Wednesday 18 September 2019

Central Bank backs extra spending if worst-case scenario hits

Sharon Donnery, acting governor of the Central Bank. Photo: Gareth Chaney Collins
Sharon Donnery, acting governor of the Central Bank. Photo: Gareth Chaney Collins

David Chance

The Central Bank has endorsed calls for higher Government spending in the event of a "hard Brexit" hit to the economy.

In its annual advisory letter to the Finance Minister, acting governor Sharon Donnery said that any extra spending should not, however, derail long-term progress in reducing the State's debts.

The prospect of a no-deal Brexit was further heightened yesterday after Boris Johnson got the green light to suspend the British Parliament.

"In the case of a wider, more severe economic impact, it may be appropriate to provide a broader fiscal support package," Ms Donnery wrote.

The Central Bank's forecasts for the immediate impacts of Brexit are the most ominous of any institution here and it says the economy is likely to stall in 2020 if there is a no-deal outcome.

Longer term, Brexit will cut 6.1pc points off potential economic growth, it says.

The bank's central assumption on the Budget is that a hard Brexit would cause a 2pc decline in the budget outcome relative to gross domestic product, roughly sufficient to push the State's finances back into a deficit of around the same amount.

The prospect of a "hard Brexit" moved closer yesterday with Mr Johnson's move and likely set the stage for a general election in the UK.

The Brexit hit will ease fears the economy was on the verge of overheating after five years of strong economic growth that has propelled the country to full employment.

Even, so, Ms Donnery's letter highlighted those concerns, saying that after a period of such strong, sustained growth "there will be a material risk that the continued expansion would give rise to overheating pressures".

The bank also delivered a warning on the State's over-reliance on tax receipts from a small number of multinationals, who pay eight in every 10 euro the Government gets in corporation taxes.

"The unpredictability of corporate tax revenues points to the danger of relying on what might prove to a partly transitory surge in revenues to fund lasting spending commitments," it said.

Irish Independent

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