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Minister Donohoe outlines initial assessment of economic and fiscal impact of ‘no deal’ Brexit
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Under a disorderly exit of the UK from the EU, the Irish economy could be 4.25 per cent smaller than the current projections over the medium-term;
The Minister for Finance and Public Expenditure & Reform, Paschal Donohoe TD today (Tuesday) discussed the economic and fiscal impacts of a disorderly exit of the UK from the European Union with Government.
While the central scenario remains an orderly exit – involving the UK leaving with a transition arrangement in place until the end of next year, and some form of trade agreement thereafter – the risk of a disorderly exit has increased in recent weeks.
All forms of UK exit will have a detrimental impact on the Irish economy, with the most adverse impacts likely to be felt in agri-food and indigenous manufacturing sectors, as previous Department of Finance research has shown. The more disorderly the exit, the larger the macroeconomic impact.
As part of the Government’s ongoing contingency planning for a no deal Brexit, this preliminary assessment prepared by the Department of Finance suggests that a disorderly exit will reduce the level of GDP (the size of the economy) by around 4.25 percentage points (relative to the Budget 2019 central scenario forecast) over the medium term (to 2023) and by around 6 percentage points relative to a hypothetical ‘no Brexit’ scenario.
Weaker exports due to trade disruption – tariff and non-tariff barriers – and sterling depreciation, and more modest domestic demand due to higher consumer prices, precautionary saving and uncertainty are the main channels through which economic activity would be affected.
Commenting on the assessment, Minister Donohoe said:
‘There remains considerable uncertainty surrounding the format the UK’s exit from the EU will take. The assessment by my Department shows that a disorderly exit would be particularly severe. The level of economic activity will be around 4.25 percentage points lower than our existing trajectory over the medium-term. This aggregate figure hides an even larger hit to economic activity in labour-intensive sectors such as agri-food and indigenous small and medium-sized enterprises’.
“Further, given Ireland’s unique macroeconomic and sectoral exposures to the UK these impacts would be disproportionate relative to the rest of the EU. It is important to recognise that such estimates may not capture the full impact, and the figures may be conservative. Nevertheless, quantifying the impact is important to help Government understand the possible macroeconomic implications and to design the appropriate policy response.”
While in aggregate terms the economy is likely to continue expanding, the pace of growth would be lower than is currently expected, with negative spill-overs to the labour market and to the public finances.
In terms of the former, the unemployment rate would increase by an estimated 2 percentage points (relative to Budget 2019 projections). In relation to the latter, the headline deficit could deteriorate by nearly a percentage point of GDP in the short-term.
Minister Donohoe said:
“In the short-term, the appropriate fiscal strategy would be to allow the public finances absorb the shock – the in-built automatic stabilisers will provide the first line of defence for our economy (allowing a deficit to occur). More information will be available at the time of Budget 2020, which will be introduced in October of this year, and this will enable Government to design the appropriate budgetary policy response.”
The future path of the economy and the public finances remains highly uncertain. For instance:
Ends
The Department of Finance (jointly with the ESRI) previously estimated the impact of a hard exit, which was outlined in Budget 2019). This was based on an assessment of the impact on the UK economy by NIESR (a broadly similar body to the ESRI in the UK) in 2016.
In November, this latter assessment was updated showing that the impact in the UK was larger than previously assumed. On foot of this, the Department / ESRI are updating their original work and the results will be published shortly (and used to inform the projections that will underpin the Stability Programme).
Budget 2019 is based on the “central scenario” that the UK will make an orderly agreed exit from the EU.
The results of this initial assessment show that by 2023 the economy would be of the order of 4.25 per cent smaller than the Budget 2019 forecasts, and of the order of 6 per cent lower than a no Brexit baseline; it shows that 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 in Budget 2019) and under 1 per cent in 2020 (from 3.6 per cent) – reductions of 1.5 per cent and 2.75 per cent respectively.
The phasing-in of the impact requires judgement.
The impact would be significant with employment growth slowing sharply and unemployment rising. Tax revenue would be lower, and expenditure would rise.
By 2023, total employment would increase by around 178,000, but this would be some 55,000 below the Budget 2019 forecast. Employment in 2020 would still be higher than this year – but by a smaller amount.
The general government balance would worsen from broad balance to a deficit of 0.2 per cent in 2019 and from a surplus of 0.3 per cent of GDP to a deficit of 0.5 per cent in 2020, with further worsening out to 2023.
While ratification of the Withdrawal Agreement is still the Government’s preferred outcome, this update is the next step in a series of measures that the Government is taking, both nationally and in conjunction with the EU, in preparation for the possibility that the UK fails to agree a deal for their departure from the European Union on 29 March.
As part of its No Deal Brexit Contingency Action Plan, the Government received its latest update on no deal planning arrangements covering finance measures, agrifood and transport. Regarding the other two areas;
The Government was also updated by the Minster for Transport, Tourism and Sport on cross-border rail arrangements including operation and regulation, as part the no-deal Brexit omnibus Bill.
The Government also discussed the implications for the Irish agri-food sector of a no-deal Brexit and ongoing contingency and planning work in the Department of Agriculture, Food and the Marine. Government was also updated on recent bilateral discussions between Minister Creed with Commissioner Hogan to discuss the potential impact of a disorderly Brexit on the Irish agri-food and fisheries sectors.
The discussion also covered the need to deploy market response measures, including exceptional aid, under the CAP to provide necessary supports to Ireland’s agri-food sectors, given our specific exposure to the UK market. Minister Creed and Commissioner Hogan agreed to remain in close contact as the situation develops and we have more clarity about the nature of the UK’s departure.
Previous Department of Finance research on economic implications of Brexit:
The paper examines the sectoral import exposures of the Irish economy and other EU Member States to the UK, building on a September 2017 Department of Finance research paper analysing export exposures. Together with previous studies, this report is a further contribution that will inform the whole of Government work on contingency planning. Link to press release here.
This paper examines how exposed traded sectors of the Irish economy and other European Union (EU) member states are to the United Kingdom in light of Brexit. The paper also compares Ireland’s revealed comparative advantage at the sectoral level, to show the most specialised sectors in Ireland relative to the rest of the world, and how Brexit may affect these.
This paper examines the trade exposures of sectors of the Irish economy to the UK in light of the United Kingdom’s decision to exit the European Union. The research in this paper is motivated by a desire to better understand which sectors of Ireland’s economy are most exposed to the UK’s departure from the EU.
Note: This paper is an update of a previous version of the paper that was published with Budget 2017 on 11 October 2016. Following publication of the October 2016 version, the CSO released updated data which is now included in the revised paper.
This research was conducted under the joint Department of Finance and ESRI Research Programme on The Macroeconomy and Taxation, and examines the potential medium to long term implications of Brexit under a range of scenarios.
Looking at the effect ten years after a UK exit, a WTO scenario results in the level of GDP being 3.8 per cent below what it otherwise would have been in a no-Brexit scenario; the bulk of the impact occurs in the first five years.
As a result, the level of employment is 2 per cent below what it would otherwise have been, with the unemployment rate nearly 2 percentage points higher. The most severe scenario indicates that the Irish economy will be more severely impacted than the UK economy.