‘Cliff-edge Brexit’ to have far greater impact on Republic, fiscal watchdog warns

Ifac questions Government’s Brexit assumptions

A cliff-edge Brexit next March could have a far greater impact on the Republic than previously thought, the Government’s budgetary watchdog has warned.

The Irish Fiscal Advisory Council (Ifac) said there were a number of questionable assumptions underpinning the Government's Brexit forecasts, including the assumption that the UK was a typical or average trading partner.

The Government forecasts that Irish economic output could be hit by as much as 7 per cent in the case of a hard Brexit and by about 3 per cent in the case of a soft Brexit.

Addressing the Oireachtas Committee on Budgetary Oversight, members of the council said a big reversal in UK growth was likely to have a disproportionately larger impact on Ireland than on other countries.

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This was especially true for certain labour-intensive indigenous industries here, such as food and farming, given their reliance on UK trade, economist and Ifac member Martina Lawless said.

Last week the Bank of England warned that a no-deal Brexit with Britain crashing out of the bloc could have worse consequences for the UK economy than the 2008 financial crisis with output falling by 8 per cent, the pound tumbling by up to 25 per cent and house prices falling by 30 per cent.

The bank’s nightmare scenario is based on severe delays at UK borders and a run on the pound. Ms Lawless said the current suite of Irish forecasts had not assumed the same level of disruption.

The current rule of thumb is that if UK gross domestic product (GDP) falls by 1 per cent, Irish GDP contracts by between 0.3 and 0.8 of a percentage point.

In his opening address to the committee, council chairman Seamus Coffey repeated the council's criticism of Government's current budgetary stance, noting it was out-of-kilter with the long-run growth trajectory of the Irish economy.

The Government’s “repeated failure” to rein in unplanned spending has left the State exposed to future shocks and represent a “repeat of the policy mistakes of the past”, he said.

Not consistent

Mr Coffey said “within-year spending increases”, particularly in the area of health, were not consistent with prudent budgetary management.

He said Budget 2019, which allows for a €4.5 billion spending increase next year, was €1.1 billion above what the council considered appropriate and above the target the Government itself set down only four months earlier in its summer economic statement.

“ It is clear that recent revenue growth has been supported by short-term cyclical developments and a possibly transient surge in corporation tax receipts,” he said.

Exchequer returns for November, published on Tuesday, showed the Government netted a near record €2.7 billion corporation tax take in November.

Mr Coffey said the Government’s future budgetary plans “lack credibility” and are based on “unrealistic assumptions”.

The council said the Government’s spending forecasts would barely cover the costs of maintaining current service levels, given demographic and price pressures.

Mr Coffey also said the State’s debt burden was still among the highest in the OECD and that “ the burden is understated by standard GDP comparisons.”

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times