Dr. Robert Sweeney:

There are really two reasons why we advocate focusing on debt service. The first is conceptual. As I mentioned in the opening statement, when a government borrows, and has to repay the principal on that borrowing, it typically does not draw down its cash balances. It will issue another bond and the proceeds of that bond, then go to pay back the principal of the original borrowing. Subsequently, when that bond needs to be repaid, the government will issue another bond and so on. It constantly rolls over the debt so that governments typically do not have to pay back the principal on the debt that they continually roll over. Obviously they have to service the interest payments. Conceptually, it does not necessarily matter if a country has very high levels of debt if the burden of repaying that debt is very low. Particularly over the past 20 to 30 years as interest rates have fallen, the level of debt to GDP and the burden of servicing debt, that is, interest payments to GDP, have been diverging across member states. It is no longer the case that if one has high levels on debt, it is burdensome to service that debt. For those two reasons, that conceptual reason in that countries just continually roll over debt and the more empiric reason, in that the level of debt and the burden of servicing debt have been diverging, we advocate for anchoring the fiscal rules in terms of debt servicing or interest payments to GDP or GNI* in an Irish context.

A number of analyses have been done which look at what stage the burden of servicing debt risks financial unsustainability. That can be defined in a number of ways historically, looking at a financial crisis or one can avoid a financial crisis if one implements a lot of austerity. We looked at what level of debt servicing, beyond which one needs to take corrective action. Based on our analysis, and drawing together other analyses, it should be around 3% interest payments to GDP; beyond that corrective action is needed in terms of raising taxes or reducing government spending. There is no hard and fast rule there. Others will put it at 2.5% or some people might put it higher than 3%. I would not quibble with any of those analyses because there is always modelling certainty and so on. However, the main conclusion I would draw is that it should be anchored to the burden of servicing debt or interest payments to GDP, whatever that is. We propose 3%.