This article appeared in the Irish Examiner Business Section on January 2, 2019
There is a strong sense that 2019 will be a year of reckoning. In the UK, we will shortly reach the end of the beginning of Brexit. In the US there is growing evidence that the wheels are coming off President Trump’s ramshackle administration. Both have implications for the global, European, and Irish economies.
Almost two and a half years after the referendum most people are tired of hearing about Brexit. The UK government has stumbled from summit to summit, unable to formulate clearly what it wants from Brexit.
To keep the show on the road, Prime Minister May has painted so many red lines that she has now finally painted herself into a corner. It is shocking that less than three months from the UK’s departure from the EU, there is still no certainty on what form Brexit will take, or whether it will happen at all.
It is testament to the shambolic way Brexit has been handled by Mrs May’s government that this lack of clarity is shocking but not surprising.
Mrs May has now staked everything on a high-risk game of chicken with her parliament. By running down the clock towards March 29 she is betting that the lack of time to negotiate an alternative deal with the EU will force Remainers to accept her deal rather than face the dreaded no-deal scenario.
This gamble might work, but it is just as easy to envisage the UK crashing out of the EU without a transition period and the ensuing damage to supply chains. Ireland, of course, is particularly vulnerable to such a scenario.
A second referendum also cannot be ruled out. If the UK government cannot carry a vote on the current deal, a sensible option is to put Article 50 on hold. This would be accommodated by the EU and would provide time for a second referendum.
The question put the electorate will be crucial. A defeat for the current deal would favour another in/out decision. A victory for Remain would be welcome, but would also put the is but substantial damage has been done to the UK’s standing
The March 29 exit is not the end of the Brexit process. Really, it is just the end of the beginning. The Brexit deal that was approved by the EU and the UK cabinet at the end of November refers to the withdrawal treaty, some 599 pages of it. There is also a 26-page political declaration on the framework for a future relationship.
The future relationship is where the real difficulties are likely to arise between the UK and the EU. This will need to deal with issues such as trade, agriculture and fisheries, foreign policy and security, aviation, scientific research and funding, migration, safety and consumer standards, and energy. There will also be twenty-seven EU countries protecting their own interests, rather than one EU position.
The best outcome for Ireland next year would be a second referendum with a strong vote to remain. The consternation and expense of the last two and half years can be written off. The next best outcome is an acceptance of the deal agreed in November. Then, a long distance behind is a no-deal Brexit.
In addition to the Brexit shambles, a slowdown in US economic growth in 2019 also poses a challenge for the Irish economy. The EU economy has been trundling along in recent years, but the US economy has been performing well. This is likely to change.
The Trump administration is now entering its third year, though it seems to have been decades. Certainly, the administration has gone through decades’ worth of officials. The US experience over the last two years has shown that economies will continue to work effectively for a time even with a lack of effective governance.
But now there is a growing consensus that US economic growth will slow in 2019. There is little prospect of a return to recession. However, the fact that the IMF stated recently that a recession is unlikely shows how the prospects for US economic growth and, in turn, global growth, have worsened.
The Federal Reserve, recently criticised by President Trump for doing its job, increased interest rate four times in 2018. Despite weakening economic data the Fed is likely to remain hawkish.
At this time the political landscape in the US is also changing. There is mounting pressure on the President from the investigations into his campaign and the series of court appearances by his previous officials. Democrats are due to take control of the House from the start of the year. Impeachment is still unlikely; but the big risk comes from what the President may do to distract from his woes.
Even without the unforeseen shocks that we can expect each year, the foreseen threats are real and present. While the Irish economy performs strongly we need to keep a watchful eye on external hazards this year.
The Brexit mess is shocking but not surprising. It stems from the impossible task given to Prime Minister May, which hasn’t been helped at all by her own poor decision-making. It is has been clear from the beginning that a full-break Brexit would be disastrous for the UK economy.
The Brexiteers don’t care about that, largely because the MPs pushing it are insulated from its effects. The Prime Minister knows that a no-deal Brexit would be hugely damaging for the British economy and society and has tried to bring about a less drastic Brexit. She needed a majority in parliament to allow her to lose the votes of some of the more hard line Brexiteers. However, her decision to call a snap general election backfired and she has been politically fatally wounded since. From then on, relying on DUP support has meant that she was never going to be able to secure an agreement that would satisfy both the ideological demands of Brexiteers and the practical demands of running a functioning economy.
