Government ‘may be underestimating impact of hard Brexit’

The Department of Finance may be significantly underestimating the impact of a hard Brexit on the Irish economy, the Government's Fiscal Advisory Council has warned.

Council chairman Séamus Coffey said there were a number of questionable assumptions underpinning the department's forecasts, including the assumption that the United Kingdom was an "average trading partner".

Addressing the Oireachtas Committee on Budgetary Oversight, Mr Coffey said a big reversal in UK growth was likely to have a disproportionally larger impact on Ireland than on other countries.

This was especially true for certain labour-intensive indigenous industries here, such as food and farming, given their reliance on UK trade, he said.

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The department’s current forecast scenario, which assumes a hard Brexit, suggests the Irish economy could shrink by up to 4 per cent within the first five years of the UK departing the European Union, with the impact transmitted via the trade sector in the form of lower export demand.

“We’re not saying that the approach is flawed, we’re just saying these estimates can’t be precise,” Mr Coffey said.

“The risk we’re highlighting is that there is a potential harder impact from Brexit than currently built into the forecasts.”

Earlier on Wednesday, British Brexit secretary David Davis told UK MPs that leaving the EU would provoke a "paradigm change" in the UK economy similar to the financial crash of 2008.

Mr Davis said that in such circumstances, any assessment of the potential impact of the change on various sectors of British industry using existing economic models would not necessarily be “informative” about the likely outcome.

Transferring forecasts

Mr Coffey said the department’s projections for the impact of hard Brexit were largely based on transferring forecasts for the UK economy to the Republic.

“These effects could be more negative, more persistent and more upfront than currently forecast,” he said.

An additional risk to the Irish economy is posed by potential future changes to tax arrangements among Ireland’s trading partners amid US plans for major of its tax code, which would, in theory, make it more attractive for US mulitnationals to onshore assets.

Earlier, Mr Coffey again cautioned the Government against using the current windfall in corporation tax to fund permanent expenditure increases.

“As the council has noted on numerous occasions, corporation tax receipts are the most volatile of the main tax heads; they are prone to very large forecast errors; they are exposed to a number of risks; and they are highly concentrated with close to two-in-five euro of corporation tax receipts attributable to just 10 companies,” he said.