Real test for government will come when lofty plans meet fiscal constraints

After a tortuous negotiation, Fine Gael seems finally to be on the cusp of a deal to take command of a minority administration backed by Independents and propped up by Fianna Fáil. In many ways, however, the really difficult work is only just beginning.

In question for months to come will be the durability of the new government and whether it can deliver enough “social repair” to keep the whole edifice together and provide a stable administration.

Ireland remains very heavily exposed to any volatility in the outside world, all the more so in light of elevated post-crisis debts and the looming Brexit referendum. Thus a realistic plan to underpin recovery and secure the progress made since the crash is paramount.

The draft government programme puts 159 pages of brick on the key stone of the “confidence and supply” pact this week between Fine Gael and Fianna Fáil. The FG/FF document, which ran only to seven pages, was notable for its lack of detail and the absence of any financial data.

Humiliation

Promises aplenty, but no costings, and numerous vague entreaties to do things no-one would disagree with. In parts, indeed, it read more like a general statement of intent to do good in the world than a comprehensive economic plan.

Yet that was never the objective. The aim was to bind the two parties to common principles, FF’s basic price being a form of humiliation for FG in the (legally questionable) suspension of water charges.

The new government programme falls into a different category, although it too is very light when it comes to costing.

On the face of it, indeed, the document holds out the promise of close to €7 billion in new spending in the next five years. Still, a close examination of the most recent Department of Finance data reveals that policies already in train will cost another €3.58 billion per year by 2021. As a result, the actual amount of additional spending foreseen by the new government is closer to €3.18 billion.

That’s not a huge amount, and it might well provide some degree of reassurance to observers who saw the parade of Independent TDs into Government Buildings as a portent of profligacy.

The corollary, however, is that high ambition of the programme commitments will have to be met with modest means.

. After the horrors of grinding retrenchment, the new government pledges to boost spending on the elderly and the health and education services. It would deliver public pay increases, reverse public pension cuts and recruit doctors, nurses, gardaí and teachers.

All of that would be done while cutting income tax – and while meeting the writ of fiscal rules and eliminating day-to-day government borrowing by 2018. To say the least, that’s quite a task.

Headroom could be available via new taxes but the only new tax, it would seem, will be the charge on sugary drinks and yet another increase in tobacco taxation. Still, the government has given itself a degree of leeway by admitting that it will not index personal tax bands and credits.

It must also be said, however, that the suspension of water charges puts a further fiscal burden on the incoming administration. The net cost this year, after allowing for the parallel suspension of the conservation grant, is estimated at some €73 million. The annual cost in 2017 and following years is expected to come in around €166 million. This is not huge in deficit-cutting terms, but every €1 million foregone here is €1 million that cannot be spent elsewhere.

Frailties

There are many moving parts. The incoming administration will work towards a stock exchange flotation this year of the nationalised AIB, the proceeds of which would be used for debt reduction.

That might well be a once-off, however. The programme document says no more than 25 per cent of any bank would be sold by the end of 2018.

This date is crucial. It is the very moment at which the FG/FF pact expires. If the new government lasts that long, however, it will be quite an achievement.

The programme document marks its statement of intent, but the real test will be faced when lofty plans meet narrow fiscal constraints.

Note also that internal controversies over budgets or any other matter will have potential to contaminate the government’s guarantors in Fianna Fáil. Thus the inherent frailties are all too evident.