Tuesday, 28 April 2015

Michael Noonan's €1.5 Billion Return to Normalcy

During the first US election held after World War I in 1920, the Republican candidate Warren Gamaliel Harding - a man whose tenuous relationship with spelling and grammar led HL Mencken to quip that the language he spoke was not English but "Gamalielese" - faced off against Ohio Governor James M. Cox, who was plagued by the dubious legacy of a world war and the economic crash of 1920 inherited from the incumbent Woodrow Wilson. In seeking to woo a war and recession-weary public to support him, Harding wrote a speech in which he talked of a return to "normalcy" - a made up word which he claimed sounded better than "normality". The "return to normalcy" became his winning theme as he romped home against the hapless Cox. After seven years of crisis and borderline crisis, Michael Noonan seems to have assumed the role of Mr. Harding - announcing that the next election will be preceded by €1.5 billion in tax cuts and spending increases. Normalcy with an Irish accent, so to speak.

After the appetiser that was last year's budget, it would appear that the main course coming up later this year will involve an indulgent loosening of the belt, with Mr. Noonan promising cuts in income tax and USC until 2020 and the reversal of public sector pay cuts. While he was at pains to emphasise that there would be "no return to boom and bust" and pledged that the budget would be balanced by 2018, there was a haunting echo of Bertie Ahern and Charlie McCreevy resonating through the halls of his Department, and with it the emergence of a disturbing - if hardly, at this stage, surprising - sense that in Ireland there is no such thing as a lesson learned, only a lesson observed. However, Noonan has found receptive listeners in recounting his tale of redemption. In the officially minted economic history of Ireland since 2008, we have worked long and hard to purge ourselves of Celtic Tiger excess and are now receiving our just and long-awaited reward. The question that arises is whether this narrative bears any relation to reality. A cursory glance at the figures leaves me sceptical.

Even if our budget were to balance today (which it won't), we are still faced with a national debt which is projected at the end of this year to weigh in at €203 billion - compared to €43.7 billion in 2006. In other words, our public debt burden is almost five times larger than it was when our budget last balanced. However, remember that according to Mr. Noonan's (I fear rosy) budgetary forecasts, the budget will not balance until 2018 - leaving us with three more years of deficits and debt accumulation over and above the €203 billion sum - less reductions that can be extracted from sources like asset sales. This is hardly evidence that throwing off the chastity belt is a wise move. Unfortunately, the numbers only get worse from hereon in. 

The Department of Finance estimates that by the end of this year, its annual tax revenue will have reached just over €42 billion - up from just €34 billion in 2011 but still well down on the figure of €48 billion in 2007. On spending, the numbers are even more sobering. The Department of Finance estimates spending for the fiscal year of 2015 to come in at just over €50 billion. The €42 billion of revenue that the government receives from tax receipts does not include revenues received from sources other than taxes. However, the gap between tax receipts and spending is nonetheless alarming in the context of a budget deficit which still stood at €6 billion in 2014. Of course, that €50 billion in spending is down from a peak of €63 billion, indicating that we have succeeded in impressively reducing our spending outlays. However, this figure looks a whole lot less impressive when one remembers that this elephantine figure was reached in 2009 - a full two years after the last Celtic Tiger budget of 2007, when spending reached a (then lusty) figure of €56 billion. In other words, more than half of the peak to present spending cut has consisted of cutting back on increases in spending that occurred after the circus left town in 2007. These numbers make one thing clear - Ireland has a long way to go before belts can realistically be loosened.

However, not for the first time in Irish history, our economic policies are being determined by political cycles. During the period of 1997 to 2008, the Fianna Fail government enjoyed an unprecedented bounty of budget surpluses to give away and found that the most politically profitable manner in which to distribute them was by spreading the spending gravy far and wide and cutting taxes at the same time. Politically, it worked but economically, it left Mr. Lenihan with the mother of all fiscal hangovers to manage in 2008. Sadly for the two Brians, they attempted to spread the fiscal burden far and wide - just as Bertie Ahern had done with the fiscal windfalls. Of course, spreading pain so broadly and without distinction between the public and private sector was never going to satisfy the desires of the "fairness" lobby - which always craved government spending - or the private economy - which had to finance it. Thus, instead of accepting the 2008 crash as what it was - a timely message that our government needed to either radically slim down or radically increase its revenue base - the forlorn Cowen government sought to impose a mixture of cuts and hikes on the same model of government and economy that had grown up during the years of excess. 

