Political challenge as Brussels warns against change of strategy

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.

“The gains of these efforts are really paying off now. So diverging from that path would really create a risk.”

That is a case more easily advanced by a Brussels-based bureaucrat, immune to electoral wrath, than by Government politicians who bear the scars of the local and European polls last Friday week.

Although the commission argues that a big reduction in the €2 billion would jeopardise the glittering prize of a sub-3 per cent deficit and economic growth at 3 per cent, the elections have put the frighteners on both Government parties.

Austerity fatigue

Even though acute austerity fatigue threatens the very viability of the compact between Fine Gael and Labour, the message from Brussels is that they should not change course now.

To the argument that the very limit has been reached in terms of public acceptability of the retrenchment policy, the counter-argument is made that Ireland is still solemnly bound to fulfil political commitments made to other member states.

Fiscal discipline

All of this marks a big test, in its own right, of the new system of economic governance, which is supposed to ensure fiscal discipline throughout the European Union and in the euro zone particularly.

If the end of the bailout means the commission’s writ carries less force than during the bailout proper, the budget must still go to Brussels for approval in October and it would be open to the commission to seek changes if it believes the figures do not add up.

There is also the matter of specific policy recommendations from the commission.

After a three-year rescue programme, the EU executive remains deeply concerned about the slow pace of the looming overhaul of the legal professions. In question now is whether the departure of former justice minister Alan Shatter would see a dilution of plans for multidisciplinary practices, in which solicitors and barristers would work alongside accountants and the like.

This is deeply contentious, and a draft reform law has been delayed for years. The commission now says Shatter’s successor, Frances Fitzgerald, should enact the legislation within six months.

In further refrain of its entreaties at bailout time, the commission is also seeking major savings on drug expenditure in the health service. This was a constant source of concern for the troika but it remains a problem to this day.

Most pressing, however, is the question of the budget.