Pat Leahy: Another quiet victory for the Government’s axis of prudence

A very important battle has played out behind the scenes at the highest level of Government in recent weeks.

It hasn’t been fractious (not very, anyway) and it ended in a reasonable consensus, more or less contentedly supported by the people involved. But its conduct and resolution tells us important things: not just about the policies that will impact us all, but about how the leadership of the Government works, and how it is likely to conduct itself in advance of the next election. That will influence the election debate, and that in turn will have a strong bearing on how we are governed after that election happens. So this is all, I think, worth paying attention to.

Over the last three Mondays, accompanied by very many conversations on the margins, the three party leaders in the Coalition and the two budget ministers, Michael McGrath and Paschal Donohoe, have wrestled with the budgetary figures, and occasionally with each other (metaphorically speaking, I hope) to agree the budget parameters that were published as the summer economic statement this week.

That statement, approved by the Cabinet on Tuesday and published by the two ministers later that day, promised a decent-sized increase in spending next year, a modest tax package and to save – in a special fund to be outlined in the coming weeks – nearly all of the €12 billion or so corporation tax receipts that the Department of Finance regards as “windfall”, or unreliable.

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It passed off without much comment; the Opposition tends not to want to draw attention to the stellar economic record of the country. The Irish Fiscal Advisory Council – set up after the last crash to try to prevent repeats in the future – gave the Government a slap on the wrist. I assure you, they will get over it.

The statement came after intense debates between the three leaders, the budget ministers and a handful of their senior officials: the people who really constitute the political leadership of the country. The meetings began after three Fine Gael junior ministers wrote an op-ed article in the Irish Independent calling for tax cuts for middle Ireland, a call which was endorsed by the Taoiseach in a subsequent interview with The Irish Times, but which was not – significant, this – agreed with Donohoe, the Fine Gael minister who was actually involved in budget negotiations.

The tax package will be no bigger than last year and certainly not what many Fine Gaelers, stirred by the words of their leader, were hoping for. Add it to the low murmur of discontent that you hear from Fine Gael from time to time

It was intended – and was certainly interpreted by many of those present – as an attempt to roll the pitch in favour of tax cuts in advance of the talks. Judged by the outcome, it evidently did not work: the tax package will be no bigger than last year and certainly not what many Fine Gaelers, stirred by the words of their leader, were hoping for. Add it to the low murmur of discontent that you hear from Fine Gael from time to time.

Competing priorities

The Monday meetings soon established that there were lots of other competing priorities. They also demonstrated that when it comes to budget matters, the most important divisions in Government are not between the parties, but between the need for caution that McGrath and Donohoe advocate, and the desire for spending that nearly everybody else advocates.

It is too simplistic to characterise the debates as McGrath-Donohoe versus everyone else; but it is not wholly inaccurate either. In the event, the debates went round the house about the need to spend on this and that, the absolute requirement of Fine Gael for some tax cuts; the threat of inflation; the pressure from the Greens for additional climate action investment. But the two boys stuck to their guns. They started by insisting that the 5 per cent rule be kept (never realistic) and they conceded just over 6 per cent: by budget day, my guess will be a bit more plus a lot of one-offs. But even that is a qualified victory for them – no massive spending increases, no big tax cuts, lots of money thrown into the savings fund.

While there are many pressing needs in society, and an endless demand for public spending, the need to keep the public finances on a sustainable footing has never been greater

It means that the individual budget negotiations with the rest of the ministers will be fairly brutal. There will not be money for any more than what’s known as “ELS” – the existing level of service. There will be one-off sweeteners, but no big increases in spending to fund new initiatives.

At a time of such plenty, is this really wise, though?

Well, yes. Yes, it is. While there are many pressing needs in society, and an endless demand for public spending, the need to keep the public finances on a sustainable footing has never been greater.

Policymakers are fond of pointing to the recent past in this country as an example of mistakes we don’t want to repeat. Both Donohoe and McGrath talk about the formative political experiences they had as young politicians dealing with constituents who were at the sharp end of the era of austerity as guiding the cautious approach that has been the hallmark of their economic stewardship. And certainly anyone who lived through that firestorm won’t forget it in a hurry – even if some of them appear determined to ignore its lessons.

But there is another example of bad economic management to hand, too. As Cliff Taylor pointed out this week, the cost of borrowing for the UK is now vastly higher than for Ireland. UK two-year debt now runs at an interest rate of almost 5.7 per cent, the highest in more than two decades. Two-year Irish debt is around 3.25 per cent. In the bond markets, that’s a chasm. We don’t mention the bond markets nowadays because we don’t have to. But they sure talk about them in London.

The McGrath-Donohoe axis of prudence has emerged stronger this week. Under political pressure from within and without Government, they are reinforcing the cautious character of the country’s economic policy. It may well outlast them. If so, it wouldn’t be a bad legacy.