‘Reduce national debt with any corporate tax windfall’ – Central Bank

The Acting Governor of the Central Bank has urged the Minister for Finance to use any unexpected windfall in corporate tax this year to reduce the national debt, which stands at just over €200 billion.

In a pre-Budget letter to the Minister published today, Acting Governor Sharon Donnery has warned that the reduction of Ireland’s very high level of public debt must remain a ‘key priority’ for the Government.

In recent years, high growth rates and low interest rates have made the national debt burder more manageable, but Ms Donnery has warned this benign situation is unlikely to last.

She has urged the Government to use any unexpected windfall from corporation tax receipts this year to pay down debt. The Bank argues that it would make it easier for the Government to spend its way out of any future downturn or shock, like a disorderly Brexit.

Referring to the potential fiscal effect of a disorderly Brexit, she said such a situation would lead to a material deterioration in the fiscal position, and that this assumes “automatic stabilisers are allowed to operate fully, as would be appropriate”.

She added”any fiscal response to Brexit must be consistent with long run debt sustainability and does not undo the hard work in re-establishing Ireland’s fiscal credibility and risk the emergence of unsustainable debt dynamics”.

The Bank has also advised that the Government formalise a lower target for our national debt and aim to get there at a quicker pace than that dictated by EU rules.

The Bank has also advised that the Government formalise a lower target for our national debt and aim to get there at a quicker pace than that dictated by EU rules.

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Ireland’s national debt reached equivalent of €42,500 per person in 2018

The amount of debt owed by the state rose to the equivalent of €42,500 for every person in the country last year, according to a new report released by the Government.

The Annual Report on Public Debt shows that Ireland’s debt mountain stood at €206bn at the end of 2018, up €5bn compared to a year earlier.

This means Ireland has one of the highest per capita public debt levels in the OECD, the report says, and is also elevated compared to Irish historical standards, leaving the country vulnerable.

According to the Minister for Finance, Paschal Donohoe, international economic and political uncertainty coupled with growing demographic pressures in the coming years means prudent fiscal policy, reduction in the debt and a continuation of budgetary surpluses need to be key priorities.

“An important milestone was reached last year when a budget surplus was recorded for the first time since 2007,” said Paschal Donohoe.

“However, public indebtedness remains too high. It is crucial that we build on the solid progress made in recent years and run budget surpluses to prevent the build-up of additional debt.”

The report says that the national debt reached 104% of modified Gross National Income or GNI* – a measure of the size of the economy here that strips out distorting globalisation effects like multinational company income leaving the state, as well as various forms of depreciation.

It also warns that Ireland’s debt repayment situation is extremely sensitive to any economic growth shocks.

But it says that over the medium-term, the debt-to-income ratio is projected to continue to improve, while at the same time remaining high.

“Reflecting the distortions inherent in Irish GDP, it is imperative to bring debt down to levels more consistent with the economy’s underlying dynamics,” states the analysis.

“At the same time, any potential windfall receipts, notably from corporation tax revenues, as well as proceeds from asset disposals should be used to reduce the stock of debt, as is Government policy.”

Sustainability of the public finances will face significant challenges from the projected ageing of the population over the coming decades unless there is a policy intervention, it also cautions.

€5.2bn was paid in interest on the borrowings last year, according to the document, a similar amount as the entire capital budget for the same period.

However, despite the challenging situation, the analysis also points out that active management of the national debt by the National Treasury Management Agency has led to a reduction in the interest bill and an extension of the repayment dates on what has been borrowed.

“Building on the outturn in 2018, a prolonged period of general government surpluses should facilitate a stronger path of debt reduction, while building buffers to counter future negative surprises,” the report states.

Ireland’s per-capita public debt last year, at €42,547 is €31,811 higher than it was in 2005, prior to the economic crash.

This is the third year that the report has been produced, with the aim of providing a comprehensive analysis of the public debt situation here.

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European debt rally pauses at start of a big week for bond markets

Core European government bond yields steadied on Monday after posting their biggest weekly drop in seven weeks as investors consolidated positions before a central bank policy meeting this week where policymakers might unveil plans of more rate cuts.