The failure of Fine Gael to win an overall majority in 2011 and its reliance on Labour (aka. the Public Sector Party) to form a government has resulted in an onslaught of "taxsterity" (i.e. significant spending cuts which have angered the recipient base combined with tax increases which have damaged the economy and punished the productive). This has, in turn, led to the onset of "austerity fatigue", with the FG-Labour government resorting to crude (and unaffordable) bribery in order to prevent even more irresponsible people from coming to power. Perhaps Mr. Kenny and Mr. Noonan should heed the advice of their own government's road safety campaigns: "Wise up. Slow down."

Friday, 24 April 2015

What if the Taxpayers went on strike? (Or how I learned to stop worrying and love the NBRU)

Imagine if taxpayers could serve official notice of their objection to the rate of tax that they paid, the proportion of their tax monies spent on others instead of themselves or to the nature of the spending those taxes funded. Imagine the chaos that would ensue if, on serving such a notice, taxpayers could withhold their payments and legally demand that government officials come to the negotiation table to agree government policies more in keeping with their preferences. Imagine the spectre of benefits, pay cheques and state salaries going unpaid for days, perhaps weeks, maybe even months while taxpayers willfully thumbed their noses at the will of elected representatives, demanding, in effect, a vote for every euro instead of every person? Fresh out of a teachers' strike (over reforms to the Junior Certificate) and with the staff of Dublin Bus planning stoppages in May (over the outsourcing of certain bus routes), the aforementioned fantasy seems to be a fairly good analogue to the manner in which our government manages industrial relations in the public sector. 

What generations of  policy makers have gradually constructed is an institutional architecture that wouldn't be tolerated in any other part of the economy. To wit, they have centralised whole swathes of service provision into either de jure monopolies (like Dublin Bus), de facto monopolies (like the Department of Education) or oligarchical entities which enjoy massive legal privileges over their competitors (like the HSE), proceeded to hire vast pools of employees who enjoy the privilege of working for "too big to fail" employers whose captive customer base cannot withdraw their custom and then compounded the obvious risks of atrophying accountability by giving those employees a statutory framework allowing them to extract their favoured pay and conditions by threatening the service-using public with the spectre of leaving them without vital human and/or infrastructural services. Hence the imbalance - public sector workers (whether in whole or in part) are paid for their labour by taxes whose payers have no entitlement to withdraw or withhold their money but they themselves are entitled to withhold their labour without any risk to their right to those monies. If the idea of a taxpayer's right to strike sounds like a fantasy - and, in a social democracy like Ireland, it must - then surely the unrestrained cartellism of public sector collective bargaining ought to inhabit the same realm? Sadly not. In Ireland (and indeed across the western world), the taxpayer has no recourse other than to wait for an election and to hope for the best. The public servant, by contrast, enjoys the ability to leave his paymaster high and dry - more or less at will - while preserving his right to the said paymaster's custom.

To understand the absurdity of the situation with which the hapless Paschal Donohue in the Department of Transport is now faced, it is useful to contrast public sector industrial action with the recent one-day stoppage in Dunnes Stores. Whatever one's view of unions in general, there is an obvious difference between industrial action by employees in a private concern and those of a public body. Firstly, private sector employees retain accountability to their customer base by virtue of the competitive market. A customer inconvenienced by a Dunnes strike can always go to Tesco, Aldi, Lidl or Super Valu. Secondly, if a pay or conditions claim is successful, the associated costs can be absorbed into Dunnes' margin and thus not be passed onto the consumer, in contrast to the public sector, which has no margin into which to absorb costs. Thirdly, if costs are passed onto the consumer in terms of higher prices or the Dunnes Stores profit margin declines to a point that capital investment suffers, the consumer can punish Dunnes and its staff by withdrawing their custom. Fourthly, consumers may communicate their assent to higher prices by actually opting to shop in higher wage, higher price venues. Fifthly, a private sector workforce's decision to blackguard its employer by gilding the lily in relation to the sheer awfulness of pay and/or conditions can backfire, with its employer's reputation being damaged to the point that jobs are jeopardised. How these five factors interact in any given dispute will depend on the specific nature of each, but the totality of these considerations can and will ensure that striking workers will need to look over their shoulders at the customer base they serve and the verdict it renders.

