TDs to be warned debt levels mean Ireland is very exposed to the next crash

“Dramatic cuts” will be needed to Government spending if it continues to spiral, while high debt levels mean the country is very exposed to the next crash, TDs will be warned today.

The stark assessment from two of the country’s top economists comes as Finance Minister Paschal Donohoe will seek to re-establish his control of the public finances by publishing two budget options, one in the case of a Brexit deal before October 31 and one in the case of a no-deal Brexit.

A no-deal Brexit could turn an expected surplus into a deficit in the range of up to 1.5% for 2020, Government sources told the Irish Examiner.

In his summer economic statement, Mr Donohoe looks set to adhere to a €2.8bn increase in spending for next year.

However, €2.2bn of that is already committed, leaving just €600m to be allocated in the pessimistic scenario.

Warnings from economists Colm McCarthy and Stephen Kinsella, who will appear before the Oireachtas budget oversight committee today, highlight Ireland’s limited options to protect itself from a major economic shock.

Mr McCarthy is set to criticise Mr Donohoe for the “opportunity lost to get the budget firmly into surplus over the past several years”.

Mr McCarthy will warn that if the country is to avoid another troika-style bailout, budget policy must be “sustainable”, yet Ireland’s high debt levels and the lack of our own currency means our options to deal with a downturn are severely “limited”.

“Whenever the next crisis comes, Ireland will be starting with a very high initial debt burden and risks re-classification in a nervous debt market,” he will state.

He will warn that, aside from the UK itself, the “downside from Brexit for Ireland is greater than for any other EU member, whatever form Brexit takes.”

He will say the “risk of a no-deal” — “the most damaging outcome for Ireland” — has “risen sharply in these last few weeks”.

Mr Kinsella, an economist at the University of Limerick, will warn that Ireland “risks replaying the 2007-2009 period of drastic cuts to public expenditure on its currently forecasted path of spending increases.”

Mr Kinsella will call on the Government to “stress-test” the public finances, saying the “time to do so is now, when the public finances are strong”.

Writing in today’s Irish Examiner, Mr Donohoe admits his summer economic statement will be presented against an economic backdrop that is considerably more uncertain than at the time of the last budget.

“So, I am formulating my budgetary strategy against an unusually complex and uncertain economic background,” he writes.

“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 be able provide a boost to the economy in the event of a disorderly Brexit.”

Fianna Fáil has called on the Government to leave the option open for an emergency budget later in the year in the event of a no-deal Brexit.

The budget is scheduled for October 8, with the Brexit deadline set for October 31.

A letter to Mr Donohoe from Fianna Fáil finance spokesman Michael McGrath, seen by the Irish Examiner, calls for the Government to hold some monies in reserve in order to make “targeted interventions” to protect sectors most likely to be adversely affected by a disorderly Brexit, such as farming.

“If the Budget is not based on a ‘no-deal’ Brexit and that is what subsequently happens, it will be important to have sufficient headroom available to be able to provide targeted supports to the sectors of the economy worst hit by Brexit,” he writes.

Mr McGrath says that, given the uncertainty posed by Brexit and the need for political stability, Fianna Fáil would enter the budget talks in good faith with a view to “facilitating the passage of a budget in October”.