OREANDA-NEWS. Ireland's inconclusive general election does not alter Fitch Ratings' expectation that the next government will pursue further deficit reduction. But protracted political uncertainty, an unstable government, or reliance on more radical political elements could be negative if they reduced the authorities' ability to respond to downside fiscal or economic risks.

Friday's vote created a hung parliament after the Fine Gael-Labour coalition lost its majority. A press report on Monday suggested that Fianna Fail may offer medium-term support to a minority Fine Gael government (with 10 seats undeclared on Monday morning, Fine Gael remained the largest single party). Near-term clarity may not emerge until 10 March, when parliament is due to discuss the result.

Opinion polls consistently pointed to a hung parliament, and this was factored into our assessment when we upgraded Ireland to 'A'/Stable earlier in February. The upgrade reflected improved public debt dynamics, driven by strong growth and return to a primary budget surplus. The Stable Outlook indicates balanced fiscal and macroeconomic risks.

All parties pledged higher state spending in their election campaigns, reflecting the popular feeling that austerity policies should be relaxed. This implies slower consolidation, but not its reversal. Last year's strong fiscal performance created space for tax cuts and spending increases (primarily to fund the Social Protection and Health Ministry) of about EUR1.5bn (0.7% of GDP) in the outgoing government's 2016 budget.

But reliance on corporate tax, which contributes over 11% of general government revenue, exposes revenue growth to potential adverse changes in the business or regulatory environments.

Past governments' strong commitment to credible fiscal tightening measures during the crisis supports our view that the next government will seek to comply with EU and national fiscal rules, while maintaining similar growth policies. The medium-term fiscal framework commits the authorities to further deficit reduction if revenues outperform. We therefore expect further narrowing of the fiscal deficit over the medium term even as the authorities boost current spending to meet social demands.

A healthy macroeconomic outlook also supports our fiscal forecasts. We expect real GDP to increase by around 4% this year, and think the medium-term growth potential of the Irish economy is 2.0%-2.5%.
But a "Leave" vote in the UK's EU membership referendum in June (not Fitch's base case) would create significant downside risks for trade and investment. Deleveraging and infrastructure constraints remain a drag on growth.