Category Archives: Economy

Northern Ireland – the most affluent part of the British Isles?

A recent report from the All-Island Research Observatory reached the surprising conclusion (to its authors at least) that Northern Ireland is “significantly more affluent” than the Republic. There is a note of caution on that, as it focuses partly on employment levels which happened to be particularly bad in the Republic when the research was carried out. Nevertheless, it reflects an obvious point to visitors and locals alike that the wealth gap between the two jurisdictions does not seem to match some of the statistics (which would appear to give the Republic a marked advantage).

Obviously, despite this, Northern Ireland could not possibly be more affluent than England, Scotland or Wales. Or could it…?

Let us, for the sake of this comparison, just use the crude numbers.

Output

The EU likes to use GDP per capita as its usual determinant of output (often taken to mean income or even wealth) in any given country or region. This does cause a problem within countries, however, as often GDP is assigned only to a company or agency headquarters (frequently in that country’s capital city). Internally, the UK uses GVA per capita, effectively taking out taxes and subsidies.

Either way, it’s much the same. The ONS has GVA figures for 2013 and Eurostat GDP figures for 2010 showing Northern Ireland at around 77-78% of the UK average (around €21,000 against €27,000) – a long way behind Ireland, whose GDP/capita is actually 16-19% ahead of the UK’s even post-crash (although we’ll come back to that).

Northern Ireland's economic output (versus UK average)

Northern Ireland’s economic output (versus UK average, 2013)

So how could Northern Ireland even conceivably be the most affluent part of the UK?

Wages

GDP is not necessarily a great measurement, as it assesses only output within the region – for example it includes profits repatriated elsewhere or activity involved in clearing up disasters, but excludes unpaid (but highly valuable) care work.

So what about wages? The Department of Enterprise, Trade and Investment tells us about these every month (here is last month’s summary), showing that weekly earnings in Northern Ireland in 2014 are £367, versus £417 in the UK overall (thus 88%); full-time earnings are £460 versus £518 (89%).

Northern Ireland's average wage (versus UK average)

Northern Ireland’s average wage (versus UK average, Nov 2014)

That puts Northern Ireland in line with most of the northern UK, but it still hardly equates to the “most affluent part of the British Isles”, surely?

Household income

The measure of income and affluence preferred in the United States is Median Household Income, which reflects all the income brought into the median household before tax (though housing costs may or may not be included, as explained below).

The most recent NI Poverty Bulletin from the Department of Social Development (for 2013, summarised here) shows that the Median Household Income in Northern Ireland is £395/week before housing costs, which is 89% of the UK average – in other words, what we would probably expect from wage levels.

However, after housing costs this figure becomes £358 – which is suddenly 96% of the UK average. Compulsory housing costs are of course much higher in the rest of the UK (for a start, the combination of Council Tax plus Water Charges sets the average household back nearly £2000 per year in England, versus the average Domestic Rate of £713 in Northern Ireland).

Northern Ireland's average (median) household income after housing costs (versus UK average)

Northern Ireland’s median household income (versus UK average, 2013)

This is remarkable – the median household in Northern Ireland is in fact, after housing costs, only 4% worse off than the UK average despite economic output being more than 20% lower. That still hardly justifies the term “most affluent”, surely?

Consumption

These figures from 2012, again from Eurostat, tell a rather different story about living standards, because they demonstrate how different “output” is from “consumption”.

Countries with high outputs sometimes have quite low consumption (not least those like Ireland, the profit of whose “output” is often based on foreign investment and thus repatriated). Countries with relatively low outputs can have quite high consumption (not least those like the UK, where there is significant old wealth). Thus, Ireland ranks third in the EU for output but falls right down below the EU average for consumption; the UK, on the other hand, ranks third for consumption but only tenth for output.

Within the UK, the Office for National Statistics has published household spending figures for 2013 – it is worth opening the table rather than relying on the headline figures. They show that, excluding taxes, insurance (of any kind) and savings/pensions, average weekly household spending by UK country (with percentage of UK average in brackets) is:

  • England £505.40 (102%)
  • Northern Ireland £484.70 (98%)
  • Scotland £449.00 (90%)
  • Wales £438.00 (88%)

This may be what we expect from the weekly household income figures, but here is the thing: they include household taxes/costs, which are either effectively taxes or are dependent upon property prices (you cannot live in wealthy London and the South East, after all, without paying that premium).

Once we exclude household taxes and net rent/mortgage, we arrive at:

  • Northern Ireland £440.50 (104%)
  • England £427.30 (101%)
  • Scotland £388.60 (92%)
  • Wales £383.10 (91%)

Suddenly Northern Ireland’s higher take-up rates for pay TV, or higher ownership of tablets, or higher spending on beauty products and clothes begin to make sense…

Northern Ireland's average household consumption (versus UK average)

Northern Ireland’s household consumption (versus UK average, 2013)

So there you have it – once they have paid their taxes and their shelter, households in Northern Ireland actually spend (or “consume”) 4% more than the UK average, and more than in any other country of the UK.

Disposable income

Almost anyone who lives in Northern Ireland has heard it – “I enjoyed London, but you know, even on two thirds of the salary you can live a better life here because of the cost of living“. It turns out there is a large degree of truth to that! Once they have sorted their tax and their mortgage/rent – the necessaries, in other words – households in Northern Ireland do actually spend more than in any other UK country.

There is an obvious health warning here, of course, beyond the normal “lies, damned lies and statistics”. In the same way GDP is not a perfect of real wealth and quality of life, nor is “consumption”. In fact, there is increasing evidence that Northern Ireland households are spending more but also becoming indebted more.

