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Did the government Brexit-proof Budget 2019?

Oct 12, 2018
By Annette Hughes

It is the government’s role to navigate us, as a society, towards a more secure and better future. The budget each year is the opportunity for the government to set out the public finances for the coming year and to prepare the economy for any challenges that lie ahead. There are many domestic and external challenges on the horizon. Brexit is one such impending threat which could steer the economy off course. Indeed the Minister for Finance and Public Expenditure and Reform referred to it (16 times) in his Budget 2019 speech as the “political, economic and diplomatic challenge of our generation”. 

The Rainy Day Fund

The announcement of a Rainy Day Fund (RDF) is welcome but the Minister also stated in the 2018 Budget that a RDF was to be established this year by transferring at least €1.5 billion to it, to start it off, from the Ireland Strategic Investment Fund, with a further €500 million in contributions to commence from 2019. However, the Budget did not go far enough to mitigate the inevitable economic shocks from Brexit. For instance, the €1 billion out-performance in corporation tax could have been set aside for the RDF instead of plugging the gap in the health budget. The intention to balance the budget in 2019 is not ambitious enough. The best way to Brexit-proof the public finances is to run a larger budget surplus during the good times, building up buffers to guard against any Brexit related shocks to the economy. The government should have been running a surplus in 2018. 

Debt interest

A point which does not receive much attention is our declining debt interest costs, which have been a favourable source of fiscal space in recent years. Indeed, in Budget 2014, the Department of Finance forecasted that Ireland’s annual interest bill would rise from €7.7 billion at that time to €9.5 billion in 2018. What actually happened was a sharp decline in interest payments to €5.3 billion in 2018, largely thanks to the European Central Bank’s (ECB) asset purchase program, which drove down the cost of borrowing in bond markets.

As with corporation tax, the savings in debt interest have largely flowed into a higher current expenditure base, and the debt interest projections in Budget 2019 for the coming years look sanguine, to say the least. With the ECB winding down its bond-buying program and withdrawing from quantitative easing, it may be more prudent to plan for higher interest costs than envisaged in Budget 2019, and any remaining savings should be recycled into a larger budget surplus. 

SMEs

A number of targeted measures were in the Budget to support the most exposed sectors in the economy, as they transition to Brexit. The €950 million funding in total for the Department of Business and Enterprise for 2019 to continue to attract new businesses, and the €300 million Future Growth Loan Scheme for SMEs and the agricultural and food sectors, as well as the extension of start-up tax relief, will aid the adjustment to the post-Brexit landscape. However, loans totalling just €2.49 million, less than 1% of the total scheme, have been provided to date under the €300 million Brexit Loan Scheme launched for SMEs in March this year. The Irish SME Association have stated that the conditions relating to research and development are particularly difficult for SMEs to achieve, as at least 80% of the loan received has to be spent on research and innovation activities with the remainder on costs necessary to enable such activities.

The situation is incredibly fluid and it is impossible to predict where the politics on Brexit will end up. Perhaps companies themselves shouldn’t rely on Government and need to take responsibility for their own contingency planning if Brexit is to be the “political, economic and diplomatic challenge of our generation”. 

Annette Hughes is an Economist and Director at EY-DKM Economic Advisory