Why we should still worry about sovereign debt

By Anthony Foley

The Government owed €201.3bn in 2017 — equivalent to €42,000 for every person in the country.

Most of this debt was accumulated in the economic collapse when the taxpayer bailed out banks and the annual expenditure by Government exceeded annual revenues for every year since 2008.

However, even in 2007, there was a substantial Government debt of €47.1bn. The period after the collapse added €154.2bn, or 77% of the current debt level. 

Despite five consecutive years of economic growth, the Government has run annual financial deficits albeit on a decreasing basis.

The usual performance indicator of Government debt is the ratio of debt to GDP. Legal obligations and targets on debt in the EU Growth and Stability Pact are expressed in the debt-to-GDP indicator. 

This ratio takes account of the relative burden of debt by relating it to the economy’s income and the EU objective is for the ratio to be below 60%.

On this indicator, Ireland compares reasonably well and is ranked 13th highest in the EU, with a ratio of 68%, compared with Germany’s of around 64%.

The 10 highest debt ratio countries in the EU in 2017 include Greece at over 178% and Italy at almost 132%. France’s debt stood at 97%, while the UK’s was at almost 88%. Seven countries, including Denmark, had ratios below 40%.

The Irish debt to GDP ratio has greatly improved in recent years, mainly because of the unprecedented increase in the monetary value of GDP in 2015. But the debt picture is worse than it appears. Mainly due to multinational accounting practices, GDP overstates Ireland’s economic capacity or resources. 

A truer measure is a modified gross national income (GNI) measure. On this measure, Ireland’s debt was around 100%. That makes it the fifth highest indebted sovereign, after Greece, Italy, Portugal, and Belgium.

Most of the substantial improvement in the debt picture is essentially a statistical illusion. If EU debt targets were expressed in terms of the modified GNI measure the public finances would be very constrained.

Another measure of the burden of debt is the proportion of Government revenue which is used to pay the interest bill.

In recent years this peaked at 12.6% of revenues in 2013 and declined to 7.7% in 2017 due to higher absolute revenues and lower interest rates. 

The ECB has ensured low-interest rates and the interest rates on some troika loans were cut. These developments saved Ireland billions in interest payments.

We should worry about the national debt. Repayment of debt when it becomes due is usually financed by additional borrowing rather than accumulated savings.

For example, €14.9bn in debt in 2019 and €19.5bn in 2020 are due to be repaid and we will not have that kind of money spare in the Government coffers. 

Large existing debt levels constrain the ability of governments to respond to new economic downturns and challenges with additional borrowing where appropriate.

Ireland faced into the 2008 collapse with a debt of €47.1bn, or less than 24% of GDP.

The following years were miserable in terms of austerity and economic decline.

Consider how much worse it would have been if it had started out with a debt of €150bn.

Should there be a recession, Ireland would begin with a debt of 68% of GDP (or more accurately 100%), which is a lot worse than 2007.

The main worry is that the high levels of existing debt constrain the ability of Government to respond appropriately and adequately to possible future economic shocks.

Anthony Foley is associate professor of economics at Dublin City University Business School

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