Public finances leave no room for Kalsoy tunnel

The Faroe Islands cannot afford to borrow for a proposed undersea tunnel to Kalsoy, the chairman of the Economic Council told KVF, warning that public finances already face a major sustainability challenge.

Johnny í Grótinum said setting up a publicly owned tunnel company would not change the fact that the public sector would have to borrow to fund the project. The tunnel is expected to cost at least several hundred million kroner.

Earlier this week, Transport Minister Jacob Vestergaard said he intended to amend the law governing the Norðoyatunnilin tunnel so it could prepare a tunnel to Kalsoy.

The Economic Council recently concluded that the Faroe Islands’ fiscal policy is unsustainable, with deficits expected to grow for many years. Its calculations show that the government and municipalities may need to borrow about 7 billion kroner in today’s money over the next decade, through 2036, to cover rising deficits.

Public debt is currently about 9 billion kroner, or 30 percent of gross domestic product. With GDP estimated at 29.5 billion kroner, a borrowing level of 60 percent of GDP would amount to about 18 billion kroner. After accounting for existing debt and the projected 7 billion kroner in borrowing, only about 2 billion kroner would remain under that benchmark, í Grótinum said.

He also pointed to plans to prepare a Suðuroy tunnel, which would also require borrowing. Until a decision is made on that project, he said, there is no room for an additional tunnel to Kalsoy.

Asked whether other countries had excessive debt, í Grótinum cited France, which has debt equal to 120 percent of GDP and is expected to run a deficit of about 5 percent of GDP this year. He said investors and lenders had lost patience, pushing French borrowing costs sharply higher in recent weeks. France is now paying 1.5 percentage points more in interest than Germany, a historically high gap, he said.