Higher taxes inevitable because of COVID19

KyussB

Triangle wrote: »

I'm genuinely interested in this.

So we had a debt of around 50billion pre the last recession. After it, we had a debt of 240 billion.

If we don't repay the debt, and keep borrowing at each recession - where does it go pear shaped - or more to the point, what stops the debt rising to unsustainable levels?

Well, GDP is 40% higher now than it was at the peak of the last crisis - but this is warped by Ireland's MNC's, so it's not quite a good comparison.

The GNI* figure is a better indicator, but it seems to stop at 2018 - and it shows an increase of about ~20% above the pre-crisis peak.

So, that amount of growth occurred, even through the worst recession experienced in generations, even through austerity - and every bit of growth grows GDP, making Public Debt vs GDP fall over time.

GDP growth is typically exponential in the medium/long-term - growing by a percentage each year, perpetually, except for in downturns - so that alone means that as long as we are always maximizing GDP growth, it doesn't take that long for it to start bringing down Public Debt vs GDP.


The other thing to consider, is that the total-stock/size of Public Debt doesn't say anything about its sustainability. Government bonds (i.e. public debt) at 0.1% interest, is fairly easy to manage financially - government bonds at 2% (or even up to 6%) interest are a different matter. So the sustainability of the Public Debt, is determined by its composition (all the different types of government bonds, at differerent interest rates, that it's made up of).

If interest rates on bonds go up all of a sudden, this doesn't affect the whole existing stock of Public Debt, though.

The bonds all largely have different expiry dates and lifetimes (6 months, a year, 3 years, 5 years, 10 years - even 100 year bonds are being considered I think), so a portion of Public Debt regularly falls due each year, at different times. To roll-over this debt as it falls due, new debt is issued - and that's when high interest rates can become a problem in the present.

When interest rates fall again though, high interest bonds can be paid off and replaced with bonds at a lower interest, so aren't necessarily a problem, except in the short/medium-term - and (cutting an already long story short) we can expect interest rates to remain extremely low (even hitting negative on bonds, from time to time) for a very long period now, because the integrity of the whole Eurozone presently depends on that.

Another set of issues, but I won't get into them, is EU treaty rules that make no economic sense, but create political issues with use of Public Debt.

AlekSmart

Triangle wrote: »

I'm genuinely interested in this.

So we had a debt of around 50billion pre the last recession. After it, we had a debt of 240 billion.

If we don't repay the debt, and keep borrowing at each recession - where does it go pear shaped - or more to the point, what stops the debt rising to unsustainable levels?

It's a good question.

I was quite impressed at the scale of the PPE figures released under an FoI request....no,on second thoughts,make that VERY impressed....

https://www.rte.ie/news/business/2020/0616/1147843-co-clare-company-gets-102m-for-supplying-ppe-to-hse/

It's quite a long piece but the gist is...

The HSE has paid out a total of €773m for PPE to the middle of May and the two largest payments have gone to overseas firms - the Hong Kong headquartered company, China Resources Pharmaceutical, has been paid €225.12m for PPE while South Korean based Dobu Mask has been paid €102m.

The HSE figures confirm that Aer Lingus has been paid €7.48m for transporting vital shipments of PPE from China.

As the CV19 emergency moves on to the next phase,the questions will inevitably start to be posed and not only about the disease itself.

Economists,please line up outside the door.....:eek:

Triangle

KyussB wrote: »

Well, GDP is 40% higher now than it was at the peak of the last crisis - but this is warped by Ireland's MNC's, so it's not quite a good comparison.

The GNI* figure is a better indicator, but it seems to stop at 2018 - and it shows an increase of about ~20% above the pre-crisis peak.

So, that amount of growth occurred, even through the worst recession experienced in generations, even through austerity - and every bit of growth grows GDP, making Public Debt vs GDP fall over time.

GDP growth is typically exponential in the medium/long-term - growing by a percentage each year, perpetually, except for in downturns - so that alone means that as long as we are always maximizing GDP growth, it doesn't take that long for it to start bringing down Public Debt vs GDP.


The other thing to consider, is that the total-stock/size of Public Debt doesn't say anything about its sustainability. Government bonds (i.e. public debt) at 0.1% interest, is fairly easy to manage financially - government bonds at 2% (or even up to 6%) interest are a different matter. So the sustainability of the Public Debt, is determined by its composition (all the different types of government bonds, at differerent interest rates, that it's made up of).

