Cliff Taylor: Rapid economic turnaround poses its own difficulties for Government

It is hard to imagine a more favourable scenario for economic growth. Interest rates are at rock bottom. The euro has collapsed on international markets, giving a major boost to exporters to the UK and US and to the tourist sector. There is spare capacity in many areas of the economy – in particular, there are plenty of people still seeking work. Inflation is almost non-existent and oil prices are low.

Whether you talk to car dealers, accountancy firms, lawyers or tech companies, they will tell you that levels of business for this year so far are the highest since the pre-crisis period. For those in industry, the picture is more mixed, but most are doing fine and the lower euro should help.

Of course big problems remain: unemployment, mortgage arrears, and a generation of younger people with a choice between rising rents or a high price to get on to something that used to be called the property ladder. The falling euro also has a flip side, in rising costs for those importing goods and buying them.

However, the whole context of the economic debate has changed in a matter of months. The domestic economy is finally showing signs of revival, consumers are starting to spend and we now see a pretty broad recovery in place. Mario Draghi's quantitative easing has provided further powerful fuel through a collapsing euro and low interest rates. The State raised €1 billion in 30-year borrowings on Thursday at the extraordinarily low rate of 1.3 per cent. Even the wider euro-zone economy is now showing signs of recovery, although Greece continues to fizzle ominously in the background.

The politics of this will now be fascinating to watch. The Government suffered over the past year from over-promising and under-delivering in terms of the real impact of what it could do for people’s pockets. Backing down on water charges and limited tax cuts in the budget may have calmed the mood of voters a bit, the opinion polls look somewhat better for the Government parties, but it remains to be seen how strong the political dividend of recovery will be.

The pace of economic turnaround makes it tricky for the Opposition parties, too. Austerity is over. They can argue about how it was all managed and its legacy. Some Opposition politicians were making noises after the publication of the IBRC joint liquidators’ report on Friday about the likelihood that €270 million will be repaid to junior bondholders. Everyone is still furious about the bank bailout, but presumably the main preoccupation of voters is now on what happens next.

Subtle message

Expectations management is now a key issue for the Government. Ideally, it would sell a subtle message: things are getting better, but resources are still limited. We will have some scope in the budget, but not that much. That kind of thing.

Subtlety, however, is not a strong point of the Irish political system, particularly as a general election comes into sight. The Government’s approach will be more straightforward: it will try to create as much room as possible in next October’s budget and use it to its best electoral advantage. Ministers will criticise the spendthrift Opposition,while throwing the loot out themselves.

On cue, the predictable demands are starting to build: for higher public pay, lower taxes and more spending in a range of areas. We say we want to avoid the old boom/bust cycle, but we don't always behave that way. The new general secretary of the Irish Congress of Trade Unions (Ictu), Patricia King, says that every employee deserves a pay rise. Business lobbies are calling for lower tax and more State investment. The spending ministers are drawing up their lists.

You can see where this goes next. Demands for public pay increases and a “restoration” of the crisis cuts will be tabled by the trade unions in formal talks to get under way with the Government after Easter. The Government has also promised a forum where various interest groups would be invited to give their views, many no doubt also calling for more Government spending.

Long shopping list

The danger of all this from the Government’s point of view is the emergence of a long shopping list, only part of which it will be able to afford. Perhaps the Government’s spring statement, which will outline the expected financial framework for the next few years, can provide some context. We have wriggle room, but you can only wriggle so far.

The more fundamental point is that one of the reasons why we had the crisis was that the structure of our public finances had gone out of kilter. Talk of the “restoration” of pay cuts, reversing tax hikes and abolishing the dreaded universal social change ignore this reality. We can’t go back to a structure that didn’t work.

The demands also ignore the new euro-zone budget rules, put in place during the crisis, which will put a cap on spending growth. The big argument we are likely to have with Europe this year is not about getting money back from our bank bailout; it is about how much of what we have we can spend, under rules now governing budgets. Minister for Finance Michael Noonan argues that these are unfairly restrictive. He may have a point, though a Government looking to spend more money in a pre-election budget rarely deserves the benefit of the doubt.

The economic situation has changed and the debate needs to change, too. Growth gives us options, but not a free pass to cut taxes and hike spending. But is it possible to have a logical discussion on budget priorities in Ireland in a pre-election year when economic growth is picking up? Or is it a case of those who shout loudest being first in the line?