Dramatic election raises big questions about economic policy
Old two party policy consensus now in question – but change will not be cheap
A dramatic election result points to uncertainty and change in economic policy .
For the first time two big parties – who have broadly agreed on the direction of policy for many years – have been joined by a third, calling for a different approach. Whoever forms the next government, this has to be significant.
We will, for example, almost certainly see a move to ramp up public sector house building and greater State involvement in other key areas like childcare, even if the next government does not include Sinn Féin.
Whoever is in power will respond to the public mood, particularly the dissatisfaction of younger voters.
And if Sinn Féin were to enter government – requiring one of the big parties to reverse its policy of not doing a deal with it – more dramatic change in spending, tax and policy towards multinationals is possible.
In the short term, the uncertainty over who will form the next government and the length of time this may take will raise its own issues. The outgoing government and ministers will remain in charge, but with a caretaker mandate. This comes as the second phase of the Brexit talks gets going, with the EU finalising its negotiating mandate and talks due to start with the UK in March.
This may not cause too much of a problem if a government can be formed before Easter.
After all, in general there is an agreed approach to the talks, which is to try to use Ireland’s influence to have as close as possible a trading arrangement with the UK. But if government formation drags on, or we head to another general election, then this could get problematic.
Key talks in fisheries are due before the summer. And as well as making an input into the main trade talks, Ireland also has a key role in working out the new trade regime to apply in Northern Ireland, already difficult given that it must be up and running by the end of the year.
Other key threats also face the economy – talks on international corporate tax reform at the OECD face a vital few months ahead of a ministerial meeting in June. And the lack of a new government will effectively stall much of the investment in the new National Development Programme, certainly for projects not already started.
A couple of months without a new government formed may not make much of a difference here, but a more prolonged period would.
However, the bigger uncertainty about the move to the left by voters is what it will mean for future economic policy.
We may see some business investment decisions put on hold until this becomes clearer, because some of the Sinn Féin policies would clearly have an impact, especially for the multinational sector and commercial property. Big companies will be asking whether the policies Ireland has championed in recent years towards foreign direct investment are going to change – and if so by how much.
Investors in Irish government bonds will also be watching the outcome. Ireland has benefited from low borrowing costs as the budget has moved into surplus in recent years. All three main parties are committed to remaining in surplus, though Sinn Féin does favour higher spending and somewhat lower surpluses, meaning a move by it into government would be closely watched by investors.
As an article on the Bloomberg financial wire service pointed out yesterday, Brexit risks and post election uncertainty could tempt some investors to take profits on Irish bonds, which have increased strongly in price here in recent months. For the moment, however, the borrowing costs on these bonds remain exceptionally low. Sinn Féin’s policies of increases tax on the banks and pushing them to reduce mortgage rates is also likely to lead to nervousness amongst investors in this sector.
Higher government spending may result, whoever is in power.Even if, for the sake of argument, Fianna Fáil and Fine Gael end up as part of or supporting a new government, perhaps with the addition of some smaller parties, election 2020 is going to change economic policy.
The clearest message is of voter discontent with housing policy. The market may already be turning – with house prices and rents stalling and some rise in supply – which will help the next administration. But any new government will surely plan to boost public housing provision significantly, even if achieving this will be no easy task.
Greater State involvement in other qualify of life issues relevant to younger voters, such as childcare, is also likely .
Of course, were Sinn Féin to enter government, the scale of change in economic policy would be greater. Like all parties, it would not expect to see all its manifesto promises in a programme for government. But it would surely hold out for key promises in areas like housing, for higher spending paid for by more tax on the better off and businesses and for key positions in a new administration.
This would bring a new direction and tone to economic policy – the most significant change in many years. As with any big change, the consequences are unpredictable and carry some risk as everyone works out what the new policy will mean in practice.
A key backdrop is that whoever forms the next government faces the familiar risk that economic growth and so tax revenues are less than expected. Ahead of the election,the Department of Finance estimated that €11 billion would be available in “unallocated resources” in the next five budgets.
Any hit to growth could quickly cut this figure – and in any case, some of it will have to go to pay higher public sector pay and other costs of inflation.
To deliver change, rather than just promise it, whoever is in government will have to hope for a fair economic wind – and do whatever it can to keep growth at a reasonable rate. This will be required to create the growth and taxes necessary to address the big election issues – housing and health.
Bringing change will not, after all, be cheap.