If interest rates on bonds go up all of a sudden, this doesn't affect the whole existing stock of Public Debt, though.

The bonds all largely have different expiry dates and lifetimes (6 months, a year, 3 years, 5 years, 10 years - even 100 year bonds are being considered I think), so a portion of Public Debt regularly falls due each year, at different times. To roll-over this debt as it falls due, new debt is issued - and that's when high interest rates can become a problem in the present.

When interest rates fall again though, high interest bonds can be paid off and replaced with bonds at a lower interest, so aren't necessarily a problem, except in the short/medium-term - and (cutting an already long story short) we can expect interest rates to remain extremely low (even hitting negative on bonds, from time to time) for a very long period now, because the integrity of the whole Eurozone presently depends on that.

Another set of issues, but I won't get into them, is EU treaty rules that make no economic sense, but create political issues with use of Public Debt.

Thanks, I think I understand a.bit better now.

KyussB

Relevant article today:

NTMA raises €750m of short-term debt at negative rate
Bills priced to yield minus 0.49% for investors

The National Treasury Management Agency (NTMA) sold €750 million of short-term debt on Thursday in an auction, with the notes priced to carry a negative interest rate – continuing a trend that began in late 2015.

The agency, which manages funding for the State, said the new so-called treasury bills that mature in December were priced to yield investors minus 0.49 per cent, meaning that buyers of the notes are paying the Government to hold their money for the period. The rate was marginally lower than that attached to bills issued in another auction last month.

...
The NTMA received demand for 3.8 times the amount of debt that was on offer in the latest auction, it said.

https://www.irishtimes.com/business/economy/ntma-raises-750m-of-short-term-debt-at-negative-rate-1.4282364?mode=amp

The government just passed up on an extra €2.1 billion that the country gets paid to take!

For the greens to agree to likely austerity in a couple of years, AND to pass up on money at that time that is not only likely to be 'free' in a sense, but which we would most likely get paid to take still - is madness and makes zero economic sense, and is absolutely a betrayal of their voters, their supposed meagre 'green' policies, and of the entire country.

Geuze

Note that Treasury Bills are short-term debt, under a year.

Lower rates, yes, but then there is the maturity/rollover issue.

Issuing, redeeming and rolling over ten 1yr Treasury Bills might cost less than issuing a single 10yr bond, maybe, but you face more risk, as you don't lock in the low fixed rate.

You are taking on interest rate risk.

On 9-June we issued a 10yr bond at 0.285%.

Yes, that is higher than -0.49%, fair enough.

But the NTMA state that increasing the average maturity time is a good idea.

They are trying to achieve a mix of bonds/debt across the maturity profile.

blanch152

Geuze wrote: »

Note that Treasury Bills are short-term debt, under a year.

Lower rates, yes, but then there is the maturity/rollover issue.

Issuing, redeeming and rolling over ten 1yr Treasury Bills might cost less than issuing a single 10yr bond, maybe, but you face more risk, as you don't lock in the low fixed rate.

You are taking on interest rate risk.

On 9-June we issued a 10yr bond at 0.285%.

Yes, that is higher than -0.49%, fair enough.

But the NTMA state that increasing the average maturity time is a good idea.

They are trying to achieve a mix of bonds/debt across the maturity profile.

That 10yr bond is incredible value compared to this time ten years ago.

KyussB

Geuze wrote: »

Note that Treasury Bills are short-term debt, under a year.

Lower rates, yes, but then there is the maturity/rollover issue.

Issuing, redeeming and rolling over ten 1yr Treasury Bills might cost less than issuing a single 10yr bond, maybe, but you face more risk, as you don't lock in the low fixed rate.

You are taking on interest rate risk.

On 9-June we issued a 10yr bond at 0.285%.

Yes, that is higher than -0.49%, fair enough.

But the NTMA state that increasing the average maturity time is a good idea.

They are trying to achieve a mix of bonds/debt across the maturity profile.

There is both a massive need for stimulus, and no sign of higher interest rates anytime soon - I believe the ECB just extended the duration of its negative interest rate loans.

Even if you just park the money until maturity and don't spend it, you make millions in profit for the state, with zero risk of any kind.

There is no reason at all for not taking that money.