October 7, 2019 / 11:16 PM / 2 months ago

Ireland prepares for the worst with no-deal Brexit budget

DUBLIN (Reuters) - Ireland presented a no-deal Brexit budget for 2020 on Tuesday, pledging a 1.2 billion-euro package to keep companies afloat by allowing the state’s finances to return to deficit if Britain leaves the European Union without a transition period.

Irish Finance Minister Paschal Donohoe presents Budget 2020 at Government Buildings in Dublin, Ireland October 8, 2019. REUTERS/Lorraine O'Sullivan

With Britain’s latest scheduled exit from the EU just three weeks away, Finance Minister Paschal Donohoe made the call last month to assume the worst, eschewing the tax cuts and spending increases of recent years to set aside funds for exposed businesses.

Donohoe gave the booming economy a 2.9 billion-euro boost, mostly through pre-committed extra spending in areas such as infrastructure and public-sector pay — a far cry from the savage austerity budgets of a decade ago, after Ireland’s financial crisis.

“This is a budget without precedent ... A budget that has been developed in the shadow of Brexit,” Donohoe told parliament in what could be his last budget of this parliament. His Fine Gael party favors a May 2020 election.

“This does not mean that no-deal is inevitable. But equally we stand ready if it does happen. It is a challenge Ireland has the measure of.”

Ireland is considered the most vulnerable to Brexit among remaining EU members because of its close trade links and shared land border with the United Kingdom. The Irish government has warned economic growth could nearly halt next year, putting up to 80,000 jobs at risk, if Britain crashes out of the bloc.

While some British lawmakers think that threat will force Ireland into a last-minute concession in negotiations, Britain’s smaller neighbor is approaching the Oct. 31 Brexit deadline with an economy that has grown faster than any other in the EU each year since 2014.

“UNCERTAIN DAYS AND WEEKS”

Donohoe spent the first 15 minutes of his hour-long speech detailing how the government would seek to meets the demands of companies that would be hurt the most a chaotic Brexit.

Just over half his package, which excludes additional funds promised by the EU, will support agriculture, enterprise and tourism, with 220 million euros deployed immediately in a no- deal Brexit to help vulnerable but viable companies adjust.

The contingency fund - which Foreign Minister Simon Coveney said he hoped the government would never have to draw down - was broadly welcomed by business groups.

“The approach taken by the government to plan for a ‘no deal’ Brexit is a prudent one that will best help protect business and trade in the uncertain days and weeks ahead,” said British Irish Chamber of Commerce Director General John McGrane

The finance ministry forecasts that gross domestic product growth could plunge from 5.5% this year to just 0.7% in 2020 in a no-deal Brexit. In that case, the budget package would lead to a deficit of 0.6% of GDP next the lower end of an initial 0.5% to 1.5% estimate.

It would take until 2022 to reach the 0.1% surplus delivered last year, Ireland’s first in a decade. Borrowing would rise at a time when the national debt is still high — around 100% of GDP — after the crisis 10 years ago. Ireland’s deficit reached double figures during that period.

Donohoe acknowledged that the economy was poised between the twin risks of overheating and Brexit. But many economists regarded the choice not to cut taxes and raise spending as much as in previous years as a wise one, regardless of the Brexit outcome.

If a no deal Brexit is avoided, the funds earmarked will not be borrowed for other purposes, Donohoe said. Junior Minister Kevin ‘Boxer’ Moran - an independent member of the minority government - said the necessarily prudent approach amounted to “no chocolates, only smarties” for voters.

“Regardless of the reasons cited, most economists would approve of restraint at the peak of the cycle, though it is worth remembering economists don’t have to get elected!” EY chief economist Neil Gibson wrote in a note.

Reporting by Padraic Halpin; editing by Larry King

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