Wednesday 20 September 2017

A draw can be a good result in football but it just doesn't work in politics

The next government – in whatever guise – must contend with a clamour for more spending and pay rises
The next government – in whatever guise – must contend with a clamour for more spending and pay rises
Richard Curran

Richard Curran

The political system is heading into a period of uncertainty that may last a year or more. Uncertainty is bad for business, investment and the economy, but just how bad? Ultimately, who pays the price of instability?

The outcome of the general election was more akin to a draw than anything else. Fine Gael essentially blew it but still remains the largest party.

Fianna Fáil surprised everybody with the extent of its gains and has the valuable away goal, but it can't lead a straightforward majority government.

Talk of a grand Fine Gael/Fianna Fáil coalition is already dissolving even though it is the only combination that will give a clear strong majority. Instead, the political narrative is being set by Fianna Fáil leader Micheál Martin who is talking about reforming the processes of the Dáil.

At the very least the country is heading into some unknown territory. That unknown may only last until next year when another election might have to be called. Either way the short-term road ahead looks pretty unclear.

The economic price for that uncertainty might not be paid in the way everyone expects. There was an automatic assumption that an uncertain outcome would affect Ireland's cost of borrowing on international markets.

It didn't happen. On Monday morning Ireland's ten-year bond yields ticked up by a tiny nine hundredths of a per cent to 0.9pc, before falling again as the market expects more Eurozone quantitative easing.

The international sovereign debt market is no longer a real market. The idea that a country like Ireland can borrow ten-year money at 0.9pc when our debt to GDP is running just below 100pc is simply not real.

In Spain, where they haven't managed to pull a government together since December, bond yields have gone up but are still at just 1.7pc on ten-year money.

The cost of raising debt has more to do with Mario Draghi than Enda Kenny, Micheál Martin and who the Healy-Raes might support as Taoiseach. Rather than be complacent about the impact of instability on our cost of raising debt, we should be deeply concerned at how those artificially low rates are unsustainable regardless of whether we have a government or not.

We are lucky that this year only around €8bn of our existing debt has to be refinanced. The NTMA has already raised around €4bn of its targeted €6bn to €10bn for this year.

But some really big years lie ahead for whatever new government emerges. Between now and 2020 about €66bn of our national debt matures. The NTMA has to raise this amount in fresh borrowings at whatever the market rate will be, plus whatever additional new borrowing is required. The stakes are very high. If our cost of ten-year debt went up let's say to 3pc - still a historically reasonable level - we would end up shelling out €1.3bn per year more in interest payments on it, than if we were to raise it at current rates.

That would certainly shrink the so-called fiscal space.

Another flash point for a political fudge of some kind would be the Budget. It is very hard to see how anything other than a strong government with a solid majority would get a budget passed.

A weak government could get the wrong budget passed - namely something for everyone - that would cost a fortune.

How would the dynamic between the Minister for Finance and the Minister for Public Expenditure work? Public expenditure needs to be disciplined but equally, there is a genuine and serious need to spend money in the right way. The next administration will come under enormous pressure from within the public service for pay increases. It had already started with nurses and other groups. They are queuing up to demand improvements in their position.

The more the new government brags about how well we are doing, the greater the pay claims. Some claims are probably badly needed, while others are not. Strong government involves making distinctions about the allocation of resources without an eye towards votes in the short term.

Just this week the European Commission published a scathing report on the inadequacies of spending in education, health and the rising inequality that occurred during the last administration.

How can those issues be tackled through greater spending while taking more low paid out of the tax net and trimming back on the USC? Unless the economy keeps growing, the maths starts to look like the loaves and fishes.

The answer is that the new government should engage in better spending and not just more sending on public services. Different parties will have contradictory views in Leinster House about who is most deserving.

But the new government will be very conscious of the mistakes made by Fine Gael and Labour on these issues in the last government, which were ruthlessly punished by the electorate.

A government, other than a Fine Gael/Fianna Fáil coalition is more likely to postpone tough decisions and kick for touch until the next election, rather than use up political capital on unpopular decisions that won't go through.

The last government did well in some things but fell hopelessly short in others. Promises were made about culling the prices the state pays to drug companies for medicines. State procurement reform was supposed to deliver billions in savings. The last government selected certain multi-billion euro transport and infrastructure projects over others without publishing a shred of evidence or cost/benefit analysis on which would be most beneficial.

These are all issues where the last coalition could have done better. But it is hard to see much political consensus in some kind of temporary minority government set-up on how to spend the limited fruits of a limited recovery.

The first challenge for any new government will be to inject a sense of realism into the economic discussion on how much money there really is to spend.

Politicians behave differently when there is an election coming. They often make their biggest mistakes in the run-up to it. We could have a full year with the possibility of another election dictating policy decisions or ensuring certain decisions are simply not made.

A draw can sometimes be a good results in football, but it doesn't work in politics.

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