Ramp-up spending in crisis Brexit IMF warns
State will be 'uniquely vulnerable'
The Government will have to consider boosting Budget spending to keep the economy from going into a tailspin in the event of a no-deal Brexit, the International Monetary Fund (IMF) said yesterday 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.
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The IMF 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 materialise, the Government should let automatic fiscal stabilisers 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 IMF said. The IMF'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 euro of revenues from company taxes that should have been saved so as to help offset shocks like Brexit.
Even so, the IMF 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) are "at risk". Based on official data for 2018, that would mean that €1.9 to €3.2bn of the €10.4bn of company taxes paid into the Exchequer would be at risk.
The IMF'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.
The weaknesses in budget controls in healthcare span current and capital spending and the Fiscal Council last week highlighted overruns of €500m a year between 2013-18.
It also put a spotlight on the spiralling costs of the National Children's Hospital project.