The Irish economy has been doing well over the last few years, whatever about the astronomic and much-derided GDP estimates released last week. The Central Statistics Office has acknowledged that these numbers are a product of an international statistical methodology which gives strange answers when applied to Ireland with its large multinational sector.

The more reliable domestic indicators suggest that the economy grew by about 5% last year and there has been an impressive reduction in unemployment. Figure 1 shows the unemployment rate for those aged 25 to 74 (as a percentage of those actually seeking work) and the decline since the middle of 2012 has been dramatic, from over 13% to about 7%.

Bubble years

The bubble years are easy to spot, when the rate was around 4% and even lower on occasion. These were years of heavy immigration into the country and an unemployment rate this low was associated with an economy that was overheating. But the rate could certainly fall towards 5% or so without any side effects and this is where it seems to be headed. At the present rate of improvement, the rate should be 5% within about two years.

Not merely is the unemployment rate falling, the total numbers at work are growing quite rapidly, rising by 2.6% last year. Wages have also begun to increase and since the inflation rate has been close to zero, this means that wages have finally begun to grow in real terms. The result is a recovery in the volume of retail spending. `

Getting quite close to its practical capacity

If these favourable trends continue, notwithstanding the Brexit uncertainty, there would be a case, and fairly soon, for accepting that the economy is getting quite close to its practical capacity. That would mean that any further relaxation of budget policy (it was relaxed in the final budget before the election) would feed straight into wage pressures and an import splurge.

It should be clear over the next few months whether Brexit has affected the immediate outlook. If not, there will be no case, aside from political expediency, for a soft budget next October.

Ireland’s public debt stands at just over €200bn and will rise further in 2016, since there is still an ongoing deficit. The widely-quoted ratio of this debt to GDP has become meaningless because of the inflated GDP measure: with GDP overstated, the ratio looks lower than it really is. But the flawed measure is still relied on by the European Commission even though they must be aware of the shortcomings.

It should be clear over the next few months whether Brexit has affected the immediate outlook

So economists have turned to other ratios that give a better picture and the National Treasury Management Agency, who manage Government borrowing, have proposed alternatives which are more plausible as measures of debt sustainability.

At the end of 2015, the debt was almost three times the Government’s annual revenue, one of the highest debt-to-revenue ratios in the Eurozone. Debt service outgoings absorbed almost 10% of Government revenue, also very high by European standards. On these measures, Ireland still has a substantial overhang of public debt, the legacy of the monster deficits of 2008 onwards and the costs of rescuing the banks.

Interest rates are currently so low that this big debt overhang is not inflicting immediate pain. But since maturing debt has to be refinanced at whatever rates prevail in the future, it would hurt if interest rates start drifting up.

This would happen slowly at first but one of the lessons from the sovereign debt crisis back in 2011 and 2012 is that market sentiment can turn nasty unexpectedly and countries with a high debt load are the most vulnerable. Four eurozone countries (out of 19) are ahead of Ireland in the firing line – Greece, Portugal, Italy and Spain, but the firing line is not the place to be.

Ireland is now so close to achieving a zero ongoing deficit that the opportunity should not be missed. The economy, with any luck, should continue to grow for another year or two and the deficit could be eliminated without any further spending restraints or tax increases. Government borrowing costs are at artificially low levels which cannot last indefinitely. Best be prepared.