Minister for Finance Michael Noonan has unveiled a series of budgetary measures to cushion the Irish economy from the likely impact of Brexit, including the setting of more stringent debt reduction targets and confirmed the establishment of a so-called rainy day fund.
He said the measures, some of which have been flagged in advance, would act as “economic shock absorbers” to ensure the economy could withstand any negative impacts arising from Brexit.
From 2019 on, the Government plans set aside up to €1 billion annually for a contingency fund or rainy day fund, which is to be deployed in “a counter cyclical manner” in the event of a Brexit-related downturn or another global shock.
Another central plank of the strategy is a revised debt/gross domestic product (GDP) target of 45 per cent, which is significantly lower than the 60 per cent currently required under the EU’s Stability and Growth Pact.
The more stringent debt target, which was advocated by Central Bank governor Philip Lane in a pre-budget letter to the Minister, will allow for greater levels of borrowing in the future should they be needed. The Government is aiming to hit the new domestic target by the mid-2020s.
“This will allow future governments not only to apply the rainy day fund but to borrow to mitigate the impact of future shock on the lives of our people,” Mr Noonan said.
The new debt target comes in the wake of the 26 per cent upward revision in GDP last year, which saw the ratio of debt to GDP fall from 105 per cent to 78 per cent. The revision was widely seen as unreflective of the true state of the economy.
VAT rate
Another feature of the Government’s Brexit strategy is the retention of the 9 per cent VAT rate for the hospitality sector.
Mr Noonan said that though the economic rationale for maintaining this reduced rate may not be as strong today, he considered it prudent to retain it as a buffer for the sector against the weakness in sterling, which will likely see a fall-off in tourist numbers from the UK.
Additional funding is also to be allocated to the Revenue Commissioners to scope potential customs problems arising from Britain’s decision to leave the EU.
An easing of the capital gains tax (CGT) regime for entrepreneurs and start-ups; a higher tax credit for the self-employed; and an income averaging scheme for farmers were also highlighted as measures designed to Brexit-proof the economy.
The Department of Finance also published two reports as part of Budget 2017 assessing Ireland's exposure to Brexit.
A report, entitled UK EU exit – An Exposure Analysis of Sectors of the Irish Economy, said the severity of the impact was difficult to gauge in advance of the UK's negotiations with Brussels.
However, it noted that the UK accounted for nearly €14 billion, or 15 per cent, of Ireland’s goods exports in 2014, and €20 billion, or 20 per cent, of Ireland’s services exports in 2014. For indigenous companies, the UK accounts for 40 per cent of all exports, he said.
According to the report, the top five sectors in terms of share of total Irish exports to the UK, were: computer services; food and live animals; chemicals; insurance and financial services; and transport.
In terms of regional impacts, the report found the most exposed manufacturing sectors had a comparatively large share of employment outside of Dublin, most obviously the food and drink sector.
The other report, entitled Getting Ireland Brexit Ready, laid out how the various taxation measures contained in the budget would insulate the Irish economy from Brexit, while noting the severity of the impact would be difficult to gauge.
