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Irish Government suffers a shaky start as Europe says no

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The new Irish government is off to a somewhat shaky start. You could almost feel sorry for them.

The customary thing here is for the media to give an incoming administration a honeymoon of a week or two to give them a chance to settle in. But this time it’s different. This time there can be no honeymoon.

Like many newly married couples in Ireland these days, the new coalition partners did not really expect to get one. Given the crisis we face, the country cannot afford the time.

The government has had to hit the ground running. As the new Taoiseach (Prime Minister) Enda Kenny said before the election, there is not a moment to lose. And the pace of events since he took power last Wednesday shows that he was right.

Last Thursday, the day after he became taoiseach, Kenny was on the plane to Brussels for a meeting with Jose Manuel Barroso, president of the European Commission. The next day he was in the thick of a full EU summit rubbing shoulders with the other prime ministers in Europe.

The emergency EU summit had been called to discuss Libya, but Kenny was also pressing Ireland's case for a better deal on the bailout. He got absolutely nowhere, and if he had any illusions about how tough it's going to be he won't have any left now.

All his illusions were shattered, and he looked pretty shattered himself when he got back home, saying that this was just round one.

Some of the simple things he has done in his first few days have been encouraging and good for the optics, as they say in political circles these days. The new taoiseach arrived on foot at Government Buildings for his first day at work, walking up the footpath through the waiting cameras and reporters who are more accustomed to seeing a taoiseach sweeping through the gates of the Dail (Parliament) in a chauffeur driven Mercedes.

His driver probably had dropped him off around the corner from Government Buildings, but somehow it didn’t matter. It looked good.

It was the same on Wednesday when Kenny appointed his new Cabinet. The practice in the past has been for the new ministers to go up to the president's residence in the Phoenix Park in a convoy of black limos to get their seals of office.

This time they left their ministerial Mercedes behind them and they all went up together in a mini-bus. It was an effective visual signal that we are entering a very different era in Ireland.

At the first meeting of the new Cabinet a further cut in pay for the taoiseach and his ministers was agreed. Again, a good way of sending out the message that everyone here will be affected by the cuts that have to be made (even if our ministers are still paid far more than their counterparts elsewhere!)

But as well as these positives, there were worrying signs as well. As we pointed out in this column last week, all the heady election rhetoric about radical change and new beginnings is being quietly shelved.

There are two excuses -- first, the financial crisis means reforms must wait, and second, the agreed program for government does not include many of the specific reforms that were in the individual Fine Gael and Labor election manifestos.

Let’s take a simple example, one that raised great hopes among the teenagers in our house. Before the election Fine Gael promised that the compulsory teaching of Irish in schools would be ended.

Now they are saying they will look at it, but not before a complete reassessment of how Irish is taught has been completed. Which could take years.

On a more serious note (although nothing is more serious in our house than the hated system that force feeds Irish to kids) there was Kenny’s promise to reduce the size of government. He still went ahead and appointed 15 ministers, as before, plus he even squeezed in an extra seat at the Cabinet table for a super junior minister, who will be able to speak at Cabinet meetings but not vote.

Of particular concern is the fact that Kenny ignored the promise he made before the election to reduce the number of junior ministers from 15 to 12. He went ahead and appointed a full team of 15, all of whom will have ministerial salaries and all the perks that go with being a minister. In a country this size it’s ridiculous even when we can afford it -- and absolutely crazy now when we can’t.

Also on the Fine Gael hit list as part of the drive to smaller government were the hundreds of so-called quangos, all those organizations funded by the state with offices and staff who never seem to do much except make red tape, spend tax money and produce mountains of paper.

We were told that Fine Gael would be swinging the axe on a hundred or more of these bodies without delay. But there is nothing happening so far on that, and instead the program for government and the plans of the two parties actually envisages the creation of about 30 new quangos. Of course these ones will be useful!

Before the election Fine Gael published a list of 28 major changes they would make in their first 100 days in office. Labor, of course, had its own list.

The problem for those trying to monitor whether they both keep their word is that the agreed coalition program has fudged many of the promises from both parties. Nice trick that.

One of the main planks in the Fine Gael election document was the undertaking to cut public sector numbers by 30,000. Getting down the numbers on the state payroll is essential if we are to get our deficit under control.
But Labor, which is backed by the public sector unions, wanted the lower figure of 18,000 jobs to go on a voluntary basis. The compromise in the program is that the number of public sector workers is to be cut by up to 25,000 by 2015, which is a less watertight commitment and a longer timeframe than before.
And it will be mainly voluntary. So don’t hold your breath on that one.

There are various other promises in the program aimed at stimulating the economy and increasing jobs. There is to be a slight cut in sales tax to encourage consumers to spend, and a small cut in tax for employers who take on extra workers.

There is also a plan to provide an extra 15,000 training places for people out of work (although the much criticized FAS national training agency is to be wound down). Plus there is a so-called NewERA construction project to build even more infrastructure which is to be funded by billions taken out of the National Pension Reserve Fund.

Nobody seems worried that we have been down this construction route before and that although it gives a quick boost on jobs it’s no substitute for permanent jobs in manufacturing industry or services. And not everyone seems to realize that using the pension reserve like this is really just another form of borrowing.

A quick read of the program for government reveals that it is very short on specifics, and that the clear plan for cuts that Fine Gael had proposed has now been fudged. Instead of reducing state spending and raising taxes in a significant way, it trims a little here and adds a little there but not enough to make much difference.
It completely ducks the issue of reducing state benefits to make savings. And with Labor on board this is going to be much more difficult.

One paper here last week highlighted the case of an employer who wanted to hire two or three workers and had found people qualified to do the particular jobs servicing vending machines. He was offering €28,000 a year. But he could not get anyone to take the job because those he interviewed said they could get more on welfare.

The paper then did an analysis and found that at present an unemployed couple with three children would need to be paid more than €50,000 a year before it would make sense for one of them to come off welfare (and rent allowance, fuel allowance, clothes allowance, free health care and the other benefits that you only get if you're on welfare). Reform of this system is essential if we are going to get anywhere reducing the budget deficit.

All the news here over the past week has been about Kenny squaring to the EU to get a better bailout deal. But the biggest challenge the new government faces is here at home.

It's how to get spending down to bring it into line with tax revenue. We can only keep spending at the rate we are because we have been given the bailout fund by the International Monetary Fund (IMF) and the EU.

That deal requires us to get the deficit down to 3% over the next few years. The target was the end of 2014 and it's now the end of 2015 -- and even meeting that is going to be very tough. It will require much more cuts and tax hikes than anything in the program for government. This feeling in the air here at the moment that we can carry on as before is very misguided.

On the bailout, the EU (mainly Nicolas Sarkozy and Angela Merkel) have made it clear to Kenny that it's too early to contemplate any change in the terms, since we've only just got the deal ... unless of course we want to raise our 12.5% corporation tax rate a bit in return.

That would seriously impact on Ireland's attractiveness as a base for multi-national companies, so we don't want to go there. But it irritates the hell out of the French and Germans since it undermines their moves towards a common tax system for the EU as a whole.

The Greeks have already got a lower interest rate on their bailout deal, but we are still being told that we have to wait. So far there is no give on the idea of restructuring our overall debt so that we have to pay back less. That is what we really need.

That is the elephant in the room at these EU summits because it is now clear that unless we are given a degree of debt forgiveness then the possibility of sovereign default (Ireland saying it can't pay back the money) becomes a very real one.

It's that serious -- and the chances of and implications of a sovereign default by Ireland is something we will be looking at in this column in the coming weeks.

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