A disorderly Brexit could knock up to 6 percentage points off Irish economic growth in the long term, equating to €21 billion in cash terms, the Irish Fiscal Advisory Council (Ifac) has warned.
As the Brexit talks enter a crunch phase, the budgetary watchdog warned that the hit to the economy here could be significantly bigger than the Covid-19 shock, with the agri-food and domestic SME sectors “particularly exposed” because of their reliance on the UK market.
"As time grows shorter in terms of the negotiations, there is less and less time for firms to prepare," Ifac member Martina Lawless told the Oireachtas Committee on Budgetary Oversight.
She also warned that the short-term impact of a disorderly, no-deal outcome could be significantly worse than currently predicted, as firms adjust to trade checks and the introduction of tariffs.
“There is the risk that a hard Brexit would have a slightly worse effect in the initial couple of months as firms are adjusting to all of these new checks and as the customs capacity is expanded,” she said.
Even with a free-trade agreement between the EU and the UK, which would allow for tariff-free trade, she said there would be significant additional barriers and costs to trade that will result in a 3 per cent hit to Irish growth over the longer term.
Ifac members appeared before the committee to discuss the council’s recent analysis of the Budget 2021.
Council chairman Sebastian Barnes said the UK's exit from the EU was such a unique event that gauging the economic impact was difficult.
On Covid-19 and the public finances, he and Ifac chief economist Eddie Casey said the Government's budget deficit this year – the difference between what it spends and what it takes in in taxes – could be significantly lower than the official estimates, in the region of €18 billion.
At the outset of the pandemic, the end-of-year deficit was expected to climb to as high as €30 billion.
However, better-than-expected tax revenues have improved the Government’s financial position.
Mr Casey said spending on Covid-related supports in the final quarter of 2020 is likely to be less than anticipated, as is spending on capital projects, resulting in a deficit of €18 billion or lower.
Nonetheless, the council warned that Ireland’s debt ratios will climb to between 109 and 127 per cent of modified gross national income by end of 2021 as a result of additional borrowing to fund Covid-related supports.
“Assuming interest rates remain reasonably favourable, debt ratios should fall over the medium term except in a repeat-waves [of the virus] scenario,” Mr Barnes said.
In his opening address, he noted that Budget 2021 included substantial, permanent increases in Government spending of at least €5.4 billion over and above the additional Covid-19 spend.
“Rather than being temporary and targeted, these will remain after the pandemic,” he said, noting the increase in core spending was “surprisingly large” in the context of past budgets; budgets since 2015 have had packages closer to €3.5 billion on average.
The permanent increases could even be as high as €8.5 billion as it is not possible to ascertain the nature of some of the increases in non-exchequer areas, such as funding for local authority housing, he said.
“The council is not opposed to a permanent rise in spending in and of itself. The issue is that there is no sense of how the lasting increases will be financed sustainably over the medium term,” he said.