Nevertheless, the figures do present us with a fascinating story. Despite significantly lower economic output, a combination of UK-level public sector pay, low property prices and low household taxes leaves the average Northern Ireland household with a disposable income effectively higher than much of the rest of the UK.

But, whatever you do, don’t tell anyone…

We must stop electing people who refuse to govern

The failure of the Northern Ireland talks is being presented, particularly on UK-wide media, as a financial crisis. It isn’t. It is a democratic crisis.

The crisis is simple. With rare exceptions, the people of Northern Ireland vote, at election after election, for people who do not want to govern.

What happened on Friday was that the DUP and Sinn Fein (both parties who, in the past, had told the UK Government to stay out and let them get on with it) confirmed their refusal to govern Northern Ireland on the terms agreed in 1998 and amended in 2006 with effect from 2007 – the terms they themselves negotiated.

It so happens that one of those terms was finance. They would be allocated a budget alongside revenue-raising powers which they could choose to allocate and raise as a they saw fit. They have failed to do so – running out of money despite the only real “savage cuts” being applied to community relations budgets. They tossed away hundreds of millions on fantasy roads, security infrastructure they had been given to use, and refusing to implement reforms – as well as a few hundreds of thousand into their own pockets through “expenditure claims”. Faces unreddened, they then went and asked for more!

Another of those terms, however, was improved community relations – including parades and symbols. Another, implicitly, was dealing with the past. In no case was either “side” going to get exactly what it wanted.

Government is about tough choices. It is about re-allocating priorities, compromising on certain issues, and providing a clear sense of direction. It is easy to blame the populist politicians who refuse to do this – but we elect them!

We are not alone, of course. Populists in England threaten to make the UK effectively un-governable in 2015; similar will happen in Ireland the following year. They long ago made Italy and Belgium un-governable. In 2014 it was Sweden – yes, Sweden! The United States had to close down its government too. All again, because people are choosing to elect people who refuse to compromise and, thus, who refuse to govern.

As ever, in Northern Ireland we are the extreme example, with populists utterly dominant. As ever, it is finance which makes the crisis look apparent to everyone, as jobs go and pay is cut. As ever, however, this is not a financial crisis – it is a democratic crisis. It is up to us the people to stop electing people who refuse to govern.

Sorting NI’s public finances – update

I was very interested in the response to my “modestly provocative proposals” for fixing Northern Ireland’s public finances. Generally, I was encouraged by the willingness of many respondents to pay their way. If that willingness is representative of the public, it would indicate that as with political realities during the 1998 negotiations, the public are ahead of our politicians on the financial realities during the 2014 negotiations.

It cannot be denied, however, that this is also political. It is not merely a matter of balancing the books as an objective accountant, but making political choices. So I thought it worth responding to some queries based on the principles which underlay my proposals.

Re-distributive Revenue Raising

There was some debate around Prescription Charges. I understand why. However, their re-introduction would punish the sick, particularly those with long-term conditions. That is not re-distributive and it is fundamentally not fair.

On the other hand, I proposed the introduction of motorway tolls to pay for road-building: vehicle drivers pay for the roads they drive on. That is fundamentally fair. To some under my proposals extent Eastern drivers do pay for new Western infrastructure, that is true, but that is to even up a historical anomaly. That is also fundamentally fair.

I also proposed the raising of household rates. This means people who pay rates pay a little more; those who do not, do not. It is a wealth tax. It is fundamentally fair.

I also proposed the introduction of a public sector levy. This would see public sector workers taking home the same disposable income as everywhere else in the UK – a reverse ‘London weighting’, if you like; it would also see the highest paid workers contributing a little more for a short period. That is fundamentally fair.

Greener Transport

In addition to the above re tolls, there was some debate around what is, essentially, a general proposal that more commuters should use public transport. Some suggested public transport simply couldn’t cope. Others said it was already bad enough with ‘Belfast on the Move’.

To respond simply, I would stand over the view, but I accept it is a political one, that fewer people should commute by car and, particularly, fewer between around 7am-10am and 4pm-7pm.

I would add, as a matter of fact, that headlines suggesting reports had shown Belfast to be particularly ‘congested’ were inaccurate. In fact, those reports suggested not that Belfast was particularly congested during peak hours, but that it is notably uncongested by the standards of a typical UK city during non-peak hours.

I would contemplate, in fact, operating the motorway tolls only during those hours (or having higher tolls at those times, similar to the Dublin Port Tunnel).

Motorway tolls at the gateways to Belfast, perhaps only during peak hours, would be preferable to a ‘Congestion Charge’, in my view. Such a Charge would make the City Centre even less accessible during non-peak hours, causing economic damage.

Administrative Simplification and Jobs

One respondent wanted one Health Board and one Education Board. Effectively, we now have that.

However, I do propose the simplification of structures, particularly around overall devolved finance management and OFMDFM.

My proposals notably do not involve compulsory redundancies in:

  • Teaching – school mergers do mean an overall reduction in teaching posts, but I do not believe any compulsory redundancies would be necessary (it would be necessary, however, to train fewer teachers in the first place, one reason for a Teacher Training College merger);
  • Social Security Agency – I am unclear why DSD is proposing these, other than just general budget pressures, but my proposals do not envisage them;
  • Health Units – under my proposals there would be no loss of staff in the Health and Social Care Service beyond those envisaged in ‘Transforming Your Care';
  • the Arts – my proposals do involve merging the Department of Culture into other departments, but this would merely release a current administrative burden to enhance bodies such as the Arts Council; and
  • Neighbourhood Renewal – there is no reduction in Neighbourhood Renewal necessary under my proposals.

