Normally one would expect that a new government of a different stripe would blame its predecessor for all the economy’s ills, and then take urgent action to redress them before the voters forget whose fault it was that such tough medicine was needed. Early action also gives time for any popular upset at austerity measures to wear off before the next election.
All too often, however, incoming governments are hamstrung by commitments made during the election and thus fail to act swiftly or strategically in their own interest. Deferring corrective action is rarely in a country’s interest either.
The Irish experience of the 1980s, and again following the 2008 crash, is that taking action rapidly is much less painful economically. But even when a return to stability is well managed, as it was by the 2011-15 government, punishment generally follows at the subsequent election.
As Fianna Fáil and Fine Gael had been the backbone of the last two administrations, blaming the previous government was not an option for our recent budget. However, in taking the easy options now, that budget has left less scope for generosity towards the end of the Government’s term of office.
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The VAT cut for hospitality was a foolish election commitment that should not have been implemented.
But looking at our neighbours in the UK highlights how smoothly Irish budgets have been managed in recent years by comparison, even if the outcomes have not always been wise.
The Liz Truss budget of 2022 provoked an economic crisis. Despite a very weak fiscal position, she planned big tax cuts, ignoring the implications for UK indebtedness. The financial markets called time on her administration.
The Sunak government bought breathing space by kicking the can down the road for the incoming Labour government to fix. Labour inherited a serious economic and fiscal mess. However, in its first autumn budget, the party did a very bad job of pinning responsibility for the cutbacks required on the 14 years of Conservative mismanagement.
Initially the UK treasury planned significant cuts in expenditure, including welfare, to save money. However, this approach was badly thought out, and was totally unacceptable to many Labour MPs. The combination of climbdown and cutbacks was a political disaster, although the government had inherited the underlying fiscal problems.
[ Ireland dodged a bullet this year. But there’s a caveatOpens in new window ]
This year’s Reeves budget went somewhat more smoothly. However, it made the classic mistake for a relatively new government of postponing difficult decisions to later in its term of office.
The UK National Institute for Economic and Social Research estimates that the recent budget is mildly stimulatory, adding around 0.4 per cent to growth next year. However, taxes will need to increase in 2028 and 2029 to stem the rising tide of debt. In those two years, coming up to the next UK election, fiscal policy will be reducing UK growth by up to 0.4 per cent a year.
If the Liz Truss budget was a horror show, compared to the economic disaster of Brexit it was a minor upset.
Sometimes in the run-up to big decisions, forecasts of doom stemming from a particular choice may be exaggerated. However, 10 years after the Brexit referendum in the UK, it is clear that the economic consequences are even worse than predicted at the time.
In 2016, the IMF estimated that the cost to the UK of Brexit would be a loss of 4 per cent of GDP. Last month’s study by a respected US think tank, the Brookings Institute, estimates the actual loss of national income by the UK as a result of Brexit at around 6 per cent to 8 per cent. Employment and productivity are 3 per cent to 4 per cent lower than they would have been if the UK had stayed in the EU.
The Brookings study shows that the UK’s economic performance over the last decade has been exceptionally poor compared to most other countries. Those UK companies that relied on the EU market have performed much worse than other businesses.
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The new-found “freedom” outside the EU has not enabled the UK to replace lost EU markets with new opportunities elsewhere.
The loss of so much output and income means that the UK government is mired in debt, with a continuing large borrowing requirement.
While the UK’s current economic difficulties are due to Brexit, the Labour government feels unable to set the record straight – it doesn’t want to alienate Red Wall voters who backed Brexit. However, Keir Starmer is negotiating with the EU to reset the relationship, and moderate the costs of exit.
A thriving UK economy is important for Ireland – it remains a crucial market. We need Britain’s discussions with the EU to reach a successful conclusion.
