What a contrast between the budgets announced in London and Dublin over the past week.
One involved massive borrowing, triggered a run on the currency and was condemned by the IMF while the other was greeted with general approval even though it involved a generous €11 billion package to help citizens through the cost of living crisis.
It is hard to believe that a little over a decade ago Ireland was in the throes of a financial crisis and was widely regarded as a basket case economy. The situation prompted a generous loan of €3 billion from our neighbours in the UK and ultimately required a €60 billion bailout from the IMF and the European Central Bank.
The astonishing change in fortunes since has been all about politics rather than economics. It is a stark reminder that political choices do have much bigger long term implications for a country than many voters realise when they go to the polls to elect a government or make a choice in a referendum.
Ireland clawed itself back from the brink thanks to the courage of politicians from Fianna Fáil, Fine Gael, Labour and Green Party who were prepared to court unpopularity and even political annihilation in the drive to ensure that disaster was averted.
At the time a range of populist forces, some of whom are now projecting themselves as the alternative government, were calling for debt default and suggesting that Ireland should follow the example of Argentina which had taken that course on a number of occasions. Just look where that unfortunate country is now, mired in yet another round of economic disaster.
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Irish political leaders between 2008 and 2016 made the difficult choices that put the country back on the road to economic growth and prosperity. The housing crisis is an unfortunate hangover but on the whole the outcome has been far more positive than anybody could have anticipated at the depth of the crisis.
By contrast the UK has travelled in the opposite direction, mainly due to one massive decision that set the country on a downward spiral – Brexit. While this has become the secret that dare not speak its name in British politics, it has influenced everything that has happened to the country since the people voted to leave the EU in June, 2016,
The emergence of Liz Truss as prime minister and Kwasi Kwarteng as the chancellor of the exchequer committed to a low tax, low regulation economy is the logical conclusion of Brexit but it is the decision to fund public services at their current level through massive borrowing that has really spooked the financial markets.
Former chancellor George Osborne put it in a nutshell when he said that the markets were punishing Liz Truss for failing to balance her budget.
“Fundamentally, the schizophrenia has to be resolved – you can’t have small-state taxes and big-state spending,” he said.
The danger facing the UK now is that it could in time become the Argentina of Europe. It should not be forgotten that Argentina was once among the richest countries in the world but generations of bad political decision-making has brought it to its current sorry state.
While the UK still has plenty of time to change course, a country that has endured chronic political instability, with four prime ministers in six years, is clearly in trouble. The continued desire of the Brexiteer faction of the Conservative Party to engage in pointless conflict with the EU is a symptom of the problem.
The fate of the UK under Truss should be closely watched by the Irish electorate. The instant reaction of the financial markets to the profligacy of Kwarteng’s budget is a salutary lesson about what can happen if the commitment to “change” results in hasty and ill-thought out policies.
In contrast with events in London, the giveaway budget unveiled by Paschal Donohoe and Michael McGrath on Tuesday was given a general welcome. The €11 billion package was funded not through borrowing but by the massive budget surplus generated by the scale of the economic recovery.
The political challenge facing the Coalition was whether it would respond to the cost of living crisis in a way that would reassure a worried public that it was serious about protecting people to the greatest extent possible.
The combination of permanent measures like welfare increases and tax cuts costing €6.9 billion and a range of once-off measures including help with energy bills costing €4.1 billion has done that for the present.
On energy the Coalition rightly rejected the wasteful and costly energy cap introduced by Truss, and advocated by Sinn Féin leader Mary Lou McDonald, and instead opted for the more sensible approach of helping citizens with their energy bills. Although people will still find their living standards under pressure over the next year, despite the largesse, the public seems reassured that the response has been adequate.
Whether the Coalition parties will get any thanks for their approach in the longer term is another matter. But voters should take heed of our neighbours’ fate and realise that change is not always for the better.