The Government's record €17.75 billion budget factors in the high probability of a hard Brexit with no EU-UK deal by the end of the transition period, the Department of Finance has said.
The budget includes a €3.4 billion recovery fund aimed at stimulating the economy and employment in the wake of the Covid-19 pandemic and Brexit.
There is €340 million committed to Brexit-related spending next year, including on compliance required at ports and airports after the UK’s departure comes into effect on January 1st and the hiring of additional 500 staff for checks, bringing the total number hired to about 1,500.
Minister for Public Expenditure and Reform Michael McGrath in his budget speech to the Dáil said that the uncertainty around the outcome of the trade negotiations between the EU and the UK meant “providing the necessary funding to deal with all Brexit scenarios”.
The Government is increasing the Department of Agriculture’s budget by €179 million on this year to €1.8 billion, part of which will be used to fund the necessary controls for agri-food imports and exports to and from Britain after the end of the transition period on December 31st.
The Department of Finance says in its economic and fiscal outlook that the probability of a disorderly Brexit increased over the summer and is sufficiently high to justify a budget based on bilateral trade between the Republic and the UK on World Trade Organisation terms from January 1st.
It expects trade between the State and the UK will involve “varying degrees of tariffs on goods” as well as possible non-tariff barriers such as “customs declarations and delays at ports” and “disruption to supply chains”, many of which involve “just-in-time” deliveries.
The department has designed the budget to limit the economic fallout from the pandemic and “severe bilateral trade disruption with the UK”.
The economic hit from a disorderly Brexit is forecast to reduce economic GDP by about three percentage points from the level expected under a scenario where a deal is agreed.
Export growth is forecast to be 1 per cent next year on an assumed disorderly end to the transition period with the UK, about four percentage points lower than if a deal is agreed.
Small and mid-sized exporters are expected to be among those worst affected.
A hard Brexit is expected to affect trade most of all with both tariff and non-tariff barriers reducing exports and resulting in a subsequent lag on domestic demand.
The department expects a hard Brexit to result in “lower activity in the UK and elsewhere, further reducing the demand for Irish exports”.
It warns that the impact on the more traditional manufacturing sectors could be “severe”, especially if tariff and non-tariff measures on UK-sourced materials lead to production shortages.
It is assumed that the effect of Brexit on exports from the multinational sector will be “fairly modest” as they are less reliant on the UK market and less response to short-term fluctuations, noting the very strong growth in exports of pharmaceuticals and computer services.
The department said that employment will be most affected by a hard Brexit in sectors with greatest exposure to UK such as agri-food, manufacturing and financial sectors, which have been less affected by the pandemic.
The department’s no-deal modelling with State think-tank, the Economic and Social Research Institute, suggests that nine sectors are at risk of a double shock from the Covid-19 pandemic and a no-deal Brexit.
It found that the sectors, out of 57 analysed, were “severely exposed to one shock and moderately exposed to the other, a combination that leaves them at risk if the two shocks are combined”.