None of these factors apply to industrial relations in the public sector, where service users can be held to ransom, with working parents facing the nightmare of unsupervised children (teachers), traffic gridlock and perhaps no transport at all (buses and trains), no means by which to enter or leave the country (air and sea ports), death or unnecessary suffering (health service staff) or (to prevent any of the above) the diversion of monies away from personal incomes, private investment or alternative public expenditures in order to pay the hostage takers and restore/preserve normality. It is for this reason that such union-enthusiasts as Franklin Roosevelt and George Meany opposed the unionisation of the public sector. This was not out of free market principle - they didn't have any. It was out of a basic understanding that public monopolists, like the police and the military (which haven't traditionally enjoyed the right to strike) occupy special positions of responsibility in return for the monopoly that they and their employers collectively exercise over our security and well-being.

For this reason, we have problems which go well beyond any specific issue to which any strike relates. I actually agree with the teaching unions that Jan O'Sullivan's "reforms" to the Junior Cert are a terrible idea. As for the outsourcing of bus routes, I'm sceptical that Mr. Donohue's policy of selective outsourcing will bring any of the market disciplines that mass transit needs and confident that it will add a layer of administrative cost. However, notwithstanding any points of potential agreement with the unions, the taxpayer simply cannot expect organisations funded and mandated by employees to represent the interests of consumers and cannot trust them when they claim to so do. Paschal Donohue should stop imploring and start telling the hard truths, but needless to say, I won't be holding my breath.

Friday, 3 April 2015

UK Election 2015: Whither Lib Dems and why it matters?

Health Warning: This is extremely turgid psephological material which only anoraks will enjoy. Anyone who is not an anorak may otherwise find it useful as an insomnia cure. The author accepts no legal responsibility for personal injuries suffered as a consequence of narcolepsy or fainting resulting from attempts to read the content nor for psychological trauma resulting from same.

The overwhelming (and perhaps correct) consensus amongst commentators in the UK is that Election 2015, like its 2010 predecessor is pointed inexorably to a hung parliament, with the Tories and Labour both stuck in the mid-thirties, with the UKIP surge and with nationalists eating into the Labour vote in Scotland and Wales. Of all of the mainstream commentators whose opinion I have studied, only Peter Oborne (formerly of the Telegraph) has suggested the possibility that the numbers are actually pointing to a return to a two-party system - at least in England. His hypothesis is a fascinating one - namely that the collapse of the Liberal Democrat vote will open up a multiplicity of seats to the Tories and Labour and that UKIP's vote will be too diffuse to result in statistically significant seat gains. 

The Oborne hypothesis desperately needs to be studied, because it is currently extremely unclear what (if any) basis (other than groupthink) the political commentariat has for making the assumptions that it is making. What has made me super-suspicious is my visits to websites specialising in results modeling and seat prediction, a typical example of which is electionforecast.co.uk (a website run by academics from the University of East Anglia, LSE and Durham), which provides seat ranges for each of the parties based upon their vote share in the opinion polls. Every opinion poll published on the BBC's election website as of this morning is putting Nick Clegg's Liberal Democrats on 8-9% (from 23% in 2010). This represents a loss of between 60 and 70% of the party's 2010 vote. The folks at electionforecast.co.uk, however, are forecasting that the Lib Dems will take between seventeen  and thirty five seats with a central forecast of twenty six - compared to fifty seven in 2010 - a prediction which almost left me gasping in disbelief. 

