The Quiet Road

Yesterday over in London the New Labour government delivered a “pre-budget report”. This is essentially a way to test the reaction of the electorate to the contents of the budget without going through the hassle of leaking stuff through journalists. And despite the fact that opposition parties are wailing and gnashing their teeth based on claims that they’d make a 5% adjustment here and 4.2% adjustment there, there was ultimately little of note in Chancellor Darling’s speech. Aside from the one-off 50% windfall tax on bank bonuses, there will be little in the next UK budget that can be considered radical in any way (and, being a “one off”, that 50% tax isn’t even all that radical and will probably be avoided by many by deferring their bonus until next year… given that plenty of the recipients can afford to do so).

On the other hand, there was some genuinely tough decisions made here in Ireland yesterday as our own Finance Minister (Brian Lenihan) delivered our third unpopular budget of the year, building upon the tax rises and spending cuts already seen in 2009.

Predictably, the budget has met with a polarised response. Those on the left have roundly condemned it, while those on the right have lauded it (including the British conservatives, whose support always makes me suspicious of a thing). Equally predictably, such blanket condemnation / praise simplifies the issues involved to the point of meaninglessness. The economic mess that Ireland finds itself in right now is serious and it’s complex, and while I’m certainly not going to cut the government any slack — they’ve spent the past decade steering us up this creek after all — there is merit to some of Lenihan’s strategy.

The first thing to point out is that Ireland is a small nation. Our population is roughly the same as Greater Manchester, so our tax base is limited. The second thing to point out is that we are in serious debt. This is a direct result of the policies of the current government who oversaw the greatest period of prosperity in the history of the nation but failed to use it as an opportunity to safeguard the future. When George Osborne, the British Shadow Chancellor, hailed Ireland in 2006 as “as a shining example of the art of the possible in economic policy-making”, it was this short-sighted short-termism he was celebrating. Given that the British appear ready to hand the purse-strings to Osborne early next year, it seems they are unwilling or unable to learn from the mistakes of others. And the third vital point to make is that we are not in charge of our currency.

These three points — small tax base, large debt, no currency control — significantly limit the options for the Irish government in comparison with a nation like Britain. This is why we have little choice but to impose a series of painful budgets on the country. Having spent beyond our means for the past 10 years, it’s time to balance the books.

Incidentally, while membership of the Euro limits our options in certain ways, those who view this as an argument against the single currency are willfully ignoring the fact that our membership of the Euro probably protected the nation from bankruptcy and the banking sector from collapse last year. But that’s a discussion for another day.

Unemployment payments

Back with the budget, yesterday’s 4.1% cut in unemployment benefit effectively reduces the payments to the level they were about a year ago. Taken in tandem with the significant deflation Ireland is experiencing, our unemployed are still paid more than almost any other nation in the world. I’m not suggesting it’s a life of luxury being on the dole in Ireland — and those who claim it is are talking politicised nonsense — but it is a life above the breadline. Which is ultimately what our social welfare system is designed to provide. And I say that as a socialist.

That our nation of four million people, in significant debt, can nonetheless keep almost all of the 12.5% of us who are unemployed fed, housed and warm while still treating their illnesses and educating their children is to be applauded, not lambasted. Cutbacks will have to be made in already tight household budgets, certainly. But that’s what happens when the entire nation goes on a decade-long credit-fueled spending spree. An unemployed single parent in Ballymun may not have been responsible for that spending spree, but nor are they responsible for the creation of the welfare system. And the uncomfortable fact is that the large rises in dole and child benefit payments during the past few years represent a not-insignificant part of that spending spree.

Life is still better for the average unemployed Irish person than for the average unemployed American, Briton, Serb, Russian, Pole, Italian, Spaniard, Rwandan, Mexican or Greek. Yes, unemployed Scandanavians, Canadians and French probably have slightly higher standards of living — but we’re near the top of that particular table and should acknowledge that. Personally I figured that a 7-10% cut in welfare payments would have been possible without anyone going hungry or cold. That it’s been limited to 4.1% is as much political as it is economic (given the size of the unemployed voting bloc these days) and has meant cuts elsewhere that are — arguably — larger than is fair.