My proposals do involve a voluntary redundancy scheme which would specifically see removal of grades and, specifically, a reduction in Finance staff, and the effective abolition of OFMDFM.

Timing

There was a suggestion that raising revenue should follow the appropriate administrative savings, to demonstrate value.

I quite like that idea.

Nevertheless, it is noteworthy that most of my proposed revenue raising takes place towards the back end of the next Assembly Term. Arguably, therefore, my proposals achieve this.

Electability

A number of respondents noted that my proposals would be ‘electoral suicide’ or similar.

I’m unsure, from other respondents, that it would. Nevertheless, that this point is raised was my underlying reason for doing this.

Fundamentally, my proposals do offer a way to balance NI’s public finances. Furthermore, they do so in a way which is absolutely redistributive. They are fundamentally fair.

The suggestion, therefore, is that the voters won’t vote for something which is fundamentally fair. What do readers make of that suggestion?!

Sorting NI’s public finances

UTV this evening runs what promises to be a fascinating programme on what three experts would do to address Northern Ireland’s public finance deficit – around £600m give or take, assuming some sort of deal on Welfare Reform and taking into account Barnett consequentials.

I am not an expert, of course, but merely a humble citizen. But, for the fun of it, here are some thoughts on what I personally (writing in a purely personal capacity) would do.

This applies only to what is known as Departmental Expenditure (currently almost exactly £10b) – it does not refer to Annually Managed Expenditure (c. £8b) or UK Treasury spending in or for Northern Ireland (c. £5b).

Revenue Raising

I outlined the case for Revenue Raising two weeks ago, but should be clear I would not actually do all of it personally. Also, I would set out a five-year strategy for raising revenue, not just one, so that households and businesses could be prepared; and I would be specific about where the money so raised would go.

Personally, I would be inclined to do the following:

1. Remove the Rates Cap and Raise Regional Rates by 7% for 2015/16 and inflation plus 3% for the four years thereafter to raise £50 million in year one and another £100 million over the next Assembly term.

This would be allocated to the Health Budget, specifically to ensure the availability of cancer drugs.

2. Introduce Motorway Tolls (at levels similar to the Republic of Ireland) at M1 Ballyskeagh, M2 Ballycraigy [i.e. the new service stations] and A2 Dee Street to raise £75 million per year.

This would be allocated to the Capital Budget, specifically to ensure the construction of key freeflows and expressways along the A1, A6 and A2, with extra specific benefits:

  • assurance to the hard-pressed construction industry that projects will proceed;
  • improved connections for the North West and improved safety;
  • greater use of public transport by commuters (to avoid tolls) thus alleviating the funding problems in that area; and
  • in the longer term, it is easier to apply to the European Investment Bank for loans for tolled roads than not.

3. Introduce water charges, but deferred by one year (the year of the most significant Regional Rates increase) and not brought in fully until the 2019/20 financial year to raise £100 million in 2016/17 rising to £250 million in 2019/20.

The would be allocated to the Capital Budget aimed primarily at the upgrading of water and sewerage infrastructure, but also perhaps to more general infrastructure projects such as the North-South electricity pipeline, thus securing sufficient power and water even in emergencies in preparation for the closure of the Kilroot power station in 2021.

(See also my note on a Levy in Indirect Savings below.)

Not Revenue Raising

Note that the above means, at least initially, I would not re-introduce Prescription Charges (the amount so raised simply isn’t worth it and I fail to see why people with progressive conditions should pay a particular penalty in effect simply for having them); nor would I introduce bin charges or fire call-out charges.

The Regional Rate even if it added Water Charges would remain the lowest household charge in the UK even at the end of the next Assembly term (meaning Northern Ireland would retain its status as the UK’s “lowest taxed region”, all else being equal).

It is possible that pressure would come to have income tax and aggregates levy devolved to Northern Ireland, as will now be the case in Scotland. In principle, I support this (as I support a Federal UK and thus the same powers for Scotland, Northern Ireland and Wales). In practice, however, I would leave them unchanged either way.

Direct savings

I am sure there is a technical term for this, but what I mean here is “government give-aways” which should be re-assessed.

1. I would be inclined to leave tuition fees alone, but would contemplate raising them slightly during the next Assembly term if the DEL (or successor department) budget remained tight – raising them is a progressive taxation move as they are only paid by graduates upon earning a certain amount in any case, but I would be wary immediately of imposing further financial problems (even if long-term) on young people (even if confined to a particular group).

2. I would restrict concessionary fares (i.e. those for over-60s and Translink’s own staff and families) on public transport to non-peak hours; it may not then be necessary to raise the qualifying age to apply only to pensioners. It is hard to say precisely what this would save, but it may be in the region of £20 million annually initially, and rising.

Anything so raised would be reallocated to public transport to secure new routes and maintain fares at roughly the current level. It would also have the benefit of increasing train capacity during non-peak hours (and probably reducing it slightly during peak hours).

Indirect savings

Even with all this, I have only saved about a quarter of the £600 million gap in Year One (which exists even with Welfare Reform implemented and the Treasury’s October loan paid off), and in practice with pressure on Health budgets and the immediate requirement to invest in infrastructure, I am probably still only treading water with subsequent rises. We still need close to half a billion from somewhere!