We are now at the stage where there is no prospect of a renegotiation. The EU’s position since the very beginning of negotiations has been consistent and clear. There have been frequent reports of the frustration of EU negotiators with the lack of preparedness, clarity, and engagement on the UK side.
The tactic of pushing this deal to the last minute to put pressure on some MPs to accept it on the basis of no alternative has the obvious implication that it means there is no alternative. At most Prime Minister May will be able to secure some political statements or clarifications, though these will be useless in persuading sufficient MPs to accept the deal.
The proposal from some MPs, not just recently, that the UK could achieve a Norway Plus model for the future trade relationship shows that there remains confusion in the UK between the withdrawal agreement and the future relationship. The Brexit deal that was approved by the EU and the UK cabinet at the end of November refers to the withdrawal treaty, some 599 pages of it. There is also a political declaration on the framework for a future relationship.
The agreement which would be put to the UK parliament does not preclude changes to the subsequent relationship, which is not part of the treaty. However, competence has been very sadly lacking in the UK politics for some time.
So, what will happen next? One option now is for a vote in the Commons in the knowledge that this is the only alternative to a no-deal Brexit. However, too many MPs have rubbished the deal to make this a realistic outcome. Unless the clarifications from the EU are dramatic, there is little reason for MPs to shift their views. Perhaps a declaration that other forms of future relationships, such as Norway Plus, will be explored may be enough. But time is running out on that.
The second option is a no-deal Brexit. This is now increasingly likely. It is clear though that this is not an accidental outcome. The UK can revoke Article 50 unilaterally, so a no-deal Brexit would be a deliberate act, albeit an act of omission. There is a majority in parliament against such an outcome, but the problem is that there is no other deal which MPs can accept. Could the Prime Minister be preparing to put it up to MPs opposed to a hard Brexit to accept her deal or no deal?
The final option, and the most sensible at this stage, is a second referendum. It is ironic that the Tory party has just had a leadership vote, despite having one in 2016. There seems to be no issue with this being undemocratic, so why would a second referendum be undemocratic. Now that the likely withdrawal agreement and framework for the future relationship is known, such a vote would have much greater validity than the vote in June 2016.
Such a referendum could be called soon, with a February vote. If the result was again for leaving this would provide cover for MPs to accept the withdrawal agreement as the clear wish of the people.
What we can count on in the coming weeks is for more drama, as UK politics continues to make an even greater show of itself.
This article appeared in the Irish Examiner Budget Supplement on October 11, 2017
Budget 2018 shows that it takes more than a deep recession and a troika bail-out to rid us of the spirit of Charlie McGreevy. Once again we are back in the era of Finance Ministers spending what they have. We can only be thankful for the EU fiscal rules that limit the damage the political system can do to our economy.
In the aftermath of the Irish economic collapse in 2008, many pointed fingers of blame at economists for failing to provide warnings about what was unfolding. There is some merit to this. Too many economists either weren’t paying attention or ignored the evidence and hoped for a soft landing. However, there were more than enough warnings issued if the government of the time had chosen to listen. Instead they pondered why all those moaners didn’t commit suicide or referred to those opposing the giveaway budgets during an economic boom as left-wing pinkos.
There were noble aspirations to learn our lessons. The Fiscal Advisory Council was, in the words of its first chairman, set up to institutionalise the memory of the crises. It hasn’t worked.
Less than a decade later and the government is again ignoring the warning voices, even though this time they are significantly louder and greater in number. In the weeks leading up to this budget the political debate has been about which of Fine Gael’s and Fianna Fail’s tax promises would be implemented. Now we know it is both. However, in trying to keep this fragile political arrangement in place, the net effect of the tax measures announced yesterday are negligible for most taxpayers.
The government is playing political games with significant economic risks, for the sake of a couple of euros a week in income tax. The economy is approaching full employment and growing strongly. This is before the additional stimulus of a necessary, large house construction programme emphasised in the budget. However, there are obvious and substantial risks to this economic recovery from Brexit and EU and US tax changes. The responsible approach is to be cautious. Tax cuts can wait.
The increase in new tax revenue of €830 million, from increases in commercial stamp duty, excise duty, and the new sugar tax and the very welcome vacant site tax rise, should not have been used for income tax reductions. These tax raising measures are sensible in themselves. The revenue generated would have gone to providing the buffer we may need if the risks to our economic recovery materialise and to offset the stimulus of the housing and infrastructure investment. We persist with pro-cyclical budgets. We learn little.
