Technical

Technical

After a runaway election for the Conservatives in December, and a successful Brexit vote last week, it looks like the United Kingdom will be leaving the European Union on 31 January,  but what does that mean for an EU-UK trade deal? By Akriti Gupta With British MPs having given their final backing to UK Prime Minister Boris Johnson’s Brexit deal on 9 January 2020, the UK is now set to leave the European Union (EU) on 31 January 2020 with a deal in place. This approval comes following a mercurial, three-year-long debate over the outcome of the UK’s decision to exit the EU.   The House of Commons voted 330 to 231 in favour of the Brexit Withdrawal Agreement Bill, giving it three weeks to pass through the House of Lords and receive Royal Assent to meet the Brexit deadline. The latest vote gives approval to the 11-month transition period starting at 11PM (GMT) on 31 January 2020, after which the UK will cease to be an EU member state but will continue to follow its rules and contribute to its budget.Moving forward  As UK Brexit Minister Stephen Barclay emphatically concluded the vote (“It is time to get Brexit done, this bill does so.”), the focus turned to upcoming talks on establishing a long-term UK-EU trade deal. Mr Johnson is confident that the transition period is a sufficient amount of time to negotiate a viable trade deal, but his EU counterparts are less optimistic about reaching an agreement by 31 December 2020. However, while the new EU Commission President Ursula Von der Leyen stresses the necessity to uphold the integrity of the European Union, she also highlights the importance of establishing a partnership “beyond trade” with the UK. Even though there is much to be said about the future of the UK-EU trade partnership, areas such as climate action, data protection, fisheries, energy, transport, financial services, and security are key areas that have yet to be touched upon.    As we look forward to the UK navigating the unchartered waters of negotiating a viable trade agreement with the EU, the clock continues to tick. In the words of Ms Von der Leyen, the story of old friends and new beginnings continues.  

Jan 13, 2020
Technical

Neil Gibson, Chief Economist at EY Ireland, explains why giveaway budgets are no longer the reward for Ireland’s economic success. This year’s Budget announcement was a clear indication that, despite the country’s positive economic position, the budgets of old – punctuated by tax cuts and giveaways – have likely been consigned to the history books. Instead, the focus is firmly on public service delivery, targeted and time-limited supports and risk mitigation. No-deal now the base case The first 15 minutes of Minister Donohoe’s speech was dedicated to dealing with a no-deal Brexit, indicating how significant the Government expected the impact to be. The base case for the economic forecasts is now a ‘no-deal’ outcome, growth is expected to fall from 5.5% this year to just 0.7% in 2020. The intent to provide funding to mitigate adverse Brexit effects was prudent, but its effectiveness will be determined by how quickly and effectually this is deployed. In the event of a no-deal outcome, some businesses will need very rapid support to solve cash-flow challenges but there can be no expectation that this will become a long-term source of support. The money must be used to buy time and then help firms to adapt to the new trading conditions, assuming no-deal conditions persist. There will need to be flexibility in the deployment of support, and it was slightly surprising how detailed the commitments were to different schemes and departments. Amazingly, at the time of writing, it remains unclear what form of deal, if any, will be struck. Time to adjust Budget expectations To get a sense of the room, we surveyed attendees at our EY Budget event and it seems Budget 2020 may have fallen short of expectations more broadly, with the majority of respondents saying they felt ‘exactly the same as before’ while 19% felt ‘disappointed’, 16% felt ‘reassured’, 3% felt ‘worried’. Nobody felt ‘inspired’. Budget analysis often focuses on the individual. Who is better or worse off, and by how much? Understandable, but there is growing recognition that money is not the only barometer of success. What of our healthcare and education systems? Our safety and, increasingly, what of the health of our planet? We are being asked to think less inwardly – to look at the bigger picture, the community and the world around us. This was never going to be a giveaway budget. Minister Donohoe, correctly, pointed to the risks facing the Irish economy and the fact that, even after five years of impressive growth, the economy is only just balancing the books. Looking at the infrastructure and public policy needs and the challenge of tackling climate change, it is fair to say that the era of widespread tax cuts and giveaways is long gone. Now, the public faces into a potential era of tax increases as further tax receipts will be required to fund public expenditure. The carbon tax announcement, for example, demonstrates how the linking of tax to beneficial spending plans could become more common. The ring-fencing of tax receipts to resolve specific economic or societal questions can often be easier for people to accept and tougher for businesses to argue with. Supporting that, 74% of business-people surveyed feel the €6 carbon tax increase per tonne does not go far enough, according to the EY Budget poll. Ring-fencing may be more electorally palatable, but it runs the risk of creating a very fragmented tax and expenditure system. It can also reduce the flexibility needed to adjust to unforeseen circumstances. Caution required The cautious and restrained Budget 2020 may seem at odds with an economy that is one of the world’s fastest-growing developed economies and more than 50% larger in GNP terms than it was five years ago. But Minister Donohoe, as expected, highlighted the twin threats of a global slowdown and Brexit as reasons to avoid any sweeping giveaways. Most economists would approve of this restraint at the peak of the cycle, regardless of the reasons, though it is worth remembering that economists usually do not run for election. The reality is that, despite Ireland’s well-documented growth, it is just about balancing the books and with a net debt of close to €180 billion, there is very little capacity to deal with future slowdowns. If Ireland cannot pay off debt at the peak of the cycle, what does that tell us about its economic foundations? Public expenditure has risen strongly in line with tax revenue, despite the messages of restraint and welfare savings, as the labour market has improved. Our growing population, the legacy of underinvestment in infrastructure, well-documented shortfalls in health spending and a rising recognition of education’s relative spending deficit lessens the Minister’s ability to adhere to so-called ‘counter-cyclical’ economic policy (i.e. spending less money when the economy is growing rapidly and more money in a time of slow growth). The harsh reality is that more tax will be required, or a renewed effort will be necessary to find efficiencies in what Ireland currently spends. Neither option will be popular, and this is before we tackle the climate change and emissions crisis. Perhaps the cautious and restrained tone is therefore justified – giveaways will not be the reward for Ireland’s success.

