Just weeks into its term of office, the economic challenges facing the new Government are starting to come into clearer focus. The boom is over and the economy is now moving into a new phase.
As this happens, fresh problems are emerging: pressure is coming on public-sector pay; the public finances appear to be lurching into deficit; inflationary pressures are pushing up prices and threatening competitiveness; and an uncertain international economic backdrop poses additional concerns about the outlook.
The Fianna Fáil/Progressive Democrat coalition benefited in its previous terms from the fruits of the economic boom. Surging economic growth led to strong exchequer surpluses while, until the last year or so, inflation remained subdued. Now it faces a much more difficult scenario.
Its first major test is the situation in the public finances. The Central Bank warned yesterday that the exchequer finances were moving into deficit and that the Republic could even breach the guidelines of the EU growth and stability pact this year. It said that the public would have to be satisfied with a more modest level of public services - or pay more tax.
This is a timely message, given that next Monday, the benchmarking finding on public-sector pay will be published. As reported, this recommends a range of increases for public servants and could add substantially to exchequer spending. Judgment on the merit of these awards will have to await study of the detail of the report.
Whatever the Government's response to the benchmarking report, however, it must not endanger the stability of the public finances. The half-year exchequer returns, due to be published next week, will provide a clearer picture, but so far the trend has seen spending ahead of target and revenue well below. There is a need for corrective action; the only question is how drastic it needs to be.
In terms of stability, the other main, and related, challenge facing the Government is to control inflation and thus maintain the competitiveness of the economy. The report from Forfás, the industrial policy agency, which estimates that the Republic is now the second most expensive place to live in the euro zone, should give the Government serious pause for thought.
One area of obvious attention is competition. Strong action is needed in a number of areas. The extent to which professional fees featured in the list of items showing unexpected increases over the euro changeover period will be of interest to the Competition Authority, which is conducting a wide-ranging examination of competitive practices in the legal and other professions. The Government may also wish to re-examine the Groceries Order and planning restrictions on large retail outlets, as well as the competitive environment in a range of other sectors.
The Government's response to benchmarking will also be important for the inflationary outlook. Care will be required to ensure that payments do not add to the existing spiral of wages and prices. Having had the money to be popular in its first term, the coalition may find the going a bit tougher this time around.