My UCC colleague, Vittorio Buffachi had an op-ed in the Irish Times yesterday supporting Jeremy Corbyn's proposal of a salary cap to address income inequality. Unlike the critics cited in Vittorio's article, I would not describe Jeremy Corbyn’s proposal as idiotic or lunatic, but neither is it an effective way of addressing the problem of income inequality.
Opposition to the proposal is characterised as a neoliberal response that places the market and incentives above all else. This may be true of some of the ideological opposition, but the most fundamental problem for me with the proposal is that it would be ineffective and inefficient. There are better ways to reduce inequality than implementing and monitoring a pay cap for high earners.
First it's necessary to address one of the arguments in the article, which is that “there is an assumption that inequality between wages is the best way to stimulate productivity, since the prospect of earning a high income is the only incentive behind economic activity”. I think this a bit back to front. Differences in productivity lead to differences in wages. There is little evidence that increases in wages stimulate productivity improvements, and what increases there may be are short-lived.
The assumption in labour markets is that businesses pay individuals more because those individuals can generate more income for the business. For example, we see what appear to be obscene salaries earned by professional footballers, but these are driven by the earning potential of clubs from having these players in their team. Oscar moving to a Chinese club is earning multiples of what he could earn in England. He has not become a better player – in fact he’s probably going to be less effective with poorer team mates – but he will be more productive (based on our narrow and limiting measure of productivity) because the club will generate revenue for more ticket sales, on-field success, and merchandising.
There are complications of course in measuring a worker’s productivity and the extent to which it is attributable to her, and/or the equipment she uses, and/or the combination of her abilities with co-workers. There are also the effects of bargaining power between businesses and workers that can mean workers are ‘underpaid’ where there is, for example, higher unemployment, or ‘overpaid’ where they have specific, highly demanded skills. When it comes to executives of course there is also the problem that their pay tends to set by colleagues on the board of directors, rather than market effects, and we get an insider problem.
Returning to the salary cap, I think it is likely to be ineffective partly because high-earners tend to have more than one source of income, and also have opportunities to structure income in different ways. A base salary is rarely the entire remuneration of executives. A salary cap will simply see an increase in more creative means of payment, such as share options, pension payments, and non-vouched expenses. Monitoring and implementing this becomes an ineffective use of resources. We’ve seen in Ireland how hard it is to monitor and implement salary caps in the health services, banks, the banks' regulator, and universities. The salary cap becomes little more than a symbolic gesture, though this is not to dismiss the importance of symbolic gestures at times.
However, if the real target is income inequality then more effective measures would include the introduction of a basic income for all citizens, which would ensue basic financial security and reduce inequality from the bottom-up rather than the top down. A salary cap would reduce income tax take from high-paid workers, leaving low paid workers in absolute terms either no better off or worse off from less government spending power.
Along with a universal basic income, a wealth tax (as suggested by Picketty) would be far more effective in addressing income inequality – as opposed to wage inequality which is only a subset of income inequality.
It is now generally accepted that, of all the EU members, Ireland has most to lose from a hard Brexit, not least because of the level of trade between Ireland and the UK. This explains the anxiety shown by Irish politicians, government agencies, and the Irish media on Brexit since the referendum shock las June. Despite all of that attention, there remains too much uncertainty about the Brexit process to estimate the precise effects.
History and geography has tied the Irish and UK economy together through trade, and while the share of trade between the countries has reduced since both joined the European Union, they share approximately €1 billion in trade every week. The impact of, at best, currency fluctuations and, at worst, the imposition of tariffs will be substantial and damaging. Brexit will be painful for the Irish economy, and the harder the Brexit the more pain we can expect.
It is unlikely that 2017 will bring about much more clarity on the likely outcome of Brexit. If Brexit is to happen then the preferred ‘soft Brexit’ option would leave the UK within the European Economic Area with access to the common market. The dreaded ‘hard Brexit’ would mean the UK negotiating a bilateral trade deal with the EU which is likely to see the introduction of trade barriers and tariffs.
The softer options are better for the UK and for Ireland, though they may involve UK contributions to the EU to access the single market and/or free movement of people between the UK and the EU. Both of these would not be politically palatable in the UK.
