Michael McGrath
Question:61. Deputy Michael McGrath asked the Minister for Finance his assessment of the likely impact on the economy of a no-deal hard Brexit in March 2019; and if he will make a statement on the matter. [31236/18]
View answerWednesday, 11 July 2018
Questions (61)
Oral answers (6 contributions)
The purpose of this question is to establish the current view of the Minister and the Department of Finance on what the implications would be for Ireland in the event of a no-deal hard Brexit, which is something none of us wants to see. We are conscious of the efforts the Government is making to avoid that with our EU partners but it is a distinct possibility. We are now eight and a half months away from the end of March 2019 and I believe we need to have the up-to-date assessment from the Department of what that would mean for Ireland.
A no-deal hard Brexit would arise if the EU-UK negotiations fail to reach an agreement within the Article 50 two-year timeline. This would involve the UK exiting the EU with no successor agreement in place and without a transition period to avoid a cliff edge in March 2019.
In the short term, a no-deal hard Brexit would have a material and real impact on Ireland, which would be asymmetric relative to the rest of the EU. In other words, it would have the largest effect here in Ireland. The shock would likely lead to market volatility, further sterling depreciation and disruption to trade with the UK. This would have negative impacts for consumer spending, investment and competitiveness with potential spillovers to the labour market and public finances. Sectors with strong export ties to the UK such as agrifood, manufacturing and tourism would be especially exposed, in particular at the regional level.
With regard to the impact, my Department’s published research shows the potential impact of a hard Brexit is significant. Joint research with the Economic and Social Research Institute, ESRI, shows that the overall macroeconomic impact would result in the level of gross domestic product being almost 4% below what it otherwise would have been in a no-Brexit scenario after ten years. The level of employment in Ireland would be 2% lower with the unemployment rate nearly 2% higher.
As well as the significant discontinuity and additional costs for businesses arising from the abrupt imposition of tariffs, there would be customs procedures and other non-tariff barriers. Indeed recent reports by the Organisation for Economic Co-operation and Development, OECD, and Copenhagen Economics show that a significant divergence in regulatory standards between the UK and EU would lead to additional economic impacts.
All the existing research assumes no policy changes, which is a necessary, but unrealistic assumption. The best way to deal with the risk of a no-deal hard Brexit is to build up our budgetary capacity and to continue to implement the right domestic policies.
I thank the Minister for his reply and it is a fairly stark scenario that is set out in the event of a no-deal hard Brexit materialising, which none of us want to see. We do need, however, to be aware of what the likely consequences are. When the Minister states the rate of employment would be 2% below what it otherwise would be, with the rate of unemployment being 2% higher, I understand we are talking about figures in the region of 40,000 jobs. This is consistent with what the Department set out at the beginning of last year, that is, there would be 40,000 fewer people employed. The Minister might confirm if that is the Department's current estimate, if that remains the position and that economic output would be approximately 4% less over a ten-year period.
Can the Minister clarify, in respect of his comment about customs and other non-tariff barriers, what we are talking about with regard to this issue and what work has been done by the Department and by the Revenue Commissioners to prepare for that scenario, which none of us want to see?
On the Deputy's additional questions, the job figures the Deputy has associated with the change in levels of employment and unemployment are correct and are in line with what my Department stated a number of months ago.
Second, in respect of the Deputy's question about regulatory alignment, the Copenhagen papers articulated clearly that an effect that will be at least as big as the effect of tariffs on our terms of trade could be a shift in the regulatory rule book for trade between the UK and the European Union. The impact of that on our economic growth and on our jobs at this time is difficult to quantify because it is difficult to forecast what, if any, change could occur. As the Deputy has said, all this points to the UK, the EU and Ireland doing all we can inside the framework of the task force on the UK to come up with a positive trading relationship in the future. It is a trading relationship that would be different from what it is now but we are all conscious of the risks that are inherent in a disorderly or hard Brexit.
I thank the Minister and ask him to set out, in respect of the possibility of the UK leaving the customs union and the fact that World Trade Organization, WTO, terms of trade would then apply, what steps are being taken by way of preparation by his Department and the Revenue Commissioners for that possible scenario, which none of us wants to see.
We are all very conscious of the impact a hard Brexit would have on certain sectors of the Irish economy. The impact would be most acute in many respects across the regions, particularly where agrifood is such an important part of the local domestic economy. We are all working towards avoiding the cliff-edge scenario. It remains unlikely. The President of the Commission was here saying it was a possibility. The Taoiseach has openly talked about it. We need to confront what could become the reality even though none of us wants to see it. Will the Minister address the issue of the preparations being made in respect of customs, World Trade Organisation terms of trade, and what that would mean in practice?
As the Deputy said, the focus of the task force of the Irish and British Governments at the moment is to try to come up with a framework within which trade can continue in the future. In order to protect ourselves from an additional risk of a disorderly Brexit, we are doing three things. The first is to have our national finances in as strong a position as possible in the event of a further exceptional shock in the future, which is why I place great value in a rainy-day fund and in trying to have our books as broadly balanced as possible.
Number two is about the influence we can have in our own economy. It is the reason we are increasing capital investment in schools, colleges, public transport and our road network, to build up the resilience and competitiveness of our economy in the future.
Third, sector by sector we are putting measures in place to support the sectors as they move through areas of risk. I point to the loan funds we have in place now for SMEs and the agrifood sector, one of which is enabled by support from the European Investment Bank.