Now for the real political challenge
The political requirement to secure the survival of a minority government was a higher priority in Budget 2017 than addressing the real needs of the economy. Faced with increased economic uncertainty, the Government should have provided firmer leadership and a clearer sense of direction. But political imperatives ruled the day and now it must deal with the consequences.
Fears over how the Brexit process may unfold are likely to increase in the short-term. Sterling’s rapid devaluation has made the export of Irish goods and services to the UK less competitive with adverse implications for employment. The various special measures announced to Brexit-proof the budget are unlikely to mitigate that threat. In the global economy, the public backlash against free trade and globalisation intensifies, increasing the risk of a return to tariff barriers and protectionism, and to a slowdown in growth. As one of the world’s most open economies, Ireland has much to fear from this.
The public mood, as shown in the pre-budget opinion poll, was for higher spending rather than for lower taxes. The Government has delivered on this, providing budget giveaways of €1.3 billion, three quarters of which relate to extra spending. The Coalition has said it can finance the package and reduce both the deficit and the debt in line with EU fiscal rules. Of course this assumes its own forecasts for economic growth (3.5 per cent of GDP) and for higher tax revenue will be met next year, and that the public spending limit set in the budget will not be exceeded.
The budget reflects the handiwork of a minority government under intense political pressure: the product of the many compromises Fine Gael reached with independents and with Fianna Fáil. A last minute discovery of extra fiscal space (€300 million) helped to facilitate final agreement. Everyone involved could claim credit – whether authorship or influence – for some of the many decisions taken to satisfy the demands of interest groups.
Political stability has been maintained and a potential general election avoided. The minority government’s continuation is ensured for now. But a budget comprising small changes in personal taxation and relatively large (€1 billion) spending increases is the easy part. The greater political challenge ahead will be to defend what it has been agreed and to ensure that key budget targets are met. In that regard the wage claims of public sector groups (gardaí, teachers, nurses) pose a serious threat to public pay policy.
Before it found an extra €300 million, the Government’s budget plans had already been deemed by Fiscal Advisory Council chairman Prof John McHale to be “at the limit of prudent policies”. The coalition has left itself little room to manoeuvre.