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Hard Brexit to cut €200m a year off budget

The wriggle room for public spending would be cut by about €200m a year on average in the three years after a hard Brexit, a think tank has warned.

And the number of jobs created over the decade from March 2019 onwards could be reduced by 49,000, the Economic and Social Research Institute (ESRI) said.

The ESRI warned that the potential output of the economy would be 3.2pc lower than it otherwise would be if the UK pulls out of both the single market and customs union, and needs to use World Trade Organisation (WTO) rules.

The so-called traded sector - made up of industries exposed to international competition - will suffer the brunt of the impact, as Ireland is expected to be affected by Brexit mainly through the loss of trade with the UK, the body said.

The knock-on effect means the available fiscal space will be €600m lower in the three years after a hard Brexit, the ESRI said. And that could be a conservative estimate, said ESRI head of economic analysis, Professor Kieran McQuinn.

"You could argue there are other effects that we aren't fully capturing, more micro-related issues, such as the impact on supply chains, the impact on consumers if we start to see higher prices in retail outlets here because of the hard Border issue," Prof McQuinn said. "So you could argue if anything that the effect we are presenting is a lower bound of what essentially could transpire."

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Under this hard Brexit scenario, the traded sector is the worst hit, with a reduction in potential output of 3.6pc.

"The intensity of the loss in the traded sector is a consequence of the nature of the shock: Brexit is expected to impact Ireland mainly through the loss of trade with the UK, both because of the new expected trade barriers between both countries and the fact that UK output will be below what it would have otherwise been in a no-Brexit scenario, which reduces external demand," the ESRI commentary said.

The potential employment level as a whole is expected to be 1.9pc lower than otherwise 10 years after a hard Brexit, equating to about 49,000 jobs, the think tank said.

The bulk of the impact - about 30,000 jobs - will be in companies sensitive to trade impacts. A joint ESRI and Department of Finance study previously found that the economy could suffer a 4pc hit over 10 years in actual output, and roughly 40,000 jobs. This latest study focuses on potential output. Although there is little difference in potential and actual output when forecasting over the longer run, EU fiscal rules use potential output growth when calculating the amount of fiscal space, therefore the ESRI has focused on this.

"The reduction in potential output envisaged under a hard Brexit would likely reduce the amount of fiscal space cumulatively by nearly €600m for the first three years of such a scenario," the ESRI said.

On other domestic issues, the ESRI said the economy was not facing a credit bubble and that house prices are not overvalued. It also warned the Government needs to be cautious as the tax take has been "disappointing".

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