Gerlach: No option but budget surplus

Running budget surpluses is the most effective way open to Ireland to reduce the economy’s debt burden over the longer term, Deputy Governor of the Irish Central Bank Stefan Gerlach believes.

“It will no doubt be difficult to achieve to do so, but there is no other option,” he said in a speech to the German-Irish Chamber of Commerce yesterday.

Before the banking crisis erupted in 2008, Irish Government debt was the second-lowest in the eurozone at 25% of GDP.

It is forecast to peak at 117% in 2013. Moreover, the Government posted a budget surplus of 0.7% of GDP in 2007, which soared to a 31% deficit in 2010 because it backstopped the banking losses.

The Government is committed to reigning the budget deficit to within 3% of GDP by 2015 as part of the EU/IMF bailout programme.

Maintaining high levels of debt over the longer term is not an option, he said.

“The exact path of fiscal adjustment in the immediate future will vary in light of country-specific circumstances, and in the case of Ireland will be agreed with the Troika, [but] not reducing debt levels will have a detrimental effect on income and that effect will grow over time.”

Mr Gerlach noted the Government’s attempt to secure a deal on the bank debt, which is “another possible avenue for debt reduction through the use of the ESM to directly recapitalise the banks”.

If successful, it would alleviate the overall debt burden and break the link between the banking system and the sovereign debt. However, Mr Gerlach did not comment on the progress of these talks.

In the past, countries could grow their way out of debt through the implementation of structural reforms. But in view of the high levels of debt, robust levels of growth will not be an option over the near to medium term, he said.

Central banks have inflated their way out of debt problems in the past, but there are many problems with this route, he added.

Budget surpluses can be achieved through spending cuts or through tax increases. “While economic research suggests that fiscal stabilisation efforts that rely on expenditure cuts are more likely to be successful than those that rely on revenue increases, precisely how the necessary budget surpluses are achieved is a matter for elected parliaments to decide, since fiscal policy has large redistributional effects.

“Debts must be reduced through budgetary surpluses since the other avenues of debt reduction are closed,” he said.