Political challenge as Brussels warns against change of strategy

Analysis: Budget must still go to the commission for approval despite bailout exit

A draft reform law has been delayed for years. The commission now say Frances Fitzgerald should enact the legislation within six months. Photograph: Eric Luke

A draft reform law has been delayed for years. The commission now say Frances Fitzgerald should enact the legislation within six months. Photograph: Eric Luke

Wed, Jun 4, 2014, 01:01

The European Commission’s intervention in the nascent debate on the October budget underlines the gravity of the political challenge now facing the Coalition. Six months after Ireland left the bailout, it shows that the 2015 fiscal plan will be an immensely difficult affair.

In spite of a stinging electoral rebuke for both Labour and Fine Gael, the commission has declared that it sees no scope to slacken the rate at which they increase the tax take and cut expenditure.

Although senior figures from Taoiseach Enda Kenny down have raised the prospect of concessions for taxpayers as early as the next budget, the commission is adamant that a further €2 billion retrenchment will still be required.

There is little new in that assertion, which mirrors recent demands from the International Monetary Fund to maintain the €2 billion target. But with a contest under way to succeed Tánaiste Eamon Gilmore as Labour Party leader, the latest missive from Brussels carries potential for serious friction in coming months. This will have implications for the interplay between Kenny and the new Labour leader, for the internal dynamic within the weakened Labour Party and for the Government’s relationship with its erstwhile troika sponsors and other member states.

At issue primarily is the legal obligation on Dublin to achieve a budget deficit below 3 per cent of economic output next year. There are differing views as to how this might be achieved. Although the Department of Finance has not yet swayed from its demand for €2 billion, the Economic and Social Research Institute has suggested that a quickening of economic growth could mean that €500 million in water tax proceeds would do the trick.

Growth prospects

The latter has obvious attractions for the Coalition, and for the Labour wing in particular. Leadership frontrunner Joan Burton has publicly questioned the requirement for €2 billion but she has pledged to maintain the deficit-cutting target.

There lies the problem, for the commission believes a modest improvement in growth prospects next year does not take at all from the overall requirement for €2 billion.

Yes, recent history shows there is scope for modest compromise around the edges of the target. Yet the implication in Burton’s remarks is that she is pursuing something more than a modest downward revision to the €2 billion, notwithstanding her attachment to the “absolute objective” of a deficit below 3 per cent.

Just as the IMF says a €2 billion cut “would safeguard hard- won credibility”, the commission says any deviation could be self-defeating as Ireland’s titanic austerity drive nears its conclusion. “There has been a lot of effort over the past six years to get to the point where you really have managed to return to market financing. You have had the stability,” says a senior commission official.