It can be hard to get an intuitive sense of potential evolution of Ireland’s budgetary situation post-2015. With this in mind, readers might be interested in seeing a hypothetical scenario for the period 2016-2020. I hasten to add that this is neither a forecast nor a recommendation.
The scenario begins with the Government’s projections out to 2015 as recently published in the Stability Programme Update. To limit the number of assumptions, I focus on the actual budget balance rather than the structural budget balance. The post-2015 scenario assumes: (1) an annual nominal GDP growth rate of 3.5 percent (which, for reference, compares to a forecast in the SPU of 4.5 percent nominal growth in 2015); (2) an average interest rate on outstanding debt of 4.9 percent for 2015-2020 (equal the projected interest rate for 2015 in the SPU); (3) total General Government Revenue grows at the same rate as nominal GDP; and (4) non-interest (or primary) General Government Expenditure grows at half the rate of nominal GDP. Of course, a faster rate of primary expenditure growth would be possible for the same evolution of the budget balance with the tax system not fully indexed to nominal GDP.
Under this scenario, the actual deficit as a share of GDP would fall from the projected 2.8 percent of GDP in 2015 to -0.4 percent of GDP in 2020, a change of 3.2 percent points of GDP. (The improvement in the underlying structural deficit should be broadly similar, starting from a projected 3.5 percent of GDP in 2015. The rate of improvement is above the minimum required rate of improvement in the structural deficit of 0.5 percentage points of GDP per year along the adjustment path to structural balance.) The debt to GDP ratio would be falling at a rate of 3.5 percentage points of GDP in 2019 and 4 percentage points in 2020, within the requirements of the one-twentieth rule, which comes into force after 2018.