Paschal Donohoe: Why I must budget for a disorderly Brexit

Paschal Donohoe: Why I must budget for a disorderly Brexit

Today, I will publish the Government’s summer economic statement, setting out the economic context and budgetary strategy that will frame Budget 2020, which I will present to Dáil Éireann on October 8.

Economic context

The statement will be presented against an economic backdrop that is considerably more uncertain than it was at the time of the last budget, in October 2018.

Unemployment is below 4.5% — that is close to full employment — but challenges loom large on the horizon.

The external slowdown in the global economy reflects, to some degree, the normal ebb and flow of economic activity.

Of greater concern is the possible dismantling of the global trading system, which has been the driving force behind greater worldwide prosperity and improved living standards in this country.

However, the main source of uncertainty is the prospect of a disorderly exit of the UK from the European Union at the end of October.

A disorderly Brexit would have very serious economic and social consequences for Ireland and the Government is working hard to minimise the potential fallout.

Budgetary strategy

So I am formulating my budgetary strategy against an unusually complex and uncertain economic background. 

This involves a difficult balancing act: The need for tax and spending measures that avoid overheating the economy, while, at the same time, building up the necessary resources to boost the economy in the event of a disorderly Brexit.

Therefore, the overarching objective of the budget must be to protect the living standards of our citizens, irrespective of the type of Brexit that occurs.

To address this, I intend to present two scenarios in the summer economic statement.

The first is based on the assumption of an orderly Brexit at the end of October, with a transition period until the end of next year, as originally envisaged. 

The second is based on a disorderly Brexit later this year.

Over the summer, the Government will monitor developments in the UK, engage with our EU partners, and refine our contingency plans. 

Government will decide in September which scenario is the most likely and base the budget for next year on that.

Position of strength

The turnaround in our economy has been much faster than anyone could have imagined. 

And while we welcome the significant strides that have been made since the financial crisis of 2008, the improvement has created knock-on consequences in the pent-up demand for housing, in addition to other infrastructural pressures.

These capacity constraints are the by-product of a strong economy, and the Government is addressing them.

This is why we are prioritising capital investment. Addressing infrastructural constraints, through investment in housing, transport, and other key areas, is essential to ensure the economy remains competitive and resistant to external shocks. 

Capital spending next year will amount to €8bn; more than double the level of a few short years ago.

Our economy is very different now than it was on the eve of the financial crisis. Credit growth from 2005 to 2009 averaged over 20% per annum; from 2015 to 2019, it has been broadly level. 

We have diversified our economy and economic activity is more balanced. For example, in the bubble years 10% of the labour force was employed in construction; the figure is now 6%.

When it comes to the public finances, the contrast is even starker. 

Paschal Donohoe: Why I must budget for a disorderly Brexit

At the peak of the last economic boom, under Fianna Fáil, day-to-day spending grew by 57%, between 2005 and 2009, representing an average increase of 11% per annum. 

This pro-cyclical approach was clearly inappropriate for a booming economy.

By contrast, between 2015 and 2019, as we emerged from the bailout period and with significant pent-up demands and pressures in our economy and society, day-to-day spending has grown by a much more modest 19%, representing an average, annual growth rate of about 4%. 

This is below the rate of growth in the economy and the opposite of the pro-cyclical approach of the past.

As a result of our responsible management of the economy, living standards in this country have improved and we are on a much more stable footing. 

We now need to work hard to ensure we remain there and continue to make sustainable progress.

We face an uncertain few years ahead, but we are in a strong position to address any challenges that come our way.

Careful management of our economy and the public finances will help us to overcome these challenges and to maximise any opportunities that arise in the months and years ahead. 

Today’s statement will set out clearly how we intend to do just that.

Paschal Donohoe TD is the minister for finance and for public expenditure and reform

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