1. I would be inclined towards a voluntary public service redundancy scheme aimed primarily at Health and Education administrators and Civil Servants. Some suggest this would save £300m, though I am not so sure in the current jobs climate. Let’s guesstimate half that – £150m.

2. I would run a fundamental Public Sector and Assembly Reform Programme over the next Assembly Term, including:

  • reduction in the number of Departments to six (Education, Economy, Environment, Health, Justice, Treasury);
  • abolition of OFMDFM and its replacement by a small Executive Office (which no longer requires Junior Ministers);
  • removal of the Finance Unit from all Departments, with all payments made directly from (and indeed to) the NI Treasury;
  • removal of two Civil Service grades;
  • legislation to ensure local Councils take on only functions relevant to them (no more “European Officers” and such like); and
  • reduction in the size of the Assembly to 90 members and reduction in Office Costs Allowance for Ministers and the Speaker.

I have no idea what this would save, frankly! However, it would have extremely positive long-term effects not just on reducing the cost of government but also on improving cooperation/efficiency and simplifying access to information and services for citizens.

3. I would be inclined towards what would no doubt be a highly controversial but temporary Public Sector Levy (not totally dissimilar from the Pension Levy introduced in the Republic of Ireland six years ago).

The point is this: average earnings in Northern Ireland are roughly 88% of the UK average, yet average household income is 96% – the gap is made up partly by slightly higher welfare receipts but mainly by our lower “household taxes” (most obviously a Regional Rate averaging about £800 versus Council Tax+Water Charges averaging about £1900).

Public Sector earnings in Northern Ireland, however, are 99% of the UK average meaning that households with earners in the public sector are in fact considerably better off than they are elsewhere in the UK (a household with two public sector workers will on average be £600 better off).

The levy would be designed, therefore, to make up for that differential. It would probably decline over the course of the Assembly Term (as Regional Rates rose and Water Charges were introduced) and would likely initially be introduced at 2% of pre-tax income – on all public sector workers by a loose estimate this would raise (save) £120 million, although I would be inclined to exempt direct service positions (like nurses or teachers).

Cuts

We are nearly there – with a voluntary redundancy programme, a reform programme and a temporary levy, I have probably mustered another £300 million. I am three quarters of the way there!

It is worth noting, however, that I have done this without implementing any actual “cuts”.

1. I would remove the exemption of Education from efficiency savingssaving £70 million.

These would predominantly have to be found at administrative level, for example by sectors having to share services. However, there is no doubt further school mergers (ahem, closures) would follow. This would be initially painful, but in the long run makes for a sensible rationalisation of the school estate.

2. Further to the above, I would integrate Teacher Training.

This does, in effect, mean the closure of the site at St Mary’s or Stranmillis (likely the former). That is the way it is; we cannot afford such duplication.

3. Further to that, I would introduce further integration of facilities.

For example, it may be possible marginally to reduce funding to local government (i.e. allocating a larger share of the Rates bill to central government) in the expectation that they would invest in shared leisure centres.

4. I would streamline planning.

Further to the rationalisation of Departments above, the Planning System remains a burden. It causes delays, frustrates investment and can so much as double infrastructure construction costs versus Continental Europe.

5. I would “invest to save” in improved management of public services.

Currently decision making takes too long, involves (in particular) too many meetings, and consists of terms such as “framework”, “strategy” and “collaboration” which have frankly lost all meaning!

Conclusion

I think I am just about there!

As can be seen, it is not easy. I have introduced motorway rolls, radically streamlined government, introduced extra charges and levies, and I have closed some facilities (and I had assumed the introduction of Welfare Reform minus “Bedroom Tax”).

Yet, interestingly, I have secured better medicines, introduced better infrastructure, and brought in more efficient government. It is not all bad!

I have left some things untouched too. I have not taken the scythe to the voluntary sector; I have left arts and minority languages funding in place; I have not introduced Prescription Charges.

Of course, no one reading this will agree with every item. As I’ve long said, compromise is a good thing – so over to the readers here and the panellists on UTV tonight!

The case for revenue raising

When they are discussing curry and yoghurt, they are best ignored. However, when they are discussing finance and the economy, they are worth listening to. The position of the DUP is consistent and fairly standard “centre right”.

The key, therefore, is that any response to the DUP’s position has to be consistent and fairly standard. The only party which mustered that last week was the Alliance Party.

It is not difficult to see where the Finance Minister is coming from when he suggests that, as the effects of the Great Recession begin to bite through the long-delayed public spending reductions we should long since have experienced and planned for, the last thing you want to do is increase pressure on households by (in effect) raising taxes. That is a legitimate viewpoint. However, the one thing I take issue with is that by not raising taxes somehow the pain is removed. There is pain either way, and we need to be very clear about that.

The case for revenue raising is essentially that, without it, all the pain of balancing the budget is transferred to public spending reductions. This has just as direct a knock-on to household income, potentially, as raising taxes. This is not just in service reductions or cuts; there are consultants who operate with the public sector; members of public bodies; and of course those in the public sector who have to contemplate redundancy (after all, if “voluntary redundancy” doesn’t get you all the way to where you need to be, “compulsory” will have to follow).

The case for raising revenue (taxes) is threefold. Firstly, it enables a more graduated reduction in public spending, and thus more thought into how it should be reduced rather than just crude budget cuts. Secondly, it enables a fairer system of payment – for example, the regional rate (effectively a property tax) may be seen as a perfectly reasonable wealth tax. Thirdly, it will in fact make the public more aware of what money they are handing over – and thus more demanding of the very efficiency the public sector needs to deliver as budgets are reduced.