Nov 05, 2019
Technical

The past few weeks have seen a significant amount of development in the realm of Brexit. Akriti Gupta brings us through the recent happenings. 17 October 2019 Following intensive negotiations, a Brexit deal was agreed on between the United Kingdom (UK) and the European Union (EU), with the commercial elements focusing on issues of customs and VAT. Customs Republic of Ireland to Northern Ireland No customs obligations apply if you move your goods from Northern Ireland (NI) to the Republic of Ireland (Ireland), or vice versa, nor are there restrictions on quantities moving. Northern Ireland to Great Britain  No customs obligations apply here as NI is part of the UK customs territory. Great Britain to Northern Ireland  Goods moved from Great Britain (GB) to NI will not be subject to customs obligations unless the good is “at risk” of being moved into the EU afterwards. In such cases, customs will be charged when goods move from CB to NI with rebates available if the goods remain in the UK and are not transmitted onwards to the Republic of Ireland or elsewhere in the EU.  VAT NI will remain aligned with EU VAT laws. However, the UK will keep the VAT revenues collected in NI.  For example: A trader in Ireland purchases goods to the total value of €10,000 from NI. The NI company zero rates the goods supplied to Ireland. The Irish trader then self-accounts for VAT on the reverse charge basis at the 23% rate applicable in Ireland (€2,300). In most cases, the Irish trader can also then claim an input credit of €2,300. The status quo remains, and no cash flow issues arise between Ireland and NI.  It’s important to note that the proposals set out that the UK may apply VAT exemptions and reduced rates that are applicable in Ireland to supplies of goods taxable in NI.  19 October 2019 Upon reconvening on 19 October, the UK House of Commons voted in favour of the Letwin Amendment, which enables the UK to withhold approval for the Brexit deal, until legislation to implement the deal has been passed by the government.  The UK Prime Minister Boris Johnson officially requested another Brexit extension from the EU until the end of January 2020. This is in line with the terms of the Benn Act, passed in September, to ensure that the UK government does not leave the EU without a deal. The EU is currently considering the extension but will need the consent of all EU27 member states to grant it. If the EU refuses to grant the UK a delay to Brexit, then the UK Parliament has until 31 October to pass a deal and the associated legislation.  22 October 2019 The UK Parliament’s bid to hold a ‘meaningful vote’ – a vote within the House of Commons on a government motion to approve the Withdrawal Agreement – was rejected by the Speaker of the House, John Bercow. The UK government also published the full text of the EU Withdrawal Agreement Bill later that day. That night, UK MPs voted to approve the Withdrawal Agreement Bill in principle on its second reading. However, they simultaneously rejected Prime Minister Boris Johnson’s proposal to push the Bill through Parliament within an accelerated three-day timeframe.  Taoiseach Leo Varadkar has confirmed his support for EU Council President Donald Tusk’s proposal to grant the UK an extension to the Brexit process. Meanwhile, the EU27 member states are currently considering the request.  (The outcome of the EU extension was still unknown at the time of writing. An extension was granted and an election in the UK has been called for 12 December.)

