The economy will grow at a much slower pace than anticipated but will not tip into recession in the event of a no-deal Brexit, according to the Department of Finance.
Projections published by Minister for Finance Paschal Donohoe also show the unemployment rate could rise by 2 per cent if Britain leaves the European Union without a deal at the end of March.
The Irish economy would be 4.5 per cent smaller by 2023 than current projections, outlined in Budget 2019, and the modest surplus expected in 2020 would instead become a deficit.
Mr Donohoe said the sectors most likely to be affected are food and agriculture, given the importance of regulatory alignment and agricultural standards to Irish producers selling into the British market. He said a no-deal Brexit would be a “considerable challenge” to Irish agriculture.
Mr Donohoe brought a memo to Cabinet on Tuesday on the economic effect of a no-deal Brexit and Minister for Agriculture Michael Creed brought one on its consequences for agriculture and fisheries. Mr Creed last night said reverting to World Trade Organisation rules would put an extra €1.7 billion on to Irish agrifoods exports to the UK.
GDP growth
Overall, the Department of Finance says a no-deal Brexit “would result in a substantial slowdown in GDP growth to 2.7 per cent in 2019”, from an estimated 4.2 per cent outlined in Budget 2019.
Growth in 2020 would drop from an expected 3.6 per cent to below 1 per cent. By 2023, total employment would rise by 178,000 but this would be 55,000 lower than forecasts contained in the last budget.
In the event of a no-deal Brexit, Mr Donohoe said the decisions made for Budget 2019, announced last October, would not be changed.
However, he said such a scenario would have a substantial effect on the resources available for the next two budgets when it came to new policy choices. The next opportunity to update his expected growth figures will be the annual Stability Programme Update, due in April.
“In the scenario I am talking about here today, in respect of economic indicators that we have, that my Budget ’19 plans stand from an expenditure and tax point of view,” he said.
“In terms of Budget 2020, simply at this point in time, all I can indicate is that if we were to be in a disorderly scenario it would have a substantial effect on the budgetary resources that are available for new policy choices for 2020.”
“I do see capital expenditure overall as having a really high importance,” Mr Donohoe said, adding that he was also committed to cuts in income tax, specifically the Fine Gael plan to increase the threshold at which people hit the higher rate of income tax.
UK taxes
He noted that the UK had indicated it could significantly cut its own taxes if it was outside the structures of the EU and said the Government should stick to its own plans.
“If we are in a no-deal scenario and the United Kingdom is fully outside of the policy framework that the European Union would offer, they already gave indications regarding what they want to do with personal taxation and potentially what they want to do with their headline rate of corporation tax,” he said.
“It will continue to be important to deliver the objectives we have in relation to personal tax reform and in effect the changes I want to make on the standard rate cut-off point.
“We will only know what will be the effect of a disorderly Brexit on those plans when we get closer to seeing the effect of than on our economy. The objectives we have from a tax point of view and from a capital expenditure point of view, those objectives for me are unchanged.”