To be clear, Departmental Expenditure Limits for non-capital spending are now at roughly £10b per annum – this had reached £10.8b but for a variety of reasons (including breaching parity and hitting capital borrowing limits necessitating transfers of funds elsewhere) the £800m hit now has to be taken all at once:

  • raising the Regional Rate by 19% (as once done under Direct Rule) would raise about £115m, and removing Rates Cap another £10 million;
  • introducing water charges with few exemptions would raise about £250m;
  • re-introducing Prescription Charges as were would raise about £10m, or without exemptions about £30m;
  • introducing motorway tolls at Fortwilliam, Dunsilly and Blaris as in the Republic would raise about £50m (with the additional benefit that it would be easier to make the case to the European Investment Bank for new roads spending); and
  • raising the age of free travel from 60-65 would raise about £10m;
  • introducing nominal charges for currently free summer schemes and similar programmes, and perhaps even bin charges and Fire callout fees as in the Republic could raise another few tens of million.

It won’t get us even half way to covering the shortfall, realistically, because we won’t do all of it and, even if we did, we would phase some of it in. However, there is a debate to be had in the coming weeks. Let us have it reasonably, based on the realities of the situation we face.

The frustration of referendums

Full version of article for Stratagem NI written pre-referendum:

One of the fascinating aspects of the Scottish referendum, for me, was that it demonstrated the clash of cultures between politics and economics. The fundamental debate seems to have settled on matters economic – yet these are being debated primarily by politicians. The result is that people seemed to sense they are ill-informed and are thus growing increasingly irritated, rather than filled with passion and vigour.

Why is the focus on the currency? Throughout the campaign, polls showed around 45-50% of people certain to vote “no”, and 35-40% certain to vote “yes”. The “undecideds” were therefore crucial to the outcome.

It was expected, early on, that this would mean the focus would fall on oil revenues. However, it became rapidly apparent that oil can be argued either way – “yes” supporters argued it would make Scotland one of the wealthiest nations in the world; “no” supporters argued the oil will run out within a generation (implicitly leaving Scotland worse off than its neighbours). So the economic issue turned to currency.

It turned to currency mainly because the “no” campaign realised it could attack on the subject. Rightly or wrongly, it had long ago decided to “play for a draw” and go for an essentially cautious (perhaps negative) campaign, not least because its job has been to defend a fairly firm opinion poll lead since the outset. On currency, the main pro-“yes” party, the SNP, was clearly divided – in 2004 current SNP Education Minister Michael Russell drafted a book outlining that the first requirement of Scottish independence would be its own currency; as recently as 2009 SNP advisers briefed that they may move to a pro-euro stance; First Minister Alex Salmond settled in the end on a “Sterling Union” with the Continuing UK similar to the Eurozone, but found all three main UK parties and the UK Treasury publicly opposed. The “no” campaign wished to promote the risk and uncertainty inherent in independence, and nowhere is this more obvious than on the currency it would use (and it is possible that Mr Salmond’s “three Plan ‘B’s” may, in the cold light of day, inadvertently have served to highlight that risk and uncertainty further in voters’ minds).

All of this serves two linked warnings about referendums which may soon apply across the UK. The first is that politicians are most comfortable when they are banding figures around and making grand economic warnings; the second is that, when they do so, there is no referee to determine the veracity or legitimacy of these figures or claims. This can turn referendums, supposedly the ultimate exercise in representative democracy, into events of great frustration and disenchantment.

As we look forward, the same warning applies to a potential ‘in/out’ referendum on the European Union. Already, we hear dire warnings from “in” campaigners about the millions of UK jobs which “depend” on EU membership; and equally dire claims from “out” campaigners about the “£17 billion” that constitutes the alleged “cost” of that membership. Most alarming of all, perhaps, is the way that each side will show absolute faith in their own side’s case, and give no credence at all to any of the other side’s. The people who determine the outcome, therefore, are people in the middle who merely become increasingly confused and disenchanted by the claim and counter-claim being thrown about by either side – that would apply to any EU referendum across the UK just as it does in Scotland currently.

We in Northern Ireland are familiar with the notion, currently being experienced in Scotland, that our side is completely right and the other side is completely wrong! It is small wonder that many people of more moderate view in Scotland came to regard themselves as insufficiently “informed”. They are! Unfortunately, we needn’t expect anything different in a prospective EU referendum across the UK later in the decade.

The West’s economic (and democratic) meltdown explained

Bankers, immigrants, the rich, the poor… it’s easy to single out a group to which we don’t belong and blame it for our economic ills. How about, instead, we deal with what has actually happened? Of course, what has actually happened is complex, but it is worth trying to simplify it…

The average Western household now contains six times as much “stuff” as it did in the 1950s.

The West has been on a consumer binge, starting in the late 1950s. As of then, most Western countries have run at a loss – both in terms of Balance of Payments (importing goods and services to a value greater than they are exporting) and in terms of National/Government Deficit (spending more on public services than they are raising in tax revenues). Of the three big Western Allies – the United States, the United Kingdom and France – not a single one has managed a balanced budget since 1962 and not a single one has managed a trade surplus since 1975. How can this be?

13% of US Federal Reserve borrowing comes directly from the People’s Bank of China.

