Dawning of political reality means unpalatable budget will be passed

ANALYSIS:The Taoiseach delivered an assured performance as he defended the tough medicine in the plan – the pity is that he didn't do it consistently since he took office

THE PUBLICATION of the National Recovery Plan has coincided with a dawning of political reality across the political spectrum. Whatever manoeuvring takes place over the next two weeks, the budget, however unpalatable it is, will be passed by the Dáil on December 7th because the country has no other option.

Taoiseach Brian Cowen and Minister for Finance Brian Lenihan laid out the position in stark terms at the launch of the plan yesterday.

The State will simply run out of money unless measures are implemented that will deliver savings of the order of €15 billion over the next four years, with a substantial chunk of that frontloaded to 2011.

TDs on all sides may huff and puff from now until December 7th, but MEPs of the three main parties were bluntly told the facts of life by economic and monetary affairs commissioner Olli Rehn in Strasbourg on Monday night. Savings of €6 billion simply have to be made next year if Ireland is to get the EU-IMF bailout it needs to survive.

Rehn issued a more diplomatic statement yesterday in response to the plan but the message was the same. The targets in the four-year plan will have to be met. A new government will not necessarily be tied to all of the exact detail contained in the plan for the years after 2011, but it will have to come up with detailed alternative measures that bring about the same level of savings.

The Taoiseach tried to bring the debate forward at his press conference yesterday by insisting that there was no point in an endless debate about who is to blame for the crisis, given that voters will soon have their chance to speak on the issue.

The task facing everyone in politics now is to focus on how to get out of the mess the country is in.

Cowen delivered an assured performance as he defended the tough medicine outlined in the plan. The pity is that he didn’t do it consistently since he took office. It’s also a pity a detailed plan, along the lines of the one announced yesterday, was not published a year ago in response to the McCarthy report and the document from the Commission on Taxation.

The four-year plan will affect everybody in society but the impact will not be the same across all groups.

The unemployed and low- and middle-income earners will probably be affected most in terms of a significant reduction in their standard of living. One group will be hit through cuts in welfare payments, while the other will have to endure extra taxation.

People on State pensions will get off almost scot-free; while public service pensioners will be asked to make a contribution, it will be relatively small.

Existing public service workers are protected from further pay cuts, for the present at least, but new entrants to the public service will be paid 10 per cent less than those already in the door.

Cowen in his press conference speech spoke of inter-generational solidarity but the net effect of the plan will be harder on the young than the middle aged or old.

A reduction in the pool of public service jobs rather than a reduction in pay levels will make an already difficult jobs market even worse. The cut in the minimum wage will also impact disproportionately on the young, as will the moves to bring more people into the tax net and welfare cuts.

The overall intention is to create more low-paid jobs that will be more attractive than welfare payments.

Still, whatever the unevenness of the burden as spread between the generations, the plan appears tough enough to do the job required while not so tough that it will impose an intolerable burden on society.

As the Taoiseach emphasised, there is simply no way of avoiding a general reduction in living standards.

Taxation has to be brought up from 2003 levels to 2006 levels, while spending has to be reduced back to 2007 levels. It’s as simple as that.

Even if that happens there is no guarantee the plan will work unless there is some growth in the economy.

Ultimately the only way sustainable growth can come about is if public spending and taxation are brought into line. If the plan achieves that difficult task, the hope is that even higher growth than anticipated will materialise.

What lifted the Irish economy out of the recession in the late 1980s was the combination of prudent budgetary policy and growth after 1987. Much of the growth then was driven by a booming international economy, so Ireland is dependent on a return of calm to the euro zone and a steady level of economic growth.

A bit of luck would also be a welcome change after the past few years of unremitting bad news.

In terms of pure party politics, the plan has given the Government parties their platform for the forthcoming election.

Brian Lenihan went into campaigning mode at the end of yesterday’s press conference by saying the plan set out the only realistic policy options and any attempt to avoid them would demonstrate a lack of seriousness.

Fine Gael and Labour did a bit of political campaigning themselves in response to the plan. Enda Kenny said his party had already established from the European Commission that it would not be bound by the details of the plan for the years after 2011 but he didn’t spell out how Fine Gael was going to find the required savings for those three years.

Labour Party finance spokeswoman Joan Burton made the perfectly fair point that the plan presented the Irish people with the bill for 13 years of Fianna Fáil government. The problem is that the bill cannot be avoided by the electorate that put that Government into office three times in a row.

Burton again repeated the Labour position that the €6 billion adjustment in 2011 posed an unacceptable risk to growth in the Irish economy. However, given the fact that this figure has been agreed by the commission and the IMF, it is difficult to see how it can be avoided. Potential differences between Fine Gael and Labour will be glossed over by the passing of the budget as both parties will have no option but to sign up for the €6 billion figure if they take power after an election in February or March.

How they will behave after that is the real question because they will not be able to avoid very difficult choices over the coming years.

It is all very fine to talk about renegotiating some of the details in the plan but any alternative measures will be just as unpalatable for some segment of the electorate as the existing one.

There are no easy options left, even if the Opposition parties naturally do their best to convey the impression that there is a better way.