The refinancing of Ireland’s loans to the International Monetary Fund, announced by Minister for Finance Michael Noonan is a significant development. In times when cash is tight, to be able to lower the cost of borrowing by some €750 million per annum is welcome, all the more so because further refinancing early in the New Year should double the annual savings.
The cost of borrowing for the government is now at an unprecedented low. This is a result of a particular range of factors, notably efforts by international central banks and the ECB in particular to try to boost growth and stave off deflation. The government is correct to take advantage of this while it can. It must also do all it can to secure investor confidence and keep borrowing costs as low as possible for as long as possible, as this can deliver significant benefits given our high debt levels and need to continue borrowing for some years to come.
There are international factors at play here which the government can do little to influence. However what is important is that we do what we can to retain the confidence of international lenders. The cheaper we can raise new borrowings and refinance maturing loans over the next few, crucial years, the quicker our debt burden will fall. This is now a central issue in cutting the economic risks we face in the years ahead and leaving more resources to fund public services.
Central to this is the way we manage our national finances. The Government might have been better to have had a neutral budget last month than to have increased spending and cut tax by €1 billion. But it is important that, unlike France, Italy and Spain, Ireland got a clean bill of health from the EU Commission’s annual study of member state budgets in terms of our adherence to EU rules. Above all, we do not need any questioning now of our ability to meet our targets on deficit reduction.
Provided economic growth remains on track, we should achieve our targets for this year and next. In the run up to the 2016 Budget there is a danger that the importance of remaining with the deficit reduction commitments are given less emphasis, as various spending and tax measures are considered. The ability to form a stable government after the next election could also become an issue for investors, given the spread of support in recent polls across a range of parties and independents.
There may be a temptation to take our current low borrowing costs for granted. After all, we have continued to meet our budget targets in recent years and borrowing costs have fallen. But this would be a mistake. The fight to maintain our reputation internationally may seem distant from day to day affairs at home, but it has a direct pay-off to the exchequer and must remain central if we are to complete our exit from the economic crisis.