S&P says election could mean ‘more relaxed’ budgetary stance

The general election outcome is likely to lead to a “more relaxed” budgetary stance with greater public spending but will not, for now, affect the State’s suitability for investment, ratings agency S&P has said.

The result of Saturday’s election left Sinn Féin, Fianna Fáil, and Fine Gael as the three biggest parties with an almost equal share of seats. For a government to have a majority, it is almost certain at least two of the three parties will have to form a coalition with others.

S&P Global Ratings said on Tuesday that the “unprecedented fragmentation” of the popular vote may result in a shift in terms of government policies. This could include “a more relaxed budgetary stance, despite still-high public debt”, it noted.

“The process of forming a government is likely to be protracted, and a further election cannot be ruled out,” it continued. “At this stage, the outcome of the election has no immediate effect on our sovereign credit ratings on Ireland (AA-/Stable/A-1+).”

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The agency pointed out that population pressures on Ireland’s limited housing supply and public healthcare system had dominated the pre-election campaign.

Public spending

“In response, the next Irish government may choose to relax its budgetary stance by raising public spending on investment and for social needs, without introducing offsetting revenue-side measures,” the agency said.

“Weak inflationary pressures and the European Central Bank’s monetary stance mean that currently negative real interest rates across the whole of Ireland’s yield curve are likely to remain, even if public deficits increase.

“Nevertheless, we anticipate that any fiscal loosening would be gradual and modest, and compliant with the EU’s Stability and Growth Pact.”

S&P also said it does not foresee any “significant revisions” to the State’s corporate tax regime.

It pointed out that the regime – alongside the State’s EU membership, common law legal system, and history of enforcing contracts and protecting property rights – has proven “an irresistible draw” for foreign multinationals, particularly from the US.

“Irish growth and employment outcomes continue to rank among the strongest in the developed world,” it said.

However, the agency said it was projecting a “marked slowdown” in GDP growth toward 3 per cent on average between 2020 and 2022.

This, it said, reflects “the risk that Ireland’s second most important trading partner, the UK, departs the customs union and single market at the end of this year, without a trade agreement with the EU”.