Debt and Uncertainty: Managing Risks to the Public Finances

The Irish public finances have improved significantly in recent years and favourable financing conditions have reduced debt servicing costs. In the absence of severe adverse shocks, government debt as a proportion of national income should continue to fall. At the same time, the crisis has left a legacy of high government debt that, in 2018, was larger than the level of national income (GNI*). Starting from this high stock of debt, there is a risk that a negative economic shock could cause the deficit and debt to start rising again, undoing the hard-won improvements of recent years. In this Letter, we analyse the exposure of the public finances to potential adverse shocks. Our analysis shows that a disorderly Brexit or a permanent loss of corporation tax revenue could result in the level of debt remaining above 90 per cent of national income well into the middle of the next decade. In an environment of elevated risks, reducing the level of public debt can help to improve the capacity of the public finances to withstand negative shocks.