Budgetary prudence key to preparation for Brexit hit to economy

The Government has made a few efforts to play down expectations about the October budget. But without much success, it would appear. The post-Easter trade union conferences have seen a flood of motions on pay and any suggestions of a pullback on tax cuts is met by Fianna Fáil rumblings that universal social charge cuts, in particular, are part of the confidence-and-supply agreement under which it props up the Government.

The debate on the budget is already focusing on where to spend the €3.2 billion estimated to be available for new tax cuts and spending increases. The Central Bank has forecasted growth of 4 per cent plus for the next couple of years and official Government predictions next week will be similar. There is no question among those looking for a share of the loot that it might not all be available, or that it might not be wise to spend it all in 2019.

The economy is barrelling along – but faces a big risk next year if Brexit goes wrong. This has implications both for the amount of cash which should be spent in the budget and where it should go. It provides two arguments for caution. One is to avoid stimulating an already fast-growing economy if the Brexit talks progress and remove the immediate threat of a 2019 car-crash exit. And the other is to leave a bit in reserve in case the talks go wrong.

Worst-case scenario

This week consultancy firm PwC repeated its view that, despite recent progress in the talks, a hard Brexit remained the most likely outcome. In a worst-case scenario with the immediate imposition of custom checks and controls, delays, uncertainty and possibly tariffs, it would be nasty. It would concentrate a lot of the economic hit into a short period of time.

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Yet there is an extraordinary lack of public debate here about this risk. Understandably, after all the talk, a kind of Brexit boredom has set in. The March deal which allowed the talks to proceed appears to have lulled everyone into a false sense of security. This is particularly important in relation to the transition agreement, a kind of standstill which is due to keep trading arrangements roughly as they are until December 2020, thus removing the immediate risk of economic upheaval.

This transition agreement will come into force only if an overall deal can be reached on the withdrawal agreement – and this is far from certain. The Border conundrum continues to loom large and we are a long way from a deal on what should appear in the withdrawal agreement.

Public pay must must go back to where it was,we are told, and 'temporary' taxes such as the USC should be phased out. Some chance

In outline, either British prime minister Theresa May will have to give up a lot of her red lines or there will be no deal. If there is a middle road between these two extremes, no one has yet found it.

A deal is due on the withdrawal agreement by October – around the time of the budget – but the talks may well run on. There is so much still be be sorted and so little time. Unfortunately the last-minute nature of the political deal-making process is uniquely unsuited to negotiating something as complex as Brexit. A lot of wiser old heads around Europe are now seriously worried.

This is tricky for the Government, in terms of managing people’s expectations. It needs to fight for a Brexit deal on one side, while simultaneously warning about the impact of there not being one – or a minimal deal meaning a harder version of Brexit – on the other. But so be it: it would be crazy to have some kind of theoretical budget debate without acknowledging the Brexit elephant in the room.

Uncertainties

Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe have sent out a few hints that not all the money available will be spent on budget day. It is welcome that Fianna Fáil is now suggesting it might be amenable to supporting such a strategy, as we report today. But I suspect the "We must not repeat the mistakes of the past" narrative will get the Government so far. They need to start underlining the uncertainties we are facing. Previous forecasts suggest that a hard Brexit might cut close to one percentage point off economic growth for the first few years – and the disruption of a no-deal scenario could easily lead to a bigger hit in the first year or two, effectively concentrating more of the pain into the earlier years.

Right now the budget debate is all about the leeway to stay within European Union rules while still spending an extra €3.2 billion on spending increases and tax cuts, a multiple of what was available in recent years. But we don’t have to spend every last cent in a rerun of the early 2000s approach which overinflated the economy and left us goosed when the crash came.

This is politically so difficult because so much of our debate is based on “restoring” people to where they were before the crash. Public pay must must go back to where it was,we are told, and “temporary” taxes such as the USC should be phased out. Some chance.

We all forget that part of the reason why the economy crashed was that previous levels of tax and spending were unsustainable. And I strongly suspect that all the spending plans being now put in place will not be affordable, while at the same time cutting tax levels. The economy has done extraordinarily well over the last few years and this is now delivering jobs and higher living standards. The job is to do everything possible to ensure that we can keep moving forward in the years ahead, albeit probably at a slower pace. We can’t let the inevitable Brexit hit – whenever it comes – push us into another period of economic reversal and retrenchment.