The Department of Finance has just published its annual report on Ireland’s escalating national debt.

The document has attracted less comment than it merits, collateral damage in the contest for media attention with Vladimir Putin’s war in Ukraine.

Finance ministries cannot be expected to spread alarm about their ability to finance themselves.

But this document is insufficiently critical of the clear drift in Government budget policy in recent years, especially the inability to say no to demands for extra Government spending.

This invites an obvious question: what could possibly go wrong?

My summary of the report goes like this: “Gross debt rose to €237bn last year and will stabilise at that level if things work out.” This invites an obvious question: what could possibly go wrong?

The report includes a debt sustainability analysis which lists the obvious banana skins. There could be a decline in bloated, and accidental, revenues from corporation tax which have window-dressed the budget accounts in recent years.

There could be a faltering economic recovery and interest rates could rise. Sensitivity tests on these scenarios do not look too frightening.

But things would get scary if budget discipline is too loose and debt runs away again as it did after the banking bust of 2008.

The State could again end up excluded from the sovereign debt market as happened in the summer of 2010

In the years before the balloon went up, there was no shortage of reassurance about the condition of the banks and the sustainability of State finances, some of it from the Department of Finance and the people supposedly supervising the financial system.

The State could again end up excluded from the sovereign debt market as happened in the summer of 2010, unable to borrow and reliant on the kindness of strangers, the official lenders at the IMF and the European institutions. They financed the country from 2010 to 2013 when it was, for the first time in 100 years of independence, unable to finance itself.

At the end of the bubble period in 2008, Irish State debt was far lower than is currently the case

If you start off with a weak balance sheet, your ability to withstand a run of bad luck is diminished.

At the end of the bubble period in 2008, Irish State debt was far lower than is currently the case, but not low enough to avoid losing, quite quickly, the ability to borrow.

Tax revenue was flattered throughout the bubble by transitory tax revenues, as it is now by corporation tax receipts, breeding the hubris that spawned the ruinously optimistic bank guarantee.

Fragile banking system

The one component of the last debacle which is absent on this occasion is a fragile banking system – the banks are far fewer in number, their aggregate balance sheet far smaller and their credit quality stronger.

There is a low risk of another bank bust and no chance the public would tolerate another bailout of bank creditors.

Each year, the Government must borrow to fund whatever deficit is planned and also to re-finance the historic debt that matures

The debt report makes much of the favourable structure of Ireland’s Government debt, arguing that much of it is longer-term and at fixed, mainly low, interest rates. This is true but not comforting.

Each year, the Government must borrow to fund whatever deficit is planned and also to re-finance the historic debt that matures.

Once the European Central Bank stops buying Government bonds, the emergency policy which has made Government financing easy and cheap, Irish debt will have to be sold to private investors on its merits.

The ECB has indicated that this will happen soon and professional investors will again focus on the conduct of budget policy in the more indebted Eurozone countries. They will no longer be able to rely on the ECB to backstop the market.

If governments continue to boost spending... while declining to expand the base of revenue, the deficit will rise

As well as an end to bond-buying, the ECB is also likely to raise official interest rates.

Ireland starts into this new cycle of tighter money with a high legacy debt load, one of the highest in the Eurozone.

If governments continue to boost spending (€4bn extra permanent spending on top of the temporary COVID-19 measures in the last two years) while declining to expand the base of revenue, the deficit will rise.

Spending pressures

There are new spending pressures, most recently the failure to raise the pension age as planned and there are some monster bills coming down the line for compensation schemes, the newest, reported last weekend, a raft of claims against the Department of Health and the HSE for failures in nursing homes and hospitals during the COVID-19 emergency.

The firms which sold them the defective bricks are, of course, nowhere to be found

The bill for the victims of Mother and Baby Homes has not yet been finalised, nor has the bill for people whose houses need to be reconstructed. The firms which sold them the defective bricks are, of course, nowhere to be found.

There is no political resistance, in Government or among the opposition parties, to the expansion of public expenditure and universal unwillingness to contemplate increases in taxes or public service charges. No party supports water charges in urban Ireland, for example, and all behave as if cheap borrowing will last forever.