Bank warns of ‘immediate and severe impact’ to Irish economy in event of no deal
A pre-budget letter from the Central Bank of Ireland outlined the risks of a disorderly Brexit.
A no-deal Brexit would have an “immediate and severe impact” on almost all areas of economic activity, the Central Bank of Ireland has warned.
In the annual pre-budget letter, acting governor Sharon Donnery said that a number of sectors would be disproportionately affected by tariffs and border delays.
Ms Donnery said that a prudent budgetary approach was critical to ensure the economy had sufficient resilience and policy had room to manoeuvre.
A disorderly Brexit is one of the main risks to the Irish economy along with tensions in international trade and the global economic outlook.— Central Bank of Ireland (@centralbank_ie) August 28, 2019
She warned that a disorderly Brexit was one of the main risks to the Irish economy along with tensions in international trade and the global economic outlook.
The letter was published on the same day Boris Johnson asked the Queen to suspend Parliament for more than a month.
The British Prime Minister will temporarily close down the Commons from the second week of September until October 14 when there will be a Queen’s Speech to open a new session of Parliament.
The Queen approved the order on Wednesday afternoon to prorogue Parliament no earlier than September 9 and no later than September 12, until October 14.
Any fiscal response to Brexit must be consistent with long run debt sustainability and does not undo the hard work in re-establishing Ireland’s fiscal credibility Sharon Donnery
Ms Donnery said that if a disorderly Brexit could be avoided, the outlook for the economy was “positive”.
Assessing the potential impact of Brexit, she said: “A no-deal Brexit would have an immediate and severe impact on almost all areas of economic activity.
“Certain sectors such as agriculture, food production and manufacturing have particularly strong links to the UK, both as an export market and as an important source of intermediate inputs into their supply chains.
“These sectors would be disproportionately affected by the imposition of tariffs and non-tariff barriers such as increased border delays and significantly increased administrative requirements for firms exporting goods both to the UK as a final destination and through the UK to continental Europe.”
Referring to the potential fiscal effect of a disorderly Brexit, she noted it would be significantly more challenging.
She added: “Such a situation would lead to a material deterioration in the fiscal position.
“Any fiscal response to Brexit must be consistent with long run debt sustainability and does not undo the hard work in re-establishing Ireland’s fiscal credibility and risk the emergence of unsustainable debt dynamics.”
She noted the importance of reducing public debt in the current favourable financial market conditions, stating that fiscal windfalls, including those from corporation tax, could be ring-fenced to play a part in reducing the public debt burden.
She urged that the 2017 budget proposals to introduce an Irish specific debt target of 45% of GDP should be formalised by the Government as soon as possible.
Pointing to the unpredictability of corporate tax revenues in recent years, she said: “Any strategy on corporation tax receipts should work in tandem with the medium-term expenditure framework to ensure that revenue windfalls are used to strengthen the resilience of the economy rather than finance permanent expenditure growth.
“Favourable market conditions and windfall tax revenue should be used to reduce public debt and build buffers for future downturns as opposed to financing current expenditure.”
On Tuesday, Finance Minister Paschal Donohoe said the Government had not decided whether to base October’s budget on a no-deal Brexit scenario but added that the risk of the UK crashing out was growing.