Budget 2020: Minister stuck in a straight jacket

Budget 2020: Minister stuck in a straight jacket

Paschal Donohoe took as his Budget 2020 baseline scenario the hardest possible Brexit with the UK crashing out of the EU, if not at the end of October then sometime in the months following. This included a doomsday collapse of the economy from a 5.5% GDP growth scenario this year (four times faster than that forecast for the EU as a whole) to just 0.7% next year.

He has also assumed that the 54,000 jobs expected to be created will not happen and has allowed for a €365m social welfare increase to cover the increased unemployment rate. If this assumed disorderly Brexit takes place next year, the burden will fall most heavily on the indigenous business sector, which mainly exports to the UK.

The Finance Minister has allocated €1.2bn as a Brexit warchest to support this sector and the communities that rely on its continuity. The minister said this excludes any EU fund support, which seems a strange omission. Perhaps the €650m he proposes to borrow will come from this quarter.

However, much of the Brexit warchest comes by way of low-cost loan money. The heightened uncertainty has held back many SMEs, exporters and local traders alike, from investing.

Multinationals dominate our pharmaceutical sector and include Pfizer and Johnson & Johnson, whose exports will not be hit by either tariff or exchange-rate increases, and which can be passed on. The other major business services sector including software and communications and which is dominated by Apple, Amazon and Microsoft will not be affected by tariffs or port transport congestion.

Hence, aggregate exports from Ireland are expected to increase slightly next year, even in the hardest of Brexits.

The bigger issue for Mr Donohoe is that the surging corporation tax income from these multinationals, which rose 13% to €5.8bn in the year to the end of September, is hard to predict.

An unexpected falloff in tax from this sector if it collided with a hard Brexit hitting the Irish-owned business sector could be devastating.

The fact that 45% of all corporation tax came from 10 of these multinational companies, puts rational planning by Mr Donohoe into an uncomfortable straight jacket.

John Whelan is managing director of the international trading consultancy Linkage-Partnership.eu

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