Professor John McHale:

The first thing we need to do is understand what is happening in the Irish economy and where it stands. Putting aside any issues of international comparisons, we need to know what the situation is here. Between 2014 and 2015, by the measured numbers the ratio fell from 105% of GDP to 78% of GDP. This massively exaggerated the improvement and underestimated the extent of the debt we have. The first thing to do is get a better understanding of how things are changing over time, and the level of debt relative to the output of the economy. When we look at the debt-to-GDP ratio we are trying to compare the debt to the revenue potential of the economy, and GDP could be taken as a measure of the revenue the economy could generate. Given that GDP is problematic and inflates the true measure of activity in the economy, we go directly to examining the debt-to-revenue ratio. This is an unfamiliar number, so we scale it to make it comparable to the type of debt-to-GDP numbers with which people are familiar. There we take advantage of the fact that the revenue-to-GDP ratio was constant between 2011 and 2014, at approximately one third. We rescale revenue using the ratio for 2014 and this gives us a way to see the true improvement. By this measure, rather than going from 105% to 78%, it goes from 105% to 97%, with further improvements taking place this year. This shows there is improvement, but it is nothing as dramatic as we see with the headline numbers. It underlines the fact it is still very high and unsafe. Again, we are not forecasting a crisis, but with a debt ratio this high there is always a risk that something can go wrong. It underlines the need to continue the progress to decrease it.