It is possible that practically every economist is wrong, and also maybe the investors who make up the world’s financial markets are also wrong. Maybe the overwhelming majority of academics, trade experts, statesmen and women, politicians, officials, advisers, analysts and commentators familiar with global economics and trade relations are wrong.
“It’s the maddest thing anyone’s ever seen in economic policy by a major economic power,” said the celebrated historian Adam Tooze. But what does he know? And, of course, the markets themselves, which have lost trillions of dollars in value, could be wrong.
All this is possible. But it seems very unlikely.
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In the first analysis, an economic slowdown. That will mean pressure on the exchequer. And that will mean, potentially, a very different political outlook.
What will not be clear for some time is how deep the effects will be. The tariffs announced by Trump on Wednesday were more or less along expected lines, slapping a 20 per cent surcharge on all EU exports to the US. There is nothing on pharmaceuticals for now, but that will almost certainly come.
Two further developments will exacerbate the situation.
First, this may be only the start of the Trump administration’s efforts to bring US companies and their profits home to the US. Potential changes to tax laws could mean that it no longer makes sense for US companies either to manufacture or to pay their taxes here.
Then there is the European response to the tariffs. For now, the European reaction will be to threaten retaliation in a few weeks, but in the meantime, to seek negotiations with the US.
There is no more toxic a word in the Irish political lexicon than ‘austerity’. The years of austerity completely remade Irish politics
But it is not clear if the US is amenable to negotiations just now. If not, the EU will strike back, on the basis that Trump respects only strength. That is the path to a full-scale trade war.
But the economic fallout for Ireland could be enormous. Even on an optimistic projection of how all this affects the Irish exchequer, it seems inevitable that the days of money flooding into the Government’s coffers at a rate that delighted and amazed the mandarins of Merrion Street are over.
In recent years, cautious finance officials were in the habit of downplaying the health of the exchequer finances because they were afraid that politicians would lose the run of themselves. This fear may have been slightly undemocratic. But it was certainly well-grounded.
The mandarins would, their joke went, hide money down the back of the couch in the Department of Finance so that the politicians couldn’t find it. One official once joked to me that there was so much money stuffed down the back of the cushions that the metaphorical piece of furniture was now more money than couch.
But now the task of those finance officials will change from hiding money from their political masters to finding it for them.
How much? Projections as to what the budgetary implications of a trade war would be are sketchy. But the Department of Finance has been in the habit in recent years of warning that about half of the corporation tax revenues could be “windfall” in nature – that is, they could not be relied upon to continue.
For these warnings, the department was often accused of being the boy who cried wolf – its accusers rather forgetting that in the fable, the wolf actually turned up in the end.
Well, the wolf is here now. What if half of the corporation tax disappears? Maybe not this year but over the next couple of years. That’s €14 billion, going on last year’s figures.
That’s the economics. What about the politics?
If demographics are the tectonic plates underneath the shifting landscape of politics, then economic trends often make the weather above it.
And the political weather is about to get very stormy. The vast majority of our political debate consists of demands directed at the Government to spend more money. The Government should have spent more money, should be spending more money now, must spend more money in the future.
Since the post-crash recovery, and the long corporation tax boom that followed it, successive governments have expanded budgets at an eye-watering rate. In the years since 2016, when Fine Gael returned to government, facilitated by Fianna Fáil through the confidence and supply agreement, public spending has almost doubled, from about €55 billion to about €105 billion.
The past three years have seen budget day packages of more than €10 billion each, with several billion of that showered on voters in the shape of thrice-repeated “once-off” giveaways. Those days could be over.
There is no more toxic a word in the Irish political lexicon than “austerity”. Never mind that it simply meant reducing spending so that the country could live within its means. Never mind that its opponents had no alternative except defaulting on Ireland’s debts. Never mind that events would prove them wrong – the potency of the charge remains. The years of austerity completely remade Irish politics.
No government wants to implement austerity but some find they have no choice. If the Coalition finds itself in a position where austerity becomes unavoidable, it will almost certainly be destroyed.
