Cliff Taylor: Next taoiseach will have little leeway to curry voters’ favours

When Enda Kenny became taoiseach in March 2011 the outlook was bleak. A few months earlier, Ireland had entered an EU-IMF bailout programme necessary to avert national bankruptcy. The banking sector was in intensive care and unemployment had skyrocketed. The economy was on the floor.

On the face of it, his successor faces a much easier job. Growth is strong, unemployment is back to pre-crisis levels and the economic signals for the months ahead look reasonably bright.

But the irony is that, despite this buoyant backdrop, the next taoiseach may be taking over just as economic growth peaks – and with significant problems to be faced. Tax revenues in the early months of the year have been behind target and the scope in the October budget is going to be limited. Furthermore, hanging over everything is the threat of Brexit and the slowly dawning realisation of the huge economic damage which a hard Brexit could cause.

A different task

When Kenny took the reins in the dark days of 2011 he faced an altogether different task. Economic confidence was shot and the economy was being run by the troika – the European Commission, the IMF and the ECB. An early attempt by the new coalition between Fine Gael and Labour to get consensus to burn the bondholders – by imposing losses on senior lenders to Anglo Irish Bank and Irish Nationwide – was shot down by the ECB.

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Achieving success in this would not have transformed the State’s debt position, but it would have helped. And politically it would have been gold dust. Not doing so, having hinted it was possible during the general election campaign, was a significant early hit for Kenny and his ministers. The public impression was that nothing was really going to change.

It was quickly clear to the coalition that the only way forward was to dig in for a long battle. Kenny had some political cover – not having been in power when the bubble burst – which enabled him to “blame” the troika for some unpopular measures. Also, a chunk of the unpopular work on tax hikes and spending cuts, including the introduction of the USC, had already been done.

The tactics pursued by Kenny and Minister for Finance Michael Noonan were to keep the head down, get Ireland out of the headlines and get on with it. Having been knocked back on the bondholders issue, the State got some negotiating " wins": improving the initially onerous bailout terms on a number of occasions and, early in 2013, getting grudging ECB approval to restructure the promissory notes used to bail out Anglo Irish Bank and Irish Nationwide.

These moves cut the initial cost to the exchequer of repaying the bailout costs and the price of the banking collapse. At the same time, growth was picking up internationally and the Irish economy was starting to bounce back. While it didn’t feel like it at the time, the turning point in growth came some time in 2012.

In turn, this boosted tax revenues and conservative budget forecasts allowed Ireland to beat its budget goals each year. Moving into 2013, the patient was starting to show signs of recovery.

Defining moment

Slowly, confidence returned in the international bond markets and Ireland was able to start borrowing again and to exit the bailout at the end of 2013. While controversy will rage for years to come on the policies Ireland signed up to during the bailout, getting out from under the control of the troika at the end of 2013 was a significant victory for Kenny and the defining moment of that coalition government.

When Kenny became Taoiseach, there was already talk of a second bailout being needed and dark warnings about further losses hidden deep in the Irish banking system. You could argue that the coalition did not have a lot of choice in its economic approach – and that the international pick-up and the calming of euro tensions was a key factor. And both these things are true. But regaining economic independence was far from a foregone conclusion when Kenny took office.

It remains a major bugbear of members of that coalition that they felt they never got the credit they deserved for working their way through the bailout and out the far side. In their early period in power, in particular, the financial system remained under significant strain and success was not guaranteed. It could all have gone from bad to worse, but it didn’t.

The approach of playing by the rules and meeting all the targets worked economically, but ironically it also had a political cost, especially for a coalition whose election platform was that it would stand up to Europe.

This was a particular issue for Labour, with its “Labour’s way or Frankfurt’s way” election rhetoric – particularly as the ECB was seen to have won on the politically toxic bondholder issue. The public were still stung by the bank bailout as well as the huge hits to their living standards, and were getting ready to bite back.

If the coalition felt under-appreciated for getting Ireland out of the bailout, the political reaction to its economic policies was only to get worse. Apparently lacking some direction after leaving the bailout, the coalition got hammered in the row over water charges, controversy surrounding IBRC and the general kick-back against austerity.

Despite steady economic growth, the 2016 general election saw Fine Gael hit and Labour hammered. The resulting “new politics” produced an unprecedented political line-up and a budget that introduced modest further tax cuts and spending increases, with new spending funded in particular by a surge in corporation tax receipts.

The trouble for the next taoiseach is that Budget 2018 will not allow any significant leeway to curry favour with the voters. In fact, given existing spending commitments, the initial indicators are that the scope for extra spending and tax cuts will be limited. The Government will hope that, like every year recently, overperforming tax revenues will provide room for a bit more largesse. But sluggish tax receipts in the early months of the year have put this in doubt and, at worst, could remove room for manoeuvre completely come October.

Budget leeway

So the difficult economic message for the new taoiseach to sell is that this may be as good as it gets in terms of the tax we pay and what it funds. If we want more, we will have to pay for it via tax. In theory, if the economic winds stay favourable, EU budget rules would give us a bit more budget leeway from 2018 on. In practice, this is based on economic growth forecasts which are now in danger because of Brexit.

The second difficult economic message for the new taoiseach is to find a way of dealing with this uncertainty. Brexit could be a big economic hit. Or, if a decent trade deal is done between Britain and the EU, it could be tricky, but not too bad. For Ireland, there is a world of a difference between a hard and soft Brexit. Planning for this, and communicating it politically, will be at least as tricky a task as plotting the path out of the bailout.