Win lenders’ confidence

As we exit the bailout, we need three things to ensure we stay out:

* 1. Public financial discipline is essential;

* 2. Economic growth has to be fostered;

* 3. The flow of inward foreign direct investment must be maintained.

The Government deserves congratulations. It has succeeded in its objective of exiting the bailout. Whether we should have tried to secure a second bailout with guaranteed medium-term, low-interest financing to avoid the uncertainties of the international financial markets, or sought a precautionary credit line, are different issues.

Without these successes, a return to full reliance on financial markets would be much less likely.

Exiting the bailout means we will be able to borrow money at reasonable interest rates from international financial market lenders. Their willingness to lend depends on their confidence in our repayment capacity.

This leads to three inter-related requirements for a future free of bailouts.

Public financial discipline is essential. Economic growth has to be fostered. The flow of inward foreign direct investment must be maintained.

We have to show that the economy’s capacity to repay public debt is strong. We have to continue to reduce the annual Government borrowing requirement. The 2014 borrowing target is 4.8% and the aim is to have it below 3% in 2015. Thereafter, there is a need to meet the fiscal treaty target of a structural deficit of 0.5%. There will also be a requirement to gradually reduce the debt of GDP ratio of approximately 120% to 60%. As soon as possible, public finances should show a surplus. This will give comfort to lenders, but we have to achieve this in ways which do not inhibit economic growth.

The public finances will be more easily managed if the rate of economic growth improves. Current government projections for economic growth are modest at between 2% to 3% annually up to 2016. Measures such as retention of the 9% hospitality Vat has helped in this regard but alcohol excise increases reduced the positive impact. Plans to bring forward the date of tax payments from October to the summer will inhibit growth. There is limited scope to stimulate growth by boosting domestic demand and the main focus will be on supply-side measures such as supporting the local export and technology sectors and in credit provision.

The employment and export contribution of foreign direct investment will continue to be critical to economic growth. The bundle of features which attract multinationals including the 12.5% tax rate and the skills base must be maintained.

The international economic environment will be an important determinant of our economic performance and interest rates on our government bonds and, unfortunately, we have no control of this.

* Tony Foley is senior lecturer in economics at DCU