The fifth National Economic Dialogue (Dialogue) took place on June 26th and 27th this year.
The dialogue is an important part of the budgetary process and aims to foster discussion on how best to sustain and strengthen the economy while addressing the many competing economic and social priorities within the limited resources available.
My opening remarks on Understanding the Context: Economic Perspectives and my closing remarks at the Dialogue are available at www.budget.gov.ie along with the Chair’s report on the discussions.
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. The Economic and Fiscal Outlook, due to be published with the Budget 2020 documentation, will update this assessment. At present 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, 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 nature and timing of the UK’s exit from the EU is causing uncertainty in terms of the EU, including Ireland’s, future trading relationship.
The Government’s consistent message has been that a no deal Brexit will have profound implications for Ireland on all levels. These include macroeconomic, trade and sectoral challenges, both immediately and in the longer term.
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 compared to a no Brexit baseline.
The most recent Contingency Action Plan, published in July, set out in detail the Government’s analysis of the risks and impacts of a no deal outcome across 26 key areas. A no deal outcome will never be the EU choice but it remains a significant threat. Preparedness and contingency planning must continue at EU and Member State level.
Given the lack of clarity regarding the timing and format that the UK’s exit will take, I recently announced that Budget 2020 will be framed on the assumption of a ‘no deal’ Brexit. Three main factors influenced the Government’s approach:
- First, to give certainty to businesses and citizens that the Government is prepared for a no-deal Brexit and stands ready to support the economy in such a scenario;
- Second, to safeguard the hard won progress of recent years in stabilising the public finances; and
- Finally, to avoid a situation in which decisions made in the Budget might need to be reversed in future.
Assuming a no-deal Brexit ensures the Government has the necessary resources at its disposal to meet the impact of this exceptional challenge, while preserving the longer-term sustainability of the public finances.
In a ‘no deal’ scenario, the Government will make the resources available to support those in need, and to introduce timely, targeted and temporary supports to the sectors of the economy most exposed to the impact of a no-deal Brexit.
Other than ‘Brexit’, the main short-term risks relate to a deteriorating 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 5.2 per cent from the peak of 16 per cent in 2012.
The headline budget deficit was eliminated last year for the first time in a decade. The Government has been taking steps to build up the resilience of the economy so that we have the capacity to deal with adverse economic shocks. This includes building up our fiscal buffers by balancing our books, reducing our debt burden and establishing the 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.