A Very Public Sacrifice

We're going to hear a lot more about sacrifice in the next few months; years even. The Government's increasingly dire situation regarding tax revenues (falling when they were budgeted to be rising) leaves two choices:

1. cut spending substantially (including public sector employment)
or
2. increase taxes (including income taxes)

A third option is to do both - if things get back enough. And they may well get bad enough. Despite the OECD painting a relatively positive picture for the Irish economy in its forecast this week, things are already turning much more negative than they anticipated. Take interest rates: every single economic forecaster (even the gloomiest) has been projecting a cut in interest rates by the end of the year. But now it seems the ECB may well increase its interest rate - as early as next month. The timing of this could not be worse. Ireland faces an exchange rate/interest rate squeeze that will make the UK's ERM difficulties back in the early 1990s look like a mere prelude. And we know how that ended ...

Hence the need for sacrifice. I think our new Taoiseach Brian Cowen is a man who will not be shy about demanding sacrifice. Just read what he had to say in his inaugural speech on becoming Taoiseach:

One of the challenges we face today is to temper a rising tendency towards individualism within Irish society. We have rightly encouraged a culture of the individual taking personal responsibility for their own well being. We have reaped benefits from the more confident Ireland as presented by its most successful people forging new opportunities at home and abroad.

Overdone this carries risks. Not correctly harnessed this can sap the energy from our sense of community which is still strong and visible in so many ways. What we must prioritise is to turn the benefits of individual flair to the benefit of the community as a whole.

This is what government wants. This is what government needs. Our responsibility is to fuel the engine of community – to lead the charge away from the promotion of exclusive self interest towards a superior value of a wider community interest. The pre-eminence of community and participation over self promotes social harmony and a better quality of life for all. This is what will allow us develop a society of social inclusion.

So can we expect a period of tension and strife in the public sector? I'm not so sure. A fascinating new paper from the University of Bristol on pro-social behaviour has found that workers in non-profit organisations (in sectors like healthcare and education) are more willing to do unpaid work than their equivalents in for-profit organisations. So maybe that is where Brian Cowen needs to look first as he demands sacrifice? Whether he will get it or not is an entirely different matter, of course.

Dirigiste Economics

I'm in France this week on holiday so the posting frequency may be a bit low (especially if the sun keeps shining like it is ;-)

As always there's value in seeing Ireland as others see us - or don't. The first thing that strikes me is how well the public sector works in France. You can actually see where your taxes are spent. It costs €1 to get the bus from Antibes into Nice, a journey of about 15 kilometres. The train is €3. Both run on time for about 20 hours a day. Not quite your Dublin Bus/Irish Rail pricing structure (or service level).

This is upsetting to my libertarian instincts, but still I do admire value for money; whether it's from the private sector or the public sector. And no, I don't want to pay French levels of tax either. Which is why the recent OECD report on Ireland's public sector is so damning. Instead of focusing on a better, more efficient public sector, our political leaders have embarked on an act of national vandalism called decentralisation - carrying home entire government departments to their constituencies like some kind of hunting trophy. I think only the Khmer Rouge went further ...

So we get the worst of both worlds: high (and hidden) taxes; poor and inefficient public services. So should we go one way or the other: dirigisme ou laissez faire? By the way, there's a notice on the OECD's web site announcing that they are closed from 8th May to 12th May for the Victory Day and Pentecost holidays. While in France ...

Binge Government

The OECD's Ireland Report (summarised here) paints a sobering picture of the challenges we face in the short, medium and long term. The challenge that caught my attention was government spending - here's what they have to say about the trend shown in the chart:

Public expenditure increased by around 15% in nominal terms in 2007. Spending growth is expected to moderate in 2008 as a stepping stone to annual growth of around 5-6% in later years. This requires a substantial change of pace after the rapid catch-up growth in earlier years: the increase of government expenditure from 2000 to 2006 was second only to Korea in the OECD. Such large and sustained increases in public spending have rarely been experienced in developed countries since the 1960s, even if the share of government spending in national income remains low by OECD standards. Although the pace of growth will be very much lower than in recent years, the rate of expansion will still be faster than in most other euro area countries.

In other words: our politicians lost the run of themselves, 'binge spending' as the nation binged on drink, debt and drugs. But the party has come to an end and the mess has to be tidied up. But the Government is in the same situation as the hungover host who has run out of paracetamol; it hurts. The Government's analgesic of choice is, of course, taxation. But the taxpayers are not prepared to spend more when they feel that what's been handed over to date has been squandered. The OECD itself points to spending on healthcare: which rose by 64% in real per capita terms between 1999 and 2005. Few would consider it the most efficient or effective use of taxpayer resources all things considered.

So the OECD focuses on greater public sector efficiency, higher productivity, reduced pension commitments and greater competition. All of which have been proposed before: but as the OECD freely admits in its report, much of what it has recommended in the past has been ignored or - worse - the opposite strategy has been adopted.

