A prudent budgetary approach is critical to ensure the economy has sufficient resilience and policy has room to manoeuvre – Acting Governor, Sharon Donnery

• A disorderly Brexit is one of the main risks to the Irish economy along with tensions in international trade and the global economic outlook.
• However if a disorderly Brexit can be avoided, the outlook for the economy is positive and the potential risk of  overheating calls for more ambitious fiscal consolidation.
• 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.

The annual pre-Budget letter (PDF 1.07MB) to the Minister for Finance from the Central Bank of Ireland was published today. The letter from Acting Governor, Sharon Donnery, to the Minister for Finance, Public Expenditure and Reform, Paschal Donohoe TD, is published in line with the Central Bank’s mandate to provide analysis and comment to support national economic policy development. 

Assessing the potential impact of Brexit, Acting Governor Donnery 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. “Such a situation would lead to a material deterioration in the fiscal position”, and that this assumes “automatic stabilisers are allowed to operate fully, as would be appropriate”. She added “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”.

Not all risks are to the downside and in the event that a disorderly, no deal Brexit can be avoided, the economy is expected to perform strongly in 2019 and 2020. She noted that “…there will be a material risk that continued expansion would give rise to overheating pressures.  With output at or close to potential, a tighter fiscal policy would help to manage demand pressures. The uncertain environment also highlights the necessity of reducing the dependence on potentially transitory revenues and building buffers to facilitate a stabilising countercyclical fiscal expansion in the event of a future downturn. Failure to run sufficient surpluses during phases of good economic performance may limit the Government’s room to manoeuvre.” 

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 “Budget 2017 proposals to introduce an Irish specific debt target of 45 per cent 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”.