What we can expect in 2017 is for Prime Minster Theresa May to trigger Article 50 and begin the process of negotiating the difficult process of extricating her country from the EU. She has committed to doing this by the end of March. The British government clearly doesn’t have a plan for Brexit and is scrambling to find one. This explains the sometimes contradictory messages coming from the British government and meaningless statements such as the “red, white, and blue Brexit”. The Conservative government has committed to providing a strategy for Brexit to parliament in advance of invoking Article 50. It is unlikely that strategy will be comprehensive or enlightening, and the government will claim that a more detailed plan would hamper their negotiations.
In the meantime, EU leaders sit and wait for the British to get their act together. There is little incentive for Chancellor Merkel, President Hollande, and other leaders of larger EU members to adopt anything other than their best poker faces. The Brexit process is unprecedented and triggering Article 50 will set in train a series of negotiations whose outcome is unpredictable. In this context it makes sense to be non-committal and let the British come with their opening offer. Even after a formal application to leave is submitted, the European leaders are unlikely to prioritise Brexit negotiations. They have their own domestic concerns with elections scheduled in France, Germany, and the Netherlands in 2017.
Two critical factors that will need to be clarified early in the negotiations process are whether an Article 50 application to leave can be withdrawn and whether there can be a “transition period” beyond the two years allowed for in Article 50. It is difficult to overstate how substantial the Brexit process will be. For example, the UK has not negotiated a trade deal on its own in over 40 years. It is unlikely that any civil servants have experience of doing so. EU laws, rules, and regulations are embedded in British laws over the last 40 years and it will be arduous to unpick all of them.
There is a risk that 2017 could also see a UK election. It could be prompted by Prime Minister May seeking to strengthen her hand going into negotiations and trying to take advantage of ongoing Labour party troubles. On the other hand, perceived failures in negotiations might embolden Brexiteers to seek to replace her as Conservative leader. Signs that EU leaders are being tough on single market access and the movement of people could feed perceptions among hardliners that the unwelcome soft Brexit has to be opposed from the top of the government.
Ireland has more at stake than any other EU member from Brexit. However, our worries are not likely to be eased much in 2017 as British and EU leaders begin negotiations. The ultimate shape of Brexit will only emerge in 2018 and beyond, and in the meantime we can expect more uncertainty and posturing from British and EU leaders. The Irish need to persist in making our case, but it may be some time before the decision-makers turn their heads to listen.
President Bill Clinton coined the phrase ‘It’s the economy, stupid’. For President-Elect Trump it’s more a case of stupid economics. President-Elect Trump does not have an economic plan that can bring the US economy to the rates of growth of 4% or more than he promises. In fact, his lack of a coherent plan, and perhaps more importantly the lack of qualified, experienced people around him to develop and implement a coherent plan, threatens the US economy with a return to recession. This is bad news for the US and bad news for the global economy.
The US economy is recovering from the worst depression since the early 1930s, notably a depression that was also succeeded by a rise in populist demagogues. President-Elect Trump said his economic policy could be summed up in three words, jobs, jobs, and jobs. Based on the performance of the US economy since 2010 then he should simply keep doing what President Obama has been doing, since approximately 14 million more workers are in full-time employment in the US now compared to 2010. President Trump is unlikely to do that.
President-Elect Trump’s main economic ideas include a tax cut for top income earners (like himself), a cut in corporation tax to 15%, an infrastructure investment programme, a return to protectionist trade policies, and the removal of excessive regulation on business. All this will be achieved while reducing the budget deficit. These ideas, they are too vague to be considered policies, are not just wrong for the US now, they are inconsistent with each other.
There is no evidence to suggest that cuts in income tax for top earners will stimulate economic growth, these earners tend to invest their money rather than spend it. The funding for a large infrastructure investment cannot be achieved without an increase in the deficit and the level of borrowing. The US rate of unemployment is 4.9% - a dramatic decline from around 10% in late 2009 at the height of the recession. This means the US economy is about 1% away from the traditional level of full employment. An infrastructure stimulus at this time, in the absence of a dramatic rise in immigration to bolster the workforce, will result in a rise in wage costs in all sectors and significant rises in inflation.
This rise in prices will be exacerbated by an increase in the costs of goods and services due to import levies, or the substitution of cheaper foreign goods with more expensive domestically produced goods. There will be jobs lost in some sectors that rely on exports as US trade partners respond by levying their own duties on US goods and services. The result will be an economy propped-up by a state-funded infrastructure programme with lower manufacturing employment.
