Gerald Nash (Louth, Labour)
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479. To ask the Minister for Finance his views on the recent Parliamentary Budget Office analytical model for public debt sustainability analysis (details supplied); and if he will make a statement on the matter. [18524/21]

Paschal Donohoe (Dublin Central, Fine Gael)
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I welcome the analysis conducted by the Parliamentary Budget Office (PBO) on public debt sustainability. This work provides a strong commentary on the impact of the Covid-19 pandemic on debt levels and the potential implications for the medium and long-term sustainability of the public finances in Ireland.

The analysis reinforces aspects of my own Department’s Annual Report on Public Debt in Ireland 2020, which was published in January. A key take-away from this report was that the public finances are well placed to absorb the large increase in public debt created by the Covid-19 crisis. The stock of public debt in Ireland is high but remains sustainable and is predicted to remain manageable. Indeed, forecasts from the 2021 Stability Programme Update, published last week, suggest the debt-income ratio will begin to reduce from next year.

From a broader perspective, it is important to recognise that there is no one factor that determines the sustainability of public finances but that this is down to a number of elements. Firstly, while public debt has increased, the prudent management of the public finances in the pre-pandemic period means that this rise in public indebtedness can be absorbed, and economic growth in the coming years is expected to help reduce the debt-income ratio.

In addition, as the Deputy will be aware, borrowing costs have remained exceptionally low: additional debt has been financed at rates close to zero. In other words, favourable financing conditions mean that the sustainability of the public finances has not been undermined by the pandemic.

There are also several structural features of Irish public debt that remain favourable. In particular, Irish debt has a relatively long maturity profile. As outlined in the analysis from the PBO, given that the bulk of Irish debt is at fixed rates, the probability of an interest rate shock having a near-term impact on debt sustainability is low.

Nevertheless, it will be important to slow, and eventually halt, the pace at which debt is accumulated. Reducing the fiscal deficit in a gradual, orderly manner that takes into account the need to continue providing some counter-cyclical support to the economy, will slow the pace of debt accumulation. Once the health crisis abates and restrictions on mobility and economic activity are lifted, we will see a measured phasing out of the temporary supports put in place to lessen the impact of the pandemic.

As economic recovery gains momentum, a cyclical improvement in the public finances should then support elimination of the deficit over time. On this basis, the baseline scenario is that the fiscal accounts can be returned to broad balance by the mid-part of this decade.