Though hopes have grown that the ECB might cut its deposit rate as soon as Thursday to soften the impact on the euro from a much-awaited Fed rate cut, market watchers say policymakers will change its forward guidance before taking fresh steps.

Money markets are assigning a 55pc probability of a 10 basis points deposit rate cut with a Reuters poll expecting the ECB to change its forward guidance towards more easing this week and move to cutting interest rates only in September.

As a result, German bond yields for 10-year maturities were broadly steady at minus 31 bps in early London trading and within striking distance of a record low of minus 40 bps hit earlier this month.

Spreads between benchmark US debt and corresponding German bonds were broadly steady at 273 bps.

Barclays strategists note that although hope of more ECB easing has increased since ECB President Mario Draghi’s June speech in Sintra, downside risks to the eurozone economy have not increased over that period.

Moreover, the Fed is also expected to cut rates by only a quarter point, compared to some bets of a half point rate cut.

“Therefore, we do not think Draghi will want to soften his easing bias from the Sintra speech…President Draghi is very likely to prepare the ground for a broad easing package in September,” they said in a weekly note.

Ongoing tensions between Britain and Iran over the seizure by Iran of an oil tanker is also set to keep demand of safe-haven core European debt intact.

Markets were also watching for political developments in Italy after tensions rose in the ruling coalition party last week, raising concerns that the increasingly unwieldy government might collapse.

Though Italian bonds have also broadly been the beneficiary of expectations of more ECB policy stimulus, with yields on 10-year debt falling by 120 bps since mid-May, the rally has stalled since late last week.

“We need to watch for more developments on the Italian political situation,” said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

On a technical note, primary market activity is likely to remain slow with only Belgium and Italy to sell bonds this week though the net issuance of €4.5bn-€6bn is expected to be more than offset by inflows from redemptions and coupon payments, according to strategists at Unicredit.

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EU debt levels up in 2018 but debt-to-GDP ratio down

Government debt levels rose in the European Union last year, according to Eurostat, but economic expansion in the region pushed the overall debt-to-GDP ratio down.

The countries that use the euro had a combined debt of €9.86 trillion in 2018, up €99 billion (1%) year-on-year. Meanwhile, in the wider European Union, debt levels rose €135.5 billion (1.1%) to €12.7 trillion.

However rising activity meant that debt made up a smaller portion of the region’s economic value.

The EU’s debt-to-GDP ratio stood at 80% last year, down from 81.7% in 2017. In the euro area the ratio was 85.1%, down two percentage points year-on-year.

According to Eurostat the EU member state with the lowest debt-to-GDP ratio last year was Estonia at 8.4%. The highest was recorded in Greece, which saw its ratio rise almost five percentage points to 181.1%.

Last year Ireland’s national debt rose by almost €5 billion to €206.2 billion, however the country’s debt-to-GDP ratio fell 3.7 percentage points to 64.8%.

Eurostat said that 13 countries reported a budget surplus last year, while Ireland reported a balanced budget.

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Household debt shrinks to 2003 levels but economic risk remains

Even though household and company debt remain high by international standards, they have fallen sharply and may now be in line with the underlying fundamentals of the economy, according to the Department of Finance.

Yesterday’s report did warn that in the event of a downturn the high debt levels could pose a risk to the economy and said debt ratios would remain above European Union risk levels to 2023.

But overall, the picture was one in which borrowing by firms and individuals was consistent with economic growth and income levels.

“After nearly a decade of deleveraging, household debt is on a much more sustainable path,” the department said.

“Using these benchmarks, it appears that Irish debt may in fact be in line with levels predicted by the economy’s underlying fundamentals.”

Household debt has fallen to levels not seen since 2003, well before the economic crisis, at 126pc of disposable income after having peaked following a property and mortgage-fuelled boom that saw the ratio hit a peak of 212pc of disposable income in 2009.

Even so, the ratio is the fourth-highest in the EU and the sixth-highest on a per capita basis, at €29,000 per person. Overall, the core ratio of private debt was 172pc of GNI* (a measure of economic output in Ireland that strips out distortions in the economy) in 2017 with households at 77pc and ‘core’ corporate debt at 95pc of the measure which strips out distortions from the economy.

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