The first duty of the incoming government is the same as ever – to protect the safety and security of its citizens. The second follows pretty close behind – to maintain the strength of the Irish economy and safeguard the prosperity that has increased living standards, disposable income and life expectancy, and also provide the resources to tackle (not quickly enough, many people would jump to say) social problems like the housing crisis, poverty and exclusion.
You can certainly argue that different policies should be adopted by the new government to address these problems. But you’ll find that all of them cost money. All those promises of investment in childcare and health and carers and infrastructure and all the rest – they all depend on continued economic prosperity.
And prosperity is not a given. Look to the UK, where the Labour government is grappling with an emerging crisis in its public finances.
One of the first canaries in the coal mine is always pressure on your bonds – the mechanism through which countries raise debt finance. When the bond markets think your economy is faltering and that therefore you are a bigger risk to lend to, they charge a higher interest rate, increasing your cost of borrowing.
Last week the cost of borrowing for the UK rose to its highest rate in 16 years – a movement on the markets that the Financial Times said “left the government scrambling to reassure investors over the state of the public finances”. Earlier this week the benchmark 10-year UK bonds were yielding an interest rate of more than 5 per cent; by contrast, the Irish rate at the time of writing is 2.8 per cent. You do the math, as the Americans say. One FT columnist noted, “When bond markets get sticky, it is unhelpful to be the ugliest horse in the glue factory.”
So how do you “reassure investors over the state of the public finances”? The British government has already raised taxes, and pledged not to do so again. Borrowing more is hardly the solution to high borrowing costs. So now Chancellor Rachel Reeves must cut spending more than she planned.
And as we know, cuts to government spending inevitably hurt the people who depend most on the State. Sure, everybody always says that they will seek to protect the most vulnerable. But it rarely works out that way, does it?
Older readers will need no reminding of what it looks like when the public finances go into a tailspin. After the economic crash of 2008-09 here, the total budget adjustment required to fix the public finances – ie bringing the State’s spending more or less into line with its revenues – would ultimately amount to about €32 billion, or 20 per cent of Ireland’s GDP at the time. It required massive tax increases and brutal spending cuts.
[ From the archive: The Crash – 10 years on: scars remain amid the recoveryOpens in new window ]
In his memoir of his time in government then, the former Labour leader and tánaiste Eamon Gilmore recalls realising that “every cut would have a direct impact on services” – but also understanding that they would have to be pushed through. And as social welfare, health and education accounted for more than 80 per cent of expenditure, that’s where most of the cuts would be made.
Almost nothing was off the agenda – child benefit, back-to-school allowances, disability payments, fuel allowance, community employment schemes and many other allowances, schemes and payments that benefited those most in need – they were all scalped. Taxes were hiked. Everyone suffered.
And beyond the lines of numbers in budget documents was a vast archipelago of human distress – lives blighted, relationships ruined, life chances sabotaged, emigration, distress, depression, ill-health, suicide. This is what happens to your people if you lose control of the public finances.
All this may seem like a different planet now. It is more than a decade since the end of age of austerity in Ireland, and budget surpluses are now the order of the day. The outgoing Government has been able to increase spending massively, cut taxes, save money – and still run giant surpluses.
But there is no law of men or nature that says this fortunate state of affairs will continue indefinitely; indeed, it would be astonishing if it did. Even aside from the clear and present danger posed by the imminent presidency of Donald Trump – and its threats of trade wars, tax reforms, international instability and disruption – the cycle of economic and political history suggests that Ireland will see less felicitous times in the future. It would be wise to prepare for that.
[ How will Donald Trump really impact Ireland?Opens in new window ]
But there is, in many quarters, a sense that the economy will look after itself – that constant growth and ever-burgeoning tax revenues are the natural state of affairs, rather than the product of a painful correction of the public finances after the crash, and the choice to embed ourselves in the US-led globalised economy. (As an aside at this point, remember all those demands that Ireland default on its debts back in 2010-2011? Do you think we’d be better off now?)
How do we protect our prosperity? By investing in infrastructure and in social capital. By keeping a tight rein on spending. By being nimble and clear-headed about our interests. And by having the political will to act when necessary.
The programme for government published this week contains some reasonably sensible aspirations about stimulating indigenous growth and protecting our economy, even if there isn’t exactly a great deal of detail there. To its credit, it also lays down some priorities in the event of an unexpected downturn in the public finances. And as one of its architects points out, there is now a political consensus on running surpluses.
But how firm is the commitment to fiscal discipline? Would it stand up if things got tough? I have my doubts. Let’s hope we don’t find out.
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