Something in the economic formula is right

Economics: In the wake of the election drubbing for the coalition parties, Michael McDowell this week made the call for moving forward with the liberal economic agenda. Deregulation, lower taxes and competition were the way forward, he said, as the audience at an IBEC function muttered agreement into their pre-dinner Chablis.

It was, of course, an address directed as much at the Progressive Democrat's coalition partners as at the business audience and was responding to various Fianna Fáil luminaries darkly hinting that the PD agenda was losing them votes.

Last night at a function in Kildare, Charlie McCreevy weighed in, saying the low-tax policies had been a "spectacular success".

Clearly there is something of an ideological split in Cabinet, with many Fianna Fáilers feeling that the McCreevy/PD agenda is losing them votes. There is a danger in all this that focus is lost both on what we have been doing well and what we have been making a mess of.

Put simply, overall macro policies have clearly been successful, although our recent loss of competitiveness must be heeded. But many attempts at reforming various parts of the economy - micro policy - have been either poorly designed or badly executed. Or both, in some cases.

McDowell and McCreevy are correct that much has been achieved. Total employment has increased by more than 600,000 in the past decade, and the jobs market has maintained a strong performance even after growth has slowed in the past couple of years. Meanwhile, economic growth has consistently outpaced the international norm - by a distance.

The election result has brought out the usual revisionism about this extraordinary economic record. However, whatever criticisms are made of the development of the economy, it is essential that sight is not lost of the successes.

Clearly something in the formula has been right. The precise factors which triggered the economic renaissance will be argued over for many years.

However, a mixture of long-term factors (such as favourable demographics and rising education) and shorter-term policies (such as low tax and - generally - sound public finances) combined to lead to a period of unprecedented growth.

Reversing these "success" factors would be a mistake. The most obvious way that this could happen would be through a decision to push up spending on social policies to try to curry favour with the electorate, paving the way for creeping tax increases and a gradual deterioration in the public finances. This may seem a distant risk, given the current buoyancy in tax revenues. However, the cutbacks and stealth-tax increases which followed the pre-election spending splurge should provide a lesson on how quickly the public finances can turn.

Whatever about the economic risks, politically such a strategy would also be dangerous. There is a demand for better public services and improved infrastructure. But if the pre-election period taught us anything, it is that more money does not solve all the problems. Spending was rising by some 20 per cent at its peak, but the level of services did not improve commensurately. The Brennan commission's report into the health services showed many examples of lax control, for example. Meanwhile, public investment projects have generally run late and over-budget.

Economically, the key issue is achieving value for the money. Politically, people will only be prepared to pay more taxes if they see better services being delivered in return. The message from the electorate is surely that they noticed the stealth-taxes and the non-indexation of tax bands, but do not believe there was a payback through improved services in health and education.

The other part of the agenda being led by the Government's liberal wing - deregulation - has, however, turned into a bit of a mess. Progress is dreadfully slow in the transport area, epitomised by the mess over Aer Rianta. A clear strategy is needed to deliver improved capacity and lower cost, but there is little sign of it in the break-up plan.

Where is the progress on extra capacity at Dublin, for example? And is the priority for Shannon to maintain employment levels or deliver low-cost air access to the west.

There has been progress in delivering increased competition in some areas such as telecoms and airlines. In others, such as electricity, things have arguably got worse.

Government ministers are good in talking up the success of a stable macroeconomic environment and low taxes. But they have a long way to go in addressing the micro part of their agenda. And that's what could make the difference when the voters next go to the polls.