Mr. Tom McDonnell:

Deputy Joan Collins asked about debt and debt sustainability. As members are aware, Ireland's debt-to-GDP ratio was previously forecast to peak at approximately 120% in 2013. That was contingent upon growth levels that perhaps were slightly unrealistic and optimistic, as indeed they have been for the past four years, because of modelling problems and optimism bias. However, the point is that if growth is lower than anticipated, as is likely, and as IMF multipliers that measure the impact of austerity and stimulus on growth and employment come to pass in the future, as is likely, then growth and employment will be lower and the debt-to-GDP ratio will not stabilise at 120%. In itself, however, even a ratio of 120% is a problematic number because if one considers Ireland's debt-to-GNP ratio, it will peak at approximately 150%, and the weight of evidence from economic history suggests that beyond 90%, such debt begins to weigh permanently on growth and employment. Consequently, in an economy with a higher ratio of debt than that, certainly at ratios of 120% or 150%, the burden becomes increasingly heavy and one wastes more and more of one's income each year on debt interest repayments. In a couple of years' time, for example, the interest repayments would exceed the entire education budget and both short-term and long-term growth become lower. The productivity potential of one's economy becomes lower and one moves towards a negative cycle, which becomes increasingly worse and one moves towards a situation akin to that which obtains in Japan. While one might argue that Japan has maintained its high levels of debt for a long time, the Japanese economy essentially has stagnated for two decades. Is that what we want for Ireland and is that the way we are going?

In addition, a country such as Ireland is more susceptible than are countries such as Japan or the United States. One reason is that we are dollarised, albeit with euro, in that we do not control our currency. This means we can run out of money and debt sustainability actually kicks in at a much lower point than it would for countries such as Japan, which have maintained a higher level of debt than 150%. One can see that the other countries in Europe which are engaging in the same process as Ireland, that is, Greece, Portugal and Spain, are in freefall at present. Moreover, weighing us down even further are the household and corporate debt, as well as the damage in the banking sector. All these things will weigh on consumption and an investment for the foreseeable future, as we wind out of this balance sheet recession. One could be talking about years of stagnant employment and growth unless there are major changes of policy, ultimately at a European level.

Nevertheless, however, as Ireland itself has a deficit requiring €8.6 billion in adjustments over the next three years - the deficit itself of course is closer to €13 billion or €14 billion - the question is what Ireland can do. Ireland can choose particular austerity measures, for example, that minimise the damage to growth, to vulnerable people at the very bottom and to employment. Moreover, there are areas for which one can aim. For example, when one is considering taxation measures, the worst thing one can do is to tax low income workers. They spend all their money in the economy, it has negative implications for the labour market and so on. On the other hand, the least damaging areas are those such as intergenerational wealth transfers, such as capital acquisitions tax in Ireland, or passive income, such as rental income. That is the kind of smart fiscal consolidation in which one can engage. Even though we are constrained, we still have choices.

One of the worst things one can do is to cut the capital budget disproportionately. The troika and, I imagine, virtually every economist in the world would heavily criticise any government that would cut its capital budget disproportionately, on which budget long-term growth and growth for people who are in long-term unemployment at present is contingent. This is particularly the case in the construction sector, because the jobs from the boom time period are never coming back at the same level they reached previously. Consequently, the worst thing one can do at this moment is to cut the capital budget. The Government has been criticised in this regard by the troika. We would also criticise this, as exacerbating the crisis and making it worse than it otherwise needs to be.