June 14, 2017 / 5:11 PM / in 2 months

New Irish PM set to clash with finance ministry on debt target

DUBLIN (Reuters) - Ireland's finance ministry believes a national debt target set last year that new Prime Minister Leo Varadkar has pledged to ease is a prudent marker, the department's chief economist said on Wednesday.

Outgoing Finance Minister Michael Noonan last October set the target to cut the debt as a proportion of gross domestic product to 45 percent by the mid-2020s, below the EU limit of 60 percent. Varadkar has said he would raise that to 55 percent to allow for greater capital investment.

"I don't buy into the idea that just because the debt-to-GDP ratio is now down to 75 (percent), that the debt issue is resolved," John McCarthy told a parliamentary committee. "I think and the department has said that 45 (percent) is the prudent target."

The target was partly a response to distorted GDP figures that have flattered the debt ratio. Ireland's debt-to-GDP fell below 80 percent from 94 percent at the stroke of a pen last year when GDP growth for 2015 was adjusted up to 26 percent after a massive revision to the stock of capital assets.

McCarthy said his department views 45 percent as an appropriate target given the distortions and sees it as the equivalent of the EU limit of 60 percent for other countries.

Ireland's national debt remains among the highest in the euro zone by most other measures and McCarthy said it would also likely be much higher when measured against a new yardstick being introduced to gauge the true health of its economy.

The new measure, "Adjusted Gross National Income" - or "GNI*" - will be phased in by the end of 2018 and exclude the effects of firms re-domiciling, or relocating or depreciating their capital assets.

McCarthy said at a best estimate, the debt-to-GNI* ratio will probably exceed 100 percent when the figure is published. That would put Irish debt levels closer to those of Spain and Cyprus than Germany and the Netherlands, as implied by debt-to-GDP.

Varadkar will name a finance minister later on Wednesday with Public Expenditure Minister Paschal Donohoe expected to replace the retiring Noonan. Varadkar said last month that Donohoe backed his position on the debt target.

Varadkar will also scrap another Noonan initiative to establish a contingency reserve, or "rainy day fund", in favour of further funding badly needed infrastructure projects, the Sunday Business Post newspaper reported.

Editing by Mark Heinrich

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