The challenge of the great unknowns in the pandemic and the political mood

The new Government faces even greater difficulties than the last one to inherit such a dire scenario back in 2011, writes Dan O’Brien

‘DUBLIN’S way or Frankfurt’s way’. These were the fighting words of the man who was about to become Tanaiste — Eamon Gilmore — in the depths of the last economic fiasco in early 2011. The man who is now Tanaiste, Leo Varadkar, said around the same time while he was still in opposition that not another ‘red cent’ of taxpayers’ money would go to propping up companies, in that case banks.

The Fine Gael-Labour government which took the reins of power almost a decade ago presided over the turning around of the economy within two years. One suspects that if those now settling into new ministerial positions were given a twoyear time-frame for recovery, they would bite the offerer’s arm off.

They will face some of the same challenges that were faced then, including around bailing out private companies with billions of euro borrowed on behalf of taxpayers. However grim things were in 2011, after three years of grinding recession, the then government faced a much easier job in most respects than does the new three-party coalition.

First, there is the chronic uncertainty. Nobody knows how the health emergency will play out in the short term — between now and the height of the normal flu season in eight months. Although the data on the virus from around the world, and from Europe in particular, have remained largely positive over the past week, there have been exceptions. It is to be hoped that the exceptions do not become the global norm.

The new Government also faces a more challenging political environment than its 2011 predecessor. The coalition has a slender majority in the Dail of four seats. The Fine Gael-Labour coalition of nine years ago enjoyed a stonking 30-seat majority. But it is not just the parliamentary arithmetic that is less favourable. The political mood could hardly be more different, and more febrile.

A year ago, Fianna Fail and Fine Gael were by far the best supported parties in the local and European elections. Sinn Fein had a disastrous poll, suffering a loss of support of around 40pc on the same elections five years earlier. The party performed so badly that its preparations for this year’s general election were focused mainly on damage limitation. To the surprise of Sinn Fein, and everyone else, the party’s support surged in last February’s general election.

Nobody can say for sure what is happening in Irish politics — if political analysts know what is going on, they would have predicted the election results both this year and last year. Nobody did. Nor has anyone plausibly explained why Sinn Fein went from doing so badly last year to becoming the best supported party this year, least of all Sinn Fein itself. Part of the explanation must be the sort of anger that a significant chunk of voters feel across the democratic world towards traditional mainstream politics. One of the great unknowables of the pandemic, in Ireland and elsewhere, will be whether it cools the fury that has driven support for those who claim that ‘the establishment’ and ‘elites’ are conspiring against the ‘average Joe’ struggling to get by.

The general perception in Ireland that the pandemic has been handled well and that the health system — a source of anger in the last election — has not been exposed as “Third World” could relegitimise the centre ground.

Central to political perceptions of the new Government will be the economy. When Enda Kenny became Taoiseach in March 2011, the unemployment rate was 13pc. As Micheal Martin takes the top job in Irish politics, he inherits a jobless rate of 22pc, higher than any previous Taoiseach over almost a century.

How the economy evolves will determine the resources the Government has to address many of the Covid and non-Covid challenges it faces (even if it should be stressed that more spending is certainly not the solution to every problem, as is so often the underlying assumption of Irish political discourse). Last Thursday afternoon, government revenue and spending figures for the first half of the year were published. They predictably showed soaring expenditure, most accounted for by more welfare spending, with health costs adding a much smaller amount to the pandemic bill.

These costs should be manageable in the short term. One thing that will be central in determining how long massive spending increases can be sustained is how much money flows into the government’s coffers. Big recessions usually crush tax receipts.

In the second quarter of the year — covering April, May and June, the worst months of the pandemic — consumption taxes were around one third lower than the same period in 2019. Hardly surprising VAT and excise duties were so badly affected when the country became a ghost town.

More surprising is how seemingly little effect the shock to employment had on personal income tax. In percentage terms, income tax and PRSI revenues combined declined in mere single digits in the second quarter of this year compared to the same period last year. Much of that is because the low paid, who have been hardest hit by the pandemic, pay little personal tax, a long-standing feature of the Irish system.

Another reason is that a chunk of the wage subsidies being paid for by the Government are being taken back in tax. Moving money around like this may mask the scale of the hit to come on the biggest by far source of revenue for the Government.

The biggest surprise in the revenue figures was profit tax. In the second quarter alone, €5bn was paid over by companies on their profits, more than was paid in entire years not so long ago and a massive one-third annual increase.

Profits usually collapse in deep recessions, causing tax revenues from them to fall more sharply than most other taxes. But as Irish profit tax receipts have become as unpredictable as the Irish electorate in recent years, they may buck the traditional trend. That would give the new Government a cushion.

An even more important cushion will be the different dynamic in the relationship between Dublin and Frankfurt, and a much more growth-friendly European Central Bank. In this regard, the Government is in a better position than the Kenny-Gilmore administration, which faced immediate strains with the ECB, then a member of the troika which was overseeing Ireland’s bailout. In 2011, the ECB also made one of the clearest mistakes in its history when it prematurely increased interest rates while the European economy was still on its knees.

Since mid-March, the ECB has been almost unrecognisable from 2011. It has been in full-on emergency mode, acting like other peer central banks and using its balance sheet to indirectly fund spending across the single currency area.

An Irish man, Philip Lane, is one of six core decision-makers. He is also the institution’s chief economist. While those holding these positions are duty-bound to act in the interests of the single currency bloc, nobody can erase their backgrounds. “The country I know best” is euro-jargon for one’s country of origin. It will comfort members of the new Government that the country the ECB’s chief economist knows best is the one they will try to guide back to health.

‘Since mid-March the ECB has been almost unrecognisable from 2011’