Stark reality requires savage cuts and years of austerity
15 November 2009The enormous reversal in Ireland’s economic fortunes since 2007 has caused huge distress to voters. Some have lost jobs, most have faced loss of income and all of us face increased uncertainty.
For those who own their own homes, there has been, at best, a large drop in the value of the equity in their houses and, at worst, a drop in to negative equity. The fear that people may lose their jobs and their homes is now real and widespread.
These massive economic changes have led directly to a massive change in our political landscape as support for Fianna Fáil has collapsed while support for the main opposition parties has risen. According to The Sunday Business Post/Red C polls, FF support has dropped from 42 per cent at the last general election to just 24 per cent.
Meanwhile, support for Fine Gael has jumped from 27 per cent to 35 per cent while Labour’s popularity has jumped from 10 per cent to 18 per cent.
The sweeping gains of FG and Labour at this summer’s local and European elections confirm that those parties’ opinion poll gains are substantive rather than merely a passing phenomenon.
Political insiders are now firmly of the view that only a miracle could cause the reelection of the current FF/ Green government led by Brian Cowen. That means that Enda Kenny looks set to be our next taoiseach, with Eamon Gilmore as his tánaiste.
But what sort of government would a Kenny/Gilmore combination offer? That important question is hard to answer. The two parties appeal to different constituencies and it is unclear how their separate directions would be reconciled in government. Fine Gael’s rural and middleclass roots often point in a different direction to Labour’s metropolitan and public sector instincts.
Under the pressures of the budgetary crisis of the 1980s, the divergent instincts of the two parties initially paralysed Garret FitzGerald’s 1982-1987 government before eventually causing its premature end as Labour walked out in the face of a difficult budget. How would a Kenny/Gilmore combination cope under today’s, much greater, budgetary pressures?
What is clear is that a lot of the two parties’ recent policy stances could not cope with even a glancing meeting with reality.
Recent assertions by FG and Labour that cuts in welfare are off limits, that free medical cards for our elderly are affordable, that the minimum wage should remain untouched, that low and average rates of public sector pay should remain sacrosanct all make for good politics.
They imply that such measures are not needed and are merely a product of FF capriciousness and heavy-handedness. But what may make for good politics ignores economic reality.
That reality is stark: the government plans to spend about €55 billion this year and it looks like the government will take in tax revenues of about €32 billion: an astonishing 40 per cent of total public spending is being borrowed. Put it another way: for every person in employment, the government is borrowing a whopping €12,000 this year.
There are three ways we can reduce that horrendous deficit.
Firstly, we can grow our way back to higher tax revenues.
But it would be unwise to bet on high growth, given the weakened state of the global economy and Ireland’s lack of cost competitiveness (although that’s improving fast).
Secondly, we can tax our way back to higher tax revenues.
But marginal tax rates are already high, and the share of the total tax take paid by high earners is enormous.
True, as FitzGerald argues, there is scope for considerable increase in the taxation of average income earners who still pay low rates of income tax compared to our European neighbours. But that would be deeply unpopular.
Finally, we can cut spending. But, as the public sector pay bill and welfare payments together account for about 70 per cent of current government spending, that too would be deeply unpopular.
The bottom line is that the Irish state has pretty much run out of low-pain policy options. It is left having to implement savage spending cuts, not because it wants to, but because it has to.
That is true for the current FF-led government. It would still be true if we had an FG led government.
Cowen’s challenge to the opposition leaders this week that they indicate how they would adjust the budget by €4 billion is an attempt by him to level the political playing field.
Having been cast in the role of the Grinch that stole Christmas, Cowen would like his electoral rivals, Kenny and Gilmore, to play the role for a while. But why should they? It’s the government’s job to govern. It’s the opposition’s job to oppose.
The key question is not whether Kenny and Gilmore have an austerity plan for this year’s budget. It is whether, once elected, they would have the guts for several years of austerity in government.
Having got the Lisbon Treaty passed, with Nama passed by the Oireachtas and with Budget 2010 preparations now well under way, Cowen’s gambit this week puts that question centre-stage.
Having done his governmental homework, Cowen is now free to return to the sort of tough, bruising political encounter he likes best.