Time to get real about Budget 2019: next year could be tricky

Effects of economic recovery and external threats require shift in budget strategy

We seem to be living in two parallel universes. In one, the usual pre-budget music is under way, with the ritual warnings from the Department of Finance and the near certainty that cash will be "found" at the end of the day for some giveaways. In the other the coincidence of Donald Trump and Brexit threatens to turn our economic world upside down.

Yes, the Government is all talk about prudence in the face of these threats and of “preparing for the worst”. But the budget wrangle will be the usual stuff of Ministers trying to “win” as much extra cash as possible for their own department and of the Government trying to keep everyone happy. For once, it’s surely time to be a bit more strategic – 2019 could yet be a tricky year.

There are always uncertainties, of course, but we now face a couple of whoppers, driven by the extraordinary international politics we are watching in the UK and the United States. And these make forecasting for 2019 and 2020 hugely difficult. The Department of Finance, not unreasonably, is basing its sums on gross domestic product growth of 4 per cent next year and 3.4 per cent in 2020. But factor in a hard Brexit and a deepening trade war between the European Union and the US and you would be looking at a very different picture. The difficulty, in terms of planning, is that the gap between the possible outcomes is so large.

On Brexit, the key, in terms of 2019, is whether there will be a transition period after the EU leaves next March, which would basically be a kind of standstill until the end of 2020, ensuring little change in trading arrangements. If there is no deal on the withdrawal agreement, however, there will be no transition and the UK will crash out next March in chaos. To avoid this, the much-discussed Irish Border backstop has to agreed – which will be really tricky.

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No-deal Brexit

While the Government continues to talk tough about there being no Irish Border in any situation, I can’t see how one is avoided in a contentions “no deal” situation. And the most significant economic hit in the event of a no-deal Brexit would could from trade going across the Irish Sea, the largest market for our Irish-owned exporters and our biggest source of imports.

For example, IBEC economist Gerard Brady pointed out during the week that our food and resources industry remains hugely exposed. In many sectors we have not diversified away from the UK with some 55 per cent of beef exports going to the UK and also big risks too for dairy exports and forestry product.

This is the domestic Brexit exposure, the bit that would hit rural Ireland, even as Dublin might be protected a bit by banks and other financiers relocating from London.

The Trump risk, meanwhile, is to the modern foreign direct investment sector. Ireland is what the National Treasury Management Agency has called a "high beta" bet on the US economy – volatility there has a significant impact on us. And if there is one thing Mr Trump brings, it is volatility.

There is the issue of our corporate tax revenues – with 40 per cent coming from the 10 largest companies, mostly US multinationals. Big US tax changes and encouragement from Trump to invest at home may have implications here, as may EU changes driven in part by the tax avoidance regimes of the multinationals. Controversies such as the one surrounding Facebook this week – and the wider issues of data regulation – also put Ireland in the spotlight.

Meanwhile our location as a kind of aircraft carrier for US multinationals also exposes us in the brewing trade war between the EU and US. Domestic industries, such as whiskey, could be hit if Trump targets them for tariffs, but so too could sectors such as pharma, which accounted for almost €30 billion of the total €53 billion we sold in goods to the US in the first five months of 2018. Big US pharma companies export products back to the US market, precisely the kind of activity which Trump believes should be done in America.

Budget pressures

Ministers are well aware of all this. But they also face the usual budget pressures. Plans to boost investment spending are welcome, though challenging to implement, but there is big pressure on day-to-day spending, too, and calls for tax cuts.

We are in the unusual situation of facing problems caused by rapid growth – labour shortages and a housing squeeze – while there are also real outside threats. From where we stand now, the biggest issue over the next few years may be holding on to the gains we have and trying to get past some nasty bumps with minimal damage.

This means different budget priorities – and a different message. It means being a bit more cautious in forecasting tax revenues and leaving leeway in case things do go wrong. It means – via the budget and other policies – a forensic focus on the risks, including measures to support sectors and areas now exposed – mainly rural Ireland in the case of Brexit.

There seems a strange reluctance to really lay these risks on the line, to emphasise to companies and to us all what is at stake and the inevitable uncertainties. Irish politics, it seems, demands that we are told that it will all be “grand.” And if the Government keeps spinning this message out, it can’t be surprised if people expect goodies in the budget.

If the storms pass and we aren’t badly hit, then all the better. But with the most extraordinary developments in international politics for many generations, we just can’t be having the same tired old budget debate, pretending that our economy exists in splendid isolation.