How COVID 19 is set to increase the Irish debt burden and how it affects you
Ireland has been commended internationally for having one of the strongest responses to COVID 19. However, this has come at a cost. To keep the economy afloat, the government had to roll out multiple stimulus packages to maintain the incomes of workers and businesses, while augmenting the health response to the virus. For this, it has had to borrow money. Now, Ireland is set to have the highest debt burden per capita in the EU in 2021.
What does that mean?
Think of a household. You’ve got a father, mother, and probably some children. Imagine the father taking out a loan to make some renovations to the house. To make the payments, he may have to take on some extra shifts at work. While Father bears the primary responsibility for the loan, the mother and children are affected as well. Mother may have to cut back on household spending. The children may see less of their dad as he works more. Everyone pays the debt in some way.
It’s an extremely simplified version of what happens when the government borrows money, but it serves to illustrate the point. When the government borrows money, the whole country becomes responsible for paying it back and every person assumes a portion of that debt. In Ireland’s case, each person is now responsible for €48,291 of a total public debt that has reached €241.6 billion.
The news gets worse. That public debt figure is projected to increase by a further €1,509 per head in 2022 as government is expected to continue borrowing
While no one is going to be coming around to collect payments in cash, public debt affects society in different ways and eventually begins to affect the people living within it. Very much in the way the renovation loan started to affect the family in our example.
First, the silver lining…
Unlike many other countries with this problem, Ireland has a few advantages that will help it offset the worst effects of high public debt. For one thing, the country continues to have a good credit rating with international agencies. That means confidence remains high in the country’s ability to repay its debt. Ireland also has low interest rates. This means loans are being paid back at very near principal. Additionally, experts believe interest rates will remain low for the foreseeable future. The third thing is that Ireland is a high income earning country. It has the ability to pay its debt back.
Now for everything that can go wrong
See those low interest rates? They may become problematic if interest rates rise. If they do, the country will be paying back debt at a cost far greater than projected when it borrowed the money. Because this is public debt being repaid with taxpayers’ money, one consequence is that less money becomes available for other public goods. The public goods most likely to be affected are things like healthcare, education, road works, and social programmes assisting those most in need, to name a few.
If debt levels remain too high, creditors can also lose confidence in the country’s ability to repay and they will stop giving loans. Governments tend to take loans to embark on projects that stimulate economic growth. No loans, no projects, lower to no growth.
Low economic growth spawns its own set of problems. Think of the economy as an interlocking series of threads forming a pattern. One of the threads is business. Another thread is the average, everyday consumer. What happens when the economy is doing poorly?
One of the first things people do is stop spending money. Because they aren’t buying anything but necessities, businesses begin to feel the pinch. They begin to cut back on production and, if things become bad enough, they begin to send staff home. They may even close, reducing the general number of jobs available. What do all these people who are now without jobs, and without the hope of getting any do? Very likely, they apply for government benefits, burdening an already overextended public purse.
Definitely a nightmarish situation to consider.
In the final analysis
From all indications though, the above, while possible, appears unlikely. Ireland is reported to have had massive economic growth in the closing months of 2020 This demonstrates that the country at least has the potential to rebound quickly once the lockdowns are over. It is projected that the worst of the pandemic should be behind us by the later half of the year, which gives the country the opportunity to focus on lowering its public debt.
That said, it’s a situation that bears watching. High public debt leaves the country vulnerable to all the ill effects mentioned above and more, even if it’s just an offhand possibility.