Public service pay cuts

And when I talk about unfair cuts, specifically, I’m talking about this. The public sector pay cuts represent the single largest spending cut in the budget and is being imposed upon workers who have already taken large pay cuts this year. It’s being met with satisfaction by the private sector and business leaders who seem to view it as somehow unjust that public sector workers have a modicum of job security. In reality, almost everyone in the public sector traded the opportunity to become wealthy for that job security. Business leaders can start complaining about public sector job security when they accept a government mandated pay cap. Until then, let me just point them towards Article 45 of our Constitution which makes it pretty clear that we’re a socialist nation at heart. I particularly like…

The State shall, in particular, direct its policy towards securing:
… ii. That the ownership and control of the material resources of the community may be so distributed amongst private individuals and the various classes as best to subserve the common good.

Excerpt from Article 45 of The Consitution of Ireland

And if you don’t like it, then I suggest moving to a country where wealth distribution isn’t enshrined in the constitution.

Part of this wealth distribution is our welfare system, our free health (means-tested, admittedly) and education. And part of it is the maintenance of a relatively large public sector in which jobs are secure.

And I’m not suggesting that public service workers should be immune from pay cuts. The money has to be found somewhere after all. But I don’t think it’s right that they should be bearing so much of the burden. Cut the welfare budget by another 4% and raise income tax by another 3%. Put up corporate tax by 2.5% (still giving us an extremely low rate). Whatever’s raised by those means should then be used to reduce the cuts experience by the public sector — who have already been hit hard this year.

The carbon tax

Predictably, I’m all for this one. The Greens may claim it as a victory, but I believe it’s more about Fianna Fáil looking for at least one new revenue stream that they can blame on somebody else. Doesn’t matter though; taxing fossil fuels is necessary and while this tax probably isn’t enough to produce significant reductions in their use, it’s a positive first step.

Transportation fuel prices have already been increased as a result, though home heating fuel is exempt until next spring (which is fair enough, as many low-income households will already have budgeted for their winter fuel, and any hike in home heating in the middle of December would run the risk of some going cold).

I think the car scrappage scheme (getting paid by the government to trade in your old car and buy a new one) is ultimately counter-productive. As an economic stimulus package I think it’s of dubious merit (we have no indigenous car manufacturing) and as a strategy to reduce emissions I think it’s extremely limited. The difference in emissions between an old car and a new one, after factoring in the carbon emitted by the car’s production and importation is unlikely to be worth the money being spent on the scheme. Far better to take that cash and invest it in renewable energy.

What I’d like to see, however, is a scrappage scheme that genuinely reduced carbon emissions. Citizen S proposed such a policy, and I think it would probably work. Essentially the government pays people to scrap their cars, but only if they agree not to buy another one for a given period of time. They’d voluntarily have their driving-licence suspended for (let’s say) two years; though they could return the scrappage fee should their circumstances change and they need to drive again.

The scrapped cars could be melted down and recycled as wind turbines.

Booze and fags and stuff

Strangely enough, the budget included a reduction in the rate of alcohol tax. The rationale behind this was to combat cross-border shopping. Large numbers of Irish people drive up north to buy cheaper booze (just as the British cross the channel for it). While there, they tend to spend money on other stuff as well and Lenihan sees this cross-border shopping as a significant drain on the treasury. I don’t know exactly how big a drain it is, but if — as he suggests — a reduction in alcohol tax will actually increase revenue by reducing cross-border traffic then it may make sense.

Domestic violence and addiction groups have complained that the reduction will have the effect of increasing alcohol consumption, and while that may be true, I suggest it’s probably quite marginal (much of the savings to be made on a pint or a short are being negated by pay cuts and tax increases).

Interestingly, the government decided not to increase the cost of tobacco products, claiming that doing so would be counter-productive as cigarette smuggling is already extremely prevalent and any further price increases would actually lower tax revenues from that source as yet more people sought out an illegal supply. I can’t comment on this as I don’t know how true that may be, but if it’s a fact that increasing cigarette tax would result in a decrease in revenue without substantially affecting the number of people smoking, then such an increase would indeed be silly. I don’t smoke tobacco any more so it’s all rather moot from my perspective.

