Belfast Telegraph

View from Dublin: implications of Brexit being finally laid bare

Paschal Donohoe
Paschal Donohoe

By Brendan Keenan

The puzzle of the Irish Government's apparent intractability on the Brexit question deepened, if anything, with the recent publication the Summer Economic Statement - where the differences between an orderly and disorderly UK departure were laid starkly bare.

It is an acute dilemma for an election-driven Taoiseach. On the figures, an agreed withdrawal with a one-year transition would barely dent the budgetary position, allowing even the few square metres of fiscal space left over after recent splurges to be put to use.

A disorderly exit, on the other hand, would knock a large hole in all those plans. The Irish government may be the only body left which can prevent such an outcome. But from its point of view, the political crisis which would follow any weakening of the backstop arrangements might well outweigh the billions which would be saved.

At its extreme, according to the summer statement, the difference would be around €4bn (£3.58bn) in 2021 alone. That translates to a deficit of almost 1% of national income, excluding the operation of multinational companies (GNI).

We are told there will be a draft budget for each of these scenarios come October, but that is not quite what we see in the statement. There is one budget, worth €3bn (£2.68bn) - although much of that is already in train - leading to a surplus of around 0.5% of GNI if there is an orderly Brexit.

If a disorderly one is expected, it will be the same budget, not a different one. It will simply include added borrowing of up to €3bn to cover the loss of revenue and increased spending as the Brexit crisis erupts.

The politics of introducing such a whopper of a budget while nothing bad has actually happened must be very tempting. And if the Halloween horrors are not unleashed, who is to say when and how it might all be reversed?

On the figures, Remain would not be much different from the consequences of an orderly withdrawal.

In either case, the government will be left with the more difficult political task of slowing the economy. As in 2006, anecdotal evidence suggests it is overheating more than the statistics suggest. Back then, the anecdotal evidence turned out to be correct.

The recent past might also make us wonder if that disorderly scenario may not in fact be optimistic. The Irish public finances consistently prove more elastic than expected. Work is still going on in the Department of Finance to determine just how volatile are general tax revenues when conditions change - and now we have the uncertainty over corporation tax revenues as well. The department had a plausible argument in 2006 that the Exchequer could handle the emergence of a deficit of 8% of GDP, which seemed as much as anyone could reasonably expect. It turned out to be twice that. Nothing on that scale is anticipated now, but that is not to say that deficits could be bigger than the range forecast in the summer statement.

The year 2019 is very different from 2009, mostly for the better but much worse in one particular area: debt. Ireland was just about the least indebted state in Europe 10 years ago; now it is one of the most. We will not need as much fiscal room as we did after the crash, but we don't have much to begin with, because of the size of the national debt.

On the positive, the weighted average maturity of Ireland's long-term marketable and official debt was estimated at 10.5 years at end-2018, one of the longest maturities in Europe.

The Finance Minister was at his most gnomic in his closing address to the National Economic Dialogue two weeks ago. He pointed out that day-to-day current spending is just 6.5% higher than the peak of 2009, which we may take as a defence for why it has risen at that rate annually for the past couple of years.

More intriguing, if more obscure, were Paschal Donohoe's, comments on capital spending, which is also rising rapidly. He noted that in most departments, capital spending is significantly above levels which many had said were unaffordable when the plans were first announced.

That might be a criticism of pessimistic commentators and advisers, but it might also be a warning that future capital spending demands will get a cool reception if things turn down, given his other assertion to the assembled social partners that the budgetary parameters forecast for a hard Brexit will have to be kept.

That will be difficult enough, even if things are no worse than the official forecasts. In particular, the consequences for a debt burden as large as Ireland's look alarming. In its less-than-complimentary advice to the Government this month, the Irish Fiscal Advisory Council (IFAC) endorsed the forecasts, but also analysed the risks in Irish public debt.

This normally routine exercise has become more pertinent as Brexit dangers increase.

Belfast Telegraph