Irish political update – How will Covid-19 impact a Programme for Government?

As we reach the second weekend since the publication of Fianna Fáil and Fine Gael’s negotiation framework policy document, finally, we are beginning to see some movement within the smaller parties on how they respond to the advancements of the two “civil-war” parties.  

A bleak financial update from the caretaker Government earlier in the week has set the tone for what lies ahead as we move out of the health crisis and into the economic crisis.  

Will any of the smaller parties step up to the plate and choose to be at the decision table as Ireland makes its recovery, or do they still believe the promises of Fianna Fáil and Fine Gael to be ringing hollow?

A bleak Stability Programme Update

Earlier in the week, Pascal Donohoe in his role as caretaker Minister for Finance released the most up-to-date figures and economic projections for Government as part of the Stability Programme Update (SPU). Unsurprisingly, the document held a bleak outlook and included the worst figures for Ireland since the financial crash of 2008-2011.  

According to Government, GDP is projected to fall by 10.5% this year, with a maximum drawdown of 14-15% in the worst-case scenario, and if restrictions remain in place late into the summer – which is likely to be the case for some sectors that simply cannot operate while adhering to social distancing measures. 

The Government is expecting to run a deficit of 7.5% or €23 billion this year, instead of the €2.2 billion surplus that was forecast at the beginning of this year. The difference is a €25 billion reversal in public finances that nobody was expecting before we heard of the global pandemic. Instead, many expected and looked forward to a potential shift in how Ireland does politics – with an emphasis on public services, housing and climate action. This is what the electorate voted for in February but now the outlook is very different as priorities will shift towards supporting the SME sector, managing the spread of Covid-19 across communities, and providing almost one million people with social protection in the form of wage subsidies or unemployment benefits. 

According to the SPU, unemployment is predicted to hit a peak of 22% in Q2 of this year, before it begins to ease. An overall loss of over 9% or 220,000 jobs is expected for 2020. People are expected to regain employment in the second half of this year; therefore, the Government is projecting an annual average unemployment rate of 13.9% for this year. Conditions are set to further improve into 2021, with an expected 5.5% growth projected in the SPU which would see the unemployment rate fall to 9.7% in 2021.  

Looking ahead again, in 2021, the economy is projected to grow by around 6% with exports leading the recovery but getting to that point will be no easy feat. Economic activity is not expected to return to its pre-Covid-19 level until 2022, which is much longer than some even expected any new Government formed to last, given the inconclusive result and three-way split between Fianna Fáil, Sinn Féin and Fine Gael in February.  

While we awaited these projections from the Department of Finance, we saw modelling scenarios from professional services firms, projections from the ESRI and later the Central Bank of Ireland with all scenarios proving a very difficult recovery for Ireland, but none as stark and austere as Donohoe’s official announcement. Let us be reminded that the forecast of when our economy will begin to improve assumes that the coronavirus will be under control and restrictions will be lifted mid-summer – yet none of this is certain. The reality of how this crisis is already and will continue to affect our society and economy is definitely beginning to sink in amongst most if it hadn’t already.  

Should political parties sit on the side-lines while a programme for a recovery is drawn up? Or should they be working to ensure they are involved in making the decisions that will undo the mess Covid-19 will undoubtedly leave behind?

The devil is in the detail

The “un-costed” and “vague” framework document has done its initial work and grabbed the attention of the Green Party. Eamon Ryan’s party are the first of the smaller parties to issue a formal detailed response. The six-page response includes 17 questions or targets which would have seemed far too radical for any Fianna Fáil or Fine Gael led government before but with each eager to lead the country out of this recession, the Greens very well could command the direction of this next Government and have a hand in moving Irish politics slightly more left than it ever has been before.  

The Green Party’s response is not a set of red lines for entering Government but instead aim to gain clarity on the level of ambition of both Fianna Fáil and Fine Gael so that the Green Party can assess whether the two parties want real change and are committed to radical action on issues of carbon emissions, energy efficiency, housing, social justice, biodiversity, quality of life, and fiscal responsibility.  

After considering the Green Party’s response to the framework document, the Regional Independent Group have u-turned their position on having a third party be part of any coalition that includes them. Up until this point, the Group had outlined the need for another party to ensure stability, but the climate measures the Green Party would like to see introduced and included in a programme for Government are unworkable to the Independents, who say they don’t take rural Ireland into consideration.  

Pressure on the public purse

There is a growing concern that the supports to businesses such as the Temporary Wage Subsidy Scheme and those on the Covid-19 Pandemic Payment may be dwindled as maintaining such high-levels of support is unsustainable in the longer term. However, any decision-makers will have to tread with caution as any such changes could bring extreme negative consequences to a party already only governing in a caretaker capacity. Meanwhile, Opposition benches have warned a return to Ireland’s period of austerity is not acceptable. The public do not need reminding of which parties were in Government during Ireland’s last period of austerity and it can be expected they will not be forgiving if they feel the brunt of this crash hard.  

SMEs are the backbone of our economy

If this pandemic has proved anything it is the importance of Irish SMEs to the economy. Most of Ireland’s employment comes from the SME sector which has been hit hard in recent months and will subsequently face a steep uphill battle to get back on its feet. Ongoing support will be needed from Government with specific policy to address issues including the development of SMEs, access to cash, and how our SMEs are positioned in relation to the tax system, in addition to policy built to ensure businesses are able to shake off the burdens of Covid-19.  

A Seanad report issued last year recommended the need for a specific SME strategy which never came to fruition as well as the need for a Minister with responsibility for developing and implementing SME policy. A thriving Irish economy needs to include a thriving SME sector and there is strong support for a return of a Minister with a sole focus on small and medium enterprises as well as an SME taskforce.  

Programme for Government

Movement on the formation of the next Government has remained slow up until this point, however, negotiations are expected to ramp up now that the Green Party have expressed a willingness to engage.   

What is clear is that any programme for government including the Green Party will entertain some climate action initiatives as that will be essential to get the Green Party membership on board. The reality though is that the extra billions in finances that any party expected to be able to use in achieving manifesto priorities are no longer available for spending in those areas. Covid-19 has taken over and will have to take precedence in the immediate years of any new Government. The Green Party will have to set out how they plan to implement such targets and how much these measures will cost to the exchequer if they are to get Fianna Fáil and Fine Gael to agree on a 7% reduction in carbon emissions or any of their other asks. 

The Tourism and Hospitality sector in Ireland, which accounts for over 300,000 employees has suffered a massive blow as a result of restrictions on travel and closures of hotels and businesses. The sector is calling for the current VAT rate of 13.5% to be reduced to zero for at least a year while the sector tries to recover. We did see a reduction issued during the last financial crash, and based on the past, we can be sure to expect some incentives to be introduced in the next budget to help this sector.  

The National Public Health Emergency Team is monitoring the spread of Covid-19 and considering if restrictions can be eased. Meanwhile, the Government is considering exit strategies and how and when the country can return to work. Any programme for government will need to take into consideration the restrictions businesses continue to face and how long these remain in place. 

Looking ahead

Next week we expect Micheál Martin and Leo Varadkar to meet with the Green Party leader Eamon Ryan to further discuss how all three parties could potentially lead the country through its recovery. It these parties proceed; we expect to see a programme for Government announced in May.

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