The toughest political battles may yet be fought within the Government

With the Dáil off for what our legal confreres call the “short vacation”, the Taoiseach gambolling about Strasbourg for the early part of the week, everyone watching the ongoing Westminster pantomime with a sort of horrified fascination and a light Cabinet agenda on Thursday, there was a bit of a lull in the political temperature this week.

But recent days still showed us what the defining political issue will be for the rest of the year. How the Government deals with it will define much of its political fortunes during that time and afterward. No prizes for guessing: it’s the cost of living.

The Central Statistics Office reported on Thursday that inflation was running at nearly 8 per cent, the highest for 40 years. Consequently growth forecasts are tumbling. Moreover, the outlook is for this unhappy cocktail to continue for the medium-term future, raising the dread prospect of stagflation – where inflation is rampant but incomes are not growing. Inevitably the European Central Bank signalled that it will increase interest rates in July by a quarter point, with a likely further half-point increase in September. More rate rises will probably follow, economists say.

The end of the era of ultra-low interest rates is hardly a surprise to anyone who has being paying attention, but its political consequences will be profound. Nothing will have a bigger impact on politics than the squeeze on incomes and the rising cost of living.

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Paschal Donohoe gave notice on Friday that the days of unlimited spending financed by Covid-facilitated borrowing are well and truly over. But Donohoe and his Fianna Fáil wingman, Minister for Public Expenditure Michael McGrath, will have their work cut out to resist pressure from within Government for a further pre-summer package of cost-of-living supports, never mind imposing meaningful fiscal discipline on the budget process for the first time in three years when push comes to shove in the autumn.

With Fine Gael leader Leo Varadkar this week signalling an intention to revive one of his old hits – the people who get up early in the morning – the toughest political battles may yet be fought within the Government.

Until now political pressures on the Coalition have been eased by throwing borrowed cash around like snuff at a wake – but the changing economic environment means that option is greatly constrained. In addition to the challenges of helping people hammered by rising costs, Ministers face pressing demands for resources from sources that cannot, for political reasons, be long-fingered.

Next week formal talks on a new public sector pay deal get under way; each percentage point of an increase (beyond the currently committed 1 per cent in October) costs €250 million a year. At recent conferences public sector workers were seeking increases in the region of 8-10 per cent; even half that would be a massive fiscal headache.

The Government is committed to a step change in funding for the military that will cost a few hundred million a year at an absolute minimum. And the cost of climate mitigation measures – the fundamental bargain that grounds the Coalition and without which the Government would fall apart – over the next decade is best measured in the tens of billions.

As a result, reaching decisions on tax and spending – and these are always the most difficult things governments do, and through which, above all else, they express their will and their political project – is going to become increasingly difficult. There is an acute awareness of this in the senior decision-making levels in Government but not so much lower down the political food chain. Lots of people have no idea just how scratchy this is going to become.

The new environment also presents decisions for Opposition parties. Will they simply wail for the endless throwing of more money at multifarious needs – the usual approach – or will they seek to sketch out a response that could conceivably form a basis for an alternative and more effective government policy? Demanding more money for everything is the traditional privilege of opposition parties. But it is not one that stands up to much scrutiny when the time comes to choose a new government.

First test this weekend is for the Social Democrats, who gather on Saturday in Dublin for their annual conference. Since its foundation in 2015 the party has successfully established itself in its niche, and had a relatively successful election in 2020, securing 3 per cent of the vote and six seats. But like all small parties it lives on the electoral margins; most of its seats could be in danger in the next election. It will be in especial danger from Sinn Féin second candidates should the anticipated swing to that party materialise.

While the party has sustained itself it has been at best a bit-player in Irish politics, notwithstanding the effectiveness of some of its individual TDs on occasion. It has ducked out of two rounds of government formation, in 2016 and in 2020. Repeating that manoeuvre next time out would be to invite irrelevance.

Personal antipathies more than policy or politics have prevented any alliance with the Labour Party; there is no sign that the regime change in Labour will thaw relations. This is petty and counterproductive; the potential for a red-green force of 20-25 TDs to be the kingmakers between Fianna Fáil-Fine Gael and Sinn Féin after the next election is obvious.

As a parliament the Dáil is unusual because of the relatively high number of its members who don’t really want to be in power – they prefer the ease of media commentary and performative parliamentary outrage rather than getting their hands dirty with the responsibility of decision-making.

It would be a pity to see the Social Democrats settle for a role on the sidelines. Far better that the party should spend the weekend figuring out who they might go into government with, what would be their price, and - crucially - how they might make that happen.