The Brexit deal struck between the UK and EU before Christmas is a positive step, but it remains unclear what the final agreement will look like and how regulatory alignment will work, the Parliamentary Budget Office has said.
In its inaugural review of the economy, the new agency said that Brexit remains the biggest challenge facing the country. “Some of the main difficulties of Brexit are likely to be in trade and the prospects of tariffs, divergent regulations and exchange rate uncertainty will weigh on business decisions,” the PBO said.
The office cited analysis from the ESRI which estimated that were World Trade Organisation (WTO) tariffs to be introduced after Brexit it would result in a permanent loss of approximately 4 per cent of Irish GDP when compared with a non-Brexit scenario. This analysis also suggested that the general government balance would be 1 per cent of GDP lower following a “hard” Brexit due to rises in unemployment, associated social welfare payments and falls in taxation revenue.
The PBO was set up last year following a recommendation by the OECD. It provides another layer of oversight of the government’s finances and also provides fiscal and budgetary intelligence to members of the Oireachtas.
It published its first quarterly review yesterday, which found that there were a number of positive developments in the state finances. However, along with Brexit, there were a number of risks, including high debt levels.
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Ireland’s debt to GDP ratio is 70 per cent at present and is projected to decrease in the coming years. “Overall debt and interest payments remain high as a proportion of general government revenue at 268.7 per cent and 7.8 per cent respectively.
“This leaves the capacity of Ireland to absorb any shock to the tax base much diminished. At present Ireland’s gross government debt expected to be around €203 billion at end 2017, which is over four times its equivalent in 2006 [€43.7 billion].”
The PBO also noted that Ireland’s industrial base is highly concentrated in a small number of hi-tech sectors, with the result that output and employment are exposed to firm and sector-specific shocks.
In addition, as a small and open economy, Ireland’s business model is geared towards export-led growth, “which therefore leaves the economy sensitive to cost competitiveness.”
The National Competitiveness Council has said that Ireland’s dependence on a small number of products in a small number of export markets is of concern and a potential constraint to competitiveness.