It is always easier to attack than to defend complex, long-term initiatives such as Nama
THIS WEEK’S emergency Budget seems to have come in perhaps a little short of what some economists or foreign finance houses might have wished for, but at the top of what is currently politically sustainable domestically.
Although some economic commentators view the 2009 projections for tax receipts as still being too optimistic, overall the Budget appears to have been accepted internationally as a genuine and measured, if belated, effort by Ireland to address its public finances. Whether it works will depend to a large extent on the wider economic environment in which Ireland’s economy has to operate for the next few years.
This depends more on decisions made in Berlin, Washington or Beijing in the months to come than those made in Leinster House last week.
The abolition of the social welfare Christmas bonus payment is perhaps the most politically sensitive of the Budget announcements, which is why there were murmurs from all sides of the Dáil chamber when the Minister announced it. However, the fact that the cost of living is falling and actual cuts in social welfare rates were avoided – at least for the moment – will blunt some of its political impact.
Notwithstanding a new-found acceptance among many sectors of the electorate that tough measures are necessary, the income tax increases announced this week are certain to add to the Government’s political problems. In January, workers watched the first tranche of the new income levy come out of their pay packets. Those in the public sector saw another larger chunk of pay disappear when the pension levy was implemented in March. As a result, many workers may feel able to guess what further impact a doubling of the income levy will have on their take-home pay in May. However, the changes in cut-off points at which the different levy rates will apply is something they may not yet have appreciated.
Local and European elections are often described in academic literature as “second-order elections”, by which is meant that they are viewed by voters as less important, and attract lower turnouts.
The turnout in our last local and European elections in 2004 was comparable, however, to Dáil elections, and the results were shaped primarily by national rather than local factors or European issues. Voters felt they had been misled in the 2002 general election and were angry about the spending cuts introduced shortly afterwards. They turned out in 2004 in near record numbers for a local poll to deliver a severe mid-term rebuke to the Ahern-led government, resulting in Fine Gael winning more seats than Fianna Fáil in the European elections and coming close to being the largest party in local government.
If recent polling is anything to go by, voter anger, even before this Budget, is even more intense now than it was in 2004. Some individual Fianna Fáil incumbents may be buffered by their work rate and local record, and some new faces will manage to distance themselves from responsibility for national political action to some extent. Coming as they do just weeks after workers will have felt the full punch of this week’s Budget, these local and European elections are going to be more “national” than in 2004, and seem set to be another disaster for the main Government party.
Overall, however, it is those paragraphs in the Minister’s Budget speech dealing with banking rather than budgetary matters which are likely to have the most enduring political sequelae.
The policy announcement to establish a National Asset Management Agency (Nama) to acquire certain property and development loans of the banks has the potential to light a political fuse. As the country was still absorbing the scale of income deductions on Tuesday evening, business and economics reporters were struggling to understand and explain the banking initiative. However, the budgetary strategy would have had no credibility without a strategy to address the banking crisis. Its inclusion in the Budget speech serves to underline the extent to which getting out of our economic difficulties requires tackling our banking crisis in tandem with our public finances.
Since Tuesday, the Government has been behind the curve in trying to explain what Nama is to be and how much it will ultimately cost. It was always going to prove difficult for our political system to process this announcement. What is proposed is a large-scale, complex initiative designed to address an immediate problem with undetermined long-term consequences.
As illustrated by the debate on the Lisbon Treaty referendum last year, neither our political system nor our public debate generally absorb the long-term or the complex particularly well.
It is always easier to attack than to defend such proposals. There is always a temptation to engage in the type of populist rhetoric and scare-mongering in which some Opposition politicians and various pundits have engaged this week, over which some more informed economic commentators have rightly criticised them.
Explaining the Nama proposal and persuading people of its merits is one of the greatest communications challenges faced by Government, one made more difficult by the level of public anger directed at the banks and the uncertainty about future prospects for the economy generally and the property market in particular.
Unfortunately, doing nothing is not an option. Concerns about the level of toxic debt infecting our banks means that much of the international banking system is refusing to lend to them, and they in turn are unable to extend credit to businesses.
Solving our banking crisis will inevitably involve risk and will certainly require political courage, but unless we tackle the banking problem the additional pain inflicted by this week’s Budget will have been in vain.