The victorious allies after World War II went on this binge while the defeated powers ran surpluses and became economic superpowers. The standard of living, regardless of how measured, rose in West Germany, Japan and even Italy to exceed that of the United Kingdom or France by 1990. After the Fall of the Wall, while Germany and Japan stuttered and Italy’s economic fortunes went into reverse, they were replaced by China.

Then something arguably unprecedented in the history of the global economy happened. The rich world not only began to run a trade deficit with the poorer but growing economic powers (as the United States, United Kingdom and France had done with West Germany and Japan effectively in post-War trade), but it actually began to borrow money from them directly to fund public services and welfare provision. For a decade or so from the mid-1990s this option was beguiling for all concerned – China lent the United States money, and that fuelled a consumer boom with which Americans and those who traded with them most frequently (above all the British and other Europeans) bought Chinese goods.

In the Far East, you save up for your own Healthcare and Welfare provision.

With the money thus borrowed – not just by governments but also by corporations and households – the West (except Germany) went on a consumer boom and paid for welfare and health provision none of which it could actually afford on the basis of goods/services traded or (thus) tax revenue raised. The difference was made up from money borrowed both to raise tax revenue from consumer booms and directly by governments – largely, as noted above, from countries (notably in the Far East) with no heritage of government-funded health or welfare provision. Those countries could afford to lend because their people were starting from a much lower wage level and were grateful merely for the increased wages that exporting to the consumer boom gave them. In the Far East, it is typical for people to make their own savings for Healthcare and retirement, and for Social Care to be provided by the family unit.

Health and Welfare typically account for two thirds of public spending in the West. Therefore countries which do not fund this from public spending – like China – only need to raise at least a third of tax revenue per capita in order to have money over to lend to countries which do. The bizarre outcome of this is that far poorer countries (per capita) end up subsidising services in far richer countries which they do not themselves provide – but we need to understand that this is only temporary, because the money comes in the form of loans and they themselves will soon come under pressure to provide those services.

Property prices in the English-speaking world have more than doubled in real terms in the past 35 years, but have remained stable in German-speaking Europe.

The consumer boom in the West, meanwhile, hailed a property boom, particularly in the English-speaking world and Spain, where property ownership is culturally the norm. Pressure on banks to fund ever increasing property prices while expanding property ownership to the masses (as “ownership” came to be seen almost as a “right”) led to ever more complex financial “products” where dodgy loans were bundled up with more secure ones and sold on, effectively as an insurance gamble. Globalised banks – even outside the English-speaking world and Iberia – got involved in this high stakes game of musical chairs and in 2007 it was in fact a French bank left standing when the music stopped. Somebody should indeed have noticed that these schemes were becoming vastly and ludicrously complex – but then somebody should also have noticed far earlier on that a single parent in the American South with four children and no education probably shouldn’t be getting or even seeking a mortgage. Most of the people who had funded and insured that mortgage (and countless others like it) didn’t even know they had…

The result was a calamity as a property prices crash meant households could no longer borrow against property, a run on the banks meant businesses could not get credit from them, and thus consumer spending and collapsed just as businesses needed it most. This then saw a knock-on collapse in tax revenues just as governments needed more money to nationalise banks.  The central issue was that, in the English-speaking world and Iberia, property was effectively being traded in a different currency – whose value then crashed meaning that anyone who had savings in it (a lot of ordinary people, frankly) got burned and anyone relying on them to pay off debt, invest in businesses or provide vital tax revenue got burned as well. (This applied right across the Western World regardless of where the mortgages were because its banking system is so interconnected.)

Overall UK debt is now approaching seven times GDP.

There is a lot of focus on “national debt” – but this applies only to public spending (exactly what that means varies from source to source). The UK’s national debt is indeed atrocious – soon to be more than two whole years’ tax revenue – yet actually by most measurements it is now fairly average in the West. Where the UK is truly awful is in overall debt – add in households debt (say on cars or holidays or new kitchens as well as mortgages) and corporate debt, and the UK’s overall debt is among the worst anywhere in recorded history.

Here is the thing: much of that “national debt” is already borrowed from Chinese interests. Much of the other debt has been accumulated buying Chinese products – from toys to smartphones.

Want a bridge built? Ask the Chinese!

In other words, what has happened over the past 20-40 years is we have been borrowing money from the Chinese (and others) to buy their products. We did this because we thought they were cheap – but having bought them, we are now going to have in effect to buy them again as we pay the debt back.

In the meantime, remember, the Chinese have been subsidising our Health and Welfare systems but they are just reaching the point where they will want those themselves. In effect, this means we will have to subsidise theirs, from now on  – after all, we are the debtors and they are the creditors.

There’s worse (from a Western perspective), because the really crucial point is yet to come.

Recently, San Francisco had to rebuild a major traffic bridge. It sought tenders from within the United States for the work, but all involved closing the bridge entirely while reconstruction took place. So they looked globally and, sure enough, a company came forward to build the bridge while maintaining the current one in place for the duration of the work – from China. Remember, the work will be paid for, in part, by money borrowed from China in the first place.

Long story short:

To cut a long story short, what has happened in the past 20 years is the East has lent the West money to maintain a lifestyle – with property, employment rights, taxpayer-funded welfare/pensions and government-funded Health services – that is highly civilised but that it has not actually earned since at least the 1970s Oil Crisis. The East has gone without all these civilising things, but has used the situation to export goods and services of increasing value to the West, thus raising its own wages and (particularly) expertise. As the East’s expertise now exceeds the West’s, it will expect its wages to do the same – creating perhaps 2 billion more “middle-class” people in the next generation or even the next decade. It no longer suits the East to subsidise Western lifestyles which it can now legitimately aspire to for its own population.

