Political day of reckoning due sooner rather than later

INSIDE POLITICS: The Government's policy errors of the past 10 years have fatally compromised its authority to lead

TUESDAY’S BUDGET was the Government’s last chance to get to grips with the appalling crisis in the public finances. If the fourth attempt to deal with the problem in a little over six months doesn’t work, it is hard to see how the Government can survive the year, as it can hardly go back for a fifth bite at the cherry.

Even if the measure does bring some stability into the public finances it will simply represent a step on the road towards a solution. The cut in incomes inflicted on the country’s taxpayers on Tuesday was just the first instalment in a five-year plan that will have to contain a lot more pain.

Tough and all as it was, the Budget was tailored politically to give the Coalition breathing space. Some of the most difficult decisions were actually postponed until next year but that will not make them any easier to implement when the time comes.

The Government’s basic strategy is to buy time on both the economic and political fronts. It is attempting to stabilise the position on the public finances this year, rather than making serious inroads into the problem. There are strong economic arguments for this, as a real drive to keep borrowing at the target level of 9.5 per cent of GDP set in January would have involved the kind of spending cuts allied to tax increases that could have killed rather than cured the patient.

That said, the worrying side of the strategy is that the new borrowing target of 10.75 per cent of GDP has been set not just for this year but for next year as well. Borrowing is rising at a truly alarming rate and we are set to move in just a few years from being one of the most prudent countries in the European Union, in terms of borrowing, to being mortgaged up to the hilt.

The impact of the decision to take the bad property loans off the banks’ balance sheets is a complicating factor that will add to the country’s indebtedness, even if the plan works. If it doesn’t work, future generations will pay an enormous price for the property bubble generated during the Ahern years on top of the price being paid now.

On the political front the strategy was not simply to keep the Fianna Fáil-Green Party Coalition intact but to come up with a budget that would not provoke strikes or street protests. Ministers recalled only too well the experience of last October when the withdrawal of the automatic entitlement of the over-70s to a medical card generated turbulent protest that spilled over into political instability. This time around, Brian Lenihan has managed to avoid alienating any particular interest group or creating a sense of victimhood among one segment of the population. As a result, the immediate political outcome has been calm and Government TDs have not come under pressure to kick over the traces and reject the party line.

It was interesting that the first phone call to the Minister for Finance, when he did the traditional question and answer session on Pat Kenny’s radio programme on Wednesday, came from a teacher complaining about tax increases, as she was already under financial pressure because of her purchase of a holiday home in Croatia. It didn’t excite the kind of sympathy generated by irate pensioners.

It has also helped that the social partners have effectively backed the Budget, employers’ body Ibec openly and the trade unions implicitly. Protecting public sector workers is the top priority for the unions who actually support the strategy of focusing on extra taxation as the solution to the problem in the public finances.

However, the absence of noisy protest may be disguising the real story. The backlash from the broad electorate when the measures bite home in May could reflect itself in the European and local elections on June 5th and in the two byelections in Dublin South and Dublin Central on the same date.

The consensus among the political number crunchers in the main parties up to recently was that the local elections would not result in dramatic changes. Last time out in 2004, Fianna Fáil did very badly and Fine Gael did very well, almost drawing level in terms of council seats. Because of the complications of our PR system, Fianna Fáil could fall further in percentage terms and not lose many more seats while Fine Gael could gain a significant share of the vote without gaining that many extra council seats.

However, that assumes relatively small swings compared to 2004. If the Budget helps to generate a significant drop in the Fianna Fáil vote and a surge for the Opposition parties that results in a rout for the two Government parties, the impact on political stability could be very real. That in turn would make the next steps in dealing with the public finances more difficult still.

The big issues ahead, already identified by Lenihan in his Budget speech, are how to get further savings from the social welfare budget of €21 billion and the public sector pay bill of €20 billion. Deflation will make it much harder to achieve savings as cuts in rates of welfare or pay will be required. On the tax side, the introduction of a property tax and the taxation of child benefit are just some of the new measures that will have to be put in place.

The Coalition is clearly hoping to get some cover behind the recommendations of the Commission on Taxation and Colm McCarthy’s Bord Snip Nua, but ultimately it will have to take political responsibility for whatever action is taken.

Even assuming that Tuesday’s Budget does work out as planned, the Government still has a fundamental problem. Its authority to lead has been fatally compromised by the policy errors of the past 10 years that brought the country to its current sorry state. Sooner or later there will be a political day of reckoning.