“Higher debt can limit room for manoeuvre in future downturns” – Deputy Governor Sharon Donnery

• The increase in government debt to support public health, the economy and households was warranted
• Higher debt, however, can limit room for manoeuvre in future downturns
• The resilience from having sufficient buffers in place proved vital in responding to the pandemic and will be paramount in dealing with future downturns 

Central Bank of Ireland Deputy Governor Sharon Donnery virtually participated in a panel discussion “The debt danger” at Les Rencontres Économiques d’Aix-en-Provence this evening (2 July 2021). The Deputy Governor spoke about public debt levels in the post-pandemic environment and over the longer term.

Speaking about the global public health emergency, The Deputy Governor said the resulting increase in government debt to support public health, the economy and households was warranted. However, as we emerge from the worst of the crisis, the global debate on the appropriateness of elevated public debt levels has reignited. She cautioned that higher debt “can limit room for manoeuvre in future downturns… and that as health risks diminish, considerations of elevated debt levels require more nuance.” Ms Donnery added that “Elevated debt increases sovereigns’ exposure to fluctuations in financial market sentiment, especially those with shorter maturity structures. Depending on its composition and how it is financed, large public expenditure programmes also have the potential to crowd out private investment.”

Speaking more specifically about Ireland, Ms Donnery said that “Our research demonstrates that Ireland is among the most vulnerable economies to both cyclical and structural changes in the global economy. Accordingly, it is important to build resilience in our economy and public finances when the economy starts to recover so that we can respond to shocks as needed.” Looking ahead, Ms Donnery said that, “Targeted and temporary supports should gradually replace the broad supports which were suitable as a rapid response to the onset of the pandemic. In particular, supports should facilitate post-pandemic structural adjustments in the way we live, work and travel, rather than targeting a return to pre-pandemic norms.”  

Referring to the recently published Central Bank Quarterly Bulletin 2021:3, Ms Donnery said that the Government may need to consider additional revenue-raising measures or cuts in spending in the medium term to address spending pressures related to an ageing population; the need to invest in critical infrastructure such as housing and in meeting climate change targets; and the potential fall-off in corporate tax revenue.

Referring to the global debate on elevated public debt levels, which also applies to Ireland, Ms Donnery said that “judging the appropriate level of government debt, is challenging. Given the scale of the issues facing us, we need to reconsider traditional measures of evaluating the trade-offs of additional debt. Expenditure on clearly-stated and measurable goals that emphasise quality over quantity are more likely to reap the benefits and minimise the costs of additional government debt. While low interest rates ease repayment burdens, this may not last. The resilience from having sufficient buffers in place proved vital in responding to the pandemic and will be paramount in dealing with future downturns.” 

Notes

The Cercle des économistes created the Rencontres Économiques d'Aix-en-Provence in 2001. They have become the meeting place for reflection and debate in the French economic world. Further information is available at https://www.lesrencontreseconomiques.fr/en/program/