The Irish Fiscal Advisory Council (IFAC) has warned that Ireland could face a large budget deficit should the UK exit the EU without a deal.
IFAC said to the Oireachtas Budgetary Oversight Committee that due to rising unemployment related expenses and the falling of taxes could lead to “severe budgetary costs.”
The country’s financial watchdog said that the governments “rainy day fund” is inadequate and there is “nothing built up.”
Seamus Coffey, chair of the IFAC gave a stark warning to the government and told them they may need to cut spending and or raise taxes to prevent rising debt.
Coffey said, “Brexit could mean severe budgetary costs. This is even before potential customs infrastructure and supports to hard-hit sectors are considered.
“Measures to deal with the costs of a hard Brexit should, however, be accommodated as far as possible.”
He added, “The council is of the view that repeating the pattern of slippages would be inappropriate.
“It could add to further overheating pressures and reduce scope for budgetary policy to support the economy in future.
“The government must deliver on its spending plans for 2019. If spending overruns occur, the government should find offsetting savings in other areas.
“It should not rely on further surges in corporation tax receipts, which could prove unsustainable, to fund slippages.”
The government have been advised by the watchdog to keep to their plans for a €2.8bn budgetary expansion.
He said, “The €2.8bn expansion would be slightly below the sustainable growth rate of the economy.
“It would also reflect risks of a disorderly Brexit, the reliance on corporation tax, possibilities of overheating and the rapid rise in spending between 2017 and 2019.
“There is a case for more caution given the risks of Brexit and the worsening global outlook.
“If spending overshoots in 2019, the government should scale back its pre-commitments for 2020.”
Michael Tutty, from IFAC said, “We’ve been having significant overruns on corporation tax every year, with the prudence fund, what we’re saying is we should be putting it away during the year, and put that into the rainy day fund at the end of the year.
“It would be on top of the rainy day fund, which is not adequate.
“The rainy day fund has very little in it as yet, we would say that you have to build up significant amount in the fund if it’s going to be useful as counter-cyclical measure.
“In anticipation of Brexit we might have a slowdown, we wouldn’t say you raid the fund at this stage, the government should be running surpluses now so when the bad times come we have something built up, we have nothing built up, the surpluses weren’t realised.
“We haven’t done the right things in the good times, we haven’t run surpluses.
“We’re back to where we were in the past, we should build things up in the good times.
“We find it difficult to say at this stage; ‘Yes, raid the rainy day fund or start borrowing’ yet because we haven’t done the right thing, we don’t feel there is scope at this stage to start spending lot of money.
“If in 12 months’ time we see significant effects from Brexit then we start looking at it, but our predictions at the minute are of a slowdown rather than a reverse.”