Oireachtas Joint and Select Committees

Tuesday, 5 February 2019

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

 

2:00 pm

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I thank the committee for the invitation to be here to discuss Brexit preparations and the recent European Commission communication entitled, Towards a more efficient and democratic decision making in EU tax policy. In relation to Brexit, the Government remains firmly of the view that the only way to ensure an orderly withdrawal of the United Kingdom is to ratify the withdrawal agreement, as endorsed by the European Council and agreed with the British Government. The European Council has made it clear that it stands by the withdrawal agreement and that it is not for renegotiation. The agreement, with its backstop provisions, is the only agreement on the table that provides the essential legal guarantee to avoid a hard border in any circumstances and protect the Good Friday Agreement in all its parts. As a Government, our focus remains on securing ratification of the withdrawal agreement but we must also continue to implement our preparations for a no-deal scenario.

On 19 December, the Government published its Brexit contingency action plan, setting out its approach for dealing with a no-deal Brexit. Intensive work relating to the action plan continues across Government on a daily basis. As Minister for Finance, my objective is to protect the economic and financial interests of the State and to support the work of the Revenue Commissioners so as to minimise the Brexit disruption to trade to the greatest extent possible.

My Department is working within the whole-of-Government approach and co-ordinating closely with its agencies which are developing and implementing plans and measures to protect our economy. I recently met with the chief executive of the National Treasury Management Agency, NTMA, the chairman of the Revenue Commissioners and the deputy governor of the Central Bank on these matters. All are engaging closely in the overall whole-of-Government preparations and are confident that they have put appropriate contingency plans in place to do everything possible to limit the inevitable disruption to consumers and trade in the event of a no-deal Brexit.

However, it is not possible to eliminate all risk in a no-deal situation. Any Brexit will be negative, and a no-deal most of all. Not all issues are within Ireland’s direct control. This is not, I should emphasise, to avoid responsibility but to be frank and open. This is an exercise about the limitation of different degrees of damage. The Government is working actively at EU level and the EU will be taking a number of unilateral, limited and temporary measures in areas such as air transport, for example. However, it is important not to pretend that there can be what some in the UK are calling a "managed no-deal". No such thing exists and, from the EU perspective, we need to be very careful not to put at risk the benefits of the withdrawal agreement and, in particular, the transitional arrangements and the backstop.

Last week, following discussion with Government, I issued an initial assessment of the economic and fiscal impact of a no-deal Brexit. The new analysis is based on an initial application of the latest UK estimates from the National Institute of Economic and Social Research, which is the UK equivalent of the ESRI. Brexit, in whatever form, is an historic challenge for Ireland, and the implications for our economy will be disproportionate relative to those for the rest of the EU. While my Department's central economic and budgetary planning scenario remains an orderly exit based on the UK leaving with a transition arrangement in place, the risk of a disorderly Brexit has increased in recent weeks. In a disorderly exit scenario, while in aggregate terms the economy would be likely to continue expanding, the pace of growth would be significantly lower than is currently expected. My Department's initial assessment suggests that the level of economic activity would be approximately 4.25 percentage points lower than our existing trajectory over the medium term and approximately 6 percentage points lower than in a no-Brexit scenario. The reduction in the pace of growth would have negative spillovers to the public finances and the labour market. The headline deficit could deteriorate by nearly a percentage point of national income in the short term. As for the labour market, the unemployment rate would increase by an estimated 2 percentage points relative to budget 2019 projections. As earlier research from the Department of Finance has shown, the most adverse impacts of Brexit are likely to be felt in the agrifood and indigenous manufacturing sectors. The more comprehensive assessment by the Department of Finance and the ESRI will be published later this quarter. This output will be incorporated into the stability programme update, due in April.

I recognise that these estimates may not capture the full impact and that the figures could be conservative; indeed, the impact in certain exposed sectors and regions could be worse than the average. Nevertheless, quantifying the impact is important to help Government to understand the possible macroeconomic implications and to design the appropriate policy response. Of course, it is important to point out that Ireland is facing the challenge of Brexit in a robust economic position, with the highest national income growth in Europe and record employment levels. In addition, exports, job creation, inflation and public debt indicators are all strong. This strong performance will provide a better and stable platform for the external challenges that lie ahead. We have already taken many actions, many of which are supported by long-term planning through the national development plan and the national planning framework.

On financial services, my Department has been working closely with the Central Bank on planning for Brexit. The Central Bank has statutory responsibility for financial stability. It is working closely with financial services firms to ensure they have contingency plans in place for the end of March and are adequately prepared to cope with the possible effects of Brexit with as little disruption for consumers as possible. As for financial services, the Department and the Central Bank have stressed that responsibility for contingency planning remains with individual firms.

