Oireachtas Joint and Select Committees

Wednesday, 10 April 2019

Committee on Budgetary Oversight

ESRI Report on Ireland and Brexit: Discussion

2:00 pm

Dr. Kieran McQuinn:

I thank the Deputy for the questions. They are greatly relevant. On the 2019 budget, it is interesting that the Deputy would ask that question because we release a commentary just before each budget and we are obviously thinking about the kind of stance that we would suggest and recommend to Government. If the Deputy recalls, in the autumn of last year there were some calls among commentators, which were perfectly legitimate in many respects, for a contractionary budget. The feeling was that the economy was overheating and that a lot of pressure was growing in the economy etc.

Our reflection on that at the time was that it was still optimal for the Government to pursue what we called a neutral policy. This was basically a policy that would neither stimulate the economy nor be contractionary. We offered two reasons for that. One was that we took the view there was a real danger of a no-deal Brexit outcome and that the economy would be hit by a substantial economic shock as a result. Moreover, we took the view that if we were to implement a contractionary budgetary policy at the same time we would effectively be compounding the adverse shock that would result. The other reason was that there was still a need to continue investment in key resources, especially in the housing area, for example. That is what we suggested.

In broad terms most commentators would probably have taken the view that the 2019 budget was not neutral and that if anything, it was slightly on the stimulatory side. Overall, the implications for the public finances that Dr. Bergin outlined under an adverse case clearly show a significant potential increase in the deficit. That is obviously something that one would be slightly concerned about. In particular, we should be mindful of the fact that the budgetary position last year was somewhat massaged by bumper corporation tax receipts. As committee members probably know, corporation tax receipts went up by over 20% last year even though the Department of Finance only expected them to increase by 4%. The headline position or surplus recorded last year was not truly reflective of the underlying position. That is reflected in our forecast for this year and next year. We believe there will be a return to the deficit.

The bottom line is that while there is a deterioration under the adverse case, I still reckon it is within the broad budgetary parameters. Personally, I do not believe there is a need at this stage for a supplementary budget. I believe there is a case for the Government to pursue, at the least, a neutral policy. I would not say it should be explicitly counter-cyclical in terms of increasing expenditure to offset the impact but I would not go to the other extreme either, which would be to suggest that we should have implemented a contractionary policy to offset overheating pressures. In broad terms, I do not really think we need a supplementary budget, even under these circumstances. Obviously, we need to keep an eye on the situation. In particular, we need to keep an eye on the revenue side and what happens to key taxation aggregates like corporation tax, which recorded substantial increases last year.

Reference was made to the regional aspect. Dr. Bergin should feel free to come in on this point. I was not directly involved in the work Dr. Bergin did but it was beneficial in several respects because it used the standard tools we use in the institute, including the big macro model that can feed in many of the outside shocks that will come about due to Brexit. It also leveraged off the micro work we have been doing in the institute. My colleague, Dr. Martina Lawless, has done a good deal of micro-level work looking at sectoral issues. In fact she has published several papers on the issue. Her analysis has emphasised the regional dimension to the issue. In particular, she has looked at the sectors that would be most impacted. As we all know at this stage, agriculture and the related food processing sector, as well as tourism, are the sectors that could be particularly impacted. Obviously these sectors have a specific regional imprint. One interesting aspect of her work was that from a regional perspective, we all think of the Border area as being an area that clearly would be particularly impacted. Her analysis also suggested, however, that certain parts of Munster that are heavily reliant on agricultural income as a main source of income could be particularly impacted as well. We could have potentially a broad spread in terms of the impact.

We have done a good deal of work in looking at Brexit and the housing market. We see a broad regional spread in terms of the implications. Clearly for areas outside Dublin, and to a lesser extent outside Cork and Limerick, adverse implications arise for the housing market. In Dublin we can see an increase in demand for housing if we have large numbers of people coming to work. As I said, we have done a good deal of work looking at the regional aspects. Certainly, these are things of which we were mindful in the analysis we have conducted.