Brexit could leave hole in Government budget, watchdog warns

Brexit could leave a major hole in the Government's budget, requiring it to cut spending or raise taxes, the Irish Fiscal Advisory Council has warned.

The State’s financial watchdog said a “large budget deficit” could emerge in the wake of a no-deal Brexit due to falling taxes and rising unemployment-related costs.

“This is even before potential customs infrastructure and supports to hard-hit sectors are considered,” the council said in a pre-budget statement.

The Irish economy is expected to suffer a significant economic shock if the UK leaves the EU without a deal. A confidential report circulated to Ministers last week warned that 10,000 jobs in the tourism and hospitality industry alone could be lost within the first three months.

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“The Government might need to cut spending or raise taxes to prevent debt ratios from rising,” the council said. However, it said measures to deal with the costs of a hard Brexit should be accommodated as far as possible.

In its statement the council also warned of “further slippages” in Government spending this year because of budgetary overruns in health, the payment of the Christmas bonus to social-welfare recipients and underestimated social payments. This could result in spending being €1.3 billion higher than previously planned, it said.

The council has previously accused the Government of mismanaging the public finances and failing to keep spending in check while using exceptional corporation tax receipts to paper over the cracks.

“Repeating the pattern of slippages would be inappropriate,” the council warned, adding that it could add further overheating pressures to the economy and reduce the scope for accommodative budgetary policy in the future.

“ If spending overruns occur, the Government should find offsetting savings in other areas,” it said. “It should not rely on further surges in corporation tax receipts, which could prove unsustainable, to fund slippages.”

‘Temporary’ gains

Government revenues have been boosted by “unexplained” corporation tax and a strong bounce in the economy, it said. “These gains are likely to prove temporary,” the council warns.

For Budget 2020, the council, which is chaired by University College Cork economist Seamus Coffey, recommended the Government stick to its plans for a €2.8 billion budgetary expansion. This would leave it with a budget-day package of €600 million, given that €2.2 billion is already committed. That, the council said, was in keeping with the sustainable growth rate of the economy.

“It would also reflect risks of a disorderly Brexit, the reliance on corporation tax, possibilities of overheating and the rapid rise in spending between 2017 and 2019,” it said.

“There is a case for more caution given the risks of Brexit and the worsening global outlook. If spending overshoots in 2019, the Government should scale back its pre-commitments for 2020,” it said.

The council said that although the domestic economy continued to perform strongly and risked overheating, the international economic outlook had deteriorated in recent months. “While the situation is volatile and evolving, risks of a hard Brexit are high,” it said.

The council said the pace of Government spending increases had been fast in recent years, accelerating from 4.9 per cent in 2015 to 6.7 per cent in 2018, reflecting large in-year spending increases, particularly in health.