independent

Sunday 20 April 2014

Brendan Keenan: Coalition in need of a new story based on revised economic plan

WHEN the first IRA ceasefire was declared, a shrewd, if cynical, observer said that unionists were too dim to admit that they had won, and republicans were too clever to admit that they had lost.

It still seems to be much the same. The loyalist mobs are waving their victimhood over the Belfast City Hall flag. But there is no doubt which flag will fly, only about how often. The flag is the union flag. Who won?

These ruminations were sparked, not by the flag issue but by a shrewd, if cynical, letter to a newspaper about the budget rows. The writer maintained, in so many words, that Labour was too dim to admit to its victories and Fine Gael too smart to own up to its losses.

The argument was that Labour had preserved the bulk of public sector pay and pensions, as well as securing no reduction in basic social welfare rates. Fine Gael had merely achieved no increase in income tax rates and bands – although after the disaster of the 1997 election, both parties might have been in favour of that.

The argument is not entirely convincing but it is certainly an intriguing thought. A more convincing one is that the government parties have lost the story they want to tell and, whether dim or not, are starting to look like they have lost.

The Taoiseach came in for some heavy criticism over his communication failures after the Budget. There has always seemed to be two Enda Kennys when it comes to communication – sometimes quite a master of clarity and even persuasion, and at others barely intelligible.

One does not quite know the reason. Some say that he is simply not comfortable with economic issues, but at times he handles them quite well. I suspect – but this is merely amateur psychology on my part – that it depends how much he believes in what he is saying. A fault in a politician, undoubtedly, even if somewhat refreshing.

Whatever the reasons, the difficulty is very real. The story which the Coalition set out to tell – most of which it inherited from the previous government – is no longer true. The facts have changed.

Keynes observed that when this happens you must change your mind. But you must also change your story.

The original story called for severe budgetary adjustment in the early years. Then, as the economy recovered, the austerity brake could be eased and growth would take over most of the adjustment.

The story is clear from the figures in the plan. So far, budgets have taken almost 16pc of GDP out of the economy. There is "only" 5pc to go, with each budget from now easier than the previous one.

In fairness, it was a plausible enough story in the beginning. Even if one took the view that this would be a 10 to 12-year recession, we should be entering the recovery phase by now.

Unlike investment, what matters in politics is not when recovery reaches the previous peak but when it begins to come out of the trough. It seems pretty clear now that this will not be before 2014, when it should have been 2012.

The original story is no longer plausible. The severity and persistence of the euro crisis, even if foreseen, could not have been inserted into official EU and IMF plans. In this vicious circle, the euro crisis cannot be solved unless and until the euro crisis is solved. Stories of imminent recovery lack credibility.

Without recovery, that remaining 5pc of GDP will have to be taken out the hard way. Without a new narrative, that may prove politically impossible. The last one heard, the old line was still in use; with the Taoiseach talking about restoring confidence in the economy and the Tanaiste about solving the economic crisis.

Neither are in the power of an Irish government. Its task is to fix the country. The post-Budget controversy suggest that, both inside and outside Leinster House, a lot of people still do not understand how broken it is.

Labour's story, as that correspondent pointed out, should have been the modest nature of the correction in the public sector, especially compared with Greece, Portugal or even Spain.

The target has been, not to cut day-to-day government spending but to hold it steady. Without the last four budgets, public spending would have risen by around €10bn by now – clearly a completely impossible scenario.

All the tax rises so far have been to fund government spending held at 2006 levels. They are not yet large enough.

It is not just that they have produced a mere €1bn rise in revenues, as a shrinking economy offset the impact. They are still a few billion short of what would have been needed were the economy not shrinking.

Here is one reason why Budget 2013 may be causing so much trouble. Revenue is meant to rise almost €2bn – more than it has in the previous three years. With little assistance from growth, more was required by way of new measures and it is not at all clear that they will be enough.

The latest IMF report, published on Monday, clearly accepted that they probably will not be enough. It says that, if the targets are missed, the Government should not chase them with more austerity.

EU creditor governments may not agree, leaving the disturbing possibility that any deal on Anglo debt could be accompanied by demands that fiscal targets are met, even if growth falls short.

Weak growth also threatens the prospects of a return to markets in time for the big debt replacement due in January 2014 and increases the risk of a second bailout.

The Government desperately needs a new story, based on a new plan, which it can sell to the country and its creditors. This has to have targets based on actions which the Government can take, on tax and spending, not on outcomes as at present, over which it has no control.

The present planned actions now look like taking until 2017 to restore basic stability to the public finances. Anything less – as so many politicians and others are crying for – would bring the process into the next decade.

It is time to decide what timeframe we want, and then put in a lot more careful thought than has been evident so far, as to how exactly it is to be achieved.

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