On the basis of its ongoing work, the Central Bank has been able to provide assurance that while some level of market disruption is inevitable, the financial system as a whole should be resilient enough to withstand a hard Brexit and that the most material "cliff-edge" financial stability risks arising from Brexit may have been largely mitigated. In this context, the contingency preparations announced by the European Commission last November mitigate the immediate risks arising from potential loss of access to UK-based market infrastructure - the central clearing counterparties mechanism, which is used to clear derivatives - and for Ireland specifically, access to a central securities depository allows for the settlement of Irish equities and exchange-traded funds.

On CSD, I am proposing legislation in the Government general scheme to support the Commission decision. As far as consumers are concerned, the most important issue for them arises where the UK or Gibraltar-based insurance firms do not have adequate contingency plans in place. While most insurance firms and intermediaries providing services from the UK and Gibraltar have taken appropriate action, contract continuity still remains a risk where firms have not taken adequate action. The legislation I am proposing as part of the Government omnibus Bill will allow for the run-off of policies in place at the time of Brexit over a three-year period, eliminating the most material risk for customers of insurance firms.

The Department of Finance has been working closely with the Revenue Commissioners on Brexit since the referendum. While the Department is responsible for overall policy, Revenue is an independent body responsible for implementing that policy in a fair and efficient manner. Revenue is on the front line in terms of our preparations for Brexit and facilitating efficient movement of legitimate trade post-Brexit to the greatest extent possible. I know that the Chairman of the Revenue Commissioners attended this committee on 24 January and outlined the work and scale of the challenge of the very significant increase that can be expected in traders who will have to deal with customs formalities for the first time, leading to an estimated tenfold increase in customs declarations, the complexity of issues relating to the landbridge and the challenge for Government agencies, including Revenue, in putting the necessary arrangements in place. The Chairman outlined to the committee the very significant programme of work and he made reference to ICT, staffing and outreach to business, all of which is being done through either trade representative bodies, events or seminars. A no-deal Brexit will be a serious challenge for our traders. I am, however, satisfied that the Revenue Commissioners have been working very hard and will continue to work hard to ensure they are prepared to facilitate the efficient movement of legitimate trade to the maximum extent possible in a no-deal scenario.

In terms of legislation, the draft omnibus Bill, known officially as the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill 2019, was published on 24 January. It calls out particular areas that need to be addressed urgently. Part 6 refers to legislative amendments proposed for income tax, capital tax, corporation tax and stamp duty legislation to ensure continuity for business and citizens in regard to current access to certain taxation reliefs. Part 7 deals with implementation of the European Commission’s equivalence decision under the central securities depositories, CSD, regulation. Part 8 includes legislative measures for a temporary run-off regime. I look forward to working with all Members of the Dáil and Seanad to ensure the necessary legislation is in place before 29 March.

Turning to the second item on the agenda, the launch earlier this month by Commissioner Moscovici of a Commission communication entitled, Towards a more efficient and democratic decision making in EU tax policy. This communication sets out a roadmap which aims to start a debate around changing the system of voting for tax files from unanimity to qualified majority voting, QMV. At this point, we should reflect on what has been achieved on tax issues at EU level. Since 2015, there have been 21 different measures, an average of more than one initiative every three months. This is evidence of progress being. The Commission roadmap identifies the passerelle clause as being the most feasible option for moving away from unanimity. This provides that the European Council could unanimously decide to move an entire policy area or part of a policy area from unanimity voting to QMV. The support of the European Parliament, as well as national parliaments, including Dáil Éireann, would also be required. This is a highly sensitive suggestion for many member states, including Ireland, as any move to change the voting method used for tax files would reduce member states' sovereignty. Given the large volume of important agreements reached at EU level on tax issues, I do not see the need for, or merits of, any proposals to move away from the requirement for unanimity.

Regrettably, the United Kingdom leaving the European Union means that some things will change. Planning for this change has taken place on a whole-of-Government basis. No future relationship between the EU and UK will be as good as the status quo. Membership of the Single Market and customs union is a core element of our economic strategy. That will not change. Ireland will remain an active and enthusiastic member of the EU. The Government is committed to working with the European Commission and our EU partners to ensure the closest possible relationship between the EU and UK.

In terms of taxation the same principles apply. It is our view that the way to achieve the best results and tangible progress is to have all member states working together for the benefit of the whole European Union. I thank the Chairman and look forward to questions from members.

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