The reduction in corporation tax to 15% will worsen the deficit, and is unlikely to lead to the promised return of foreign-based operations of US multinationals. While it sounds vaguely reasonable, it ignores the manner in which multinationals avoid taxation. In Ireland we are especially worried about this proposal, as we fear it will undermine our taxation advantage. It doesn’t, and when we consider that large multinationals have effective taxation rates much lower than the nominal 12.5% it’s hard to see how it would. US multinationals will continue to benefit from differences in taxation regulations which are far more important for their tax avoidance schemes than tax rates, and so will retain overseas operations.
The Trump movement was based on worries about globalisation. This was one of many sleights of hand by the candidate. There are no economic policies that have only benefits, all involve trade-offs between costs and benefits. The period of more rapid globalisation has coincided with a decline in global income inequality. Average incomes in poorer countries are converging on those in richer countries. This is probably due to economic development in poorer countries arising from greater trade.
At the same time there has been substantial increases in income and wealth inequality within richer countries. And the US is one of the worst performers for income inequality. This is the problem that middle class voters in the US should be concerned about. The prescription for this is not a reduction in global trade but higher taxes on wealth and redistributive policies, not lower taxes as promised by President-Elect Trump. By blaming globalisation and immigration for a worsening economy, which is in reality improving, the Trump supporters were hoodwinked into focusing on the wrong problems and solutions.
President-Elect Trump’s success is worrying for the US and global economy. It became an article of faith among his supporters that because he is a successful businessman, though that is even questionable, he will make a successful President. This assumes that the abilities to run a successful business and the same as those to run a successful country. This is just nonsense. An economy is not a society, and a political leader needs to devote as much time to ensuring society functions as well as an economy does. For leaders, care, empathy, A business man (and they usually are men) can increase profits by treating workers poorly and he will lauded by his shareholders. A President that sacrifices social cohesion to and concern for all citizens to build an economy destroys a society.
During the recent election campaign I was asked to appear on the Right Hook, on Newstalk, a show hosted by George Hook, to discuss the future prospects for the Irish economy. I have contributed to his show many times over the last few years. I think the last time was in late summer 2015.
I informed the researcher on the show that I was quite annoyed and upset by George's comments on the refugee crisis and immigrant council report before Christmas and that I'd rather not appear on his show again. In particular his editorial on November 16 last (after the horrific attacks in Paris) were, to me, disturbing.
Variously he refers to the acceptability of long-term detention centres lasting decades, the barbarism of ISIL "stemming from the culture of Islam", that Irish intervention to save lives in the Mediterranean incentivises migrants to make that deadly journey, and that the images of Alayn Kurdi's body in the surf (and implicitly all of the other children dying in the surf) should not be used as a basis for policy. He says that hard cases make bad law. I disagree. Hard cases expose bad laws. The unnecessary death of these children (and adults) is absolutely the basis for new policies.
I do not know if George Hook is xenophobic and/or racist, or if he means what he says or is saying it for effect. It's irrelevant anyway for his arguments, and there's no reason not to give him the benefit of the doubt. However, it must be the case that what he says feeds into populist and xenophobic attitudes prevalent in Ireland. The reports of 225 cases of racist abuse reported by the Immigrant Council cannot be dismissed by putting in a spurious context of Ireland's four million population. George Hook must know that this level is under-reported, and even if it wasn't then it should be condemned outright, rather than referring to it as "not good".
The comments made by a broadcaster with a privileged public forum on which to speak that, for example, we should put Irish people first, that "this is still our country", and that "when we went abroad, we worked our butts off and we integrated" (implying migrants to Ireland do not) all feed into making migrants - especially Muslims - targets for attack. George Hook has himself been subject to terrible abuse online and by post. A tweet of mine is quoted in a journal.ie article objecting to this vile abuse. It would be worthwhile for George Hook to reflect on whether his arguments have hardened or coarsened the dialogue in Ireland, and heartened those who see Muslim migrants as fair game for taunts of "go back home". We have seen how attitudes in the US have polarised and coarsened following the rise of so-called shock-jocks and editorialising radio shows. We need to avoid such a development here.
I refused to contribute to his show because I did not want to appear in any way to give tacit agreement or to even appear indifferent to the editorial views on the show. The most obvious way for me to register my objections was to decline to contribute to a show with whose editorial stance I absolutely disagree.
