Many people might be surprised to learn the Government is more deeply in debt to its own citizens and the citizens of other countries than it was 10 years ago. The difference between now and a decade ago is that the debt burden is no longer a critical issue.

Although the Government is spending less than it receives from taxes and other sources and has posted large budget surpluses in each of the last two years, a substantial legacy of debt remains from the high-spending, high-borrowing 1970s and 1980s. At the end of 1999, the national debt was £31.4 billion (€39.8 billion) compared with £24.8 billion in 1989.

The Republic is not unique in having a national debt. With the exception of Luxembourg, governments in every EU member-state spend more than they raise in taxes and must borrow to make up the difference. Governments borrow money from their own citizens - domestic or internal debt - and from overseas sources - external debt. The borrowings take the form of long-term bonds which pay an attractive fixed-rate of interest.

National debt is the accumulation of years of these borrowings and is calculated as a proportion of gross domestic product (GDP) - all the goods and services produced within the State in a given year.

In the 1970s and most of the 1980s, governments spent substantially more than they collected in revenues and borrowed hugely to make up the difference. The result was a high level of debt and a debt/ GDP ratio way above the EU average. During those years, "national debt" became a household phrase.

"The national debt is analogous to having a mortgage," says Dan McLaughlin, chief economist with ABN Amro. "If you take out a £50,000 mortgage and you're in your 20s, it's a big commitment. As you get older and your income grows, the mortgage as a percentage of your income starts to fall and becomes less of a burden. It's the same with Ireland. The debt ratio peaked as a percentage of national income in the late 1980s.

"Also, if you have a large mortgage, you're very vulnerable to interest rate hikes. In Ireland in the first half of the 1980s, interest rates were rising so we had to devote a substantial amount of tax revenue to servicing the debt."

In 1987, the debt/GDP ratio peaked at around 115 per cent of national income. Essentially, the State at that time owed more money than the economy as a whole, including the multinational sector, was producing in goods and services. The landmark budget of 1987, introduced by the then finance minister, Mr Ray Mac Sharry, was the first attempt to control excessive spending and manage the debt.

These efforts were given greater urgency by the need to get Ireland in fiscal shape to join economic and monetary union in 1992. A criterion for entry was a debt/GDP ratio of - or approaching - 60 per cent. Ireland's rate in 1992 had fallen to 91 per cent and was continuing to plummet as a result of savage government spending cuts and better debt management following the establishment of the National Treasury Management Agency (NTMA) in 1990 which, under Dr Michael Somers, now manages all the State's debt.

As the economy took off in the mid-1990s the debt/GDP ratio fell faster so that by the end of 1999, national debt as a proportion of gross domestic product had dropped to 47 per cent, the third lowest debt/GDP ratio in the EU.

The interest bill on the national debt as a percentage of tax revenues has also been falling steadily and is now 10 per cent, compared with 28 per cent in 1990. With less tax money diverted to servicing the national debt, more is available for tax cuts or other programmes.

But its absolute value has remained at a standstill. "The Government has never paid off a significant part of the national debt," says Eoin Fahy, senior economist with Ulster Bank Investment Managers. "What's happened in the last few years is that the economy has grown while the national debt has stayed virtually the same, give or take small amounts due to foreign exchange fluctuations and technical changes introduced by the NTMA to reduce the cost of the debt."

The debt's value has not fallen because the Government continued to run budget deficits until two years ago. But a strong economy has changed all that. Budget surpluses have become a way of life and policy-makers must decide what to do with them.

Should the money be used to pay off the national debt? Or should it be spent on more productive purposes to build roads or houses, for example? Last year, the Government chose to set aside a substantial portion of the budget surplus and the money it received from the Eircom flotation to establish a fund to meet future public pensions liability. This was a significant departure in terms of forward planning and a move broadly welcomed by economists and others.

"The most important criteria is the interest rate savings," says Mr Fahy. "If you paid £1 billion off the national debt today, you would save £40-50 million per annum in interest payments. That's small because interest rates are low. By putting the money in a fund that would invest in the stock market, you could get a return of 8-9 per cent. The savings by paying off the national debt are around 4-5 per cent."

So do we need to worry any more about the national debt? No, says Mr McLaughlin. "The level of debt is so low relative to national income that it's not a huge priority to repay it. The economy is growing so fast that as a percentage of national income, the debt will fall very rapidly. In 10 years, it will be down to a negligible percentage . . . if nothing goes wrong."