Central Bank governor to call for ‘credible’ path’ to cut State debt post-Covid-19

Central Bank governor Gabriel Makhlouf will tell the Oireachtas Special Committee on Covid-19 on Tuesday that the Government must set out a "clear and credible" path to reverse a spike in the budget deficit and national debt resulting from the current crisis.

“The rise in the government deficit and debt ratios is both warranted and necessary and is currently affordable. But the high level of debt will leave government finances vulnerable to future shocks and it will be important for the Government to provide a clear and credible return to much lower and sustainable deficit and debt positions,” Mr Makhlouf will tell the committee, according to a prepared statement, seen by The Irish Times.

Mr Makhouf said Government supports should be focused on boosting economic activity and avoiding "scarring effects" such as long-term unemployment.

“Any such action by the Government is likely to be costly in the near-term but will benefit the fiscal position over the medium term if it is effective in reducing the degree of damage to the economy’s productive capacity,” according to the statement.

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The new Government is working on what Taoiseach Micheál Martin has called a “sizeable” stimulus package aimed at boosting domestic demand and employment. This follows the last administration committing about €9 billion to deal with the healthcare and economic crisis, as well as €7 billion of indirect supports such as loan guarantees and commercial rate deferrals.

The Government is on track to run a budget deficit of between €23 billion and €30 billion this year, according to Minister for Finance Paschal Donohoe.

The programme for government, agreed last month, said that a medium-term roadmap detailing how the Republic would reduce the deficit and return to a “broadly balanced budget” will be set out in the next budget.

The Central Bank estimated last week that the Government debt level will soar from €217.5 billion at the end of last December to €239.1 billion by the close of 2022.

‘Strong position’

Still, Frank O'Connor, director of funding and debt management at the National Treasury Management Agency (NTMA), will tell the committee on Tuesday that the State is in a "strong position" to deal with a spike in borrowing requirements, a decade after it was forced into an international bailout.

Mr O'Connor will highlight how the exchequer returned to a primary budget surplus, excluding interest costs on debt, in 2014 and delivered an overall surplus for each of the past two years. The Government's creditworthiness, which was rated as junk by Moody's at height of the financial crisis, has recovered to an extent that another ratings firm, Standard & Poor's, awarded it an AA-grade late last year.

The NTMA’s annual interest bill has fallen by more than 50 per cent over the past five years to €3.5 billion in 2019, as the average rate declined at a similar pace to less than 2 per cent, according to Mr O’Connor. This has been driven by the European Central Bank’s multi-trillion-euro quantitative easing programme and more easily its €1 trillion-plus response to Covid-19.

‘Borrowing rates’

“This and other policy actions increase the probability that borrowing rates for sovereigns in the [euro area] will remain low for the foreseeable future,” Mr O’Connor said in a prepared statement.

However, he reiterated comments from NTMA chief executive Conor O’Kelly last month that the “exceptionally favourable” current market rates are unlikely to last forever and that debt will need to be refinanced in the future at a potentially higher cost.

Meanwhile, Mr Makhlouf will highlight that there will have to be continued focus on buttressing against future challenges, including international tax reform, the longer-term implications of the UK’s withdrawal from the EU and climate change.