Leo Varadkar: It will ‘feel like a recession’ for people whose income will not rise as fast as cost of living

The countdown to the Dáil’s summer break had been going relatively well for Leo Varadkar.

First, he learned he would not face criminal charges over the leaking of a confidential GP contract, removing a potential roadblock to his return as taoiseach in December.

As Minister for Enterprise, Trade and Employment, he presided over another record surge in foreign direct investment (FDI), a perennial comfort blanket for the Irish economy against an uncertain global backdrop as well as driver of buoyant tax receipts.

And just last week the Government saw off a Sinn Féin motion of no confidence. Failure to do so would have caused a political storm and potentially a general election down the line.

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However, these mini victories were overshadowed by a poll in The Irish Times last Friday, pointing to another slide in support for the Government and for Fine Gael combined with another lift for its main political opponents.

[ Irish Times poll: Support for Fine Gael at lowest level since 1994 as Sinn Féin hits record high ]

[ Satisfaction with Government collapses in Irish Times opinion poll that reveals many new highs and lows ]

Varadkar’s spats with Sinn Féin deputies, most recently an extremely heated and personal exchange with Pearse Doherty in the Dáil, have become a focal point of Irish politics, a measure of the wider political temperature, and a reflection of the political spectrum.

As the temperature sizzles outside, Varadkar sits in his office in Government Buildings, sipping a cold 7Up. “I’ve been in politics long enough to know that opinion polls do not predict the outcome of elections — they certainly didn’t predict the outcome of the last election. Sinn Féin is doing well in the polls but they’re largely doing that by cannibalising the rest of the opposition and the other left-wing parties,” he says.

Naturally, he wants to focus on the Government’s achievements: the economy’s rapid rebound from Covid restrictions; the return to near full employment; the continued influx of foreign investment; the prospect of a budget surplus this year, way sooner than most expected; and how this budgetary wedge can be used to alleviate cost-of-living pressures.

Sinn Féin, he insists, represent a threat to these achievements, a threat to Ireland’s “business-friendly” economic model.

“Sinn Féin is promising a fundamental change in our economic policy and if we have a fundamental change in our economic policy our economy will change fundamentally,” he says.

“It might not happen immediately, it might take two or three years, but there will be less investment, there will be fewer jobs, the tax take will be smaller than it otherwise would be, and the cake will get smaller for everyone.

“They want to increase employers’ PRSI by something like 40 per cent. That will make it more expensive to employ people in Ireland. They want to increase income tax on people they describe as high earners but the truth is, they are hospital consultants, they are IT professionals, they are executives in companies ... they are jobs that can go elsewhere if the tax burden is too high,” he says.

He also references Sinn Féin’s opposition to the EU’s trade deal with Canada, which has yet to be ratified by several EU governments, labelling the party as “trade-sceptic” and “euro-critical”.

“Mary Lou [McDonald] and Pearse Doherty” have campaigned against every single EU referendum, he says. “I know they’ve changed their mind on Europe. They’re not anti-Europe in the way they were, but they’re certainly not enthusiastic and we wouldn’t be at the centre of things any more [with Sinn Féin in government], we’d be diminished,” he says.

I put it to him that Sinn Féin in government in the North don’t appear to be the radical departure he’s presenting.

“What that says is that all the stuff about change is only guff and if they would get into office they wouldn’t really change anything ... maybe that’s true ... it’s funny proposition either they will keep their promises and our economy will go into decline and we’ll be worse off or all their promises around change are only guff,” he says.

His two-year stint as Tánaiste and Minister for Enterprise, during which time he brought forward legislation to enhance sick pay and redundancy entitlements for workers as well as legislation to establish the right to request remote working, is scheduled to end later this year.

Cost of living

Barring a political upheaval, he will reoccupy the State’s top political post under the Coalition’s rotating taoiseach arrangement in December. It will commence in the bleak midwinter when cost-of-living issues are likely to be most biting. Price hikes could well have morphed in shortages and rationing by then.

While he is confident Ireland will avoid a recession, he admits that a lot of people’s incomes will not rise as fast as the cost of living “and for them it will feel like a recession”.