Nov 05, 2019
Technical

Annette Hughes, Director at EY-DKM Economic Advisory, takes a look at the current Irish economy and explains what it could look like if there is a disorderly no-deal Brexit on 31 October. Our world leaders recently assembled for the G7 meeting in Biarritz to discuss global issues, such as the protection of the environment, the escalating trade war between China and the USA, and foreign policy. Ahead of the summit, it was described by President of the European Council, Donald Tusk, as a difficult test of unity and solidarity. Meanwhile, the UK and the EU are working to find common solutions to issues much closer to home, notably Brexit. The last three years since the UK voted to leave the EU, without full knowledge of the consequences of an exit, have been very difficult politically and economically. Following a failure to reach an agreement by the 29 March 2019 exit deadline, the position now is that the six-month extension to the Article 50 process will expire on the 31 October 2019. If no other agreement is reached, the UK will leave on that date under a no-deal Brexit scenario. Brexit and Ireland Outside of the UK, Ireland will be the country most affected by Brexit. Yet, in the run-up to the October deadline, the Irish economy has been performing well. Following a better than expected outturn in 2018, with Irish GDP up by 8.2%, the Irish economy had a strong start to 2019, registering 2.4% growth in the quarter, and a year-on-year increase of 6.3% in Q1 2019. The star performance has been the labour market with a total increase of 45,000 jobs in the 12 months to Q2 2019 and annual employment growth of 2%, while the July unemployment rate of 4.6% is deemed to be close to full employment. As a result, there is limited spare capacity in the economy and upward pressure on wages continues.  Exports Exports increased by 10.4% in 2018 and by 13.8% year-on-year in Q1 2019. It is acknowledged that any shock as a result of Brexit will be transmitted to the economy through the traded sector, which includes the high-performing pharma and ICT sectors. This is because, as an open economy, a reduction in global demand would lower the level of exports over the long-term below what it would otherwise be in a business-as-usual scenario and, in turn, lead to lower levels of employment. A discerning Irish consumer Recent data relating to consumer confidence shows a more discerning consumer. The KBC Consumer Sentiment Index was at its weakest reading in July 2019 since November 2014. Other recent reports from the Bank of Ireland, MyHome.ie and Retail Ireland all point to an increasingly nervous and gloomier consumer concerning their purchasing mood, their expectations about property prices and their personal finances.  Irish business sector The business sector is also nervous, as the manufacturing Purchasing Managers’ Index (PMI) entered negative territory in June 2019, and the downward trend continued in July. Firms have cited the decline in production and new orders as the cause of this depression.  The potential fallout from Brexit, whatever deal transpires, is expected to result in a level of Irish output below where it would otherwise be were the UK to decide to remain in the EU. While many businesses have taken a scenario-based approach, ranging from variations on an orderly soft-Brexit, including a free trade agreement with a deal, to a disorderly no-deal Brexit, there is no doubt that the recent narrative has shifted to the latter as we approach the October deadline.  Ireland post-Brexit A study from the ESRI and the Department of Finance (DoF) found that GDP in Ireland ten years after Brexit will be around 2.6% lower in a deal scenario, 4.8% lower in a no-deal scenario and 5.0% lower in a disorderly no-deal scenario respectively, compared to a situation where the UK stays in the EU. Within this aggregate position, certain sectors like agriculture and food, and areas such as the border regions, are expected to be disproportionately affected. In the short-term, the ESRI/DoF expect output to increase by 3.8% in 2019 and 3.2% in 2020 in a baseline, business-as-usual scenario, and by 1.2% and 2.4% respectively in a disorderly no-deal scenario.  The Central Bank of Ireland (CBI) has projected that GDP growth for 2019 could be reduced from 4.4% to 0.4% and from 3.6% to 1.6% in a disorderly no-deal Brexit. The rate of growth in employment would also be severely impacted, and there may be some 34,000 fewer jobs compared to the employment that could be realised in the event of a no-Brexit scenario (i.e. business as usual) by 2020. However, the CBI does acknowledge that their assumptions around a disorderly Brexit are more severe than those made by the DoF and the ESRI.  EY’s Brexit Lead, Simon MacAllister, has provided the latest deal probabilities, putting the likelihood of a no-deal Brexit at 55%, although he does expect there to be lots of developments in September.  Such an outcome would involve the imposition of World Trade Organisation tariffs, which would have negative consequences for consumers, businesses and ports across the island of Ireland. These consequences are likely to be significant, given Ibec and InterTrade Ireland’s recent comments about the low-levels of Brexit preparedness among Irish firms.  Going forward The next significant milestone from Government will be the forthcoming Budget on 8 October, which will need to be framed around the most likely scenario. The timing will not be great, just three weeks before the Brexit deadline – no mean feat for Minister Paschal Donohoe. 

