Managing recovery as difficult as recession

The staggering scale of the economic turnaround revealed by the latest growth figures could be a lifeline for the beleaguered Coalition but the recovery could prove politically almost as difficult to handle as the recession.

On the face of it the sudden return to the kind of growth last seen during the Celtic Tiger years should be a shot in the arm for both Coalition parties, who can face into the next election claiming that their adherence to tough policies have paid off. In politics, though, things are never that simple. One thing politicians should never expect from the voters is gratitude. Having endured the pain the voters will now be looking for something back as soon as possible. At this early stage in the recovery, though, there is not nearly enough money around to meet all the pent-up demands for tax cuts, extra spending and pay increases.

Managing expectations and directing resources into areas where they will deliver maximum political benefit is the tricky task facing Michael Noonan and Brendan Howlin as they put the 2015 budget together.

Howlin has already given his Cabinet colleagues a bit of a dressing down for making spending demands that far exceed the available resources and Taoiseach Enda Kenny has weighed in behind him.

Marginal tax rate

An income tax cut of some kind is clearly in the offing, given the Taoiseach’s speech to business leaders on Thursday night in which he highlighted the need to deal with the fact that workers pay the highest marginal rate on incomes of just €32,800.

However, devising a tax cut that will give people a noticeable increase in their pay packets is not going to be easy. Fiddling around with bands and allowances to reduce tax could prove costly to the exchequer while generating a paltry political reward.

One man who knows all about that is the former Labour Party leader and minister for finance Ruairí Quinn, who warned colleagues at his party's think-in at the beginning of the week about overcomplicating tax cuts.

He pointed to the way the rainbow coalition lost the 1997 general election despite having achieved a budget surplus, strong economic growth and falling unemployment, because it offered voters a tax package that was too complicated.

By contrast Fianna Fáil and the Progressive Democrats offered a simple cut in tax rates that didn't cost any more and was not nearly as fair, but it was something the public understood and voted for.

One issue that could dwarf the impact of any tax cuts is the introduction of water charges from next month. Both Fine Gael and Labour discovered during the local and European elections that there is huge resentment among voters at having to pay for water for the first time.

Kenny gave a commitment that the average family would face charges of €240 but the information emanating from Irish Water indicates that many households could end up paying twice or even three times that amount.

If that turns out to be the case the Coalition will face a wave of public anger that no amount of tinkering with tax in the budget will placate. Its priority must be to allocate resources to ensure water charges are kept as low as possible at least for the next few years.

Given that most households will not be metered in time for the introduction of the charges the Government would be justified in setting a maximum flat charge. An exchequer subsidy would be worth it because experience in every democracy is that voters resent new taxes, no matter how small, while being able to live with substantial existing taxes, particularly those deducted at source.

Tax is just one side of the budget equation. The other is public spending and Ministers face a range of difficult choices on that front as well.

Insatiable demands

The insatiable demands of the health service are one of the biggest headaches facing government not just in

Ireland

but in every western country. The departure of Dr

James Reilly

and his replacement by the up-and-coming

Leo Varadkar

as Minister for Health was supposed to mark a decisive change in approach but the indications are that it is going to be more of the same when it comes to rows over the health budget.

While Varadkar has had a refreshing impact by calling a spade a spade on the proposed universal health insurance, he has irritated most of his Cabinet colleagues by making the same demands for increased spending as his predecessor.

While the media has carried a litany of stories about health cuts over the past few years Howlin has pointed out repeatedly in the Dáil and elsewhere that total spending has remained steady since the Coalition took office. It was €14.2 billion in 2011 and €14.1 billion last year. The arguments about health spending will probably be the biggest battle at Cabinet, as other departments will be putting in strong claims for extra resources now the budgetary pressure is beginning to ease.

Managing all of the conflicting claims to come up with a budget that goes some way towards meeting public expectations will not be easy. Still, it will be far easier than finding €2 billion in further cuts and tax increases that was on the cards only a few months ago. The need for that €2 billion adjustment has now evaporated and instead the Coalition is talking about a package of spending increases and tax cuts worth around €600 million.

The trick for Ministers will be to produce enough goodies to keep the electorate reasonably content this year in the hope that the continuing improvement in the country’s economic fortunes will enable them to come up with a really expansionary, election-winning budget in a year’s time.