Ireland avoids ‘snowball effect’ of weak growth and higher debt payments

Ireland and Japan were the only two OECD countries to avoid “the snowball effect” last year, AIB has noted in its latest report on the economy.

The two were unique in registering economic growth strong enough to negate or offset the impact of higher interest rate payments, leading to an improvement in their respective debt-to-GDP ratios.

The rest of the world’s most developed economies, to varying degrees, watched their debt metrics deteriorate. Higher debt repayments and limited fiscal headroom are the financial zeitgeist.

AIB’s report contained a mini-analysis of the current turmoil in bond markets.

“Overall, the OECD estimates that the G7 countries spent around 2.1 per cent of GDP on interest payments in 2025,” it said.

“This was forecast to rise to 2.3 per cent on average this year, but it will now be higher following the surge in government bond yields,” it said.

“This will have real economic consequences, particularly as populations continue to age at a time when many countries are spending more on defence, energy and other areas,” the report said.

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After playing a stellar, if unwanted, role in the 2008 financial crisis, Ireland now finds itself at one remove from the financial challenge of the day courtesy of record corporate tax receipts.

AIB noted that Government is set to run a large budget surplus once again in 2026.

As a result of this, the spread between Irish and German 10-year yields has actually narrowed slightly to just 13 basis points – or 0.13 of a percentage point.

“This implies Ireland is very firmly within the ”core" group of European countries alongside Germany, Netherlands and Luxembourg,” AIB said.

Without Ireland’s corporate tax bonanza, the economic atmosphere in the State would be entirely different.

The Department of Finance forecasts that the State’s surplus this year would turn to a deficit of €12.1 billion (3.4 per cent of national income) if windfall corporation tax receipts were excluded, rising to a deficit of €20.3 billion (4.6 per cent of national income) by 2030.

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“The lesson is [that] Ireland cannot take its success for granted, and the recent memory of bond markets souring on our debt highlights how quickly sovereigns can lose credibility,” AIB said.