Donohoe warns no-deal Brexit could halt economic growth

Government expects 55,000 jobs to be lost in first two years of a disorderly Brexit

Minister for Finance Paschal Donohoe with Robert Watt (left) secretary general at the Department of Public Expenditure and Reform, and John McCarthy, chief economist at the Department of Finance, at the  Summer Economic Statement.  Photograph: Aidan Crawley

Minister for Finance Paschal Donohoe with Robert Watt (left) secretary general at the Department of Public Expenditure and Reform, and John McCarthy, chief economist at the Department of Finance, at the Summer Economic Statement. Photograph: Aidan Crawley

 

The Government has accepted for the first time that a no-deal Brexit could wipe out economic growth next year.

Publishing the Summer Economic Statement, Minister for Finance Paschal Donohoe said growth could be reduced to zero in 2020 if the UK crashes out of the EU without a deal.

The department had previously projected growth falling to 1 per cent in a no-deal scenario. The revised forecast comes as Conservative MP Boris Johnson, the favourite to become the next British prime minister, has said repeatedly that he is prepared to lead the UK out of the bloc without a deal on October 31st.

The Government expects up to 55,000 jobs to be lost in the first two years of a disorderly Brexit, and up to 85,000 over the longer term. Overall employment is, however, expected to grow during the period, just not by as much.

If a no-deal Brexit is avoided the Government expects gross domestic product (GDP) to expand by 3.3 per cent next year.

Mr Donohoe said he was targeting a budget day package of €2.8 billion. With €2.1 billion already committed to current and capital spending plans, this leaves €700 million for additional measures.

The Government has already committed to allocating resources on a two-to-one basis in favour of expenditure, which implies just €230 million will be available for tax cuts, barely enough to widen one of the income tax bands.

Mr Donohoe indicated that tax cuts may have to be shelved if there was a no-deal Brexit. Such a scenario would also see the Government’s planned budgetary surplus of 0.4 per cent turn to a deficit “in the region of -0.5 to -1.5 per cent” of GDP next year.

Overruns in health

Any tax cuts could also be difficult to deliver in the context of further budgetary overruns in health. A sudden surge in health spending last month on foot of additional payroll costs has been reported, and the HSE and the Department of Health are currently examining options to make savings over the balance of this year.

Mr Donohoe has previously indicated that unplanned spending in one area would have to be covered by unspent money elsewhere in Government, or extra tax receipts, to prevent it damaging the State’s balance sheet.

The Government used an unexpected surge in corporation tax last year to plug the hole in its health budget at that time.

Mr Donohoe said the Irish economy was at a “fork in the road” between possible overheating, the result of a rapid turnaround in employment which has bid up wages, and “the very real possibility of a disorderly Brexit”.

“The appropriate budgetary strategy must be to avoid further inflating the economy and, concurrently, build up resources which can be deployed in the event of the UK leaving the EU without a trade agreement at end-October,” the statement said.

“From a policy perspective, the virtual attainment of full employment means that budgetary policy must lean against the wind – it must be counter-cyclical so that mistakes of the past must be avoided.”