It is a cliché in sports to say that teams should always focus on the process rather the results. Doing the right thing will generate the rewards. Failure is associated with focusing on the rewards without doing the hard work away from the spotlight. This general election campaign reminds of this important point. Over the course of the campaign the focus of attention has been on spending the fruits of the recovery. Parties have promised different splits between spending and tax cuts, and have disagreed on the size of the so-called fiscal space.
This is the wrong emphasis and voters should not be fooled into thinking this is the most important issue to be decided. The critical economic issue in this election is not how to spend the fiscal space, but how to create the fiscal space.
There has been a lot of confusion regarding the fiscal space. What it means in simple terms in the projected amount available to the government if the economy grows at the expected rate and after we satisfy new European spending rules. The emphasis should be on the big ‘if’ in the middle of that description. If the economy does not grow at the expected rate then the fiscal space shrinks; if the economy flat-lines then the fiscal space could fail to materialise at all.
It is forecast by the Department of Finance that the fiscal space available to the government over the next five years is €8.6bn, and it is probable that changes in the deficit rules agreed with the European Commission will add a further €1.5bn. This is not a maximum or a minimum, it is simply a prediction. The final amount of space can’t be known with any degree of certainty at this stage. In addition, in the global economy right now there are more than enough potential threats that should make us cautious on our own economic performance.
That’s why the key factor in the decision to be made on February 26 is which party’s plan is most likely to keep the recovery in place. This is the process. The fiscal space will then take care of itself.
The recovery, obviously not felt by everyone yet, was hard won. It is very difficult to overstate just how far the Irish economy has come from the depths of the recession. It is just over 5 years since Ireland entered the troika programme since it was unable to borrow at market rates. There can be no question but that the bailout was successful in that the economy survived and indeed has thrived since then with unemployment down, net migration down, and wages up. The effect of the cuts in public services that came as part of the correction in our public finances undoubtedly hit poorer people hardest. This must be the case since these are the people that rely on public services the most.
It is right that the recovery in the economy would generate the revenue to redress the damage done to public services during the recession. Voters should consider which plan is most credible for the restoration of these services, though of course it is important to attach a warning that with the prevalence in Ireland of coalition governments, election manifestos can be described less as promises and more as opening bargaining positions.
With regard to tax, it is relevant to note that Irish people do not pay high levels of income tax, compared to other OECD countries. The Irish income tax system is among the most progressive in the developed world, so that those on lower incomes pay much less in income tax than the average OECD low-income earner. Those on higher incomes (such as those earning in excess of 167% of the average wage) pay more than then OECD average. Proposals to weight spending out of whatever fiscal space materialises away from tax cuts is a sensible approach in this context.
We all have a difficult decision to make on February 26. The Irish economy is recovering but fragile. The recovery is not being felt by all of us. The decision is whether to keep with the same government in the hope the recovery will continue and will be shared more fairly, or whether a new approach is needed to spread the results of the recovery more quickly. The economy is a critical point right now, we need to think and choose carefully.
Back in 2011 the current government took office less than three months after Ireland entered a troika bailout. It was a sobering time for the Irish economy. We were unable to borrow at anywhere near market rates to fund ongoing public finance commitments. The rate of unemployment was 14.3% in February 2011 and rising. Ireland's debt/GDP was 111% in 2011 and 120% in 2012. There were over 444.000 people on the live register in February 2011. In short, the economy had been ruined by a combination of an inept government, inept regulation, international financial crisis, and domestic fiscal irresponsibility.
As we elect a new government, the situation has undoubtedly improved. Unemployment is 8.8% (a 42% decline in the rate from a high of 15.2%). The number of people on the live register is just under 322,000 (a decline of almost 30% from it's February 2011 level). The debt/GDP ratio was 98% in 2015. This has been, without question, a significant achievement.
There have been suggestions recently that the government cannot claim credit for the economic recovery, since they hid behind the troika in implementing the spending cuts, pay freezes, and increased charges. The implication of this is that really it doesn't matter who is in government, since the recovery would have happened anyway. I am not convinced. Several of the parties doing well in the current opinion polls suggested that we should have told the troika to keep their money and played hardball with other eurozone and EU countries on writing down our debt. This would have been economic suicide. The recovery is evidence that the right, difficult course of action was taken on the economy. We do not face decades of decline and isolation that such a default would have produced.
