Dáil Éireann Debate, Tuesday - 5 February 2019
160. Deputy Lisa Chambers asked the Minister for Finance if sensitivity analysis was conducted on the impact of a hard or no-deal Brexit on budget 2019; if in the event of a no-deal Brexit changes to measures announced in budget 2019 are envisaged; and if he will make a statement on the matter. [5045/19]
View answerMy Department’s Budget 2019 forecasts incorporate, as a central scenario, that the UK will make an ‘orderly’ exit from the EU. This would involve a transition period being agreed that extends or replicates existing frameworks until end-2020, i.e. the UK is assumed to remain in the single market and customs union during this period. From 2021 onwards, the baseline forecasts assume that the EU and UK will conclude a free trade agreement.
The impact of this scenario is to lower the level of GDP by almost 2 percentage points over the 2021-2023 period relative to a no-Brexit baseline. This feeds through to the fiscal projections underlying the Budget. The macroeconomic forecasts underpinning the Budget were endorsed by the Irish Fiscal Advisory Council as is legally required.
The section on policy strategy in the Economic and Fiscal Outlook, published as part of Budget 2019, identifies the risk of a disorderly exit and outlines that the policy response should be to enhance the resilience of the economy. Chapter 6 of the same document, on Risk and Sensitivity Analysis, includes Box 5 on alterative Brexit scenarios. This shows that over the medium-term (i.e. after five years) the impact of a disorderly Brexit would be to reduce the level of GDP by around 3¼ percentage points compared with a no-Brexit baseline. It explicitly states that this should be seen as a minimum not a maximum effect.
The Budget 2019 Economic and Fiscal Outlook includes a sensitivity analysis, using the ESRI’s COSMO model, on the impact of a 1% deterioration in global demand on our public finances, as measured through the general government balance. This specific external shock could arise through a number of channels, including through Brexit.
A number of UK studies on the economic impact of Brexit on the UK, published in November last year, subsequent to Budget 2019, have found that it will be more negative than previously assumed. Among these studies was one by the UK National Institute of Economic and Social Research (NIESR), whose previous work on the issue was a key input to the joint Department of Finance ESRI research published in 2016.
My Department is therefore working with the ESRI on a new assessment of the economic and fiscal impact of Brexit on Ireland. This will update the 2016 exercise which has formed the basis of my Department’s forecasts since then. The results will also inform my Department’s next set of macroeconomic forecasts in the Stability Programme Update in April. This is being treated as a priority and the output is expected later this quarter.
Pending completion of the more detailed work currently underway, my Department prepared a preliminary ‘holding’ assessment based on an initial application of the latest UK NIESR estimates, which were made public on the 29 January. The update shows that, over the medium-term, by 2023 the economy would be of the order of 4.25% smaller than the Budget 2019 forecasts, and of the order of 6% lower than a no Brexit baseline.
Further, the preliminary analysis suggests that there would be a sharp deterioration in the public finances, as measured by the general government balance. In 2019 the currently projected broad balance would turn to a deficit of 0.2% of GDP, with a further decline in 2020 – from a surplus of 0.3% of GDP to a deficit of 0.5% of GDP. In the short-term, the appropriate fiscal strategy would be to allow the public finances absorb the shock – the in-built automatic stabilisers will provide the first line of defence for our economy thereby allowing a deficit to occur
Clearly the impact of Brexit upon the economy and the public finances remains highly uncertain. The timing and nature of the UK’s exit remains unclear; calibrating a model to simulate the impact of what is an unprecedented shock is challenging and the phasing-in of the economic impact is uncertain.
As more information becomes available, the Department will update and publish its assessment in the Stability Programme , which will be submitted to the European Commission in April. Additional information will be available at the time of Budget 2020, which will be introduced in October of this year, and this will enable Government to design the appropriate budgetary policy response.
