Budget 2016: Coalition plays strong hand in trying to convince voters the tide has turned

Fine Gael and Labour give indication of their approach to General Election

 

The critical political and economic challenges this Government faces, as it sees them, are one and the same: to convince voters who, polls suggest, do not feel it, that the recovery has begun, and that, objectively, living standards are on the up – even if people are still significantly worse off than they were before the crisis. The subjective factor, market and individual sentiment, feelgood, is key to both sustained retail sales recovery, so essential to domestic demand and growth, and to the Coalition parties’ chances of re-election.

Confidence is everything. Yesterday’s Budget serves both those purposes, injecting some €3 billion into the economy half of it courtesy of a tax windfall supplementary estimate of €1.5 billion that will help plug the 2015 gaps. And it will go much of the way to persuading sceptical, still-hurting voters, that the Government has indeed lived up to promises both in terms of the economy and family finances. (In fact the Budget will do little for growth, pushing it up by a measly 0.1 per cent next year, according to the Government’s own figures)

In recent days economists have warned that the economy, which will grow by over six per cent this year, does not need further stimulation. Chief economist at the Central Bank, Gabriel Fagan, warns against adding “fuel to the fire when the fire is already lit”. And, no doubt, when the inquiries are convened into the “crash of 2020”, others will also be able to say “we told you so”, “we warned you”.

But in truth the increase in government spending proposed in this Budget is far from being extravagant – a rise of four per cent, when the economy is going ahead by half as much again, is clearly compatible with the EU’s fiscal rules under which we will labour from now on. They require states to confine expenditure growth to below economic expansion. And no-one has suggested the EU rules are fiscally irresponsible. Moreover they even appear to leave the Government with a degree of wiggle room in terms of potential election promises – although the surge in growth might have made it possible to eliminate the government deficit by next year, it is not proposing to run a surplus until 2018. Room for manoeuvre.

Fine Gael and Labour will not be publishing a joint programme so this budget will have to serve as an illustration of their approach, and a promise of more of the same to come. The message is not only a macro one of careful husbanding of resources and of successfully steering the economy out of recession, but, in focussing on families, particularly childcare and health, and those earning under €70,000 – the USC cuts represent a massive €600 million of the tax cuts – of their concern at the micro level for the less well off. Politically this Budget appears well judged to wrongfoot the Coalition’s election rivals to left and right.

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