Of course it is the case that some have not benefited fully from the recovery. Unemployment is still at 8.8%, which means many (including lots of young people) are still out of work. Many more had to emigrate to find work. However, was it ever realistic that the problems, which took almost a decade to create and caused such a deep crash, could be resolved fully in 5 years?
The choice it seems now is between a government that has overseen a remarkable reversal in the fortunes of the economy and financial positions of a majority of our people, or the party that oversaw the crisis, a cabal of independents, or parties that opposed every single economic policy that produced the turnaround and proposed we adopt a Syriza-approach. The opposition to this government has intensified around the issue of water charges. Water charges are €160 per year for a household. The approach to the economy proposed by Sinn Fein and the Anti-Austerity Alliance would've cost households far more than €160 a year.
It isn't just for economic reasons I find myself supporting Labour. This government has proposed and successfully negotiated a referendum on marriage equality and it legislated for the X case. I do not believe these would have been done by a Fine Gael majority government. I want the next government to repeal the eight amendment and then to legislate on a woman's right to choose, and Labour are the only party with a record on this.
The most vocal criticism of Labour in this campaign is that they broke their promises from the 2011 election. How many of those criticizing Labour for broken promises actually voted for them in the last election. Labour took 19% of the vote and won 37 seats. Their government partners had more than double the number of seats (at 76). How a party is to implement all of its policies and promises while holding a third of the seats in government is hard to fathom? In any event, the most important promise was to fix the economy, something which is obviously in train.
There are still problems, such as homelessness and housing crises, the health system's perennial difficulties, and youth unemployment. There has to be a realization of just how broken our economy was at the start of this decade. I sense we have forgotten how close we came to going under.
(Disclaimer: I'm not a member of Labour or involved with their campaign. Like all public sector workers my pay was reduced during the recession, and I've seen continued cuts to resources for third-level institution.)
There were tens of thousands of citizens on the streets of Irish cities and towns this weekend to protest against the imposition of water charges and/or the creation and management of Irish Water. The palpable anger at the charges themselves and the ham-fisted way they have been introduced has meant it is difficult to conduct reasoned discussion around this issue. There has been widespread condemnation of the manner in which the government and Irish Water itself has communicated with citizens. While a lot of this criticism is warranted it's also true that many opposed to the charges are not willing to hear the arguments in favour. It is very easy to blame your opponents for their lack of communication skills when really the issue is that you disagree with their points.
Below I set out to challenge some the arguments suggested by anti-water charge campaigners. To my mind the arguments in favour of the establishment of a single water utility are straightforward and convincing.
I have little sympathy for Irish Water and this government in how they have handled a lot of this - including the over-staffing of Irish Water and the reactions to political pressure to make the process overly complicated. My issue is that the furore over Irish Water reduces the chances of water charges being brought in and these are needed to create an adequate water infrastructure and save money for the exchequer.
1. Water charges are a form of double-taxation
It is the case that citizens have always paid for water into and waste water out of their homes. This has been financed through general taxation. This has resulted in an under-investment in the water infrastructure because water infrastructure is likely to feature quite poorly relative to, for example, education, health, transport infrastructure or tax cuts, in the competition for calls on exchequer finance. Establishing a single water utility with its own dedicated income stream from charges has two implications. First, there is an ability of such a utility to borrow on the strength of that income stream to invest in the water infrastructure. Second, moving the cost of providing water out of general taxation reduces the demands on general taxation and so can finance tax cuts or (if taxes remain unchanged) increasing government spending. Of course another option is to pay down government borrowing.
It has been argued that the removal of water rates was accompanied by an increase in VAT rates which aren't reducing when water charges come in. This is a bit woolly to say the least. I am not able to identify all of the VAT changes since water rates were removed but it would be very difficult indeed to link the water charges to any specific VAT change, and anyway it could be that the VAT rate is lower than it would otherwise have to be in the absence of water charges.
2. Water is a right and so should not be subject to commoditisation or commercialisation
Anti-water charge campaigners have argued that, since water is a right protected by the UN, it should not be commoditised. The reference to water as a right is very selective. The right2water campaign cites UN Resolution 64/292 as providing a right to water and implies this means a right to "free" water. This right to water resolution was part of a prolonged UN campaign to encourage investment in water supply in developing countries. Indeed it is not a little obnoxious to use a resolution aimed at promoting water investment in the poorest countries in the world to justify direct charges for water in one of the richest. In any event, the resolution cited does not imply a right to "free water". In fact the same resolution states the cost of water should not be greater than 3% of household income. The annual median household income in Ireland in 2011 was €35,216 according to the Nevin Research Institute. The average annual cost (before allowances) for a family with two adults and two children is €278. That's 0.08% of disposable income. To get to the maximum recommended by the UN in its water resolution would require a household on the median income to have 10 adults living in it.
