BE CAREFUL WHAT YOU WISH FOR 1104 XXVI

BE CAREFUL WHAT YOU WISH FOR

A rare near-consensus was achieved in the February General Election. It was not about how to solve our economic problems. It was about punishing the outgoing Fianna Fail government; and it did just that. Fianna Fail got a severe kicking, losing three quarters of its seats and more than half its support (and colour the Greens gone). In terms of the stages of bereavement a sizeable portion of the Irish public is still at the anger stage.

Whether the results overall represent a watershed, as some have trumpeted, remains to be seen. The Fianna Fail vote which went walkabout seems to have split along class lines with Fine Gael picking up the middle class element, Labour the working class portion and Sinn Fein the republican vote; independents picked up the rest. More people voted than ever before, some colourful independents secured election and Sinn Fein and left wing elements claimed major advances. Yet Sinn Fein only increased its share of the vote from 6.9% to 9.9%, while the United Left Alliance polled 2.6%; hardly ringing endorsements. More people actually voted for the large and heterogeneous number of independents than for both these combined. And almost three quarters of the electorate voted for the three mainstream parties.

The new government, a Fine Gael – Labour coalition, faces formidable economic challenges. What price the possibility that, in taking the hard measures necessary to rescue the economy, it will so alienate public opinion that it will in its turn become unelectable? When the dust has settled the grim reality of how to bridge the yawning budget deficit – still running at $500 million per week – will remain. Indeed, between the dissolution of the last Dail and the convening of the new one, over $2 billion had to be borrowed just to keep the country running. You would never have thought so to listen to the election chatter.

The election campaign was dominated, not by the critical issue of the budget deficit, but by the important but secondary issues of the blame game, the deal with the IMF and the ramifications of the bank bailout. The major parties recognised how little room for manoeuvre the next government would have (“we’re snookered”, as one Fine Gael T.D. remarked to me). Their election manifestos fudged on the economic issues while focussing on proposals for political and constitutional reform – hardly national priorities at present.  Some of the electorate seemed to think that the problems would be solved merely by electing a new government (with one bound our hero was free!).

The maximum to be hoped for in negotiating on the interest rate on the IMF loan would, while welcome, only run the country for two weeks, $ one billion or so. Any early favourable outcome of the current negotiations in the EU aimed at restructuring the finances of the Euro, (i.e. some debt relief for Ireland), again, will not alter the underlying reality.  Ireland’s expenditure exceeds her income; until that is put right we must continue to borrow and we can hardly expect to be loaned the money interest free. This is the stark fact.

The new government programme at least recognises there is no quick fix. However it is short on the specifics of how to tackle the deficit, and in particular seems to give hostages with regard to maintaining many current levels of welfare payments and ruling out tax hikes. The impression given is that, to secure agreement, most of the compromises were made by Fine Gael. How the programme will pan out remains to be seen. The toxic nettle of pumping more money into the banks – part of the agreement with the IMF but not acted upon by Fianna Fail – has to be grasped urgently. For this and other unpalatables the ultimate fall-back position may well be to rely on the EU/ IMF to hold the government to the letter of the existing agreement.

The benign scenario in the short term is that there will be tangible early success in terms of results achieved in renegotiating the interest portion of the IMF deal, which, however slight, can be presented as a victory. This to be accompanied by some interim fig leaf formula concocted out of the negotiating work- in- progress in Europe, sufficient to give the government a breathing space.  Again, plausible; our European partners have little to gain in pushing us to breaking point. Then, in the course of the “Hundred Days”, rapid enactment of some of the eminently sensible suggestions on the table such as reducing VAT, giving PRSI reductions for new employees, binning the travel tax and others. Such measures would have minimum impact on government revenue and could stimulate the economy and begin to restore confidence.

The recovery after 1987 is sometimes cited as an example, if not a blueprint. Yet it was based in part on agreement among the social partners on what needed to be done. The ruinous cycle of high taxes, high wage demands and high inflation was successfully reversed. The then government also struck it lucky, with Irish industry particularly well placed to take advantage of a global economic boom, and with success beyond expectation of the Financial Services Sector. Moreover, while public debt was proportionately higher than the current levels, private household debt was much lower and there was no banking or mortgage crisis.

The positive factors of 1987 are not present now. While more necessary than a generation ago, it will be much harder to generate any social partnership with nothing in the cupboard to offer, incomes pared back, a zero sum mentality, and inflation on the march. Interest hikes threaten in the Eurozone. Any growth in the world economy is likely to be modest, with clear and present threats of steep rises in energy costs against an uncertain political background in the Arab world. Ireland’s comparative advantages of a generation ago are no longer present and we face new and formidable competition for investment from rivals in the EU and elsewhere. Our competitiveness and cost base were seriously eroded during the tiger years and will not be easily restored.

The economic and fiscal straightjacket has left the government with little wiggle room. While much has been made of its large majority, this positive is very much double edged. What it needs above all is to be lucky, or at any rate to avoid bad luck. Any slight economic upturn will ease the pressure on the public finances; fifty jobs equate to €1 million, plus the multiplier effect; but this cuts both ways. There is fudge on how the fiscal gap is to be narrowed. There is an obvious hope that enough can be done to stimulate the economy to postpone the need for a showdown on raising taxes or cutting benefits.

The first hundred days should be manageable. The next less so. The cracks are likely to show in the one after that. The first budget will be a watershed. Will it see a Benjamin Franklin approach that we hang together lest we hang separately?  Or will it be “sauve qui peut”? For Ireland’s sake let us hope the former.

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