Ireland – Government Stability in Doubt

Prime Minister Enda Kenny’s minority government has managed to overcome its early hurdles, such as securing passage of the 2017 budget, under a three-year cooperation agreement concluded with the main opposition Fianna Fáil. However, obvious tensions within Kenny’s Fine Gael create doubt as to whether the minority administration can last even that long. Perhaps the most telling indicator of trouble within the governing party is the very generous sharing-out of the political spoils with Fine Gael’s lawmakers that has left Kenny open to criticism that he is buying the loyalty of his own party colleagues at taxpayers’ expense, a charge that could hurt his standing among an electorate that endured several years of very painful austerity, and may discourage a spirit of compromise among public-sector unions pressing for wage increases.
A slight erosion of support for Fine Gael since the February elections has mainly benefited Fianna Fáil, while the roughly one-half of the electorate that voted for several smaller parties and independents at the February elections, resulting in an unusually fragmented Parliament, shows no sign of rallying behind a single party that might pose a challenge to the Fine Gael–Fianna Fáil duopoly. Consequently, some form of cooperative agreement between Fine Gael and Fianna Fáil will continue to be the most realistic basis for forming a government, even in the event of an early election.
The government’s decision to appeal a European Commission tax ruling calling for Apple to pay some $14.3 billion in back taxes—a sum equivalent to Ireland’s annual expenditure on health care—may provide fodder for the anti-austerity AAA-PBP. However, the party is currently polling at around 5%. More broadly, the ruling amounts to a mandate that multinational corporations pay the prevailing tax rate, which, if upheld on appeal, figures to adversely affect Ireland’s attractiveness to large firms seeking a low-tax environment, which have played a key role in the economic revival that powered real GDP growth averaging 6.5% in 2014–2015.
The 2017 budget contained some tax cuts and increased public spending, but Finance Minister Michael Noonan adopted a generally conservative stance in response to pressure from Fianna Fáil for a more substantial loosening of fiscal policy, and the general government deficit is projected to shrink to less than 1% of GDP, assuming real GDP growth of at least 3% next year. The 12.5% corporate tax rate has been maintained, while the tax on capital gains by entrepreneurs has been halved to 10%, and the government is counting on a state-financed “help to buy” scheme to underpin a recovery in the housing market. However, as Ireland is likely to be one of the EU markets most vulnerable to Brexit risks, achievement of that growth threshold is far from assured.