Stephen Collins: Brexit crisis gave Donohoe way to lower expectations

A notable feature of the British election campaign, apart from the lies and the poisonous atmosphere, was the promise by both leading parties to end austerity by undertaking vast and uncosted spending programmes. This will inevitably end in tears, either with a raft of broken promises or a collapse of the public finances.

Whatever about the routine shenanigans in Leinster House, politics in this State has been a haven of sanity in recent years by comparison with our nearest neighbour. This has been underpinned by the remarkable turnaround in the country’s finances since the financial crash a decade ago for which Fine Gael, Fianna Fáil, the Labour Party and the Greens all deserve a share of the credit.

Over the past three years, Minister for Finance Paschal Donohoe has had to walk a fine line between spending pressures from all sides, particularly the health services, and the need to keep a grip on the public finances. In the face of all those pressures, he has managed to deliver the first budget surplus for more than a decade.

That is a considerable achievement considering he has done it in the run-up to an election when pressure to open the purse strings is always at its most intense. Former minister for finance Charlie McCreevy once famously remarked “When you have it, spend it.” By contrast, Donohoe has managed to start saving for the inevitable rainy day.

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Stricter control

The task facing him back in early summer seemed intractable. On the one hand he had come in for serious criticism from the Irish Financial Advisory Council (Ifac) for not imposing stricter control of spending, particularly in the health service. The body also expressed concern that the rocketing revenues from corporation tax were a short-term phenomenon and should not be used to fund current expenditure.

That concern was echoed this week by the Economic and Social Research Institute which looked at what would happen if corporation tax receipts plummeted by between €6 billion and €10 billion a year at some stage in the not-so-distant future. They concluded that a collapse on this scale would plunge the country back into a similar territory to the financial crash of 2008-2010.

However, the pressure on Donohoe from the political system, the media and a whole variety of interest groups was not to control spending, as advocated by the Ifac, but to continue increasing it in areas of public concern such as health and housing which are never out of the headlines. He was also boxed in by programmes already in place to bring public service pay rates back up to pre-crash levels.

In the past, Irish voters have tended to reward promises of profligacy rather than prudence

In the face of these conflicting pressures, he managed to construct a restrained budget for the election year of 2020. There were minimum tax reductions and no increase in basic welfare rates, with just limited increases to a few highly targeted programmes. With the country already on course for a budget surplus of €1.4 billion this year, the Minister’s ambitious plan for increasing that to €3.8 billion by 2022 is on track.

Lowered expectations

Donohoe managed to achieve a broad political consensus for his approach by framing his 2020 budget on the basis of a no-deal Brexit. Given the political instability in the UK last autumn, he was able to convince Cabinet colleagues it would be foolhardy to plan on any other basis.

The Brexit crisis gave Donohoe the excuse he needed to lower expectations both inside the political world and among the wider public. In an important but not very widely reported speech to the Institute for International and European Affairs last week, he set out his ambition to prepare the country for the inevitable changes in the worldwide corporate tax regime which will cut corporate tax revenues at some stage in the years ahead.

The big question is whether this prudent approach will set the agenda for the election campaign in a few months’ time or whether the parties will take a leaf from their British counterparts and let rip with spending plans of all kinds. In the past, Irish voters have tended to reward promises of profligacy rather than prudence. Back in 1977, the electorate bought the give-away Fianna Fáil manifesto which led to the dismal recessionary 1980s and, in 1997, voters opted for the tax-cutting and spending plans from the same party which fuelled another boom-and-bust cycle.

The current political climate, though, is very different. Under the confidence-and-supply arrangement, Fianna Fáil in opposition has behaved very differently from earlier decades. The party’s approach ensured that, even though the Government was far short of a majority, the Dáil was able to pass three budgets and provide a stable government at a vital time in the country’s history.

While Fianna Fáil will have to come up with attractive policies to woo the voters next year, the party would be ill advised to risk the credibility it has achieved through the confidence-and-supply arrangement by reverting to old habits and promising a spending spree if returned to office. With luck, Donohoe’s prudent 2020 budget may have framed the election debate, at least for the parties who are interested in power, for a serious discussion about the feasible options for dealing with the range of problems that face the country.