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Brendan Keenan: 'Deal or no deal, Budget is likely to prove much too cautious on Brexit'


Finance Minister Paschal Donohoe is aiming to plan ahead for a no-deal Brexit

Finance Minister Paschal Donohoe is aiming to plan ahead for a no-deal Brexit

Finance Minister Paschal Donohoe is aiming to plan ahead for a no-deal Brexit

Courtesy of the folk at the Newstalk radio station, I recently had the pleasure of reprising the 1982 Budget. Well, one of the 1982 Budgets. There were three that year. Something of the kind may need to happen again, but for quite different reasons from 37 years ago. Back then, the economy was much more like that of 2009, rather than 2019. Fianna Fáil and Fine Gael, neither of whom could get a majority despite three elections, were locked in a bitter struggle where no quarter was asked or given.

Now, we have an economy which is once again the envy of Europe; although puzzlement and a fair degree of irritation might be a better description.

Boom and bust are nothing new, but there has never been anything like the long confidence and supply agreement between the two large parties.

And so we had last week's Budget, if you could find it. There has never been anything quite like it either. It produced a strange mood among the chattering classes, and perhaps among the wider public. As Richard Curran said here last week, for better or worse, entertainment value has become one of the ways by which a Budget is judged.

This time, the existential threat that is Brexit required something different, both in the Budget content and the reaction.

Everything has been built around the threat of a disorderly Brexit. If that threat is lifted, everything changes.

The arithmetic, as the Department of Finance saw it, was set out in the Budget documents. Output, as measured by GDP, is expected to grow by 5.5pc this year, but a no-deal Brexit would collapse that to 0.7pc in 2020.

Not all of that would be Brexit - the department's spring forecast put growth next year at 3pc, allowing for some domestic and global slowdown.

Nor did the Budget contain all the possible hard Brexit damage, for which the Government has announced a contingency fund of €1.2bn.

If that were raised and spent, the deficit of 0.6pc forecast in the main budgetary projections would rise to 1pc.

One of the drawbacks of having been around in 1982 is that a billion still seems like a lot of money.

That is no longer the case, where the ballooning Irish economy is concerned.

That contingency fund represents just 0.6pc of GDP, which hardly equates to the kind of crisis we have been told to expect.

The finance statement claimed that this was the first time that any forecasting institution had published a full range of economic projections for a no-deal Brexit scenario. It is worth pointing out that the department's range of possibilities ran from minus 4pc, if Brexit were really bad, to plus 4pc if all went well. Those extremes sound more plausible than the central forecast and now we may be heading for the happier outcome.

Where would that leave the strange Budget 2020? The even stranger answer may well be: the right Budget, even if for the wrong reasons.

So far, the UK economy has been more affected by Brexit worries than the Irish, even if there has been something of a conspiracy of silence about it over there.

Sterling has suffered a steep decline. Estimates put the drop in planned investment at 25-50pc.

The Irish tourism industry bears witness to the drop in personal spending. Growth and productivity are flat.

All of this is likely to be reversed if there is a withdrawal deal; although it may have to wait until the results of the anticipated British election.

There could then be a dramatic spurt in growth which, combined with a sterling recovery, would give an external boost to the Irish economy.

Not least of the ironies would be that, while the independent Fiscal Advisory Council endorsed the Government's short-term forecasts, the medium-term forecasts were seen by several analysts as too optimistic in a hard Brexit.

The figures were for an almost instant recovery to growth of 2.5pc in 2021, stabilising at close to 3pc a year thereafter. To those who think the effects of a crash-out Brexit could be as bad as 2008 - which produced a permanent loss of output - such a recovery seemed implausible.

Yet an orderly Brexit might make them look pessimistic. GDP is not very helpful any more, but more practical indicators suggest the economy is currently growing at around 4pc a year. Amid all the violent ups and downs, it has averaged the rate of growth for 60 years, despite most economists thinking for the past 20 that its potential was no more than 3pc annually.

The finance models keep throwing up that kind of slowdown for coming years - as they do in this Budget - but the outcome keeps beating the forecast.

With the eurozone slowing, they might be right next year, but a UK bounce could outweigh the euro area drag.

The consequences could be growth continuing at 4pc, employment rising by almost 2pc and unemployment falling to 5pc, with wage growth moving ahead of productivity. That must surely count as reaching the limits of potential.

The Government has merrily helped that process along. Having come to the end of the austerity forced on them by the crash, politicians leapt on to the pro-cyclical saddle, with three stimulatory Budgets in an economy which no longer required stimulating, and could not be given any when it did.

Even this Budget, dull though it may have been, provided a mild stimulus. That was fair enough, given that it was based on a no-deal Brexit. Perhaps it should have provided even more.

But stimulus is the last thing the economy needs if there is an orderly withdrawal, and an accompanying jump in output, spending and asset prices.

Some analysts wondered if there might be a second Budget in this fiscal year; by which they meant one to cope with even bigger Brexit losses than this month's Budget anticipated.

If there is a withdrawal deal, conventional Irish politics would dictate perhaps not a formal second Budget, but a second set of measures to distribute the proceeds of the extra revenues.

It will be an election year after all. But conventional politics would again be the wrong ones. Such an outcome would add to a growing sense of alarm about the management of the public finances.

It is not the same as 1982, or all those other terrible years we might call to mind. It is not about unsustainable debt, because ultra-low interest rates have allowed the National Treasury Management Agency to transform the admittedly large national borrowings into ones with manageable costs and a well-spread-out schedule of repayments.

The Exchequer will save another €450m on interest costs next year, to add to the billions already saved as old loans were replaced by much cheaper new ones.

To this must be added the several billion in unexpected revenues from multinational corporation tax and the consistent outperformance of the economy.

Yet none of this has improved the public finances. The underlying deficit remains unchanged during the past three glorious years. One similarity with 1982, which seemed to have been eliminated in the 1990s, is that spending targets are no longer met and have to be increased in the course of the year.

Eight per cent a year growth is the new prudence. Those terrible years occurred when adverse circumstances demonstrated that the public finances had nothing in reserve. With any luck, we will never know whether a hard Brexit would have demonstrated that again, but other adverse circumstances will arise.

We do know from the current situation that spending will have to be curbed, investment curtailed and taxes raised, giving an added twist to the adverse circumstances. How much depends on how adverse the situation is.

A general recession combined with a shift in multinational tax strategies could have the makings of a crisis.

Last week's Budget might not have been enough to cope with a no-deal Brexit, and it is not enough to stabilise a post-deal bounce. If further tightening is too much to hope for, it should at least be left as it is, where it might provide a start toward what seems unattainable for Irish politicians: helping the economy when it needs help, and throttling back when it doesn't. Now that really would be strange.

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