The interplay between the Covid-19 and Brexit shocks has implications for the economic outlook. In preparation for last year’s Budget, my Department, along with the ESRI, conducted an analysis of the sectoral overlap between the two shocks. The analysis found that the sectors most exposed to both Covid-19 and a ‘disorderly’ Brexit appear to be distinct and relatively unconnected. While the analysis was based on the assumption of a ‘disorderly’ Brexit, this general conclusion is still applicable today.
Although the Trade and Cooperation Agreement between the EU and the UK provides for zero-tariffs and zero-quotas for qualifying goods, it will nevertheless introduce trade frictions in the form of non-tariff barriers. It is also a considerable ‘step-down’ in terms of services trade relative to the previous EU-UK relationship, which is significant as Ireland exports considerably more services than goods to the UK. Therefore, while the agreement protects Irish firms from the more significant impact of a ‘disorderly’ Brexit scenario, they will still be impacted by the change in trading arrangements. Thus, it represents a smaller Brexit shock for the same sectoral mix of Irish firms as under a no-deal scenario.
Using this analysis, my Department’s Budget 2021 forecasts accounted for the dual impact of the Covid-19 pandemic and a ‘no-deal’ Brexit on the Irish economy. However, the earlier than anticipated roll-out of Covid-19 vaccines and the Trade and Cooperation Agreement between the EU and the UK represent upsides to the outlook this year, though the re-introduction of Level 5 restrictions will have an offsetting negative effect.
The government has provided an enormous amount of fiscal support in response to the Covid-19 and Brexit crises. At just under €40 billion, the cumulative level of fiscal support made available in 2020 and 2021 has been unprecedented. Using counter-cyclical fiscal policy in this way has been the most appropriate course of action and was made possible only by the prudent management of the public finances in recent years. As the public health situation improves, we will have to move to a more sustainable fiscal trajectory. The Department will publish its medium-term macroeconomic and fiscal forecast with the Stability Programme Update in spring this year setting out the trajectory towards a more sustainable fiscal position.