Irish government faces post-bailout battle to woo back voters

By Conor Humphries

DUBLIN (Reuters) - After a three-year struggle to convince financial markets that Ireland's economy is back on track, Prime Minister Enda Kenny's government now has to make the case to an equally tough audience: the Irish people.

A gruelling course of austerity has set Ireland up to become the first euro zone country to exit a bailout this weekend but it has cost the government almost a third of its support, raising pressure to boost spending two years before an election.

Worst hit has been centre-left junior coalition partner Labour, losing half its voters and many to populist rival Sinn Fein, which could hand the former political arm of the Irish Republican Army the balance of power.

While Kenny's centre-right Fine Gael party seems willing to bet on the nascent recovery taking hold, some in Labour have called for an easing the purse strings - a strategy that could unsettle the markets which Ireland must rely on again for finance after it shunned a funding backstop.

"This is going to be a very big test for Fine Gael over the coming months," said Lucinda Creighton, a member of parliament who stepped down as a Fine Gael government minister in July in a disagreement over abortion.

"The rhetoric coming from the government parties can be a little bit exuberant and I don't think that is wise."

PM UNSCATHED

Kenny's affable personality, a conservative core vote and a budget policy that has adhered to the red line of not raising income tax rates have helped his Fine Gael party to come through the past three years relatively unscathed.

But with support falling to 29 percent from 36 at the 2010 election, according to the average of the last three opinion polls, it is short of the low 40s likely required to secure a parliamentary majority.

That means Fine Gael needs Labour to bounce back from its current 10 percent if it wants to avoid some trickier partners for the next government: arch rival Fianna Fail on 23 percent, Sinn Fein on 19 or a bunch of independent candidates.

While deteriorating living standards of Labour's core voters have cost the government - Ireland's leading think tank said the 2014 budget will hit the poorest hardest - it hopes an economic upturn might win them back.

"I wouldn't vote for either of them again. They are too hard on people's pockets," said Mick O'Donnell, a 54-year-old security guard, who voted for both Labour and Fine Gael under Ireland's list system but now "wouldn't open the door to either of them".

"If the economy turns around, if there is more money in people's pockets, then happy days. But until we see that...," said O'Donnell, standing outside the semi-detached house he shares with his wife and three grown up children.

Of half a dozen Labour voters walking past O'Donnell's estate of small terraced houses tucked behind an overpass on Dublin's ring road, all said they would not vote for them again.

And none had decided which party they would go for in the next election - putting them among the 30 percent of voters who tell pollsters they are undecided.

"It's all to play for between now and general election." said local Sinn Fein councillor Eoin O'Broin, whose party has been the biggest beneficiary of Labour's collapse, doubling its support from 10 percent at the 2010 election.

The big factor for Sinn Fein is leader Gerry Adams, 65, whose presence would make it difficult for any of the large parties to form a coalition.

Last week in parliament, Kenny repeatedly questioned Adams' denial that he was ever a member of the IRA.

Joining up with Fianna Fail, whose rivalry from the Irish Civil War of 1922-3 has defined politics for most of the state's history, would be similarly unpalatable for Fine Gael.

BUDGET BATTLES BEGIN

With the bailout troika of the European Union, European Central Bank and International Monetary Fund officially leaving Ireland just over two years before the next general election is due, the battle over spending is likely to begin in earnest.

Fine Gael has repeatedly said it won't threaten Ireland's 2015 EU target of cutting the deficit to 3 percent from around 7 percent this year and won't follow the lead of Fianna Fail, which boosted spending by 10 percent in each of the two years before their last election win in 2007.

"Nobody wants the country to go down the primrose path that it was led down by Fianna Fail," Finance Minister Michael Noonan said.

But there are already some signs of easing with the government opting for a smaller package of spending cuts and tax hikes in the 2014 budget and the IMF warning 2 billion euros of budget cuts planned for 2015 may not be sufficient.

Ireland's 10-year borrowing costs have fallen from a high of 15 percent to about 3.5, but loosening the purse strings could risk yields rising again - particularly without a successor deal to the EU/IMF bailout.

There is a balance to be struck. With Noonan targeting increased domestic spending as a major plank of his post-bailout strategy, easing off on austerity could give the economy a shot in the arm and push it towards the 2-3 percent growth needed to make national debt sustainable.

Labour leader Eamon Gilmore seized on improved data - unemployment falling below 13 percent for the first time since the crash and house prices climbing 15 percent year-on-year in Dublin - to say he hoped the tax burden on families could be eased.

The improvement, coupled with a stage-managed bailout exit, have helped government ratings bounce back from post-election lows in the latest opinion polls.

But with the budget watchdog warning Ireland has only a 50-50 chance of meeting its 2015 target it may need more than tax cuts.

"Really the government's fate is in the lap of the gods, or rather in the lap of global economic trends," said Adrian Kavanagh, a politics lecturer at Maynooth University.

"If there is a double dip recession ... then to be honest it doesn't matter much what the government do."

(Editing by Mike Peacock)