Perhaps then we need something more radical? I listened recently to a presentation by the President of Estonia, Toomas Hendrik Ilves, when he was in Dublin earlier this week (you can catch a flavour of his intelligent and refreshing style from this RTE interview). Estonia has a flat tax equal to 21%. No allowances, no mortgage interest or pension contribution reliefs, and no grotesque, Kafkaesque, form-filling bureaucracy overseeing it all. Countries like Russia have had a flat tax for some time, and Germany is taking a serious look at it. It may even be on the Conservative agenda for the next UK election.

The advantage would be to cut the cost of both collecting and paying taxes, and to facilitate a real political debate about just how much tax we are prepared to pay as citizens - and what we will get in return. And our politicians won't even have to switch over to a flat tax overnight: just run the two in parallel and let the consumer-citizen choose. Even the OECD might approve.

Consensus Without Consent

The European Council's Spring Summit last week in Brussels was a gift to the 'No' campaigners in the forthcoming referendum on the Lisbon Treaty. A key topic for discussion was the European Commission's directive on the next phase of climate change strategy known as 20/20/20 (see my previous post). We were treated to the spectacle of the Taoiseach being told in no uncertain terms that he (we) had no choice but to get on with meeting the target set out in the directive - and summarised in the chart.

The Irish Times quoted the European Commission’s president José Manuel Barroso, in reference to Ireland’s onerous 20% reduction target, as saying that "Our proposal is equitable, fair and technically sound - we will not change it.” He went on to say that "Ireland has benefited so much from structural aid from the EU because it was much lower than the average and now it is higher than the average." Moreover, if Ireland's leaders did not get on with delivering the target then they would be left with a "level of credibility close to zero".

To complicate matters further, it seems that Ireland's Greens want to set an even more onerous target of a 30% reduction in emissions relative to the 2005 benchmark: as reported in yesterday's Irish Examiner. Clearly we are heading into a turbulent political period as ratification of the EU climate targets proceeds with a view to completion early next year. There is an excellent summary of the issues available from the Institute of European Affairs.

It does seem we are again witnessing the democratic deficit at the heart of the European Union project, which ironically the Lisbon Treaty (née Constitution) is meant to address (at least partially). We are being presented with a 'consensus' on climate change strategy without our consent. Doesn't feel very democratic, does it?

Irish politicians (at least those who want to get re-elected) might want to think very carefully about how they proceed with the Brussels-mandated target for Ireland. A European-wide survey of public opinion about the environment published last week shows that the Irish are among the least willing to prioritise environmental protection over the competitiveness of the economy: second only to Bulgaria in our unwillingness among the EU 27 countries.

That won't, of course, stop the burgeoning number of unelected climate NGOs from making increasingly shrill demands of our elected politicians to Stop Climate Chaos. Here's how silly it gets, from just one email I received last week about CO2 emissions:

Right now each person in Ireland emits 17 tonnes a year. The Swedes emit 7.4 tonnes per person per year. The Chinese emit 3.9 tonnes, the Indians 1.6. As for the Malawians? They don’t even emit one tonne each a year.

What the authors forget to mention, in the midst of their eco-flagellation, was that Sweden has 10 nuclear reactors providing 50% of their electricity, China has 11 nuclear reactors (and up to another 10 coming on stream), whilst India has 17 nuclear reactors and 6 more coming on stream. Now in fairness to Stop Climate Chaos, Malawi doesn't have any nuclear power stations: but they do have one of the world's richest reserves of uranium and are projected to produce some 14,000 tonnes of the stuff from recently discovered deposits.

But I am being unkind: perhaps this is just a subtle effort by Stop Climate Chaos to soften us up for the nuclear option - doing the politicians job for them. Then again, perhaps not. Still, it wouldn't be the first time a climate policy embraced by the greener fringes suddenly got dumped.

All that said, the issue of climate change and our responsibilities to future generations need to be taken seriously. Part of taking them seriously, as set out in the OECD's recent Environmental Outlook to 2030, is to ensure that the prices of scarce and/or polluting resources are properly priced. A carbon tax can play a part, but the greater contribution will undoubtedly come from the forecast spike in oil and commodity prices.

I also think we need to get real about our priorities and obligations as a nation. As pointed out in an insightful new paper from the Cato Institute:

Climate change is not now—nor is it likely to be for the foreseeable future—the most important environmental problem facing the globe, unless present-day problems such as hunger, water-related diseases, lack of access to safe water and sanitation, and indoor air pollution are reduced drastically. Otherwise, with respect to human well-being, it will continue to be outranked by these other problems and, with respect to environmental well-being, by habitat loss and other threats to biodiversity.

But I believe we have a moral obligation as a wealthy nation to help those less fortunate, and I therefore concur with the conclusions in the Cato paper:

If one believes that developed countries have a moral and ethical obligation to deal with climate change, that obligation cannot, and should not, be met through aggressive emission reductions at this time - “cannot” because the planet is already committed to some climate change - and “should not” because the threats that climate change would exacerbate can be reduced more effectively, not to mention more economically, through focused efforts to reduce vulnerability or through broader efforts to advance economic development. Any such obligation is best discharged through efforts to reduce present-day vulnerabilities to climate-sensitive problems that are urgent and could be exacerbated by climate change.

I think we would have a great deal more consensus about that approach than about any 'targets' from Brussels: and maybe even some democratic consent as well.