The Budget will pass but that is the least of the Government's worries

'Budget offers the biggest challenge yet to the Government, and our elected politicians as a whole'

With Brexit, the Apple tax, and the demands of the Independent Alliance, Finance Minister Michael Noonan mighe be getting a tad frustrated.

With Brexit, the Apple tax, and the demands of the Independent Alliance, Finance Minister Michael Noonan mighe be getting a tad frustrated.

As the Dáil and Seanad return after a long summer break, Insider has been mulling over the state of Irish politics. Not that it has been a quiet summer of course, with a number of issues disturbing the peace.

Tensions between the various groupings in Government and the ongoing fallout from the Brexit vote in the UK have lurked in the background and regularly raised their head, while any semblance of political peace was shattered by the EU Commission’s judgement in the Apple tax case. These issues all tell us something about the current state of play in Irish politics. The Budget in two weeks’ time though offers the biggest challenge yet to the Government, and indeed, in light of the prevailing Dáil arithmetic, our elected politicians as a whole.

Apple tax and conflicting emotions

Vestager

The EU Commission's judgment that Ireland had breached State Aid rules and essentially bestowed Apple with unfair tax advantages over a number of years was not wholly unexpected, even if the magnitude of the sums involved was. Despite this, the main parties appeared to be caught ‘on the hop’ as epitomised by a breakdown in communications between FG and the Independent Alliance that briefly appeared to put the Government’s future in jeopardy.

In reality, there was never much doubt that the Government would lodge an appeal against the decision. To fail to do so would almost amount to an admission of wrongdoing as well as leaving the Revenue Commissioners, who made the rulings that were the subject of the judgement, in the lurch. The Government also had to be seen to defend Irish tax and inward investment policies, which have been a key feature of economic policy for a number of decades. The need to keep key multinationals, which have been crucial to job creation in parts of the State, including Galway city, on board was also paramount.

FF, FG and Labour could be relied upon to toe the line and the same is true of the Government-supporting Independents such as Galway East’s Seán Canney who by and large come from a similar background.

On a political level though it did cause some discomfort for the Government. It was bound to – what government would not be tempted by a €13 billion bonanza and would turn their noses up at it - a feeling exacerbated in the context of the cutbacks and tax hikes of recent years. €13bn would go a long way towards remedying some of the problems bedevilling Irish society at present.

On the other hand, there is surely a strong risk that, if Ireland were to concede, the net result would be that the tax would be due from Apple, but that a myriad of different countries would lay claim to it. We could then have the worst of both worlds. Insider did not envy cabinet ministers who had to make a call on this.

The symbolism of the way this played out was not lost on anyone either as it very much reflected a key fault line in current Irish politics. The establishment parties backed the appeal while Sinn Féin and the other Left-wing groups and some Independents opposed it and called for the money to be collected and spent. One thing that struck Insider was that the party with arguably the easiest call to make on this was Fianna Fáil. Had FF been vocal in calling for the money to be spent, it would have conjured up images again of the party’s recklessness - epitomised by Charlie McCreevey’s 'when I have it I spend it' quip during the boom years. It would also have left the party exposed to charges of putting short-term party gain ahead of all else.

Long-term challenges

Noonan Budget

However the bigger picture of the Apple tax case has been largely ignored. We must now leave the rights and wrongs of the Apple case itself to the ECJ and consider some of the other issues that this episode highlights, in particular the challenges the State must confront in the medium to long term.

Irish economic policy since the 1950s has heavily focused on attracting big multinationals with tax a key part of the offering. With tax justice becoming a big issue globally - and it is hard to justify the ridiculously low rates being paid by some corporations - it is unsustainable for us to rely on this long-term. There must be other attractions for multinationals to locate here.

Talk of a highly educated, English speaking, workforce, has become almost a cliché by now, but does it have as much substance as we like to think? The poor showing of Irish universities in recently published global rankings suggests not. We also need to look more forcefully at developing indigenous Irish businesses. A re-balancing in economic policy is called for, which brings Insider on to next month’s Budget.

This will not be the first minority government to introduce a Budget – but we have never had one that is 20 seats short of a majority do so before. For the first time since the days of the crisis-ridden FF-led government at the turn of the decade, there is some element of doubt regarding the Government’s ability to get its Budget passed – and of course failure to do so means an immediate general election.

In looking at previous efforts, the Government can take inspiration of sorts from Charlie McCreevey, despite seeming to get a thrill from sailing close to the edge with contentious measures such as tax individualisation, in getting this passed without much difficulty, but also learn the lessons of John Bruton’s first effort in 1982, which ended in calamity as the FG/Labour government collapsed.

A key difference between those two ministers was that the former reigned in an era of plenty, while the latter did so in one of the most challenging economic times. For Michael Noonan things are certainly a lot easier than they were for his first few budgets but there is palpably less optimism in the air and less expectation among the public than there was ahead of the last two budgets.

A damp squib?

Shane and Finian 2016

There also seems to be an air of uncertainty in Government circles regarding what its priority should be – tax cuts or spending increases. Certainly there has been a shift away from FG’s pre-election focus on tax cuts, but to Insider’s mind the Government has managed to dampen expectations of significant movement on either front with the result now, that most people are expecting no more than tinkering at the edges and a budget that will be something of a damp squib.

Nevertheless, FG in particular will be keen to be seen to deliver in certain key areas. The party took something of a hit in the General Election from pensioners incensed at the meagre increase to the old age pension; FG will want to be seen to rectify this. FF is also majoring on this theme and we can expect to see both parties clamouring to take the credit for any increase. There will also be pressure for measures to stimulate economic growth in rural and provincial Ireland; this is easier said than done and needs a longer term approach as opposed to headline grabbing measures on Budget day.

Insider will be intrigued to see what FF comes up with over the next few weeks. The party has won a lot of praise in recent months for its political tactics since the General Election. Insider is not wholly convinced though, and gets the sense the party has been making it up as it goes along. FF had a good general election result, largely attributable to some lapsed supporters going back to their 'natural home' rather than any great policy initiatives. Further gains are likely next time out, but with the sense FF is ‘back in the game’ the party will now face greater scrutiny and needs to develop a far more coherent approach to policy-making. The Budget offers it an opportunity to do so.

FF needs time to develop its offering to, and regain credibility with the electorate and Insider therefore sees no reason to suspect it will bring down the Government any time soon. FG’s key relationship for the time being is not with FF but with the Independents who do not want an early election. The Budget is therefore likely to pass.

Brexit – not going away

May Brexit

Finally, as Minister Noonan said last week, one of his key considerations will be to ‘Brexit-proof’ the Budget – whatever that means! Brexit – and again, whatever that means - is one issue that will not go away. It is very difficult for the Government to know how to react when the British government itself seems unsure how it will approach the process, something that is also true of the EU itself.

The Apple tax case has brought Brexit to the fore again in Irish minds with many people asking if the EU is encroaching on our tax sovereignty. We can expect far more questioning of the EU and Insider sees this as a topic that may set the grassroots against the establishment to a certain degree. This is a topic for another day but Insider will warn that Ireland may have some very uncomfortable decisions to make regarding both its relationship with Europe and the EU/UK trade-off in the coming years.

A hectic political autumn will be only the beginning!

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