Rehn visit to hammer home reality of €15bn nightmare – Stephen Collins accurate as ever.

ANALYSIS: If there is a silver lining it is that the move marks a decisive step towards providing some certainty for people, writes STEPHEN COLLINS

THE GOVERNMENT’S decision to opt for a budget adjustment of €15 billion over the next four years, with a significant proportion of that figure being front-loaded into next year, has put the challenge facing the country into sharp focus.

The magnitude of the four-year figure, double what was being planned only a few months ago, is truly scary. It will put a huge strain on the political system and will test the cohesion of Irish society.

If there is a sliver lining in yesterday’s announcement is that it marks a decisive step towards providing some certainty for people about what lies ahead. The continued uncertainty of the past few months about the state of the public finances and the banks has exacerbated our economic woes by dampening consumer spending and encouraging saving.

Ministers now have two weeks to make critical decisions about how the burden of the adjustment is to be shared. After that the publication of the four-year plan before the middle of November, followed by the budget three weeks later, will determine whether the country is capable of dealing with its problems in a mature way.

The visit to Ireland of Olli Rehn, EU commissioner for economic and monetary affairs, to brief the Opposition parties and the social partners in the second week of November about the nature of the problem as seen from Brussels will be an interesting exercise. It should serve as a reality check for all of those who have been trying to argue that the scale of the adjustment being undertaken by the Government is unnecessary.

While there is no arguing with the proposition that the present state of the country is primarily the responsibility of Fianna Fáil-led governments, the deep involvement of the social partners in the disastrous decision-making of the Ahern era is widely ignored. That is why it is only right and proper that Rehn should spell out the brutal reality of the choices now facing the country to the social partners, who participated in creating the mess, as well as to the Opposition parties who, in fairness, did not.

The Government statement yesterday made it clear that the four-year plan will contain a lot of information about the 2011 budget as well as the budgets of the following three years. “The size of the adjustment for 2011 and the distribution over the remaining years will be announced in the four-year plan. The plan will contain targets for growth and strategies for the achievement of those targets,” said the statement.

In interviews later, Minister for Finance Brian Lenihan refused to be drawn on the figure for the adjustment required for next year but he did concede that a significant level of front-loading would be involved. That would seem to put next year’s correction at a minimum of €5 billion and quite possibly a lot more than that.

It means that almost everybody is going to suffer serious pain. Tax increases on everybody, including the lower paid, are certain. So too are cuts in most welfare payments and it will be difficult to exclude pensions as has been done up to now.

Remaining tax breaks for the wealthy should finally go, but so too will tax breaks for people on middling incomes.

A real test of the Government’s willingness to spread the load evenly will be whether public service pensions continue to remain immune from cuts. If people on the much-lower State pension face a cut and tax relief on private sector pensions is reduced, it would be impossible to justify the current policy of exempting public service pensions from all cuts.

The Government has adopted the target of an average growth rate of 2.75 per cent for the next four years. If that level of growth doesn’t materialise the adjustment will be even bigger than €15 billion, but if the world economy starts to grow strongly the correction may not be as painful as expected. The critical thing is to get the number of jobs growing in the economy but that will take time even with the best-case scenarios.

The political challenge facing the Government is enormous. It has been forced into a position where it is attempting to implement what would have been politically unthinkable only a few months ago. So far there has been no sign that the Fianna Fáil-Green Party coalition could crack under the strain but that could change very quickly.

What is more likely is that the nerve of some of Fianna Fáil backbenchers might crack. It has taken some time to bring Ministers around to thinking the unthinkable but backbench TDs, who haven’t had the benefit of exercising power, are more likely to jib at having to accept responsibility for decisions that will appal them.

While the Government looks stable, its voting majority in the Dáil has frequently been reduced to four in recent months. It means that if Michael Lowry and Jackie Healy Rae decide to vote against the budget the result will be a tie. Just one more desertion and the Government could be defeated.

It will not be easy for the Opposition either. Over the past few weeks the Government has made a lot of play about getting Fine Gael and Labour to accept the target of getting the budget deficit down to 3 per cent by 2014. While both parties have accepted the target they will be loath to accept the measures that go with it, regardless of briefings from Olli Rehn. Still, they will need to come up with viable alternatives if they find either the four-year plan or the budget unacceptable.