Wednesday, 5 December 2012

The deficit and debt repayments

Nat O'Connor: The brief ten pages of the 2013 Estimates include the stark reminder of just why the Government is set on €3.5 billion of tax increases and spending cut today. Receipts in 2012 were just under €41 billion, wheresas spending was around €56.5 billion. That's a gap of €15.5 billion.

The actual deficit in the General Government Balance is slightly less, at €13.4 billion (Table 1a in the same document).

The gap shows the growing importance of the national debt interest repayments in making the public finances unsustainable. Servicing the national debt cost us nearly €6.5 billion in 2012 and is set to rise to €8.1 billion in 2013. That's nearly as big as the entire education budget (€8.7 billion in 2012). The details of public spending can now be seen at DoPER's databank.

This point is graphically illustrated on page 12 of the Medium Term Fiscal Statement, which is the other document currently on A copy of that image is below:

The debt interest burden is projected to peak at 16 per cent of all Government revenue in 2014.

A serious concern with these projections (and the assumption that the deficit and debt interest payments will stabilise) is that projections of economic growth have repeatedly been over-optimistic. The IMF now calculates that austerity in developed economies means that for every €1 taken out through tax or cuts, between €0.9 and €1.7 will come out of economic output (GDP) - see page 43 of IMF's World Economic Outlook. There is a real risk that even this grim picture of debt interest repayments may be over-optimistic.

At any rate, it is certainly the case that a major win on reducing the bank debt part of the national debt (and annual debt servicing costs) needs to be achieved.

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