INSIDE POLITICS:The Government may be psychologically incapable of recognising the scale of the crisis facing the economy
BRIAN COWEN handled the first phase of his transition to leadership last Wednesday in an assured fashion. It bodes well for the handover of power in less than a month but the true test of his mettle will only come after his elevation to the taoiseach's office on May 7th when the real work of government will begin.
There are difficult days ahead for the new taoiseach. Unlike Bertie Ahern - who took over at a time when the State coffers were bulging, thanks to the prudence of John Bruton's rainbow government, and the Celtic Tiger economy was already up and roaring - Cowen will take over at a time when all the vital economic indications are going the other way.
The housing boom is over, tax revenues are down, inflation is up and so is unemployment. The fundamental question is whether the incoming taoiseach has the resolve to tackle the problems, as well as the political skill to persuade the country to accept the kind of tough medicine required.
The trouble is that Cowen is a senior member of the Government whose increasing complacency over the past few years has contributed to the current problems. While he obviously has no control over deteriorating international conditions, many of our current domestic woes can be laid at the door of the Minister for Finance.
The over-reliance on the construction industry, and the various tax incentives that helped to propel the housing market to clearly unsustainable levels, was an avoidable mistake. What is worrying is that he does not appear to accept that there was a problem in the first place and he is still warning against talking the economy down, as if talking could make any real difference.
One of the fundamental problems is that property prices were boosted out of control and the only question now is how far they are going to fall.
The Government itself staked a lot on the continuation of the property boom and the fall in tax revenues is a reflection of how it had still failed to come to terms with reality as late as last December. Tax revenues for the first three months of the year are €600 million less than projected and for the full year, a shortfall of at least €1 billion is likely.
Given that Cowen had already budgeted for a €3 billion deficit, compared to a surplus the previous year, the rapid turn around in the nation's financial position is extremely worrying. In his budget speech, Cowen projected growth of 3 per cent, inflation of 2.4 per cent and more jobs this year. The reality is that growth may be close to zero, inflation is already running at 5 per cent and unemployment is rising more rapidly than at any time since the 1980s.
One of the ironies about the last election is that the Government, and Cowen in particular, convinced the electorate that they were far better equipped to deal with the economy than Fine Gael and Labour. While we will never know how the alternative would have coped with the mounting economic problems, the real danger is that the Government may be psychologically incapable of recognising the scale of the crisis.
All Governments are inclined to interpret the future in the light of recent past experience. Hence the relatively benign outlook in December's Budget, despite the fact that storm clouds were gathering from all directions.
It was the same syndrome that prompted the rainbow government to leave some money in the coffers in 1997, even though it had the resources to open the throttle and spend in election year. Politicians and officials, still traumatised by the depression of the 1980s, were predisposed to prudence. They were psychologically incapable of letting it rip, despite wonderfully positive economic indicators, never mind the political imperative of fighting an election.
This time around, the danger is that the Government may not be able to shake itself free of the habits developed during the good times and prove incapable of showing the resolve necessary to administer tough medicine to an electorate not used to such treatment. Having placated one sectional interest group after another during the boom, facing them all down now is not going to be easy. Social partnership has been a cornerstone of policy for two decades but, unless there is a return to the realism displayed in the period after 1987, it could become a millstone around the Government's neck.
The composition of Cowen's cabinet will be crucial. He skilfully managed to squash speculation about his intentions, but the appointment of his minister for finance will be critical. The vital attribute of the person who goes to Merrion Street will be an ability to stand up to all his cabinet colleagues, and if necessary, the taoiseach himself.
One of the reasons the Haughey government of 1987 to 1989 was so successful in getting to grips with the country's debt problems was that Ray MacSharry brought a single-minded determination to Finance. He told all his colleagues, including Charles Haughey, where to get off, as he drove through a range of swingeing spending cuts.
The public response was interesting. Mr MacSharry attracted huge public respect for his approach and suffered no backlash in terms of popularity.
However, the line ministers who had to implement the cuts, such as Rory O'Hanlon in Health and Mary O'Rourke in Education, took the brunt of the negative public reaction. The strong nerves displayed at that time are required again.