The Minister for Finance has warned that it is dangerous for a small economy that cannot print its own currency to think that “deficits don’t matter” when evaluating policy options in the future.
Addressing an Economic and Social Research Institute (ESRI) event, Paschal Donohoe said, in order to keeping the interest bill on the national debt down, Ireland’s deficit will have to be reduced at the appropriate pace and time.
The State will then have to set out a clear path for its reduction and for its elimination in the future, particularly for funding day-to-day spending, he added.
“Maintaining the public finances and the interest bill in particular on a sustainable path is particularly important within a monetary union where monetary policy isn’t always optimal for a small country,” the minister told the online audience.
“So while the policy framework with respect to deficits and debt is evolving, it doesn’t absolve us of the need to reduce our deficit over time.”
In reference to the measures put in place to help businesses and workers through the pandemic, Mr Donohoe said Ireland does have to provide counter-cyclical support for the economy, but it needs to be sustainable.
He said a balance has to be struck because to sustain the national debt and manage the deficit economic growth is required.
“That economic growth requires employment growth and that is why we have in place such strong support for income and for jobs,” he said.
He added that to withdraw the supports too soon would be damaging to the national finances, due to the likely harm caused to jobs and income.
“But it is important also to emphasise that at a point, the need to manage our national finances differently will emerge,” he said, echoing comments by the Taoiseach earlier.
“And it is in our interests to be ready for that moment.”
Mr Donohoe said nobody can know for certain the future path of interest rates and he pointed to increasing inflation rates in many countries in recent months “accompanied by increases in inflationary expectations as market participants have priced-in higher inflation rates in the coming months.”
But he said the higher the stock of public debt a country carries, “the more painful any increase in borrowing costs can be.”
He added that the more carefully and credibly a national deficit is managed, the better the prospects are for more affordable repayment costs.
Justifying the recent public sector pay agreement, Mr Donohoe said those who are set to benefit are public servants who have been on the frontline keeping us safe through the pandemic.
He said public services have been through, and continue to go through, an extraordinary period of challenge and change.
He said he and the Government strongly believes that the agreement got the balance right between recognition of public servants unbelievable efforts and the need for it to be affordable.
On the question of whether EU fiscal rules which have been relaxed to help countries through the pandemic will return to the way they were afterwards, Mr Donohoe said he thinks Governments will be looking at how the rules are clearer and simpler.