‘New era’ of low borrowing costs may herald tax cuts, but NTMA head warns of '100% chance' of recession

The size of the national debt may no longer be a constraint for Government spending as the world enters a “new era” of permanently low borrowing costs, leading economist Austin Hughes has said.

‘New era’ of low borrowing costs may herald tax cuts, but NTMA head warns of '100% chance' of recession

The size of the national debt may no longer be a constraint for Government spending as the world enters a “new era” of permanently low borrowing costs, a leading economist has said.

It came as the head of the National Treasury Management Agency (NTMA) warned an Oireachtas committee that there is a 100% chance of Ireland being hit with a recession in the future.

On a more positive note, KBC Bank Ireland chief economist Austin Hughes said the Government will have much more room to cut taxes and increase spending in future years and said the country must this time get it right in managing “any fiscal largesse”.

The cost for the Government to borrow money for 10 years touched a new record low yesterday of only 0.03% — which means that the State can effectively borrow for free to finance long-term borrowing.

Irish costs of borrowing, which had tumbled this year as international debt markets reacted to the shocks of US trade wars and Brexit, accelerated this week after EU leaders nominated IMF boss Christine Lagarde as their pick to succeed Mario Draghi to head up the ECB.

Market analysts said the nomination of the French former politician meant that near rock-bottom eurozone interest rates would likely be cut further and could lead to fewer fiscal constraints on European government spending to curb the rise of populist political parties in Europe.

The annual yield, or cost, on the Irish 10-year bond tumbled from over 1% a year ago to 0.5% in May, and continued to plunge this week on the so-called Lagarde effect.

Less than nine years after Ireland was forced to accept a €64bn international bailout after being locked out of bond markets as the cost of borrowing surged due to the enormous costs of bailing out the broken banks, the State’s cost of long-term borrowing has fallen to zero.

“In this context, the yield on the 10-year Irish government bonds was 3.53% at the end of April 2013. On October 9 last year, the day Budget 2019 was presented to the Dáil, the Irish 10-year bond yield was 1.05%. Today, it is 0.03%,” said Mr Hughes.

“Markets increasingly take the view that the current softness in global interest rates is not a temporary phenomenon and instead could be an enduring feature of the Irish fiscal arithmetic into the medium term.”

This is reflected in the tumbling cost of servicing the national debt, he said, noting that six years ago the IMF projected that servicing Ireland’s debt pile would cost the Government €9.4bn in annual interest costs last year, whereas “this year’s outturn should come in comfortably under €5bn and on the basis of recent interest rate trends could fall notably further in coming years”.

Mr Hughes said the “new era” for global fiscal policy “suggests that the major focus around Irish fiscal policy should be around choosing the optimal set of spending and taxation measures to enhance the economic outlook”.

At the Oireachtas public accounts committee meeting yesterday, NTMA chief executive Conor O’Kelly said that, at €205bn, Ireland’s gross debt burden remains at an elevated level.

Mr O’Kelly reiterated that there is a 100% probability of the country hitting a recession in the future because of the open nature of the Irish economy.

He told the committee the NTMA is “in the permanent contingency business” to face down whatever economic threat emerged.

Under a possible disorderly Brexit, Mr O’Kelly said yields could rise but that he doesn’t expect Ireland to be cut off from bond markets.

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