Economy in danger as Fine Gael and Fianna Fáil fight over budget

As Fine Gael and Fianna Fáil circle each other warily in the dying days of the confidence-and-supply arrangement with an election clearly on their minds, there is a real danger that the economic well-being of the country in the years ahead could be the victim of the tussle.

The exchange between Minister for Finance Paschal Donohoe and Fianna Fáil finance spokesman Michael McGrath earlier in the week over precisely how much money will be in the kitty for October’s budget is an early indication of how frayed relations between the two big parties are likely to become as budget day draws ever closer.

The next budget was supposed to be the first once since the crash in which the Government would have significant extra money to spend and virtually every interest group in the country has already staked out a claim for a slice of the €3.2 billion package.

Donohoe has tried to dampen expectations by saying that €2.6 billion of the total has already been accounted for in capital spending projects as well as day-to-day spending including public-service pay.

The Irish Times view on juries: a system that needs to adapt

---

The Irish Times view on Karl Marx: The communist manifested

---

A senseless downgrading

---

The Irish Times view on drug prices: Big Pharma’s hostages

---

Package size

On top of that, Fianna Fáil has questioned the basis of Donohoe’s calculations. That could be serious. Agreement between the Government and the main Opposition party about the amount of money that is available will be necessary if both are to honour the final part of their confidence-and-supply deal and get a third budget passed. Even if they can agree on the size of the package there is no guarantee they will be able to agree on how the money can be spent.

This political battle comes at a time when a number of economists have warned there is a real danger the country could enter a spiral that will bring us quickly back to the position we were in back just before the crash of 2008/2010.

The widely accepted view that the crash was caused solely by the banks has allowed politicians of all parties to shirk the fundamental truth

When the undoubtedly negative impact of Brexit and the international trade policies being pursued by US president Donald Trump are factored into the equation the outlook is even more dangerous.

The argument for a prudent budget is overwhelming but the political pressures in the other direction may prove impossible to resist given the pent-up pressure and level of expectation that has developed.

One of the problems is that the lessons of the crash were never fully absorbed at political level, never mind in consciousness of the public, and that means politicians find it hard to resist the temptation of repeating the mistakes of the past.

For instance, the widely accepted view that the crash was caused solely by the banks has allowed politicians of all parties to shirk the fundamental truth that “austerity” measures were necessitated by the fact that public spending and tax revenue went completely out of kilter.

On the spending side the rapid rise in public-service pay to unsustainable levels due to benchmarking was an important factor. This was accompanied by a narrowing of the tax base with almost half the workforce removed from the income tax net.

When tax revenue suddenly collapsed the money was simply not there to pay the public salary levels agreed and hence the emergency legislation to control the public pay bill and the rapid rise in income tax to help narrow the gap between revenue and expenditure.

While the banking collapse forced the country into the bailout and the long term addition to the national debt in the form of the promissory note, the “austerity” measures in the form of pay restraint and tax increases would have been required in any case.

What was truly remarkable about the “austerity” was not that it prompted considerable resentment, which it naturally did, but the fact that it was accepted without the kind of social conflict that happened in Greece.

"The pragmatism shown by the Irish public in accepting the need for severe fiscal correction was quite remarkable and it was this pragmatism that helped to ensure that fiscal stability, a necessary condition for the emergence of further economic growth, was quickly restored," writes economist Antoin Murphy, who co-wrote the definite book on the crash, in the current edition of Studies.

Union engagement

The grudging acceptance of the need to do whatever was required to prevent the economy going over the cliff edge and the constructive involvement of the trade union movement in devising the measures to keep the public-service pay bill under control were vital ingredients in the success of measures.

While the political battle continued unabated during the worst of the crisis the actions of the Fianna Fáil/Green Party government in doing what was necessary, regardless of the inevitable political cost and the subsequent behaviour of the Fine Gael/Labour Party coalition in continuing with the programme were critical.

When compared with the current irresponsible behaviour of the leading British politicians in the Brexit process our political class emerges with a lot of credit from the financial crisis.

That gives some grounds for hope that they will not allow themselves to fall back into the habits that led to the crash in the first place and will do the right thing in the months ahead.