The West’s Health and Welfare systems and even its property rights derived essentially from a national profit made through trade by being smarter and more innovative than the rest of the world. This is no longer so; therefore the money to fund those systems (as they are currently delivered) no longer exists – indeed it hasn’t for some time, as it has already been being borrowed for at least a generation (from people who had every motivation to lend a generation ago, but have none now).

Ostriches will become extinct!

Inevitably added to the West’s burden is a democratic meltdown alongside the economic one.  The skills required to get elected – basically getting attention – are utterly distinct from those required to govern effectively and realistically. It is much easier to blame bankers, or immigrants, or the poor, or the rich, or some other bogeyman and thus gain attention, than it is to face the very real re-balancing of global trade, power and influence which lies directly before us as explained above. It used to be we would just about be saved by Sir Humphrey, who would at least keep things relatively stable while the West cashed in on its expertise and thus its competitive advantage – not just in terms of technology, but also social order and governing institutions. This will no longer be enough, because not only has the Far East caught up in technological expertise, but it is getting more skilled at social order and government too. It even has the advantage of skipping some of the luxuries – like free elections and state-funded welfare.

We can bury our heads in the sand or we can accept this basic problem: the term “social justice” now only has meaning if it is applied globally. The days of paying pensions or inflating wages on the back of borrowed money in the West on the back of consumer booms for products or materials bought cheaply from the East are over.

What’s the solution? Before we come to that, can we at least accept and agree on the problem?

If we in the West want a welfare system (including pensions) and public services (including Health) which are better than those in China, we will have to work harder than the Chinese.

We don’t. There’s the problem.

 

No longer Left/Right but Open/Closed

If Tony Blair got one thing right it was a remark he made in late 2007 shortly after handing over the Premiership, to the effect that politics is no longer “Left versus Right” but “Open versus Closed”. This is still somewhat simplistic of course, but the more I think about it the more accurate I find that to be. It also explains the imminent collapse of the UK’s political system.

I tweeted somewhat churlishly after UKIP’s big gains last month that far from Northern Ireland’s politics becoming more like England’s, in fact England’s was becoming more like Northern Ireland’s. UKIP’s fundamental appeal is to “Closed” voters – people who are disillusioned by and distrusting of everything (not just the EU).

Liberals tend to appeal to “Open” voters – the type who are typically well travelled, professional, educated (the type I have referred to as Northern Ireland’s third pillar, alongside Unionist and Nationalist). However, they don’t understand “Closed” voters at all. Closed voters don’t respond to people providing rational arguments and even less well to people piling on lots of facts and statistics – because they simply don’t believe them. Nick Clegg found that out to his cost when debating Nigel Farage.

One comment I saw recently referred to anti-water charge demonstrations in the Republic of Ireland as “left-wing”. By any definition, however, they’re not – the “left” traditionally argues for higher public spending and admits that high taxes are a prerequisite for achieving that. But here was the so-called “left” arguing against tax increases, even when it is obvious they are necessary. The demos were not, in fact “left wing”. They were populist. And they were “closed” – a rejection of the global reality that a Europe that creates only 25% of the world’s GDP can no longer afford 50% of its social spending without tax rises, and that particularly applies to Ireland where the tax take is nearer the United States average than the European Union’s (but enough with the statistics…)

Unfortunately and unusually we have been lumbered with a government in Northern Ireland dominated by two parties which are utterly anti-intellectual and “closed”. They are most comfortable with identity politics, and with localised campaigning to the extent that their constituents’ immediate short-term interests always trump longer-term considerations. They are, in other words, an awful lot like UKIP – and, as with UKIP, other parties in Northern Ireland haven’t yet come up with a way of dealing with them!

Perhaps, however, if the rest of us put away our “left versus right” prejudices – which are themselves these days identities more than meaningful political standpoints – and built an “Open” coalition we would begin to get somewhere? Is it time to stand together against the closed, unreal, anti-intellectual forces of the DUP/SF in Northern Ireland (and indeed in the latter case in the Republic) and the UKIP across the UK, as well as countless other similar examples across Europe?

No one telling the truth on public sector reform

NIPSA has once again jumped the gun by saying that public sector reform “could cost 6,000 jobs”, a quote the media were only too happy to run with one slow weekend news day. One of the reasons for the traditional media’s decline is its willingness just to report statements without even a hint of challenge – the obvious challenge here being that there is no public sector reform!

It is true that the Head of the Civil Service has been tasked to bring forward a paper on “slimmed-down government”, reported two weeks ago (more reliable journalists talk correctly of a voluntary redundancy scheme to reduce the public sector workforce by more than double the NIPSA figure). Not reported in the summer, but something which happened, was the panel of six (three from outside Northern Ireland) to make recommendations on improving public sector performance. But none of this work has actually even come close to completion, so frankly we have no idea what the outcome will be – for jobs or anything else.

The only thing we can be sure of is that both processes will result in an outcome which is theoretically sound but politically nigh impossible. Implicit in NIPSA’s intervention was an opening bid that it would not accept job losses (a line the SDLP, utterly laughably, has also previously stated) – yet even the loss of 13000 jobs would only return us to the level of public sector employment which existed at the end of the Troubles (a period during which, for understandable reasons, the public sector became vastly inflated by any remotely reasonable peace-time standards).

