Higher debt levels could limit the government's room for manoeuvre in future downturns, the Deputy Governor of the Central Bank has warned.
Sharon Donnery was addressing the global debate that's emerging about whether it would be warranted for public debt levels to remain elevated after the pandemic.
While she acknowledged that the increase in government debt to support the economy during the public health crisis was warranted, Ms Donnery pointed out the economic resilience that had built up from having sufficient buffers in place proved vital in responding to the pandemic.
She said such resilience would be necessary in dealing with future downturns.
Speaking in a panel discussion at Les Rencontres Économiques d'Aix-en-Provence, Sharon Donnery said as the health risks diminish, considerations of elevated debt levels would require more 'nuance'.
"Elevated debt increases sovereigns’ exposure to fluctuations in financial market sentiment, especially those with shorter maturity structures," she said.
"Depending on its composition and how it is financed, large public expenditure programmes also have the potential to crowd out private investment."
Given Ireland's vulnerability to cyclical and structural changes in the global economy, Ms Donnery advised that it was important to build resilience in the public finances so that the economy can respond to future shocks.
She said the Government may need to consider additional revenue-raising measures or cuts in spending in the medium term to address spending pressures related to an ageing population, infrastructure investments, meeting climate change targets as well as the potential fall-off in corporate tax revenue.
The debate about elevated spending was ignited here in recent weeks with a pledge from the Tánaiste Leo Varadkar at his party's Ard Fheis to maintain up to €4 billion in extra Covid-19 spending in the health budget for next year.
He also said 40,000 houses would need to be constructed here every year, exceeding the projections of 30,000 to 35,000 housing units currently estimated annually to keep up with demand.