Stephen Donnelly (Wicklow, Fianna Fail)
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108. To ask the Minister for Finance the estimated impact on GDP and GNP if parity with the pound is maintained for one week; and if he will make a statement on the matter. [50919/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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Euro-sterling exchange rate developments have been largely driven by the uncertainty associated with Brexit over the last year or so.  There was a notable appreciation of the bilateral rate in the months leading up to the vote and a further sharp appreciation following the outcome of the referendum.  Since the vote, the euro has appreciated by approximately 17% against sterling and is currently trading at around €1 = stg£0.90 (as of 28^thNovember). 

The impact on GDP/GNP if parity with the pound is maintained for one week would be negligible due to inter alia currency hedging as well as fixed-price contracts.

However, the table below illustrates the estimated impact of a sustained 5% appreciation of the euro-sterling bilateral rate on a number of key macro-fiscal aggregates. It is important to stress that these results are based on the historical relationship between the euro-sterling exchange rate and other macroeconomic variables and as such are only indicative.

Most of the impact from such a shock is felt immediately with the level of GDP expected to fall by 0.6 percentage points in the first year relative to baseline with adverse impacts on the deficit and debt ratios. Overall, the level of output would be 0.5% lower over the medium-term relative to baseline. This, in turn, would worsen the deficit path with the effect declining to 0.2 percentage points after 6 years.

The margin of error on scaled estimates is likely to be significant as the impact from exchange rate appreciation is likely to be non-linear.

5 per cent euro-sterling appreciation

Source: ESRI, based on HERMES model estimates as published in Stability Programme Update 2016 (SPU 2016 page 27)

As we cannot control the international environment or exchange rate developments, it is crucially important that continued competitiveness improvements are achieved, including by focussing on costs we can control and by boosting our productivity. Ensuring a sustainable path for the public finances is also of fundamental importance.

In that context, on the fiscal side the Government has continued its policy focus of enhancing the resilience of our public finances to any Brexit-related shock. Specifically, it is projected that Ireland will achieve its medium-term budgetary objective of a balanced budget next year. Linked to this, over the forecast horizon, it is projected that the Debt-to-GDP ratio will continue on a downward trajectory, reaching the Stability and Growth Pact (SGP) 60 per cent threshold in the early part of the next decade and continuing to improve thereafter.

Whilst not complacent to potential challenges, including our currently elevated debt level, these developments will help provide fiscal capacity in the event of Brexit. Complementing this, Budget 2018 established the ‘Rainy Day Fund’, which provides a further counter-cyclical buffer, and represents an important measure to strengthen the shock absorption capacity of the national finances to such external risks.

Budget 2018 also announced further measures to prepare Ireland’s economy for the significant challenges ahead.  These measures include:

- a doubling of capital investment between 2015 to 2021 - boosting the growth potential of the economy

- improving the competitiveness of our personal tax system - through income tax reform

- introducing a Key Employment Engagement Programme (KEEP) – a new incentive to attract key employees

- a new €300 million Loan Guarantee Scheme for Brexit-impacted business and a complementary €25 million Agriculture Brexit Loan Scheme – targeted at enhancing the competitiveness of the businesses most exposed to Brexit

- the retention of the 9% VAT rate in the hospitality sector to reduce the impact of currency volatility in the wake of the UK’s decision

- the doubling of additional Brexit-related staff in state agencies.

The Government also continues to encourage businesses to make contact with their Local Enterprise Office, Bord Bia or Enterprise Ireland for free services to help them build a plan for Brexit. The enterprise agencies will  work with companies, helping them to deal with Brexit - making them more competitive, diversifying market exposure, and up-skilling teams.

Furthermore, the Government will also exploit fully any opportunities that arise. The Government will continue through the IDA to promote the attractiveness of Ireland as a location of choice for companies and talented people who are looking to establish or expand operations in what will be the only native English-speaking country within the EU and the Eurozone.