Paschal Donohoe: Disorderly Brexit could see €6bn downturn
Finance Minister Paschal Donohoe has warned of a €6bn downturn in the case of a disorderly Brexit occurring later this year.
Speaking at the Oireachtas Budgetary Oversight Committee, Mr Donohoe said if, as appears increasingly possible, there is a disorderly Brexit, there will be significant pressure placed on the public finances.
“A disorderly Brexit scenario could involve a headline deficit of between -½ and -1½ per cent of GDP for next year. This amounts to a negative swing in the headline balance of up to €6 billion,” he said.
The United Kingdom’s exit from the European Union will have a detrimental impact on our economy and public finances whatever form it ultimately takes, he said.
But the magnitude of that impact depends upon how disorderly that exit is. There is no precedent in modern economic history for an event like Brexit, and, as such, predicting its impact precisely is difficult, the minister warned.
Upon a disorderly Brexit, the Government will adopt a holding position and allow the automatic stabilisers provide counter-cyclical support. Temporary, targeted Brexit supports will be provided to those sectors and regions most affected. This is in line with the advice of the IMF, he said.
Should a deal be reached in time, Mr Donohoe confirmed that the Budget 2020 framework involves a budgetary package of €2.8 billion for 2020, confirming he has €700 million of unallocated funds to be decided upon on Budget day.
“With expenditure pre-commitments of €1.9 billion, (including a €0.7 billion or 10 per cent increase in capital investments), and an expenditure reserve of up to €0.2 billion, with the capacity to accommodate funding requirements for the National Broadband Plan and the National Children’s Hospital,” he said.
This leaves €0.7 billion to be specifically allocated as part of the Budget. In the event of an orderly Brexit, given our position in the economic cycle, this is the appropriate budgetary policy and delivers a surplus of 0.4 per cent of GDP. This would allow for capacity to deal with the impact of Brexit,” he added.
The twin approach, he said, mitigates the requirement for a supplementary budget in the event of a disorderly Brexit.
This year, he said the Department of Finance is projecting GDP growth of 3.9 per cent. We are also projecting a budget surplus of 0.2 per cent of GDP. With unemployment now at its lowest level since 2005, the labour market is approaching full employment, he said.
The minister confirmed that he has called on his officials to produce a paper to examine the various “fiscal vulnerabilities in Ireland, examining a range of policy options to mitigate the risks inherent in the concentration of corporation tax receipts, and those resulting from a narrow and literal interpretation of the European fiscal rules”.
“This paper will be published shortly and I will consider the proposals contained within, with a view to making a recommendation to Government in the autumn,” he said.
