Monday 14 October 2019

IMF calls on government for budget boost in event of no-deal Brexit

Finance Minister Paschal Donohoe. Photo: PA
Finance Minister Paschal Donohoe. Photo: PA

David Chance

THE government may have to look at boosting the economy via the budget in the event of a “no-deal” Brexit, the International Monetary Fund said on Monday in its annual report on the Irish economy.

The risks of a no-deal Brexit have risen sharply with a race in the Conservative Party to succeed Theresa May that has seen Brexiteer Boris Johnson emerge as the favourite.

The Fund said that government might also have to consider boosting private sector lending by easing capital requirements at banks.

"Directors acknowledged that Ireland is uniquely vulnerable to a no deal Brexit," the IMF said in its report.

"They concurred that, if this risk were to materialize, the government should let automatic fiscal stabilizers operate freely and provide targeted support to hard-hit sectors," it said.

Estimates of the potential hit to the economy from a disorderly Brexit run between 2-7pc  with the Central Bank of Ireland estimating that a no-deal Brexit  would reduce growth by up to 4 percentage points in the first full year and lower output  by 6pc in the long run.

“A fiscal stimulus may be called for, depending on the severity of the downturn in the broader economy. In case of a sharp credit contraction, Directors considered that the countercyclical capital buffer could be released,” the Fund said.

The Fund’s call for stimulus goes well beyond that discussed by the Irish Fiscal Advisory Council last week.

The Council said that in the event of a hard Brexit a stimulus to the economy would be needed but the main thrust of its report was that the government had squandered billions of euros of revenues from company taxes that should have been saved so as to help offset shocks like Brexit.

Even so, the Fund did urge the government to “accelerate fiscal consolidation to alleviate demand pressures and build buffers” and agreed with the Fiscal Advisory Council that there was “merit in saving additional corporate tax revenue” while at the same time “enforcing spending limits”.

The IMF estimates that corporate income taxes in the region of 0.6 to 1pc of gross domestic product (GDP) “at risk”.

Based on official data for 2018 GDP that would mean that €1.9-€3.2bn of the €10.4bn of company taxes paid into the Exchequer were at risk.

The Fund’s warning on spending limits came amid huge cost overruns on health.

“The share of healthcare in the budget has increased to 25pc – the highest in the EU and 10pc above the EU average,” the IMF noted.

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