Wednesday 28 September 2016

Brexit's €3bn hit to tax cuts and spending

Published 08/09/2016 | 02:30

On a visit to Dublin, Mr Tusk said he and Taoiseach Enda Kenny are working to ensure Ireland doesn’t suffer from a decision it had no hand in. Photo: AFP/Getty Images
On a visit to Dublin, Mr Tusk said he and Taoiseach Enda Kenny are working to ensure Ireland doesn’t suffer from a decision it had no hand in. Photo: AFP/Getty Images

Almost €3bn could be shaved from the amount of money available for tax cuts and spending increases over the coming years as a result of Brexit, the state's budgetary watchdog has warned.

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The Fiscal Advisory Council said it is too early to say what the impact of the June 23 vote will be on the economy, but said a severe outcome is possible.

But if "benign" estimates prove correct, it said, the so-called fiscal space out to 2021 - currently estimated at €11.3bn - would not be significantly reduced.

In its pre-Budget assessment, the Council said a total budget package of €2.4bn is planned for next year - greater than had been previously estimated. This includes the promised €1bn set aside for new tax cuts and spending hikes, as well as previously made commitments.

This, the watchdog warned, is "at the limit" of prudent policies.

"Any further relaxation of the fiscal stance in 2016 or 2017 beyond the current plans would not be appropriate given the strong pace of underlying economic activity, falling unemployment and the need to bolster the resilience of the public finances to adverse shocks," the Council said. "This means that current plans for 2016 and 2017 should be adhered to even in the event of tax revenue outperforming current forecasts by the end of 2016."

The report from the Council is the first since the EU referendum vote in June, which it said has the potential to significantly affect the Irish economy.

The Council noted that in a relatively benign scenario, in which Irish growth could be lowered by around three quarters of a percentage point next year and by less in subsequent years, the estimated fiscal space out to 2021 would not be significantly reduced.

Uncertainty

But it added: "There is significant uncertainty around the ultimate impact of Brexit on the Irish economy and a more severe outcome than the relatively benign short-run effects simulated in the Baseline Scenario is possible.

"A more severe Brexit scenario could see fiscal space reduced by around a quarter compared to the current SES (Summer Economic Statement) estimates," the Council said.

The Council said the economy is growing at a reasonably solid pace, but also referred to the fact that last year's GDP figure distorts the scale of growth. The Council also warned that since its last report, the Government has announced an additional increase in spending of €540m for 2016. This meant the planned budget package for next year is bigger than had been anticipated. And when you take in previous commitments, the combined package of measures is around €2.4bn.

Meanwhile, European Council President Donald Tusk said Brexit is a "disorientating prospect" for Ireland, with serious consequences for the north.

On a visit to Dublin, Mr Tusk said he and Taoiseach Enda Kenny are working to ensure Ireland doesn't suffer from a decision it had no hand in.

Mr Tusk met with Mr Kenny ahead of talks with British Prime Minister Theresa May today, as part of a tour of European capitals ahead of an informal summit of leaders in Bratislava next week. Mr Tusk said Mr Kenny would be the first leader he will brief after his meeting with Ms May.

Irish Independent

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