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Ireland Politics January 2019

Ireland: Policy continuity expected irrespective of who wins tight election race

On 8 February, Irish voters will head to the polls to elect their next prime minister and representatives in the Dáil Éireann, Ireland’s lower house, after Prime Minister Leo Varadkar of the ruling Fine Gael party called for snap elections on 14 January. Micheál Martin, head of the main opposition Fianna Fáil, is currently leading the polls, while Sinn Féin—the left-wing republican party—has seen a sharp rise in support. Nevertheless, the election is set to be a tight race between the two center-right rivals; neither of the two main parties are likely to secure a majority and will thus need the support of smaller parties and independent members of Parliament to form a government. In any case, given both frontrunners share similar approaches to economic policy and Brexit, the outcome of the elections should not lead to a significant shift in policy.

Both main candidates wish to maintain a close trading relationship with the UK after their exit from the EU. Meanwhile, on the fiscal front, they have proposals to boost housebuilding, as well as health and childcare services–the big election issues–through increases in spending and tax cuts. Furthermore, both intend to lower income tax rates, which ought to stimulate household spending, and maintain the corporate tax rate at 12.5%, which should continue to attract multinationals and thus support the labor market and economic activity. At the same time, both parties have committed to being fiscally prudent and staying within the EUR 11.0 billion of unallocated resources projected to be available for the next government in 2021–2025.

All in all, the election is bound to be a close race between Varadkar and Martin, with neither likely to obtain the 80 seats needed for a majority in the Dáil Eireann. With both ruling out a coalition with Sinn Fein–likely to come in at a close third–they would have to seek alliances with smaller parties to form a coalition. Moreover, whichever candidate is elected will face an economy that is projected to slow somewhat this year. While private consumption should remain healthy supported by an historically low unemployment rate, highly volatile fixed investment is expected to fall. Weaker trade amid Brexit transition period and potential overheating due to diminishing spare capacity and a tight labor market pose downside risks to the outlook.

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