Brexit would limit Irish ‘fiscal space’ - Paschal Donohoe

Minister in podcast interview warns of reduced scope for spending increases and tax cuts

Minister for Public Expenditure and Reform Paschal Donohoe  during an Irish Times Business Podcast interview with Arthur Beesley on Wednesday. Photograph: Dara Mac Dónaill/The Irish Times

Minister for Public Expenditure and Reform Paschal Donohoe during an Irish Times Business Podcast interview with Arthur Beesley on Wednesday. Photograph: Dara Mac Dónaill/The Irish Times

 

A UK vote next week to leave the EU may reduce scope for spending increases and tax cuts due to the negative impact of a Brexit on Irish economic growth, a senior Government figure has indicated.

One week from polling day in Britain, Minister for Public Expenditure Paschal Donohoe said the “huge” uncertainty triggered by an anti-EU vote would have an adverse impact on Dublin’s forecasts for the public finances and growth.

He declined to specify any probable impact on plans for the 2017 budget. Still, he recognised that the amount of money or “fiscal space” that might be available for spending and tax measures was linked to rate of economic growth.

“The fiscal space is a consequence of how your economy is growing and how you manage your national finances, so if there were to be change in the rate of economic growth it would likely have an impact on the fiscal space,” Mr Donohoe said in an interview on the The Irish Times Business Podcast.

The Irish Fiscal Advisory Council has said the risk of economic overheating meant the Government might have to pull back from mooted spending increases and tax cuts next year.

Mild stimulus

But Mr Donohoe did not believe such moves would be required, arguing that public spending could still provide a mild stimulus in the light of high long-term unemployment and low levels of capital expenditure.

The Fine Gael-led minority administration promised in May to increase public expenditure by €3.18 billion in the years to 2021, with separate commitments already made set to cost another €3.58 billion per year within five years.

While such pledges are predicated on the continuation of solid economic growth, many assessments have concluded that a Brexit would trigger a reduction in economic activity in Ireland.

In a report two weeks ago, for example, the OECD said a vote leave the EU would lead to a 1.2 per cent reduction in Irish GDP in 2018.

Asked if a result favouring Brexit would prompt the Government to change its budgetary and fiscal plans, Mr Donohoe said a recent risk assessment pointed to a negative impact on the Irish economy in such a case .

“So it would have an affect in terms of our expectations regarding our national finances and economic growth,” the Minister said.

Sovereign right

“If the UK exercises its sovereign right to leave the EU, there will be a two-year window in which the negotiation in relation to all of that which will need to ensue and probably be completed.

“The effect of that on things we currently take for granted will be huge, but it’s difficult to quantify at this point apart from the fact of it being clear that it would be negative. Of course that would then have an affect on our economy here at home.”

A leave vote would have a medium-term affect “at least” on Ireland’s economic prospects and that impact would be bad, he said.

“That, therefore, would have an effect on our forecasts for the economy in the coming years and that’s the very, very reason that you’ve have members of the Irish Government over in the UK speaking to the Irish communities, which I’ve done.”

Patrick Coveney

Separately, Greencore chief executive Patrick Coveney told a Dublin audience on Wednesday that a vote to leave now appears likely.

“It would be very ,very bad for the Irish, European and world economies if Britain voted for a so called Brexit,” he said.

“My personal judgment is that that’s what they’re going to do. I don’t think it’s like Scotland where the simple shock value enabled the Scottish people to come back from the precipice. I expect there would be an outflow of resources from the UK on a pretty massive scale if Brexit happens.”