Tuesday 23 July 2019

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Budget 2020 prepares for the worst

Wednesday, 26th June, 2019 4:30pm

The Government this week published its Summer Economic Statement (SES) with two budgetary scenarios outlined in the case of an orderly or disorderly Brexit. A no deal Brexit could result in GDP drop of €6.5 billion.

On Tuesday, the Minister for Finance and Public Expenditure and Reform, Paschal Donohoe published the SES mentioning that the economic situation is “in good health at present”, despite the uncertainty regarding Brexit.

The SES sets out the Government’s medium-term economic strategy and updates the parameters ahead of Budget 2020.

Minister Donohoe said: “A decade after the financial crisis, the public finances have been placed on a sustainable path, the economy is at full employment, public services are improving and living standards are rising. And with the level of employment moving above the 2.3 million mark, its highest level ever, the overarching objective of Government policy is to build upon the progress we have made in recent years.

“That said, it is clear that the external environment is becoming increasingly challenging and at this point in time a disorderly Brexit is a real possibility. That is why I am setting out two budgetary scenarios in this SES – the first involves an orderly Brexit occurring, while the second involves a disorderly scenario.”

A decision will be taken in September on which scenario is to be implemented when it will be clearer as to what Brexit is likeliest to happen.

He added that since the UK referendum result in 2016, steps have been taken to build up the resilience of the economy in order to deal with adverse economic shocks. This includes building up fiscal resources, reducing Ireland’s debt burden, establishing the Rainy Day Fund and increasing public spending.

The SES sets out that:

- The Budget 2020 framework involves a budgetary package of €2.8 billion for 2020.

- This would accommodate a surplus of 0.4 per cent of GDP next year and a budgetary package of €0.7 billion once pre-committed current and capital expenditure is accounted for

- In the event of an orderly Brexit, the budgetary policy is to stay within the parameters set out in the Stability Programme Update published in April (targeting a surplus of 0.4 per cent of GDP)

- With current and capital expenditure commitments amounting to €1.9 billion and an expenditure reserve of up to €0.2 billion being established to accommodate funding requirements for the National Broadband Plan and Children’s Hospital, this leaves €0.7 billion to be specifically allocated

- Under the disorderly Brexit scenario, this could involve a headline deficit in the region of 0.5 to 1.5 per cent of GDP for next year

- This would allow for the automatic stabilisers to provide counter-cyclical support allowing for a smaller surplus and temporary, targeted support for the sectors most affected by Brexit.

Fianna Fáil Spokesperson on Finance Michael McGrath welcomed the publication of the SES but warned that a no deal Brexit could represent a huge drop in GDP.

Deputy McGrath said: “In an orderly Brexit scenario, Ireland is projected to run a general Government surplus of 0.4 per cent of GDP in 2020. However, in a no deal scenario, this would deteriorate to a deficit of between 0.5 per cent to 1.5 per cent. This could represent a reduction of €6.5 billion, which will no doubt have to be funded by increased borrowing from the market.

“If we look out to 2024, a no deal Brexit would worsen the budgetary position by nearly €30 billion. These figures are stark and they underscore the importance of achieving an orderly Brexit.

“We need the State to have the capacity to respond if a no deal Brexit comes to fruition. We also need to be prepared to protect the vital public services that people depend on,” he added.

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