The simulator on the UK Polling Report Website managed by Yougov's Anthony Welles seems a bit more realistic - but only a bit. I keyed in Tories 36%, Labour 34% and Lib Dems 8% and that came up with sixteen Lib Dem seats. If we were to average these out to a Lib Dem total of roughly twenty five seats, what would this imply? It would imply that on a loss of between 60 and 70% of votes, the yellow army will somehow retain 44% of their seats. This would be bizarre enough in a proportional representation system, which protects losing parties against the wilder extremes of seat loss. However, in a first-past-the-post system like the UK's, such a result would be little short of unfathomable. In a five year period during which the Lib Dems have done few things well, they do appear to have had some considerable success in selling the following narratives:
  1. Lib Dem MPs will leverage their local organisational superiority (remember that famed by-election machine?) to a succession of contra-cyclical trend bucking holds.
  2. The Lib Dem vote will conveniently go into near-total meltdown in some parts of the UK and will hold up well in others, the unevenness of the distribution guaranteeing a surprising number of hold-outs relative to the raw numbers.
  3. Notwithstanding the plunge in support for the party, general vote fragmentation caused by UKIP eating into the Tories and Labour will save several seats that the Lib Dems should notionally lose.
The first narrative can be dismissed out of hand. Personal and local votes count a great deal less than people generally suppose - especially when the chips are down. When people are voting for a government, local considerations diminish in importance. Nonetheless, some candidates do buck national trends - but therein lies the statistical sting. For every person who bucks the trend, someone else must amplify it - otherwise, there would be a different trend. The third narrative is interesting but devilishly hard to predict. The second one can be tested by reference to the database of election results that have slowly accumulated over the last few years. So let's look at the by-elections and how the Lib Dems fared in each relative to their 2010 performance:
  • Oldham East & Saddleworth (January 2011) - 31.9% (+0.3%) - c. 1% increase;
  • Barnsley Central (March 2011) - 4.2% (-13.1%) - c. 76% drop;
  • Leicester South (May 2011) - 22.5% (-4.4%) - c. 16% drop;
  • Inverclyde (June 2011) - 2.2% (-11.1%) - c. 83% drop;
  • Feltham & Heston (December 2011) - 5.9% (-7.8%) - c. 57% drop;
  • Bradford West (March 2012) - 4.6% (-7.1%) - c. 61% drop;
  • Manchester Central (November 2012) - 9.4% (-17.2%) - c. 65% drop;
  • Corby (November 2012) - 5% (-9.5%) - c. 66% drop;
  • Cardiff South & Penarth (November 2012) - 10.8% (-11.5%) - c. 52% drop;
  • Rotheram (November 2012) - 2.1% (-13.9%) -  c. 87% drop;
  • Middlesbrough (November 2012) - 9.9% (-10%) -  c. 50% drop;
  • Croydon North (November 2012) - 3.5% (-10.5%) - c. 75% drop;
  • Eastleigh (February 2013) - 32.1% (-14.4%) - c. 31% drop (Lib Dem Seat held);
  • South Shields (May 2013) - 1.4% (-12.8%) - c. 90% drop;
  • Wythenshawe & Sale East (February 2014) - 4.9% (-17.4%) - c. 78% drop;
  • Newark (June 2014) - 2.6% (-17.4%) - c. 87% drop;
  • Clacton (October 2014) -  1.4% (-11.5%) - c. 89% drop;
  • Heywood & Middleton (October 2014) - 5.1% (-17.6%) - c. 78% drop; and
  • Rochester & Strood (November 2014) - 0.9% (-15.5%) - c. 95% drop. 
The three results highlighted in bold are those in which the Lib Dem candidate managed to poll more than 50% of the party's 2010 constituency percentage. Given the fact that they occurred before the end of the coalition honeymoon and have never been repeated in the years since, I think it is safe to write off Oldham East and Leicester South as outliers. Once one does this, the picture gets a whole lot worse. First, the results show no majorly discernable geographic bias. The North, South and Midlands of England are represented in the list, as is London. There are also results from Scotland and Wales. The results are disastrous in all regions.

There doesn't seem to be a distinct pattern in Labour or Tory held constituencies. The Lib Dem vote held up relatively well in the safe Labour seat of Middlesbrough and the Tory marginal of Corby. Meanwhile, the vote suffered a catastrophic meltdown in traditional Tory strongholds like Rochester and Newark and in traditional Labour heartlands like South Shields and Rotheram. More ominous though, is the worsening pattern - in the last six by-elections, the Lib Dem vote has fallen by more than 75% on its 2010 total. If the Lib Dems are going to lose more than 50% of their vote in every seat, it is difficult to see them holding even one of their fifty seven seats - never mind the sixteen to thirty five being bandied about. However, my analysis is obviously ignoring a gaping anomaly: Eastleigh.

