Government must win back voters, while maintaining confidence abroad

It was the year when the economy did better than might have been expected, but support for the Government kept falling. As the economic indicators went one way, the poll ratings for the Government parties went the other.

If anything, the divide between how our economy is seen overseas and how we see it at home widened even further in 2014. Internationally, we are the comeback economy. At home, people ask why they don’t feel any better off.

The Government is now trying to work out how to get the voters back onside – and the Opposition parties are fighting for support. As this pre-election battle gets underway in earnest, it is vital that the international confidence in us is not damaged. The turn in the international mood towards Ireland has been remarkable. International analysts and investors focus on an economy with growth resuming. The extraordinary inward flow of investment into Ireland continued right to the end of the year – notably via buying loans secured on commercial properties from Nama and the IBRC.

This has removed a significant risk from our economic future. There were fears of further holes appearing as Nama and the IBRC sold off assets. This now won’t happen. The next big test will be the start of the planned sale of the State’s stake in AIB, due next year, which will be a key factor in determining the final cost of the bank bailout.

Meanwhile, the Government is able to raise borrowings at historically low rates. At the worst of the bust, investors demanded more than 14 per cent to lend us long-term borrowings – which really means they didn’t want to lend money to us at all. Now ten years borrowings are available at a cost of about 1.5 per cent and while this partly reflects a collapse in interest rates across Europe – and implicit ECB support – it also shows that, in the mind of investors, we have ditched our junk status. These rock bottom interest rates will not continue forever. But the longer we can borrow money at this cost, the more we can lock in advantage for the future. The NTMA plans to raise up to €15 billion in new borrowings next year and for every one percentage point the interest rate rises, the extra cost to the state is €150 million a year, about equal to the net yield budgeted for water charges.

Hammered in polls

Internationally, it seems, the Government cannot do anything wrong. At home, it seems it can’t do anything right. More than enough ink has been spilled trying to assess the reasons for the public mood, but the fact can’t be disputed – the Government is getting hammered in every poll.

Voters are sore. Policies implemented by this Government and the previous one have cut people’s incomes by about 10 per cent on average since 2009, according to the ESRI. And while this total includes public sector pay cuts, it does not take account of private sector pay cuts, unemployment, health insurance costs and all the rest of the stuff which has hit people.

Some of these were sold in the height of the crisis as “emergency” measures. And they were. But they were the kind of emergency measures which stay in place, because the big hole that appeared in the public finances keeps needing to be filled.

The evidence that the economy is growing again is now compelling, despite the figures for GDP in the third quarter, which showed no growth on the previous three months. On pretty much every criterion we are ahead of what might have been expected at the start of the year – growth is stronger – albeit artificially boosted by multinational activity – Government borrowing is lower and unemployment is dropping.

The outlook for next year is for more of the same, though of course there are risks. The trouble for the Government is that more of the same doesn’t seem to be cutting it with the voters. The fact that the economy is recovering has raised people’s expectations, it seems. Will the public start to feel the impact of the recovery enough next year to calm their mood, or is the fall-off in support for this Government now irreversible? Already the Government is warming up to try to deliver “more” in next October’s budget – and maybe give us a hint of what is to come in the spring via a special “statement”.

Fight for political advantage

Meanwhile the Opposition parties and interest groups are calling for everything from fundamental changes to the USC, to the abolition of water charges, lower taxes, more spending and on and on. Some favour reneging on a large portion of our national debt. In the fight for political advantage to come, can the international mood towards Ireland be protected? At the moment, in the euro zone international attention is focused on Greece, where new elections are threatened. Ireland needs to stay out of the spotlight, keeping to its budget targets.

If trouble breaks out elsewhere in the euro zone, we need to give ourselves as good a chance as possible of avoiding getting caught up. In much of the current debate, international financial investors are dismissed as speculators and multinationals as tax dodgers. In fact, foreign confidence and capital is one of the bedrocks of the recovery. If we lose sight of this, we will pay for it. The challenge for the Government in the new year is to win back some political support at home, while maintaining confidence abroad.