Wednesday, 19 June 2019

Questions (113)

Bernard Durkan

Question:

113. Deputy Bernard J. Durkan asked the Minister for Finance the degree to which he has identified particular or specific threats to the stability of the economy pre or post-Brexit with particular reference to changing training conditions; and if he will make a statement on the matter. [25848/19]

View answer

Written answers (Question to Finance)

The Stability Programme Update 2019 published by my Department in April, sets out the principal economic risks facing the Irish economy, along with an assessment of their relative likelihood and economic impact (see following table). The balance of risk is firmly tilted to the downside, both in the short-term and over the medium-term.

The Irish economy is in an unusual position at present, facing possible domestic overheating and capacity constraints on the one hand, and a slowdown in key export markets on the other. In addition to this, the UK’s forthcoming exit from the EU is causing uncertainty in terms of Ireland’s future trading relationship.

In March 2019, the Department of Finance and the ESRI published a comprehensive assessment of the potential impact of Brexit. This report shows that compared to a no Brexit baseline, the level of GDP in Ireland would be around 2.6 per cent lower in a ‘deal’ scenario, and 5.0 per cent in a disorderly ‘no deal’ scenario, ten years after Brexit. The report also estimates that, after ten years, Irish exports would be reduced by 4.6 per cent in a 'deal' scenario, and 8.3 per cent in a ‘disorderly no deal’ scenario.

Other than Brexit, the main short-term risks relate to a sharper-than-assumed deterioration in the international environment and an escalation of trade protectionism.

Over the medium-term, the principal risks relate to potential overheating as the economy approaches full-employment, and changes in other jurisdictions that affect the competitiveness of Ireland’s corporate tax regime.

The economy is in a good position to meet these challenges. Economic growth, which resumed early this decade, has been consistently among the highest in the EU for a number of years, notwithstanding reservations about the headline data.

The recovery is perhaps most clearly evident in the labour market. The unemployment rate has fallen to 4.4 per cent from the peak of 16 per cent in 2012. There are now more people at work in Ireland than ever before.

The headline budget deficit was eliminated last year for the first time in a decade. Mitigation measures have been prioritised by building up the resilience of the economy and the public finances, thus improving the capacity to deal with an adverse economic shock. Some €1.5 billion has been set aside in a Rainy Day Fund. Our companies are being supported to prepare for Brexit, to diversify their markets and supply chains, to develop new skills and to explore new opportunities.

The Government will continue to work to strengthen the resilience of the economy, to maximise opportunities and to prepare our economy for the challenges ahead, including through the Ireland Connected Trade and Investment Strategy, the 10-year National Development Plan and Future Jobs Ireland 2019.

Table: macro-economic risk assessment matrix

Risk

Likelihood

Impact and Transmission Channel

External

External demand shock

Medium

High – the global economy has slowed and it is possible that the temporary slowdown becomes more prolonged.

Geopolitical factors

Medium

High – increased geopolitical uncertainty has the potential to disrupt growth in key regions and generate headwinds for output and employment in Ireland.

Disruption to world trade

Medium

High – the Irish economy is deeply embedded in the international economy and has benefitted enormously from globalisation, so that any increase in protectionism could potentially have a detrimental impact on living standards.

“Hard-Brexit”

Medium

High – An outcome to the continuing EU-UK negotiations which resulted in a WTO-type arrangement between the EU and UK would have a particularly detrimental impact on Irish-UK trade.

Domestic

Concentrated production base

Low

High – Ireland’s production base is highly concentrated in a small number of high-tech sectors, with the result that output and employment are exposed to firm- and sector-specific shocks.

Loss of competitiveness

Medium

High – as a small and open economy, Ireland’s business model is very much geared towards export-led growth, which, in turn, is sensitive to the evolution of cost competitiveness.

Housing supply pressures

High

Medium – supply constraints in the housing sector can adversely impact on competitiveness by inter alia restricting the mobility of labour.

Overheating economy

Medium

Medium – With the labour market approaching full employment, stronger than assumed growth could lead to overheating pressures. While boosting growth over the short-term, overheating pressures could generate significant imbalances over the medium-term.