Uncomfortable truths face government-formation negotiators

The negotiations on a new government between Fine Gael, Fianna Fáil and the Green Party this week will be confronted with some very uncomfortable truths.

Briefings from senior officials on the state of the economy, the current fiscal situation and the related projections for the public finances for the near and medium-term future are due to be given to the three negotiating teams in the coming days, according to several senior sources.

The briefings will paint a grim picture. The costs of the coronavirus crisis, the freeze in economic activity and the uncertain path for economic recovery will mean that the policy options of the next government will be severely constrained. In other words, there won’t be much money for anything.

Several senior figures who spoke to The Irish Times on condition of anonymity in recent days on this subject painted a gloomier picture than politicians are admitting to in public. One person, who receives a weekly briefing, explains it as follows: “Every week they give us the figures, and we think, Jesus, is it really that bad? Then the following week they give us a new set of figures which are worse, and we think, Jesus, it wasn’t that bad last week after all!”

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Official Government projections suggest the country is on course for a record deficit of €23 billion this year – an astounding figure when you consider that total Government spending will be in the region of €70 billion this year.

But even so, it is not so much this year’s figure that is worrying some people in and around Government.

The Covid-19 costs fall into two categories. There are the upfront costs this year which, astronomical though they may be, will be largely paid for through borrowing to fund this year’s enormous deficit.

Recurring costs

The worry is to what extent some of these costs will be recurring, not just next year, but in the years after that. There will be a requirement for a larger – and therefore more expensive – health service. There will be, even in the best-case scenario, a large unemployment hangover from the crisis (especially if the tourism and hospitality industries continue to be restricted) which will endure into next year and the year after. All this is going to require a bigger and more expensive state, paid for by a smaller economy.

At present, the National Treasury Management Agency, which manages the national debt on behalf of the Government, says there are no constraints on the continued ability of Ireland to borrow on the bond markets. And the national finances, and therefore Ireland’s reputation on the bond markets, went into the crisis in robust condition. Consequently, the Government has said it does not need to tap the EU’s emergency funding. But bond market sentiment – as we know in this country – can be a fickle thing.

Regardless of the external environment, it is hard to see how any responsible Irish government would not need to set the public finances on a path to sustainability next year. That will mean closing the deficit; that will mean spending restraint, and maximising income.

The policy implications of this are a matter for the politicians to decide. But it is unavoidable – and it is already very clear – that this Government will be more constrained than any administration since the Labour-Fine Gael government that took office in the wake of the bailout in 2011. Nobody will need to be reminded how that ended.

The Green Party, Fine Gael and Fianna Fáil politicians who will hear the briefing from grim-faced officials this week will know a lot of this in advance. Much of it has been apparent for weeks to those minded to look for it. But it will still be a sobering moment for them, when they are brought face to face with fiscal reality, and the political consequences of that. The talks could be in for a rocky few days.