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Ireland to run budget deficit of up to 1.5% if no-deal Brexit

Written by Business World, on 26th Jun 2019. Posted in Economy

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Ireland presented two budget strategies for 2020 on Tuesday, a preferred option that would see its budget surplus grow if its neighbor Britain leaves the EU in an orderly way, and a no-deal Brexit scenario forecasting a deficit to absorb the shock.

Ireland's finance minister usually uses the annual summer economic statement to lay out the fiscal leeway available in the following year's budget to -- in the case of recent years of strong economic growth -- cut taxes and increase spending, and what impact that would have on the public finances.

But with 2020's budget due to be presented on Oct. 8, three weeks before Britain is due to leave the bloc, Finance Minister Paschal Donohoe handed the cabinet two options to choose from in September. No option was included for a scenario where Britain delays Brexit or calls it off altogether.

"It is fair to say that we are looking at a number of economic developments which mean that this is a particularly complicated policy environment for the government to be in," Donohoe told a news conference.

With the finance department forecasting that the economy could flatline next year if Britain crashes out, rather than grow by 3.3% if an orderly withdrawal takes place, Donohoe said he would allow the public finances to run a deficit of between 0.5 and 1.5% of GDP in the no-deal scenario.

It would take three to four years for the exchequer to return to surplus, the forecasts showed, increasing borrowing at a time when the finance department says the national debt is still too high at around 100% of gross national income.

That would be a swift setback after Ireland posted its first budget surplus in a decade last year. An orderly Brexit would grow that surplus to 0.4% next year, when the government would face an altogether different challenge of an increasing likelihood of the economy overheating, the budget plan said.

The shape of the budgetary package would be broadly similar in both scenarios at 2.8 billion euros -- 2.1 billion of which has already been pre-committed in areas including planned infrastructure spending and increased public sector pay.

But in the case of a no-deal Brexit, the package would also involve temporary, targeted funding for the sectors most affected by the "severe disruption to Irish-UK bilateral trade" which would "in all likelihood" include non-tariff barriers.

This would limit the scope for new policy initiatives, the plan said. That prompted Fianna Fail, the main opposition party which helps frame the budget under a deal to prop up Donohoe's minority government, to say his plans for modest cuts to income tax cannot be entertained.

While the plan concluded that the possibility of a disorderly exit was rising, Donohoe said it was too early to pick a strategy.

"All I will say is the debate that is under way (in the contest to replace Britain's prime minister) has made it clear to me what is the right thing to do between now and October," he said. (Reuters)

Source: www.businessworld.ie

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