How to stop a no-deal Brexit drama turning into a crisis
Cliff Taylor: An old-style pre-election budget would be a recipe for economic trouble
Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe, who faces a tricky job in framing the forthcoming budget. Photograph: Dara Mac Dónaill
The question is not whether we are ready for a no-deal Brexit. It is whether we are as ready as we can be. It is impossible to be fully prepared for such an unprecedented event, because no one knows how it will play out – politically or economically. All Ireland can do is try to see around as many corners as possible and try to limit the damage. And to realise that things will happen in a chaotic no-deal scenario that nobody ever thought of – and so we need scope to respond.
There is, unfortunately, no option now but to take this risk seriously, with estimates suggesting it could cost more than 50,000 jobs and leave little overall growth in the economy next year.
The strategy must be to try avoid turning a no-deal drama into a full-scale economic crisis. There are sectors and parts of the country which are particularly exposed – and of course the monumental political issue of the Border. On the plus side, borrowing money has never been cheaper and much of the economy will not be directly effected. However, the risk is of significant disruption in some areas causing a wider hit to confidence – which quickly spreads the damage via consumer spending and investment.
Nobody really knows what a no-deal Brexit would mean. Even the Department of Finance, normally one to calibrate each forecast down to every last euro, says that in a no-deal Brexit the deficit for next year could be anywhere between €1.75 billion and €5.25 billion.
There are the political uncertainties – how would a no-deal be handled; when would tariffs be introduced, especially by the UK (we would assume the European Union won’t hang about); and what would happen at the Border. And, crucially, would both sides quickly come back to the table, or would there be a lengthy and damaging stand-off?
This feeds into the economic picture – where there are already more than enough uncertainties as it is. What would the delays be like on Irish trade crossing the land bridge across the UK to the continent? Despite some special measures, this is a real threat. Of course so is the threat of tariffs being imposed – sooner or later – on exports to the UK, notably food, and the huge administrative barriers that all companies trading with the UK will face.
So the strategy for the budget, or at least the no-deal version, will probably be based on two things. One will be to contain the damage by helping the affected sectors and fire-fighting as best as possible. The other will be to portray this as a sharp – but temporary – economic shock. One that the economy can recover from in a couple of years.
This is vital, because it will influence the attitude of those lending the country money and impact on confidence. The tricky bit is that nobody really knows how bad it will be, or how long it will last. Protecting business, consumer and investor confidence against such a backdrop is challenging, to put it mildly.
We need to accept that if it is the few-bob-for-everyone nonsense we have seen in the past, we are just asking for trouble
We are already seeing some caution – among businesses and homebuyers, for example. And you can’t blame them. Somebody asked me recently what they should do as they planned to sell a house in the North, and one in Dublin – and then buy another one in Dublin. And as they will be living in the Republic, the sterling/euro exchange rate is another factor in their conundrum. There is no ‘right’ answer. Who knows what he should do? And on a wider scale, the idea that businesses or the Government are “Brexit-ready” is just a meaningless slogan. They aren’t.
So the job for Minister for Finance Paschal Donohoe on budget day is tricky. Very tricky. The Brexit drama will probably still be playing out ahead of the Halloween deadline. He probably won’t know what is on the cards.To avoid having a second “emergency” budget in the event of a no-deal, he will outline his willingness to let the budget move from the black to the red if this happens. He may also, you might think, seek to get voted through the Dáil some lump of contingency money to spend protecting sectors that are worst hit, if a no-deal does occur.
Two things seem important here. One is that the Minister leaves enough leeway to deal with a really bad scenario. Economic opinion varies on how bad the impact will be. But we simply can’t get into a situation where the Government forecasts that the deficit could rise to, say, 1.5 per cent of gross domestic product and by next March is it clear that it is going to be 3-4 per cent. We have one big advantage: we can borrow really cheaply and interest rates look set to stay low. But to take full advantage we need to look competent in minding our house.
And this will mean doing very little beyond what is already planned. Forget tax cuts. Try to protect investment. Hope that the worst of it will pass in a couple of years and leave enough in reserve to respond.
The second is that we start to act as if a crisis might be starting to hit. There is still a real sense in the public debate that the Government has loads of cash to spend and that we can expect a kind of pre-election budget. If targets are allowed slip this year – notably on health spending – then we are asking for trouble. If corporation tax doesn’t overdeliver again to pay the bills, we could then end up missing this year’s figures, before we even meet the no-deal threat.
We all need to accept that if it is the old-style, few-bob-for-everyone, pre-election nonsense we have seen in the past, we are just asking for trouble.