Bernard Durkan (Kildare North, Fine Gael)
Link to this: Individually | In context | Oireachtas source

113. To ask the Minister for Finance the degree to which he has identified particular or specific threats to the stability of the economy pre or post-Brexit with particular reference to changing training conditions; and if he will make a statement on the matter. [25848/19]

Paschal Donohoe (Dublin Central, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The Stability Programme Update 2019published by my Department in April, sets out the principal economic risks facing the Irish economy, along with an assessment of their relative likelihood and economic impact (see following table). The balance of risk is firmly tilted to the downside, both in the short-term and over the medium-term.

The Irish economy is in an unusual position at present, facing possible domestic overheating and capacity constraints on the one hand, and a slowdown in key export markets on the other. In addition to this, the UK’s forthcoming exit from the EU is causing uncertainty in terms of Ireland’s future trading relationship.

In March 2019, the Department of Finance and the ESRI published a comprehensive assessment of the potential impact of Brexit. This report shows that compared to a no Brexit baseline, the level of GDP in Ireland would be around 2.6 per cent lower in a ‘deal’ scenario, and 5.0 per cent in a disorderly ‘no deal’ scenario, ten years after Brexit. The report also estimates that, after ten years, Irish exports would be reduced by 4.6 per cent in a 'deal' scenario, and 8.3 per cent in a ‘disorderly no deal’ scenario.

Other than Brexit, the main short-term risks relate to a sharper-than-assumed deterioration in the international environment and an escalation of trade protectionism.

Over the medium-term, the principal risks relate to potential overheating as the economy approaches full-employment, and changes in other jurisdictions that affect the competitiveness of Ireland’s corporate tax regime.

The economy is in a good position to meet these challenges. Economic growth, which resumed early this decade, has been consistently among the highest in the EU for a number of years, notwithstanding reservations about the headline data.

The recovery is perhaps most clearly evident in the labour market. The unemployment rate has fallen to 4.4 per cent from the peak of 16 per cent in 2012. There are now more people at work in Ireland than ever before.

The headline budget deficit was eliminated last year for the first time in a decade. Mitigation measures have been prioritised by building up the resilience of the economy and the public finances, thus improving the capacity to deal with an adverse economic shock. Some €1.5 billion has been set aside in a Rainy Day Fund. Our companies are being supported to prepare for Brexit, to diversify their markets and supply chains, to develop new skills and to explore new opportunities.

The Government will continue to work to strengthen the resilience of the economy, to maximise opportunities and to prepare our economy for the challenges ahead, including through the Ireland Connected Trade and Investment Strategy, the 10-year National Development Plan and Future Jobs Ireland 2019.

Table: macro-economic risk assessment matrix

Bernard Durkan (Kildare North, Fine Gael)
Link to this: Individually | In context | Oireachtas source

114. To ask the Minister for Finance the extent to which issues with the potential to overheat the economy have been identified; and if he will make a statement on the matter. [25850/19]

Paschal Donohoe (Dublin Central, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Our economy is in good shape, following several years of economic recovery driven by the export sector, the domestic economy is now increasingly playing an important role in helping to drive growth. Modified domestic demand, a measure of underlying economic activity in the domestic economy, increased by 4.5 per cent in 2018.

Despite the rapid rate of recovery, the main signs of overheating – for instance pay developments, credit growth, and inflation - do not yet suggest that significant overheating pressures have emerged.

The labour market arguably provides the best barometer of the health of the economy at present. The strong growth in employment over the last number of years has continued into this year, with total employment increasing by 81,200 (+3.7 per cent) in the year to Q1 2019. In parallel the unemployment rate has fallen from a peak of 16 per cent in early 2012 to 4.4 per cent in May 2019. This rate of unemployment and the recent signs of a pick-up in earnings are consistent with an economy that is running close to full employment. Although these positive developments in the labour market are welcomed, we need to monitor these development closely as a significant acceleration in wages, would undermine Ireland’s competitiveness.

For 2018 as a whole, Ireland’s inflation averaged just 0.7 per cent, this compares to an average inflation rate of 1.9 per cent for the EU as a whole. The comparatively low level of inflation in Ireland should help to maintain our competitiveness and protect real wage growth. While price pressures have been seen in the housing market, these are more a function of structural imbalances between supply and demand, which we are actively seeking to alleviate, rather than evidence of over-heating.

As in any healthy economy, the pick-up in credit growth has taken hold, albeit at a modest pace. However, since the financial crisis, a number of additional safeguards have been put in place to prevent the unsustainable build-up of credit, most notably the introduction of the macro-prudential regulations by the Central Bank.

Over the medium term, with the domestic economy expected to drive growth, it is important that we remain cognisant of the potential upward pressure this will place on both prices and wages, which could give rise to a loss of competitiveness. Indeed, in order to prevent overheating pressures emerging we must focus on maintaining competitiveness-oriented policies, whilst avoiding pro-cyclical policy measures. To this end, the Government will continue to implement budgetary policies designed to ensure economic stability and fiscal sustainability. This prudent approach to our public finances will help to mitigate against any future downturn in economy activity.