Dec 2009

Balancing the books

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.

Posted in: Opinion