Strained Irish coalition needs growth more than ever

DUBLIN Wed May 28, 2014 12:26pm EDT

Ireland's Finance Minister Michael Noonan looks on as he arrives at a Eurozone finance ministers meeting in Brussels May 5, 2014.  REUTERS/Francois Lenoir

Ireland's Finance Minister Michael Noonan looks on as he arrives at a Eurozone finance ministers meeting in Brussels May 5, 2014.

Credit: Reuters/Francois Lenoir

DUBLIN (Reuters) - Ireland's government needs economic growth, and fast, to take the sting out of one last bout of austerity that could topple the coalition.

Economic growth has long been seen as the final piece of the jigsaw for Ireland's recovery after it completed an EU/IMF bailout last year, resumed routine borrowing on bond markets and brought a banking system back from the brink of collapse.

But tumbling bond yields - the financial markets' way of applauding Ireland's fiscal rehabilitation by lending more cheaply - meant little at the ballot box last weekend.

Voters weary from six years of tough budget cuts delivered a sharp rebuke at local and European polls, leading to the resignation of junior coalition party leader Eamon Gilmore.

While finance minister Michael Noonan has so far said he will not be swayed by pressure from his coalition colleagues, October's 2 billion euro ($2.7 billion) austerity budget is now under attack from members of Gilmore's Labour party.

"I would be absolutely opposed to a 2 billion adjustment in this budget and I think we should fight night and day to stop that from happening," Arthur Spring, one of eight Labour party members who called for Gilmore to quit, told Reuters.

"It's going to be one of the critical issues that needs to be debated before we decide how we're going to bring the Labour Party forward. If we're going to be asked to bring in more austerity that's going to affect lower and middle income families, maybe that's a step too far."

With the Fine Gael-led government committed to getting the gap between its incomings and outgoings below a European Union target of 3 percent of gross domestic product next year, the coalition's conundrum could be solved by the less painful half of the equation - GDP growth.

Noonan hinted on Tuesday that positive tax, spending and employment data could give some leeway in October but a shock 2.3 percent fall in GDP in the fourth quarter of last year, the most recent data available, showed a tentative recovery had yet to make its way into the annual accounts.

"There are still very mixed signals in the economy and the numbers that matter for budgetary arithmetic, in terms of GDP growth, tax revenue, consumer spending and inflation, all need a serious step up to give the government the sort of leeway they desire," said KBC Bank Ireland chief economist Austin Hughes.

"But it's impossible to envisage circumstances in which there would be a budget that would deliver a real feel good factor to the economy. What we're talking about is limiting pain rather than delivering pleasure."

COMPROMISE LIKELY

Data sustained an uneven economic picture on Wednesday, showing demand in Dublin pushed house prices higher last month and a pick-up in retail sales extended beyond the resurgent motor trade, yet average weekly earnings remained lower than a year ago.

Noonan, and other politicians, will likely have a big red circle around the third Thursday in June when GDP data is due out. Monthly tax figures - which were 200 million euros ahead of target last month - will also be closely watched to see if this year's deficit goal of 4.8 percent can be bettered to hand the government a headstart.

However, as it stands, GDP growth of 2.1 percent is needed this year together with the 2 billion euro austerity package to cut the deficit. If growth comes in a percentage point higher, it could trim another 300 million euros from the adjustment target, department of finance estimates show.

While economists polled by Reuters this month see the government hitting its 2.1 percent forecast, if growth disappoints, as it did last year when the economy contracted by 0.3 percent, the coalition could have a problem.

Labour, which entered the government on the back of a series of panicked pre-election promises it has gone on to break, saw its local support crumble to just 7 percent compared with a record 19 percent at the parliamentary poll three years ago.

It is also under relentless pressure from the surging opposition Sinn Fein party which is connecting with voters it once repelled when it was the political wing of the Irish Republican Army and is sweeping up left-wing votes.

Such strains mean that if the economy allows it, it will be in the coalition's interests to agree a budget palatable to both parties before they cross their fingers and hope voters begin to feel the effects of the recovery come election time in 2016.

Declaring her candidacy for the leadership of the Labour Party, social protection minister and favorite for the position Joan Burton was also banking on growth, telling reporters that austerity had reached its limits but that Ireland also had to stick to the 3 percent deficit target.

"If Michael Noonan was to hold out against any of the things Labour are going to need, they would absolutely have to use that as an excuse and jump," said Jane Suiter, politics lecturer in Dublin City University.

"But when push comes to shove, they're likely to find a compromise. I don't think it's in the interests of whoever will lead the Labour party to have an election within six months or else the party really will be decimated."

(Editing by Ruth Pitchford)

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