Having an expansionary budget will also help us avoid a recession, he says. Some argue that an expansionary budget — the Government-proposed €6.7 billion budgetary package breaches its own spending rule and includes €1.05 billion in taxation measures — in a period of already strong price growth and when the economy is near full employment will fan further inflation.

But Varadkar insists price growth here is being driven primarily by external forces while higher interest rates will also act as a break on prices.

The cost-of-living squeeze is expected to see household bills rise by an average of €3,000 this year, a combination of higher energy, transport and food prices. Reining in Government spending in the current climate would be political suicide.

“We have a duty as a Government to minimise the amount of people who experience a loss of income in real terms,” he says, suggesting the measures should be targeted for low-income households and universal for those on middle incomes.

Varadkar’s signature political pledge has been to ease the tax burden on hard-pressed middle-income earners. By international standards, workers here end up paying the higher 40 per cent rate at relatively low rates of income, above €36,800 for a single person.

“People pay the highest rate of income tax at far too modest incomes, we’re out of kilter with other countries in that regard,” he says, noting this was one of the things, along with housing and energy supply, flagged as a concern by companies thinking of investing in Ireland.

He says the Government has been chipping away at this tax burden in recent budgets but acknowledges more needs to be done. He insists the option of a new 30 per cent income tax rate is still on the table. Reducing the burden can be done by either indexing credits and bands or via a new headline rate, the Fine Gael leader says.

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One area of perennial concern is corporation tax and the concentration risk of having just 10 firms accounting for such a large portion of tax revenue, €1 in every €8. The Central Bank warned earlier this month that as much as €8 billion of the current surge may be unsustainable. The fact that so much of this windfall has been tied into permanent spending poses a major risk.

He agrees with the idea that a portion of these tax receipts should be set aside but thinks this should be done in the context of a budget surplus. The Government is expected to run a €2 billion surplus this year.

He disagrees with the suggestion that a lot of the business tax windfall has been wasted, used to cover budgetary overruns in health, insisting that a lot of it has gone on infrastructural spending and the increase in the Government’s capital budget reflects that. He also believes corporate tax receipts are going “to get better before they get worse”. They are in line to hit a record €18 billion this year.

Brexit

On Brexit, he believes the exit of Boris Johnson as UK prime minister provides an opportunity to reset strained Anglo-Irish relations. “Northern Ireland only ever works when the British and Irish governments work hand in glove,” he says. On who is to blame for the current impasse, “fundamentally what they’ve [the UK government] done is conclude an international agreement with us in good faith, which they’re now trying to get out of,” he says.

“And in Northern Ireland rather than being even handed, they’ve chosen to side with one of the three blocs of public opinion up there and that’s not the right approach.”

One of his last acts as Minister for Enterprise will be the finalising of a White Paper on the future of Ireland’s enterprise policy. When it comes to attracting investment, he says, the country competes well on tax, skills and access to markets but falls down on infrastructure. “We [as an economy] have expanded faster than our public infrastructure has,” he says. “What’s the point of offering somebody a low tax rate if you can’t offer them power or water?”

There is, of course, no bigger infrastructural deficit than housing, and arguably no bigger political issue.

“People are angry at high rents and frustrated that they cannot yet buy their own home. Even those who have, are angry on behalf of their family and friends who can’t. I get that. The fact that so many hard-working people in their 20s and 30s are paying so much in rent and cannot buy a home is a fundamental breach of the social contract in a homeowning democracy,” he says. “We have to redouble our efforts to restore that contract. If you work hard and save money, you should be able to get a mortgage and get a foot on the property ladder.”

He insists a corner can be turned on housing with increased supply coming on stream and in combination with various Government schemes — help to buy, cost rental and shared equity.

Does he think his return as taoiseach will revive the party’s slide in the polls? “I’m not thinking about December yet. I’m very much focused on the job at hand. I’m Minister for Enterprise, Trade and Employment, deputy head of Government, leader of my party and TD for Dublin West.”

“Since the Government was formed, we’ve managed to take the economy from what felt like the brink of devastation due to the pandemic, to a place now where we have more people employed than in the history of the State, average incomes have never been higher notwithstanding inflation and trade is at record levels. We can’t take that for granted. It didn’t happen by accident.”