Theresa May’s decision to resign as Tory Party leader on June 7th and the setting in train of a Conservative leadership contest is a big headache for Ireland’s economic planning.
It now looks certain that nothing substantive will happen to break the Brexit logjam between now and September, as the leadership drama plays out. With an end-October deadline set for the UK’s exit from the EU, a period of significant chaos and uncertainty – similar or possibly worse than what we saw in March and April – is in prospect as we enter the autumn.
The new Conservative leader will face the same issue as the outgoing one: that a majority in the House of Commons are opposed to a no-deal exit, but there is no majority for an approach that would avoid this outcome.
No doubt we will hear all kinds of “solutions” and promises to take a tough line with Brussels in the leadership contest, but the EU side has made clear that it is not for moving. The Irish Border issue will be front and centre in this debate. The EU and UK sides are now most unlikely to re-engage until after summer break, some time in September.
So Minister for Finance Paschal Donohoe will have to do his Budget 2020 planning in a Brexit vacuum, initially with the summer economic statement, due out next month. A no-deal Brexit would hit growth and tax revenues.
With the budget due to be presented before the crucial EU council meeting in mid-October, which would consider any extension request, Donohoe risks putting in place spending plans based on revenues that are vulnerable if growth slows due to a hard Brexit.
On most forecasts, a hard Brexit would clearly take a heavy toll on 2020 growth and the OECD recently warned that it could plunge Ireland into recession.
The Irish economy continues to perform well. Jobs growth ran at a record level in the first quarter and the public finances are likely to remain strong – all of which will maintain pressure for more Government spending.
How Donohoe and the Cabinet handle this issue poses a real political dilemma.
