Government’s capacity for corrective reforms has died

In a matter of days four external bodies have taken issue with the Government over Budget 2015. To one degree or another, warnings from the Fiscal Advisory Council, the OECD, the IMF and the European troika institutions serve to highlight the fact that the new fiscal plan is not quite risk-free.

Encouraged by resurgent economic growth but in defiance of domestic and international advice, the Government adopted an expansionary budget to make way for modest income tax cuts from January. After years of non-stop retrenchment, this decision had its fundamental roots in politics. To anxiety within Cabinet, Ministers saw the anticipated gain vaporise before their very eyes as unforced errors over Irish Water culminated in an abrupt policy reversal.

While a bells-and-whistles relaunch of the income tax package is inevitable, the entire episode suggests that political and economic real time are falling out of sync. This is crucial, and it is no accident that the general election now looms.

Grinding measures

In the lean years of outright crisis politics and economics were in the same cycle more or less as a succession of grinding measures were introduced to assert order in the public finances and settle ructions in the banking system. That remains a work in progress yet the Coalition’s capacity to adopt and implement corrective reforms has withered. This reflects political and public fatigue – and the clamour for relief as evidence of recovery gathers.

But the job is not done yet, hence tension between the Coalition and external supervisors.

The suggestion from the EU Commission and European Central Bank that deficit-reduction should be intensified in the run-up to the election and beyond went down very badly in Government circles.

The point is always made that people in the tower blocks of Brussels and Frankfurt don’t have to go canvassing in Dublin or Donegal. The same goes for the Washington staffers of the IMF, who warn that current “highly favourable” market conditions may not last. Ditto the Paris-based officials of the OECD who find Ireland’s shift to budget stimulus from consolidation to be premature.

Although the Fiscal Advisory Council knows exactly how the political situation for the Coalition has deteriorated, it finds fault with the budget and says an opportunity was missed to bring the public finances more decisively into a zone of safety.

The stock response of Government is to proudly point a finger at the forecast achievement, next year, of a budget deficit below 3 per cent of economic output, thus meeting a bailout target set when Ireland’s stock was at its lowest ebb. Yet that remains a challenge, and depends on smooth conditions at home and the outside world. “If growth disappoints by as little as 0.5 percentage points in 2015 then the 3 per cent deficit ceiling could be in danger of being breached,” said the fiscal council’s report on the 2015 plan.

While this reflects concern that the cushion for things to wrong is simply too slim, the council also bemoans the lack of a well-specified medium-term plan for the public finances.

But, with Irish borrowing costs at a record low, does any of this really matter? The answer is it does, most definitely so.

Political fallout

As bond market types run their own numbers on the budget, it would hardly be a surprise if they took note of the water protest and its political fallout. This follows years of quietude on the street, so the question might well arise as to whether this is but a temporary outburst or something more profound.

Remember too that the Government will have to borrow again early next year to pay down more of the IMF debt and make preparations for the redemption of an €8 billion bond in the spring of 2016.

All of that will come as the election debate advances, with questions arising on the policy and formation of the next administration. Among the most slippery matters for settlement is the question of public sector pay.

For all the drama seen since the Government took office in 2011, its supersized Dáil majority provided a grounding sense of political certainty even as the harshest fiscal measures were introduced. That certainty will fade as the election nears.

As warnings from external supervisors imply, it would be wrong in that scenario to draw too much comfort right now from low bond yields on the open market.