The latest in the series of harsh budgets has proved politically more acceptable than its predecessors, but the Coalition needs to tread warily because there are signs that the Irish public has taken about as much as pain as it can stand.
One of the peculiarities of democratic politics is that the howls of outrage from small, well-organised lobby groups can often have a far greater political impact than the mood of the broad mass of ordinary voters.
Since the best-off pensioners in the country managed to upset the late Brian Lenihan’s early attempt to get to grips with the financial crisis, Government TDs have trembled on budget day each year in the face of furious protests from the groups claiming to be worst affected.
This time around, TDs in both Government parties have been pleasantly surprised by the relatively low-key reaction. Phone calls of protest to their constituency offices have been nothing like as numerous as in the last two years and the protests outside the gates of Leinster House have been tiny.
Labour TDs in particular were hugely relieved on Tuesday to find they were not getting it in the neck to anything like the extent that they had to endure for the previous two budgets they implemented since taking office.
The range of adjustments in welfare and pension entitlements has, so far at least, not generated the kind of serious political controversy that emerged in previous years. For that Labour TDs are particularly grateful.
Almost everybody hit
However, TDs of both Government parties would be mistaken to assume everything in the garden is rosy. The distinctive characteristic of Budget 2014 is that almost everybody in society has taken another hit. In the long run that could prove far more dangerous to the Coalition than the outrage of any particularly lobby group, particularly if Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin have to go back to the well next year for more savings.
While Labour TDs may be relatively happy, it gradually dawned on Fine Gael deputies, as the week wore on, that their natural supporters are becoming exasperated and will not tolerate being hit again.
In particular, the cut in tax relief for health insurance, the draconian tax on savings and the latest raid on already stressed private pensions have pushed many of them to the limit.
“Our middle-class supporters have already been hammered by massive tax increases since 2008, so this attack on health insurance and pensions could be the last straw,” said one Dublin Fine Gael TD. “They are not howling at the gates of Leinster House but they are close to losing faith in us.”
Michael Noonan’s reference to “gold-plated” medical insurance policies struck entirely the wrong note because so many of those with relatively modest health insurance policies will be hit by the move. The decision is designed to raise €127 million in extra revenue and so will be hard to row back on without making corresponding cuts elsewhere. Both Coalition parties are committed to moving to a universal health insurance system, so this decision is bizarre as it will inevitably force many people out of private health insurance into the public system.
What baffles many Fine Gael TDs is why Noonan agreed to it while proceeding to introduce free GP care for all children aged five and under regardless of their parents’ income. It is a decision for which the Government will probably get little thanks in electoral terms and it will inevitably cost far more than the €36 million set aside in the budget.
The stimulus package element of the budget should help boost the increase in jobs that has developed over the past year. The package’s biggest element is the retention of the hospitality sector’s 9 per cent VAT rate, which will cost a massive €350 million in lost revenue. That could have eased a lot of pressure in other areas, so it better deliver the extra jobs.
There was some confusion after the budget as to whether the total adjustment package was €2.5 billion or the €3.1 billion originally planned in the deal with the EU-IMF troika but rejected by Tánaiste Eamon Gilmore during the summer.
Noonan, in his budget speech, referred to the two figures, saying the adjustment would come to a total of €3.1 billion but that the tax and spending cuts would amount to €2.5 billion. The other €600 million is to come from the carry-over from decisions taken last year.
Smoke and mirrors
There appears to be an element of smoke and mirrors in this. Gilmore was able to win a political victory by getting his Coalition partners to agree to less than €3.1 billion in cuts and tax increases but Noonan can point to that figure as the final total. The troika will hardly worry too much about how it is made up as long as the target is met.
The Coalition’s political fate now hangs on the growth forecast of 2 per cent for next year coming to pass. It is reckoned that each 1 per cent increase in growth will generate €1.6 billion in extra tax revenue, so if the forecast is correct the exchequer will have an extra €3.2 billion next year.
The total budget adjustment agreed with the troika for 2015 is €2.1 billion, so growth of 2 per cent would leave the Coalition with a modest surplus to dispose of. Growth of 2 per cent would also reduce the total level of debt as a percentage of gross domestic product. So if everything turns out as planned, budget 2015 would mark the end of austerity.
The problem is that growth has been less than forecast for the past two years and if there is any slippage then another tough budget will be required. That would have the capacity to really change the political dynamic.