But tobacco isn’t the only thing that can be smoked. One wonders how bad things would have to be before the Minister for Justice reforms drug policy and Lenihan announces a cannabis tax. Certainly such a move, if done sensitively and carefully, could be a boost to the treasury without creating any serious social problems. But I suspect the government doesn’t possess the sense, the bravery or the imagination to consider this idea.

In conclusion

Overall, I don’t think this budget was the disaster it’s being painted as by the Irish left. The public sector is being asked to bear an unfair proportion of the burden, and frankly that’s problematic. That said, this budget is unlikely to be the last round of belt-tightening that Ireland will face over the next year or so. Assuming the public sector has felt the worst of the cuts aimed at them (and I believe they probably have) then we’ll almost certainly see some kind of balance restored during the next budget. Welfare payments will come down by a smiliar amount to yesterday’s announcement, and taxes for corporations and high earners will surely rise by a few percentage points. The cannabis tax will doubtlessly remain a dream, though the carbon tax will surely rise slightly. We’ll also see a return to tobacco and alcohol increases (despite the rationale used this time round) given that we’re likely to still be in a deflationary situation by then and prices will have come down across the board.

Ultimately, Ireland needs to get back on its feet as soon as possible as I firmly believe we need to be investing heavily in renewable energy over the next ten years or so. And we can’t do that without first balancing the books. This budget, though imperfect and creating justifiable anger in the public sector, goes some way towards achieving that balance.

Contrary to what those involved would have us believe, investment banking is not actually that difficult a job. Certainly when compared with being a successful surgeon, nuclear physicist or civil engineer; the skill set required by banking is neither extensive nor terribly difficult to acquire.

Which isn’t to say “anyone could do it”. Along with the necessary skills, there are certain personality traits without which, a person would find investment banking extremely arduous. There’s a lot of politics involved, probably more than most jobs, and a person needs to be adept at navigating an upwards trajectory in a cut-throat environment. Also required is a willingness to work more hours than many people are comfortable with. Those tend to be difficult characteristics to acquire. Crucially however, those who already have them are far from being a rare breed.

So the reason successful bankers are paid enormous wages and even more enormous bonuses is entirely down to the nature of the industry they work in, rather than any inherent “star quality” they may possess as individuals. It isn’t due to the hard work of modern investment bankers… humble beginnings investing their pocket money in local community projects when they were twelve, and a few decades later finding their activities have grown into a multi-billion dollar bank. It’s because they got a job in the money industry and were successful at it.

Investment banking deals with huge sums of money. In fact, pretty much the entire purpose of the industry is to move large sums of money around. So when the bank takes a percentage profit on a given transaction, it’s a percentage of a large sum. And this needs to be stressed. They don’t earn huge amounts of money because what they do is extremely difficult (or even all that useful… but that’s a discussion for another day), but because there happen to be more zeroes on their Excel spreadsheets than on the spreadsheets of a bakery or a pub.

Which is why I find the outrage and arrogance of London’s investment bankers, when confronted with a windfall tax on their bonuses, to be so hilarious. They talk about how such a move will force “the stars” of the banking world to leave London for places without such “punitive tax rates”. The implication being that this will deal a serious blow to London’s — and by extension, Britain’s — economy.

I’m forced to wonder if this is just posturing on their part, or do they honestly believe such twaddle? It appears that earning huge salaries for several years has the ability to convince highly ambitious, semi-skilled sharks that they are indispensible. When the truth is that there’s a mass of similar people more than willing to do the same job for 50% of the cash (bearing in mind that 50% of Bob Diamond’s cumulative £20million bonus is more than enough to motivate most people).

I’m also wondering, given that this latest windfall tax will target the bonus payments of “tens of thousands of bankers”, exactly where they all intend to go? Are there really places in the world looking to hire tens of thousands of foreign bankers and pay them huge lightly-taxed bonuses? Is there truly a major lack of experienced investment bankers in New York, Frankfurt or Tokyo?

And even if a handful of banking “stars” do find work elsewhere, the idea that they are taking a unique skill set with them, and that nobody in London is capable of stepping into their shoes, is deluded beyond belief.

Today 56 newspapers in 45 countries take the unprecedented step of speaking with one voice through a common editorial. They do so because humanity faces a profound emergency. I’ve reproduced the editorial in full here.