The UN also states that there is a right to housing and electricity. Does the right2water campaign consider these to be arguments in favour of providing housing and electricity for all through general taxation? Because the UN also supports a right to electricity and housing in a convention relating to discrimination against women.
3. Irish Water is being established so that it can be privatised
Few Irish utilities have been privatised. There is not a privatisation agenda in Ireland that was seen in the UK in the 1980s. The obvious exception in Ireland was the privatisation of eircom, though there are other utilities (more similar to Irish Water) that remain state companies (i.e. Elecricity Ireland - formerly ESB - and Bord Gais). I would argue that these utilities are natural monopolies due to the size of the Irish market, where the large fixed costs of their infrastructure.
Even if Irish Water was to be privatised it is unlikely that it would be privatised in whole. What has happened in Ireland and many other countries is that competition has been introduced to parts of utility businesses (usually around customer supply or generation) and the 'grid' or infrastructure underpinning supply remains in public hands - since this is a natural monopoly. Consumers have benefited from this competition where ESB, Bord Gais and Airtricity now selling electricity (and two of them also selling gas) and competing on price. Liberalisation of phone markets saw a reduction in the cost of calls while the line rental charge (the cost of the infrastructure remained unchanged).
4. Water charges are a form of indirect tax and so are unjust
It is the case that water charges are not linked directly to income and in that sense they are regressive. That means poorer households will pay a greater proportion of their income on water charges than richer households - this is certainly the case for non-metered charges. It's also likely to be the case for metered charges though it might be expected that richer households will have higher metered bills because they will have more appliances and 'conveniences'.
Ignoring the idea that usage charges may encourage less water usage and conservation there is an inconsistency in the water protests in that they are targeting a form of 'indirect taxation' that is far less costly for poorer households than a couple of percentage points on VAT.
5. Water is a public good
Treated water and waste water are not public goods in the economic definition of such goods. These are goods that will be under-provided by a market because they can be consumer simultaneously and it's impossible or very expensive to exclude someone from using them. Examples are street lighting or national defense. Treated water can only be consumed by one household and it is possible to exclude households (for example if there is a private water scheme you do not get supply if you don't pay). For most common goods the solution is for the state to directly provide or fund the provision of these goods. The decision is whether to charge directly or pay through general taxation. The former is preferable, but the latter is required when it's not possible to know how much of a good one consumes. We can figure out how much water a household consumes but not how street lighting or defense.
It has also been argued that water is a common good. Again it's unclear what is meant by that when it is thrown around by opponents of water charges (clarity is the first casualty in these debates). A common good is a good to which every one has a right of use. The problem with common goods is that if everyone has a right to use them then they get overused - essentially we can't put a price on them so they are considered to be free. There are a lot of examples of common goods and the problems associated with them. Governments apply fishing quotas because in their absence there would be over-fishing and depletion of fish stocks. This involves essentially giving a property right to some fishermen to take a set amount of fish.
The common good view of water also results in over-use and a lack of investment in fixing leaking pipes. If water is free then why care about leaks?
6. The government should fix the leaks in water pipes before charging for water
This is a classic Catch-22. To fix the leaks costs money. But where does the government (or local authority) get the money to fix the leaks. This can't be borrowed because of our national debt. So a utility with a dedicated income stream is the most obvious answer. So, if you care about fixing the leaks you should favour water charges and an Irish Water utility.
7. People can't afford the charge
This is true, but the effect is not one charge but the cumulative effect of all the budget measures. My sense is that the big problem with water charges is not paying for water but paying for water now - after the pain experienced over the last 6 years. There are more simple ways of dealing with this through tax relief (similar to the tax relief for service charges) and a social welfare payment for those not in work or below the threshold for tax. These wouldn't be administered by Irish Water so now PPS numbers needed there. There could be sunset clauses attached so that the allowances and relief would disappear over a period of 3 years (for example) as the economy hopefully strengthens and recovers.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.