Enda's budget may very well be Shanghaied by China crisis
Published 30/08/2015 | 02:30
Last Tuesday, I eavesdropped on a group of TDs sipping coffee in Leinster House. As usual, the date of the election loomed large. But the talk was not the usual gossip about local politics. No mention was made of the man from Mayo. Even Micheal Martin and Gerry Adams were ignored. The latest opinion polls never featured. Instead, they spoke of Shanghai, not Shankill, of China, not Churchtown. The TDs had been spooked by the overnight stock markets. Seeing, as they do, everything in terms of their electoral fortunes, they spotted the danger. Monday's global stock market collapses had a direct bearing on the Irish economy, the election and, most importantly, the timing of their date with destiny.
Irish shares got the message the instant the Chinese market tanked on Monday. Our local index fell 5pc. As only 2pc of our exports go to China, no one was yet suggesting that plunging growth in the world's second biggest economy would suddenly blow Ireland off course, but shrewder, self-interested politicians knew that if the panic in the Chinese market was soundly based, then amber lights were flashing for 2016 Ireland. Next year could see a rapid reversal of our economic fortunes.
The TDs were muttering darkly. Six weeks before an election budget (October 13) is a rotten time for bad news. Budget Day is already planned to a tee. Growth projections for 2016 will be revised upwards in the Budget speech. Once the 2016 garden is rosy, all the electoral flowers will begin to bloom. The key to election victory lies in the 2016 growth figure, because the 2016 Budget will be built on the growth edifice. China could undermine all that. On Tuesday the foundations of the Government's election strategy were wobbling.
Of course, growth projections are guess work. The Government guesses that the 2016 figure will be good. Very good. So good that it will open the floodgates for the mother of all giveaway budgets. No one, bar Europe, can force them to dump this damaging fantasy.
Due to our Government's craven attitude to Angela Merkel and her satellites, Germany and Europe have taken a benign attitude to our intentions to give away €1.5bn to the voters. Angela Merkel is a politician. She understands how fellow Christian Democrat and agreeable acolyte Enda Kenny needs a bit of fiscal understanding to return to power. Loyal Enda deserves lashings of leeway in his Budget. The warnings from the Government's own Fiscal Advisory Council have been swept aside, dismissed as the unhelpful musings of academics.
The gossip in the Dail cafe was on the button. China or no China, not a line of the bullish Budget will be changed. Rash promises made to key constituencies will be kept. Taxes will be cut for the better-off. The Fine Gael core vote will be satisfied. Vanity spending projects will be indulged. Pay for top public servants will be raised. Token rewards for the lower paid will go ahead. Grants galore will hit the country.
Wherever there are floating votes, there will be largesse. No vested interests will be challenged. Abominations like Irish Water, the HSE and Nama will be sidelined for a few months. The election was originally earmarked for early March 2016. By then, all the goodies would have safely reached the pockets of satisfied voters. That was the plan.
The hushed conversation took a nasty turn. Overnight, distant China had proved a domestic Irish game changer. Growth in China has halved. The neighbouring emerging markets had recognised this. Slaughter on Wall Street and the European markets had recognised it. The Irish stock market recognised it with the fall of 5pc on Monday. Global growth could be in reverse. Ireland is not immune. The chatter about China continued: the Irish Government could not fail to see the danger. Yet one thing was certain: the October Budget strategy was set in stone. Instead, the electoral timetable might need a bit of adjustment. If China continues to contract, if the US is forced to delay its hike in interest rates due to the slowdown in the world economy, if the UK follows suit to boost its own growth and if the euro continues to rise, Ireland's giveaway October Budget could look like madness by March.
Indeed outside forces might be telling our Government to reverse the tax cuts and increases in public expenditure. Right in the middle of an election.
The cabal of TDs nodded their heads one by one. The odds of an early election had shortened. Not one of them even considered the possibility that the Budget would be adjusted - responsibly - in the light of the new circumstances.
A fresh scenario was being painted. The giveaway Budget would go ahead on October 13. Michael Noonan and Enda Kenny will acknowledge the storm clouds hovering over the global economy, but they will declare the Irish economy to be in rude good health.
They will paraphrase the old Fianna Fail mantra that the fundamentals are sound, that the Irish people had made great sacrifices and that the Budget was based on officially endorsed growth figures, supported by 'independent' forecasts from bodies like the ESRI and Ibec. Unemployment figures would be below 9pc, emigration beaten, the construction industry in recovery mode, the banks fixed, the growth of the economy unmatched in Europe. Familiar words, worthy of Brian Cowen in 2007.
The narrative went on: At dawn on October 14, Enda Kenny, glowing with gold dust after the giveaway had flown through the Dail, would head for Aras an Uachtarain and ask Michael D for a dissolution. He was calling a general election because he needed a mandate from the long-suffering Irish people for five years of economic recovery. He wanted approval for his Budget.
In early November, Fine Gael would be returned as the largest party by a grateful electorate, bought by a shameless Budget that would make Fianna Fail blush.
If they had waited till March, they would have been rumbled. The risk of a global crisis exploding before then is now too high.
All sorts of emergency measures might be necessary in the New Year.
Such a cynical manoeuvre may never happen, but it is becoming increasingly likely. China is threatening to derail world economic recovery. Last week the knock-on effects of the chaos in China were dramatic. The United States bottled its proposed interest-rate rise. Sterling and the dollar declined while the euro became a safe haven. China, the confused communist regime that champions capitalism, was acting erratically.
After devaluing the yuan and cutting interest rates, it has pumped money into the economy. It has artificially propped up the stock markets, living up to its boast at its 2013 annual Communist party plenum to achieve "a decisive role for the market" while simultaneously ensuring "a dominant role for the State". No one is impressed. The Chinese stock market is down by nearly 50pc since June. The reverberations were catastrophic. Commodity prices have plunged. Wall Street's 1,000-point loss at Tuesday's opening underlined the reach of a Chinese contagion. Not only will Ireland fail to escape, we could even be one of the big losers.
If the fallout is felt acutely in the US and the UK, our two biggest trading partners, we will immediately suffer the knock-on effects. If growth is downgraded in the US and the UK, Ireland will be forced to lower its own forecasts.
Worse still, the sudden strength of the euro could cripple our export-led growth. The weakness of the dollar and sterling will make it even harder to sell to the Anglo American market.
We have been lucky in recent years, but we could be ambushed by recent events in China. The Budget giveaways could be exposed as naked bribery.
The solution being canvassed, an early election to buy the citizens' votes before the economy goes into reverse gear, is typical of the continued bankruptcy of Irish political thought.