Eastleigh, remember, was Chris Huhne's seat, in which he defeated his Tory opponent by 46.5% to 39.3%. When Huhne was forced to resign over a criminal conviction, his seat became a strong notional target for the Tories, given the weakness of the Lib Dem vote. However, the Lib Dems grabbed victory from the jaws of defeat courtesy of UKIP. While the Lib Dem vote fell sharply (nearly a third, in percentage terms), the UKIP surge caused the Tories to follow the Lib Dem vote southwards and, on a 32.1% share of the vote, the Liberal candidate won the award for least dirty shirt on the line, defeating UKIP on 27.8% and the Tories on 25.4%. The Lib Dems seem to be placing a great deal of store on the proposition that the Eastleigh result is going to replicate itself over and over again in potentially dozens of constituencies where the incumbent Lib Dem MP has currently between 45 and 60% of the vote, with the party concentrating all of its campaigning efforts on these constituencies and conceding all of the seats which it holds with a lower vote and then hoping that the UKIP whirlpool sucks in at least as many Labour/Tory votes as the Lib Dems lose to other candidates, thereby guaranteeing that the Liberals enjoy clusters of improbable holds on 30 to 40% of the vote.

Could this happen? Absolutely. With the first four-way election contest in living memory, this is the election in which such a black swan event could occur if there ever was one. However, I'm sceptical for two reasons. The first is that the UKIP vote evident in the opinion polls is not large enough to replicate the Eastleigh scenario nationally and, realistically, it would have to be in order to save a significant number of Lib Dem seats. The second is that UKIP surges would have to concentrate themselves quite narrowly into constituencies in which the Lib Dems are defending seats whilst petering out in places where the Lib Dems have no seat or no hope of one. There isn't the remotest bit of evidence that the UKIP vote will distribute itself in this way - and if it did it would create a new problem for the Lib Dems, insofar as many of the seats will eventually start falling to UKIP itself once certain vote concentrations are reached. All of this leads me to the conclusion that only a tiny (and I mean low single digits) fraction of Liberal Democrats will survive the coming electoral purge. 

In this regard, there is yet more compelling evidence that the Liberal goose may well be cooked. Look no further than last year's European elections, in which the Lib Dems were defending eleven seats in multi-seat constituencies voting pursuant to the d'Hondt proportional representation system - under which it is far easier to gain election than in first-past-the-post Westminster. In keeping with the lower votes that non-Eurosceptic parties get in European elections, the hapless Liberals were reduced to 6.61% of the vote - less than half their 2009 total. This should have constituted a good test for the proposition that the Lib Dem vote can somehow strategically retract to minimise seat losses. Did it? In a word, no. With 5.42% in the East Midlands, 6.9% in the East, 6.73% in London, 5.9% in the North East, 6% in the North West, 8.04% in the South East, 10.7% in the South West, 5.6% in the West Midlands, 6.25% in Yorkshire & Humber, 7.1% in Scotland and 3.95% in Wales, the spread was, for the most part, quite even, leaving the once proud party with one seat (Catherine Bearder in the South East). 

There are only two regional outliers from this national trend - the South West and Wales. In the South West, the vote reached 10.7% (not enough for a seat despite it being the highest regional share). However, the South West has traditionally been the most loyally liberal region in the whole of England. In the dark days of the mid-twentieth century, the likes of Jeremy Thorpe, John Pardoe and  David Penhaligon rebuilt the entire brand of English liberalism entirely from West Country seats. As such 10.7% in the South West will not cut it when it comes to saving seats. The Welsh vote is a catastrophic 3.95%. This is bad for the opposite reason. When the liberal party disintegrated in the 20th century, rural Wales was crucial in keeping isolated embers of Lloyd George's philosophy alive, with substantial politicians like Emlyn Hooson and Alex Carlile building formidable brands. The Liberals have become accustomed to believing that there can be no Liberal Party without Wales and no Wales without the Liberal Party. The latter is wishful thinking. The former is not.

In the days when the late Jo Grimond and Jeremy Thorpe led the Liberals, it was sometimes joked that they could hold their parliamentary party meetings in a London Taxi. It may well be the case that come the morning of 8 May, such meetings will be held in phone boxes. If this is so, it may well create an unlikely overall majority. But for whom?