Ahern, Cowen, The Economy and the Public Finances

The two areas of Irish life and politics, understood widely, that are likely to feel the fallout of Ahern’s announcement today are the Lisbon referendum - for a myriad of reasons, not least the implication an FF leadership race has for setting a date and the distraction from debate said provides - and the worsening economic climate. Today much other politics took place and perhaps it was one of the most post-worthy dates in a long time not considering Ahern’s move. HIQA’s report into the Rebecca O’Malley case, the launch of the Lisbon Treaty White Paper and the Exchequer figures for the first quarter are all incidents which give an indication of government in the years ahead.

Most affected by Ahern’s departure in the near term will be the Finance portfolio. Currently Brian Cowen is the unbackable 1-20 favourite to succeed Ahern and it is no surprise for he has been the anointed one for as long as Ahern was Taoiseach. Today the anointed one presented the quarterly exchequer figures for the first part of this year.

An Exchequer deficit of €354 million was recorded in the first quarter of 2008. To end March tax revenue was €600 million or 5.1 per cent behind the published profile…

The next key payment date for CGT is at the end of October. At this stage it is not expected that this tax shortfall, particularly in CGT, will be recouped later in the year. It is important to point out that I believe that the current situation is manageable given the strong position of the public finances such as our low debt to GDP ratio.

The deteriorating condition of public finances is something that will concern every single voter and worker in this country. For a decade the state has managed to twin the world of low-taxation with the world of increasing expenditure. The budget mathematics were narrowly dependent on construction and consumption to finance the increases in budgets enjoyed by Minister’s Hanafin, Harney et. al. This was premised on the availability of cheap money and credit as well as the belief that the asset would always rise in price. Since the construction went belly up in such a spectacularly predictable fashion (just ask Conor) we have begun to suffer a deterioration in our budget position.
Other factors are not helping, we are spending a lot of our money on basic goods as inflation remains stubbornly high both in Ireland and the wider Euro-zone and the ongoing rise in unemployment. However while the ECB focuses its attention on a German economy which may weather the worst of a US slowdown, our policy makers appear to feel powerless in the face of a US dollar worth almost €1.60. That exchange rate, and the interest disparaties likely to worsen it, only spell bad news for our Finance Minister.
Tough decisions need to be taken on the direction that the government moves for the coming four or five years of tighter times. We are locked into a National Development Plan, however the current Taoiseach’s love for Social Partnership may not be shared by the successor.
When if Cowen moves into Government Buildings, he moves out of Finance, stability in policy is lost in the sense that the hand on the tiller is changed. A new man needs to learn very quickly to avoid becoming a Darling-like figure. Cowen needs to be clear about the direction but also aware that he is not the Minister. This alters the dynamic and perhaps not in the best way. The resignation of Ahern at a time of political difficulty does have enormous knock on effects in the policy arena for it has guaranteed an impending reshuffle, distracted politicians and Ministers and a public that is left floundering to look after itself.

This may be a benefit or it may be a drawback but either way it is unavoidable, hope they are ready.