Thursday 27 October 2016

Coalition's vote-getting exercise risks Ireland's economic recovery

Published 11/08/2014 | 02:30

Finance Minister Michael Noonan (left) and Public Expenditure Minister Brendan Howlin.
Finance Minister Michael Noonan (left) and Public Expenditure Minister Brendan Howlin.
Finance Minister Michael Noonan
Brendan Howlin, Minister for Public Expediture and Reform

The Government is playing a dangerous game right now. The fragile economic recovery is only getting off the ground after six brutal years and already the promises are starting to mount up.

  • Go To

Hot on the heels of Minister for Finance Michael Noonan's hints about a gentler-than-expected budget (against the advice of the ESRI and the Fiscal Advisory Council), Minister for Public Expenditure Brendan Howlin has told the Irish Independent about his plans to reverse public sector pay and pension cuts.

Preparing for the end of the "financial emergency" was Howlin's description. But what we're really talking about is preparing for the next general election. There is a determination in the coalition - and particularly in Labour - not to repeat the "mistake" of 1996/97. Back then Ruairi Quinn, as Finance Minister, adopted a very prudent budgetary approach.

Too prudent in the eyes of cabinet colleagues, who felt he should have loosened the reins a little in advance of the 1997 general election, which the Rainbow Coalition narrowly lost. Labour got no thanks for doing the 'right thing' then.

And, to the horror of party stalwarts, it ended up handing over a fast-growing economy to Fianna Fail, which went on to reap the political dividends. It would be another 14 years before it or Fine Gael would taste power again.

Coalition figures would baulk at the notion they would do anything fiscally reckless.

But there's no denying that political considerations will prevail over economic ones between now and the general election.

That's understandable - it's what all political parties do - but it's also deeply worrying from an economic point of view and not without political risk for the coalition.

The economic concerns are obvious. There's no question the economy is improving. But, with the budget still in deficit, debt levels extremely high and a very uncertain international environment, we're far from economically secure. To lapse back into old-style promises, to cut taxes and increase wages risks undermining the recovery and suggests we've learned little.

Politically, the government also runs the risks of creating expectations it cannot possibly realise. The growing economy and strong tax returns may mean that the coalition can get away with adjustments of less than €2bn in October's budget. But the very strict fiscal rules, imposed by the EU, mean the government's room for manoeuvre remains pretty limited over the next couple of years, and probably far beyond that.

You wouldn't have thought so if you were to listen to the messages from government about tax cuts; free GP care for all, public sector pay increases and reduced cuts in spending. You have to assume neither Mr Noonan nor Mr Howlin is envisaging taking on the EU and its fiscal rules. Even if it could win that battle, the financial markets wouldn't wear it and there would be an obvious impact on our borrowing rates. Which begs the question: "What is the coalition playing at?"

Some of what we're seeing is good old-fashioned panic in the wake of the local election meltdown. Government figures wrongly see austerity as the source of all their problems and they want to move as far away from it as possible - or isn't possible more likely.

To be fair, they do have a tricky balancing act to maintain.

In political terms, they can't, on the one hand, argue the economy is back and on the other hand maintain that the pain has to continue. Or at least, it's very difficult to do so when the electorate is fed up swallowing the tough medicine. There had been voices in the coalition arguing that the government had to keep doing the 'right thing' and that when voters saw the benefits of the recovery, Fine Gael and Labour would ultimately reap the rewards. Whether the strategy was right or wrong, those voices appear to have been silenced since the local elections, certainly in Labour. The mood music has changed and the loss of the experienced trio of Quinn, Eamon Gilmore and Pat Rabbitte from cabinet can only exacerbate that.

However, the obvious danger for the coalition is that, given the financial constraints, they cannot possibly meet the expectations they now risk unleashing.

Of course, the tough decisions taken by both parties have been a factor in their poor poll ratings. But they shouldn't forget that it was the ludicrous over-promising in the run-up to the last general election that first alienated voters. Right now, they're in danger of repeating the mistake. Instead of fretting about what happened in 1997, they should focus on the lessons of 2011.

Irish Independent

Read More