Dealing with bad economic news

Economic growth appears to be shrinking before the eyes of whatever combination of political parties will form the new government…

Economic growth appears to be shrinking before the eyes of whatever combination of political parties will form the new government. Figures released on Tuesday showed that tax revenues in May had fallen below expectations for the first time since October 2003. A day later the European Central Bank (ECB) implemented its eighth successive rate hike since 2005 and - in its regular survey of the mortgage market - the Irish Bankers' Federation reported new mortgages falling in the first quarter compared with the same period of 2006.

The chain of causes and consequences came full circle yesterday as the latest Consumer Price Index (CPI) showed the annual rate of inflation - the bugbear of the ECB - at 5 per cent in May. It has been close to this rate since last December. Designed to curb inflation in the short run, the latest interest rates rise, together with two more predicted by financial markets, may prevent the new government from reaching the 4 per cent target rate for inflation this year on which the current partnership agreement is based.

The absence of such economic information prior to polling day created enough ambiguity to allow all political parties to get away with optimistic forecasts. This facilitated an election debate focused largely on who was most competent to manage the economy rather than how it has been managed. Because house price falls, slowing revenue growth and rising inflation did not come from nowhere. Although influenced by external factors, they were significantly affected by a whole swathe of policy choices made by the outgoing administration.

By allowing credit to expand rapidly and administered prices and indirect taxes to rise, the Coalition made a direct contribution to an inflation rate that is now among the highest in the OECD, never mind the EU. Having leaned heavily on the property market for revenue, it now finds that the goose has stopped laying golden eggs. And by limiting stamp duty reform to first time buyers, it is faced with considerable uncertainty and much lower activity in a second hand market that dominates the housing sector.

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The outgoing Government - and Fianna Fáil in particular - is fortunate that, as was the case in 2002, bad economic news emerged after, and not before, polling day. But its luck ends there. Unlike 2002 the scope to base growth on increased personal borrowing is gone. Interest rates were falling five years ago but are rising now.

Against this background, Siptu is challenging the Government and its successor to bring forward talks on a new pay agreement. And the Irish Congress of Trade Unions is seeking an increase in mortgage interest relief or a reduction in VAT. For trade union leaders who have agreed to keep their members' annual pay increases close to 4 per cent, the present inflation rate is in the words of Siptu's Jack O'Connor "unacceptably high".

If Fianna Fáil succeeds in forming a new government, its task will be to clean up a mess of its own making.