A NO-DEAL BREXIT could push Ireland’s budget back into the red for another five years – putting the squeeze on the government in meeting its pledges to ramp up spending on infrastructure and other needs.
In a recent note on the potential impact of a hard Brexit, the Parliamentary Budget Office (PBO) said the hit to the economy would push employment, company profits and consumption below the current official forecasts.
That would cut tax incomes and lead to higher welfare costs, dragging the budget back into negative territory this year “with further increases in the deficit to 2023″, based on previous Department of Finance estimates.
The PBO added that the risks from a no-deal Brexit to the public finances were influenced by existing policies as Budget 2019 had been built on the assumptions that there would be little trade friction between the EU and the UK.
An economic shock from a no-deal Brexit leading to a deterioration in the deficit highlights the fragility of the public finances,” it said.
With just over 30 days until the Brexit deadline, Irish officials are getting increasingly jittery about the possibility that the UK will go crashing out of the bloc without an agreement in place – although Taoiseach Leo Varadkar yesterday said he expected either a deal would be struck or the deadline would be extended.
Tánaiste Simon Coveney recently warned that Ireland would probably face deficits for “another year or two” in the case of a hard Brexit.
The PBO, which provides independent budget analysis to the Oireachtas, added that letting tax revenues fall while ramping up spending “may be merited” with a no-deal Brexit, depending on the size of the resulting economic shock.
That could be complicated, however, by Ireland’s already-high debt curbing the country’s ability to continue borrowing, while EU fiscal rules – which aim to stop member states from large deficits “may also be a constraint”.
Ireland’s gross government debt stood at €216 billion in the third quarter of last year, among the highest per-capita amounts in the developed world.
Back in the black
The State posted a small surplus last year, its first since 2006, on the back of buoyant company tax receipts, which have recently been boosted by the windfall from a handful of foreign firms.
The budget had included forecasts for a small deficit both last year and in 2019 followed by increasing surpluses to 2023.
A large share of the predicted increases in tax revenues were earmarked to go towards higher capital spending to cover major projects included in the National Development Plan, like Dublin’s €3 billion MetroLink.
Goodbody chief economist Dermot O’Leary told TheJournal.ie that he expected Ireland to go into a “mild” recession next year in the case of a no-deal Brexit.
“It is very likely that we would see a budget deficit of 2% or so, and it will be difficult to get back into surplus in the following years,” he said.
While the government would be “unwise” to cut spending in the short-term, a longer-term hit to the public finances could force its hand.
If it was something that was longer-lasting, or other things happen like that corporation tax receipts aren’t sustainable, you would need to make savings elsewhere.”
However in a no-deal scenario, O’Leary expected that Ireland would be given extra leeway by the European Commission to temporarily break the EU’s spending rules.
“Given the fact that Europe is well aware that this external shock would affect Ireland more than any other country, there’s a likelihood of fiscal support coming from Europe for the sectors that are most affected,” he said.
Last year the government was criticised by its financial watchdog, the Irish Fiscal Advisory Council, for its repeated failure to rein in unbudgeted spending increases in areas like health since the economic recovery.
That had left the State’s finances vulnerable to shocks like higher-than-expected Brexit costs or a sudden drop in volatile corporate taxes, the council said.
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