Politically impossible, that is, unless someone is prepared to point to the truth. No one in politics fancying their electoral chances will do so – I tried once myself and it didn’t go so well! No, voters across the Western World have settled on a preference for low taxes and high public spending – an obvious nonsense but one which they determine can always wait another five years before anyone needs to do anything about it (while introducing lots of bogeymen – from bankers to immigrants – to fill the intervening time).

Even though I have no intention of standing for election, I’ll stick to just one reality. Health Minister Jim Wells’ suggestion that Health (and Care) costs are currently rising 6% every year is likely accurate – in fact, that is more or less the case in real terms in every comparable jurisdiction across Western Europe and North America. Here’s the thing – that means, in a decade, that Health costs will likely rise over 60%!

The Health Department’s budget is 41% of Northern Ireland Departments’ current expenditure; it includes some emergency service provision, but even without that it accounts for over a third of current expenditure, which currently comes to around £10 billion. This means, within a decade, in real terms Health and Care spending is due to rise from around £3.5 million to around £5.5 billion – taking a full £2 billion (over 30%) from all other devolved departments (and thus from all other devolved services – schools, social housing, policing, infrastructure etc.)

Assuming we don’t want to lose that 30% off public service provision in the next decade, there are two principal ways we can deal with this problem.

Firstly, we can raise revenue – for example, doubling the regional rate would mean we could retain current Justice spending with a bit left over for fire and rescue; introducing water charges and tolling roads while re-negotiating capital spending limits based on that may enable infrastructure to be built and maintained for next to nothing (user pays), cutting any losses there; re-introducing prescription charges, raising tuition fees, removing rates caps and so on would add a few more quid at the edges. All of this would, however, at best recover a few hundred million – we are still well short.

Secondly, we can reform public services…

  • a single NI Executive Treasury rather than every Department having a full finance department (with separate grant systems etc);
  • competitive tendering to deliver public services, including some currently delivered internally, driving up efficiency and driving down costs;
  • removal of at least two Executive Departments (frankly six, including Justice, would probably do – causing not just savings but also more streamlined cooperation);
  • removal of at least two Civil Service (and comparison) grades;
  • a streamlined planning system – no more meetings with three different agencies and two or three departments on every case;
  • no more local Council “mission creep” – Councils don’t need “European Officers” and Councillors don’t need to discuss Gaza;
  • full and complete integration of teacher training, and subsequently of course the schools they are teaching in.

Here’s the truth – even that gets us nothing near the £2 billion we need by this time next decade… and that’s without welfare, which is a completely separate funding stream…

(By the way, the answer to this is not to “stop foreign wars”. Defence costs NI around £55 million, barely half this year’s shortfall alone – less, in fact, then the A5 dual carriageway has cost in preparation costs without a metre if it being built! So let’s stop the irresponsible fantasies and move on to reality!)

Never waste a good crisis

I am a big fan of the Irish economic commentator David McWilliams, not least of his brilliant ability to state my views much better than I can and his essential maxim that “what is important is never complicated and what is complicated is never important”. He recently won the award for Ireland’s “‘most influential Tweeter”. If only! Ireland (North and South) would be an awful lot better if he had more real influence!

I agree with him almost entirely again here – it’s really, really worth a listen. He most particularly challenges economists for ghetto-ising their knowledge by surrounding it in impenetrable jargon, leading to a lot of impotence and anger among the public.

The article’s headline is a little misleading. Mr McWilliams doesn’t quite say that humanity is incapable of learning from mistakes (admittedly he does flippantly say we don’t learn anything; a little extreme!) – quite evidently it is capable of doing so. What is true is that people are emotional; and also implicitly that we are products of our culture – the framework for our own actions/emotions and the actions/emotions of others. Entire societies function in this way.

Trying not to be simplistic but… the United States is flavoured by the fact it was founded by people at great risk spreading west across a continent, so of course it has a gun culture and an individualistic attitude to health; Germany is flavoured by wild inflation and a mad murderous dictator, so of course it is austere and prefers consensus to “charismatic leadership” now; England does evolution not revolution, so surely you didn’t seriously believe the “Vow” for vast constitutional change within months?!

So what’s this about never wasting a good crisis? If I were advising, say, a Commission set up to advise the potential next UK Government on the NI Economy I would suggest two things are core to this before we even begin:

- Northern Ireland has its own culture within which solutions must operate (theoretical academic solutions are hopeless, we need practical solutions in tune with our emotions about who we are and what is feasible); and

- keep it simple (leave out the complex stuff, just focus on the simple issues of revenue and spending, exporting and importing, receiving and contributing).

What is really necessary is a 30-year vision for Northern Ireland. If you go long term, you actually find it easier to get buy-in. Then, focus on the simple points. These include:

- you cannot spend money you don’t have (it doesn’t matter why you don’t have it);

- when you do spend, it should be on the basis of value (there’s no point spending “on the basis of need” if it doesn’t solve that need);

- it’s easier to raise revenue than reduce spending (remember the endowment effect – people value what they have more than what they could have, so once something is done “by the State” it becomes almost impossible to suggest subsequently that it shouldn’t be);

- to deliver change you have to make choices and these will make you unpopular (unpopularity is a sign you are doing something right – but is distinct from disengagement, which isn’t);

- people will support change they feel involved in even if they disagree with it instinctively (and they will oppose change they feel detached from even if they agree with it instinctively); and

- emotions (including issues of identity and religion) matter to people – they are what makes us interesting humans rather than boring robots.

Can we agree these things for the future and thus not waste the current crisis?

Follow

Get every new post delivered to your Inbox.

Join 3,177 other followers