Public sector pay and monetary union key issues for new team

THERE will be much talk in the days ahead about the task of forming a stable government. Certainly a sure footed administration will be needed to tackle some key issues of economic management over the coming months.

Presuming Bertie Ahern is elected Taoiseach, his government will inherit a healthy economy from the Rainbow, but also a clutch of tricky problems and issues which will immediately occupy its time. It is no exaggeration to say that the decisions the next government takes in its early months will set the tone for its whole administration.

Two immediate problems will confront Mr Ahern's administration: the control of public sector pay and dealing with monetary union and currency policy. Beyond that Mr Ahern and his colleagues, will have little time to waste if they are to slow the growth in spending in time to deliver the promised tax cutting Budget due in November.

Nowhere would any long lasting political instability be more risky than in the financial markets, where international investors are watching developments in all the member states aiming to qualify for monetary union.

The pound has already been the subject of heavy selling pressure which has led to some upward pressure on interest rates. Mr Ahern and his colleagues will hope the Central Bank is not planning another interest rate rise to offset inflationary dangers, from the pound's fail against sterling.

Much will now depend on sterling's moves on the markets in the weeks ahead.

Investors are likely to take a watching brief on political developments. Market analysts say that what most would fear is a policy hiatus" caused by a period of prolonged negotiation on the formation of an administration or by a shaky government.

Provided Mr Ahern manages to form a government, investors will reckon that policy on most major issues will remain largely unchanged. While some may be aware of the Progressive Democrats cautious attitude towards monetary union, they will realise a government so dominated by Fianna Fail will still aim unequivocally for membership of the single currency and continue to respect the Maastricht criteria.

Once the negotiations on forming a government proceed smoothly, there should not be any reason for political events to cause short end instability in the markets. However, if sterling rises further in the few weeks before a government is formed, a difficult situation could yet arise, with interest rates under pressure and the outgoing administration presumably loath to take any policy action in its dying days.

In the longer term, any prolonged period of instability, could cause a negative reaction in the markets. After all, a key period lies ahead for the whole monetary union project. The government will quickly have to take a view oil the major issues which, remain to be negotiated ahead of the decision early next year on who will join.

Obviously, if the project goes off the rails completely or if a postponement comes on to the agenda - a whole new set of challenges will be posed. Meanwhile, the issue of Ireland's preparations must be tackled and the inevitable currency fluctuations negotiated.

An important task will be to deal with a clutch of public sector pay claims which have followed on from the nurses settlements. The paramedics have also been granted an increase and now prison officers and the gardai are signalling they are pressing for increases. Many others are watching from the wings.

It will not be easy for the new administration to hold the line, particularly as Fianna Fail will be keen to keep on side with the pub tic sector unions, which were deeply unhappy with, the Progressive, Democrats manifesto target of reducing employment by 25,000.

The new government will calculate that if it loses control of public sector pay, then a flood of pay claims could mean it has to abandon its spending targets from day one, leaving less scope for cutting taxes.

There will be little time to lose in starting work on the 1998 Budget, due to be delivered in November. Already Fianna Fail and the PDs have promised to introduce a 20 per cent tax rate on the first £2,000 of taxable income, widen the standard rate band considerably to ensure fewer people pay at the higher rate and to cut the top 48 per cent rate. A £2,000 tax allowance for married people with one spouse remaining at home - or who pay vouched expenses to a child minder - is also a firm commitment.

The semi state area has the potential to cause headaches. Fianna Fail has promised to negotiate with Telecom workers on giving them a 15 per cent stake in the company and Fianna Fail also indicated before the election that it would decide quickly whether to sell off the TSB bank.

The PDs are in favour of selling the TSB, as well as a range, of other State com panics, including the VHI and Cablelink. However, presumably Fianna Fail's traditionally cautious approach in this area will prevail.