Government faces arduous second-half term

Assuming we are in a normal political cycle, the Government is now roughly halfway through its term of office and attention will soon focus on an election that is scheduled to take place in around two-and-a-half years.

The current administration can take nothing for granted.

Although the Government it replaced had taken the country into effective bankruptcy, the electorate has a short memory and inevitably, what opposition parties can promise over the next couple of years could do serious damage to the re-election chances of the incumbents.

The Government is getting heavy criticism from predictable sources over its stewardship of the economy, the ongoing fiscal austerity, and the persistence with a policy of paying senior bondholders what they feel they are due.

Much of the criticism is not based on fact, but in politics, facts are rarely allowed get in the way of a good story.

In terms of the economy, the picture is still not great. Economists define a recession as two consecutive quarters of negative growth in gross domestic product (GDP).

The CSO recently conducted some downwards revisions to GDP growth in 2012, which show that GDP contracted by 1% in the third quarter of last year and by 0.2% in the final quarter. Unfortunately GDP also contracted by 0.6% in the first quarter of this year.

This gives us three consecutive quarters of negative growth, signifying that the economy is once again technically in recession.

In fairness to Government, most of the current economic difficulties are outside its control. The global economy is still a bit of a mess, with our two most important trading partners, the eurozone and the UK, experiencing challenging economic times. The US is not doing particularly well and even the Chinese economy is showing some signs of stress. For a small, open economy this is not conducive to an export-led recovery.

The difficulties are being compounded by the ‘patent cliff’ issue which is seriously undermining pharmaceutical exports.

Domestically the Government has been committed to a policy agreed by the previous administration to get borrowing below 3% of GDP by 2015. That policy of fiscal austerity is clearly having a serious hit on consumer spending power.

Another problem inherited from the last administration was a banking system that was and still is dysfunctional at best and economically destructive at worst.

Over the second half of its term, the Government will have to continue plugging away at trying to restore functionality to the banking system; recreating a stable and sustainable economic model; control all forms of public expenditure; and create an environment more conducive to meaningful job creation.

Hopefully, the latest employment initiative, which is basically a rehash of previous versions, will actually be delivered fully over the next few years. There really does need to be a fundamental restructuring of how the welfare system impacts on work and every initiative has to be given to encourage the unemployed to take up opportunities that arise.

Perhaps the most contentious challenge facing the Government is more near-term in nature, and concerns fiscal policy. The troika clearly wants the full €5.1bn of fiscal adjustment to be delivered over the next couple of budgets, but the Government really needs to think long and hard about how this might impact on real economic activity.

Perhaps the politically sensible thing to do would be to deliver the €3.1bn adjustment this October and then take the foot off the pedal in Budget 2015 and 2016. However, a €3.1bn adjustment in October could prove problematical for the economy. Government must decide.


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