Central Bank warns over high national debt levels

It says tax increases may be needed to cover the continued rise in Government spending

Central Bank deputy governor Sharon Donnery.

The Central Bank has warned that high levels of public debt can limit a country’s “room for manoeuvre” in future downturns.

Speaking virtually to a financial function in France, Central Bank deputy governor Sharon Donnery said an increase in Ireland’s national debt, due to the Government’s extra borrowing to cover emergency costs brought about by Covid and to lessen the impact of the pandemic, was warranted.

However, she said as economies emerge from the worst of the crisis, the debate over appropriateness of elevated public debt levels has reignited.

Elevated debt increases sovereigns’ exposure to fluctuations in financial market sentiment, especially those with shorter maturity structures. 

"Depending on its composition and how it is financed, large public expenditure programmes also have the potential to crowd out private investment," she said.

The Central Bank this week warned that tax increases may be needed to cover the continued rise in Government spending. 

The National Treasury Management Agency is due to borrow another €16bn to €20bn this year to cover State needs.

Exchequer returns for the first six months of this year show that the State ran up a deficit of over €12bn due to its emergency spending in the past year.