Saturday 21 September 2019

Central Bank calls for high Government spending to help offset the impact of hard Brexit on economy

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 of Ireland endorsed calls for higher government spending to help offset the impact of hard Brexit on the economy on the same day as UK Prime Minister Boris Johnson moved to suspend parliament.

In its annual advisory letter to the Minister for Finance, Acting Governor Sharon Donnery said that any extra spending should not however derail long term progress in reducing the State’s debts.

“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 bearish 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 lop 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 much closer  with Johnson’s move whichj also likely sets the stage for a general election in the UK.

Fears that the economy here was on the cusp of overheating after five years of strong economic growth that have propelled the country to full employment would evaporate in the event of the UK leaving the European Union without a deal.

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 8 in every 10 euros 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.

The Central Bank urged the government to codify a commitment to reduce the State’s debt to GDP ratio to 45pc.

The debt ratio is projected by the government to fall to 61pc of GDP this year.

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