Michael McGrath (Cork South Central, Fianna Fail)
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3. To ask the Minister for Finance his department's current assessment of the impact of Brexit on the economy; his views on whether Brexit is already having a significant impact on certain sectors on the economy; if he has further plans not yet announced to deal with the issue; and if he will make a statement on the matter. [34250/16]

Michael McGrath (Cork South Central, Fianna Fail)
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The purpose of this question is to get the Minister's assessment of the impact so far of Brexit and the likely impact on the Irish economy going forward. The joint ESRI-Department of Finance working paper on the issue is helpful and interesting. Will the Minister put in context what its findings would mean for the economy? It found, depending on the nature of the post-Brexit trading relationship, that the level of output in Ireland will be 2.3% to 3.8% below what it would otherwise be projected over a ten-year period or 40 quarters. What is the current assessment of Brexit's impact now and in the future? What can we do to mitigate the negative effects of it?

Michael Noonan (Limerick City, Fine Gael)
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The UK referendum on EU membership presents an important challenge for the economy.

My Department has been to the fore in producing and funding relevant analysis on Brexit. Previous outputs include a scoping study produced by the ESRI last year under the joint research programme, initial short-term estimates published in the summer economic statement, an analysis of the possible sectoral and regional impacts of Brexit arising from Ireland's trade relationship with the UK, published with budget 2017, and a joint research paper with the ESRI modelling the medium to long term macroeconomic impact of Brexit.

The medium to long-term analysis shows the impact on Ireland will be significant. Looking at the effect ten years after a UK exit, in a WTO outcome the level of Irish GDP could be almost 4% below what it otherwise would have been in a no-Brexit scenario, with most of the negative GDP impact coming in the first five years. The level of employment, relative to a no-Brexit world, is also expected to be 2% lower in the same scenario and unemployment 2 percentage points higher. I would stress that these model results are based on a no policy change assumption.

The sectoral analysis - published by my Department on budget day - shows that those most exposed to the UK are generally comprised of indigenous enterprises that are small in scale, are concentrated in food and manufacturing industries, have relatively low profit levels and have a disproportionate concentration of employment in regional and rural labour markets. Budget 2017 laid out an extensive range of policies targeted at these exposed sectors, including the retention of the 9% VAT rate and the extension of the foreign earnings deduction and the special assignee relief programme until end 2020. 

The sharp appreciation of the euro-sterling bilateral rate is perhaps the most significant short-term economic impact arising from Brexit. Indeed, the current bilateral rate and its recent evolution will pose significant challenges, particularly for parts of the exporting sector and areas sensitive to cross-Border trade. For instance, merchandise exports to the UK have fallen by almost 4% since the referendum. Consumer prices are also beginning to reflect exchange rate developments falling by almost 1% since June.

The Government has put in place a number of arrangements to ensure a whole-of-government response to Brexit, including a new Cabinet committee, which is overseeing the overall Government response to Brexit.

Michael McGrath (Cork South Central, Fianna Fail)
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There seems to be a sense that growth in the economy is slowing. The Department of Finance downgraded the growth forecast for next year, Brexit-related or not. We are hearing concerns from several different sectors, the retail sector in particular. Evidence has shown that the traffic flows north of the Border have increased, for example. Obviously, there is serious concern in the food sector and in the agriculture area generally. These are serious concerns.

The report from the ESRI and the Department of Finance concludes that the potential long-term impact of Brexit on Ireland is severe with up to 4% of less output than we otherwise would have. That has knock-on consequences for Exchequer receipts, employment and investment in the economy. We need to have a credible and coherent plan to deal with the fallout from Brexit. We still do not know what the post-Brexit trade relationship will look like. Clearly, the consequences are serious. I certainly get the sense that we are beginning to detect the signs of those consequences.

Michael Noonan (Limerick City, Fine Gael)
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If there was never a Brexit, the economy would still be slowing down somewhat now towards a sustainable growth rate. When one comes out of a recession, there is a lot of spare capacity in an economy. When it begins to improve, growth rates are beyond the sustainable growth rate. When there is such spare capacity in the economy it grows more rapidly than it would be expected to grow on average.

Now that it is settling back, that factor exists in any case. We predicted around budget time that our sustainable level of growth would be 3.25% or 3.5% out for the five years of the forecasting period. On top of that, we took 0.5% off the growth rates for 2017, directly because of Brexit. That was built into the Summer Economic Statement. We maintained that position at budget time.

There are figures published today by the European Commission showing a very marginal reduction of 0.1% for 2017, or a reduction from 3.6% to 3.5%, I believe. It is showing a similar increase for 2018. It is all very marginal, however, and effectively it is in agreement with the figures we have been working on running from the budget.

Apart from analysing the potential fallout, it is very hard to make provision until we know where the United Kingdom will land in regard to its future negotiations with the European Union. The analysis to which the Deputy referred considers what would happen under the Norwegian arrangement, the Swiss arrangement and the World Trade Organization arrangement. The World Trade Organization arrangement, with the bureaucracy and possible tariffs that would arise from it, is the most extreme. It is almost 4%. As the Deputy said, however, it is over 40 quarters - 40 quarters from the British exit. Therefore, it is about 12 years down the line. If one assumes a rate of 3% per year and compounds it for 12 years, there is probably an increase in GDP of approximately 40%. One takes almost 5% or 4% off that. That is the impact but it is considerable. The strongest impact is in the first five years rather than in the later period.

Michael McGrath (Cork South Central, Fianna Fail)
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It is considerable. The projections are based on certain assumptions. It could turn out better but, equally, it could turn out to be worse. What ongoing work is taking place within the Department to deal with the fallout from Brexit? The Department of the Taoiseach and Department of Foreign Affairs and Trade are taking the lead role in terms of managing Ireland's response and the negotiations. However, within the Department of Finance, which is the economic engine, what work is being done to make plans and examine scenarios and contingencies? What feedback is the Minister currently receiving? Has he any concerns that there is a slowdown in growth that is Brexit related? Certain sectors are feeling the heat already, including the retail and agrifood sectors, in addition to SMEs in general that are dependent on exporting to the UK market.

Michael Noonan (Limerick City, Fine Gael)
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There is already some reduction in business confidence because uncertainty always produces that. There is some impact on exposed horticultural industries, such as the mushroom production industry. We are all aware of that. It is affecting other food exporters also. One must decide how the United Kingdom will replace its imports from Ireland on the agrifood side. Since the devaluation is across the eurozone and against other countries, the United Kingdom does not seem to have many alternative sources of supply. There could be a change of behaviour, however. To put it very simplistically, the British housewife, instead of buying steak once a week, might buy chicken. Then one would have a substitution effect that would affect exports of Irish beef to the United Kingdom. We are trying to assess these results. In addition, there will be a price change. There has already been an analysis in the United Kingdom referring to retail prices increasing there in the order of 4% to 5%. This would require a renegotiation of contracts, when the contract period runs out, by Irish exporters with a view to achieving an increase in price.

It is very uncertain and it is having an effect. It is too early to quantify it. We are taking a number of steps. As the Deputy said, the Department of the Taoiseach is taking the lead. A particular piece of work I am interested in involves our examination of the possibility of developing an export guarantee arrangement for vulnerable Irish industries. I hope to make an announcement on that before Christmas and brief the Deputy thereon.