Thursday 19 September 2019

OECD warns Irish government to build up financial reserves with risks like Brexit looming

Finance Minister Paschal Donohoe. Photo: Mark Condren
Finance Minister Paschal Donohoe. Photo: Mark Condren

David Chance

Economic growth is set to slow and the government needs to build up its financial reserves with risks like Brexit and the risk of changes to the international tax regime looming, the Organisation for Economic Cooperation and Development said.

The OECD, a grouping of the world’s richest economies, said in its report that growth would slow to 3.4pc by 2020 from 7.2pc this year, still far faster than the rest of the eurozone, underpinned by strong domestic demand and rising wages.

“The fiscal position will not improve much over the next two years,” the Paris-based body said in its report on the global economy.

“The government should remain committed to improving the fiscal position, but be ready to ease the fiscal stance to mitigate the impact of a potentially disorderly conclusion to Brexit negotiations.”

In his budget Finance Minister Paschal Donohoe set aside €500m for a rainy day fund and the government has been planning for Brexit, however, the Parliamentary Budget Office has warned the projections were based "on the assumption of an 'orderly' Brexit".

The International Monetary Fund said last week that a no-deal Brexit, an increasingly likely outcome, could lop 3pc points off Ireland’s growth prospects.

However, Mr Donohoe’s budget proposals have overshot on spending, even as bumper tax revenues have filled the government’s coffers and plans for a budget surplus have been put back.

Ireland desperately needs more spending on infrastructure  but spending in other areas has continued to rise, sucking up government funds. For next year, recurring spending is set to rise 5.8pc, under the budget plans.

The latest budget numbers in October showed that spending rose 9.2pc to €40.1bn, far faster than revenues.

“The implementation of a new development plan aimed at economic, environmental and social progress should be conditional on improving the fiscal position, and the authorities should ensure that the associated projects are carefully prioritised,” the OECD said.

The European Commission, in a separate statement, ruled on Wednesday that Ireland’s budget met the rules of the Stability and Growth Pact, a formality. It ruled Italy’s budget did not comply with the eurozone’s rules.

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