Unless we combine to take decisive action, climate change will ravage our planet, our prosperity and security. The dangers have been becoming apparent for a generation. Now the facts are speaking: 11 of the past 14 years have been the warmest on record, the Arctic ice-cap is melting, and last year’s inflamed oil and food prices provide a foretaste of future havoc. In scientific journals the question is no longer whether humans are to blame, but how little time we have got left to limit the damage. Yet so far the world’s response has been feeble.

Climate change, caused over centuries, has consequences that will endure for all time and our prospects of taming it will be determined in the next 14 days. We call on the representatives of the 192 countries gathered in Copenhagen not to hesitate, not to blame each other but to seize opportunity from the greatest modern failure of politics. This should not be a fight between the rich world and the poor, or east and west. Climate change affects everyone. It must be solved by everyone.

The science is complex but the facts are clear. The world needs to take steps to limit temperature rises to two degrees, an aim that will require global emissions to peak and begin falling within the next five to 10 years. A bigger rise of three to four degrees – the smallest increase we can prudently expect to follow inaction – would parch continents, turn farmland into desert. Half of all species could become extinct, untold millions of people be displaced, whole nations drowned by the sea.

* * *

Few believe that Copenhagen can any longer produce a fully polished treaty; real progress towards one could only begin with the election of President Obama and the reversal of years of US obstructionism. Even now the world finds itself at the mercy of US domestic politics, for the president cannot fully commit to the action required until Congress has done so.

But Copenhagen can and must agree the essential elements of a fair and effective deal and, crucially, a firm timetable for turning it into a treaty. Next June’s UN climate meeting in Bonn should be their deadline. As one negotiator put it: “We can go into extra time but we can’t afford a replay.” At the deal’s heart must be a settlement between the rich and developing worlds on how the burden of fighting climate change will be divided.

Rich nations point to the arithmetic truth that there can be no solution until developing giants like China take more radical steps. But the rich world is responsible for most of the accumulated carbon in the atmosphere – three-quarters of carbon dioxide emitted since 1850. It must now lead – every developed country must commit to deep cuts which will reduce their emissions within ten years to very substantially less than 1990 levels.

Developing countries can point out they did not cause the bulk of the problem, and that the poorest regions of the world will be hardest hit. But they will increasingly contribute to warming, and must thus pledge their own meaningful, quantifiable action. Though short of what some had hoped for, the recent commitments to emissions targets by the world’s biggest polluters, the US and China, were important steps in the right direction.

* * *

Social justice demands that the industrialised world digs deep into its pockets and pledges cash to help poorer countries adapt to climate change, and clean technologies to enable them to grow economically without growing their emissions. The architecture of a future treaty must also be pinned down – with rigorous multilateral monitoring, fair rewards for protecting forests, and credible assessments of “exported emissions” so that the burden can be more equitably shared between those who produce polluting products and those who consume them. And fairness requires that the burden placed on individual developed countries should take into account their ability to bear it; for instance newer EU members, often much poorer than “old Europe”, must not suffer more than richer partners.

The transformation will be costly, but many times less than the bill for bailing out global finance – and far less costly than the consequences of doing nothing. Many of us, particularly in the developed world, will have to change our lifestyles. We will have to shop, eat and travel more intelligently. We will have to pay more for our energy, and use less of it.

But the shift to a low-carbon society holds out the prospect of more opportunity than sacrifice. Already some countries have recognised that embracing the transformation can bring growth, jobs and better quality lives. The flow of capital tells its own story: last year for the first time more was invested in renewable forms of energy than producing electricity from fossil fuels.

Kicking our carbon habit within a few decades will require a feat of engineering and innovation to match anything in our history. But whereas putting a man on the moon or splitting the atom were born of conflict and competition, the coming carbon race must be driven by a collaborative effort to achieve collective salvation.

Overcoming climate change will take a triumph of optimism over pessimism, of vision over short-sightedness, of what Abraham Lincoln called “the better angels of our nature”.

It is in that spirit that 56 newspapers from around the world have united behind this editorial. If we, with such different national and political perspectives, can agree on what must be done, then surely our leaders can too.

The politicians in Copenhagen have the power to shape history’s judgment on this generation: one that saw a challenge and rose to it, or one so stupid that we saw calamity coming but did nothing to avert it. We implore them to make the right choice.