Sep 02, 2019
AI Extra

Brexit Day is around the corner and, whatever the outcome, it’s time to prepare ourselves for the changes ahead. Words by Cróna Clohisey As Brexit Day – 31 October – fast approaches, the Institute is encouraging businesses across Ireland and the UK that they need to ensure they can continue to trade with each other post-Brexit. Applying for a customs registration (an EORI number) is only the first step in the process.   While some traders have experience in the customs formalities required to import and export outside of the EU, it will be a first for many, particularly for smaller enterprises. Businesses should use the time between now and 31 October to upskill in the area of customs. There are various government supports to help do this.  Latest registration statistics from Revenue and HMRC suggest that thousands of small traders on the island of Ireland have not applied for an EORI, and these are the businesses that will be most affected by Brexit. Getting an EORI number takes anything between three and five minutes and is completed online. Businesses also need to assess whether or not they have gaps in customs knowledge that could prevent them from completing customs returns and declarations necessary to keep goods moving.  Regardless of whether customs duties apply, to move goods between Ireland and the UK and the UK and the EU, customs declarations must be submitted to Revenue and HMRC respectively. Traders will need to have customs expertise and software to file these declarations, or they will need to hire an agent to do this on their behalf. It’s important to remember that tax authority officials will check that the proper declarations are in place and goods will be detained at ports and borders if they are not.  Revenue estimates that customs declarations are expected to increase from 1.4 million to 20 million per year once the UK leaves the EU. HMRC estimate that declarations will grow five-fold to around 250 million. It’s best to not be caught unprepared on  31 October.

Sep 02, 2019
Technical

Cróna Clohisey gives a summary of the latest happenings in British politics, what’s next for Brexit and a look at the greater impact the exit is having on manufacturing in the UK. With the race to find a new Conservative leader (and Prime Minister) in the UK heating up, Brexit appears to have been put on the back burner – for now. The EU and UK are still planning, however, for an exit date of 31 October 2019.  In the meantime, the European Commission issued a warning to the UK that it will have to pay its outstanding share of the EU budget even if it leaves the EU without a Brexit deal.  In a statement confirming the EU’s Brexit preparedness remains fit for purpose, the Commission said it would not enter talks on the future trading relationship until the UK honours “the financial obligations the UK has made as a member state”. Car production falls dramatically According to the Society of Motor Manufacturers and Traders (SMMT), despite the fact that Brexit was delayed until 31 October, the postponement came too late for factories to change plans, prompting a dramatic reduction in output. And, so, the car factories shut down many of their operations in the UK in April to cope with disruption from 29 March, resulting in UK car production being cut in half for April. Car factories normally incorporate a shutdown period over the summer, but this was brought forward to April to cope with the supply chain disruption that Brexit might have brought and to give manufacturers time to learn new customs procedures.  EU negotiator to lead trade unit The EU’s deputy Brexit negotiator, Sabine Weyand, will lead the EU Commission’s trade unit in Brussels from June. This means she will be front and centre in the future during talks with the UK on its future relationship with the EU after Brexit. 

Jul 01, 2019