Ireland: Historic three-way coalition takes office; policy focus on economic recovery
June 29, 2020
On 27 June, Micheál Martin of centrist Fianna Fáil was elected Ireland’s new prime minister and the head of a historic three-party coalition government comprising of long-time rivals Fine Gael, as well as the Green Party. This follows February’s inconclusive election, in which no party was able to secure a majority and left-wing nationalist Sinn Féin won the popular vote. The new coalition’s policy agenda will be focused on guiding an economic recovery from the Covid-19 health crisis.
Following protracted negotiations, which were delayed by the coronavirus-induced lockdown, the members of the three parties finally backed a government deal on 26 June. Since the foundation of the Irish State in 1922, all governments have been led by either Fianna Fáil or Fine Gael; however, they have never ruled together. In the new deal, Martin will serve as prime minister until December 2022, after which he will hand the job back to his predecessor Leo Varadkar, leader of Fine Gael, who will serve as deputy PM until then. The leader of the Green Party, Eamon Ryan, will serve as minister for transport, energy and climate action.
The new coalition takes office as the country grapples with the fallout from the Covid-19 pandemic. Although the economy fared relatively well in the first quarter compared to its European peers, with growth coming in at 1.2% quarter-on-quarter, it is set to suffer in the second quarter on crumbling domestic demand and high unemployment. As the country eases lockdown measures, the government’s program includes a new stimulus package to be presented at the beginning of July, as part of efforts to kickstart domestic activity while also focusing on getting people back to work and creating new job opportunities. The package will be centered around a recovery fund, available from 2020 to 2022, directed towards infrastructure development, reskilling and retraining workers, and facilitating firms’ access to credit and capital.
The parties have also promised to unveil a medium-term economic plan alongside the 2021 budget in October, with the objective to reduce the fiscal deficit and set a path for returning to a balanced budget. With regards to taxes, they have agreed not to raise income taxes in the 2021 budget due to the coronavirus crisis. Instead, in order to close the deficit, they will focus on raising those taxes related to behaviors with negative externalities, such as carbon, sugar and plastics taxes. Meanwhile, the 12.5% corporate tax rate is set to remain unchanged, which should continue to attract multinationals and thus support both the labor market and economic activity. The parties also signaled that the Brexit policy to maintain a close trading relationship with the UK after their exit from the EU would not change and stated that keeping an open border with Northern Ireland will be a key priority.
All in all, the new government’s policy will largely focus on rebooting the economy from the fallout from the coronavirus pandemic and its related lockdowns. While fiscal and liquidity-boosting measures should provide a cushion, GDP will contract this year as a crippled global trading environment depresses the external sector, while containment measures at home suppress domestic demand.
Author: Hanna Andersson, Economist