INSIDE POLITICS - CARBON BUDGET

It wasn’t very dramatic in the end - after all carbon emissions is just above a double physics class on a Monday morning when it comes to excitement – but yesterday was the day during which the Green Party proved that it has what it takes to play its part in Government.

If its carbon budget was a revolution it was very much one with a small r. It’s the first budget of its kind every attempted in Western Europe and yesterday John Gormley admitted that in a sense, he was taking a shot in the dark.

"The concept of the carbon budget is new, and this year’s format can be seen as a pilot. I will consider how its content and format will be developed and improved in future years," he said.

What Gormley secured in the budget was the go-ahead for the much-touted 3% reduction in carbon emissions. And in his carbon budget yesterday Gormley essentially painted a picture of where we are now and where we need to be in 2012. And most importantly, he announced the first of the measures that need to be taken to get there.

n a complicated table that is strictly for anoraks, there were enough statistics and figures to tell us how it can be done. The broadbrush picture is as follows: The 2006 figures will show that Ireland emitted 70 million tonnes of carbon dioxide equivalent that year. To meet the 3% annual reduction and to meet our Kyoto targets, we need to reduce that by an average of 6 million tonnes each year. And the first of the new measures to help us reach that target include initiatives in energy; industry; and residential. As each year goes on, more measures will be added.

It’s a huge ask and will mean some pain. Gormley accepted that we might not achieve it but he said it would not be for the want of trying.

"We are not making it easy on ourselves. There is always a danger we may fail. We have set the bar high in striving for a 3% annual reduction in the Programme for Government," he said yesterday.

And to that end, when you look at the chart produced, it looks very like the Government will have to rely on what is euphemised as ‘flexible methods’. In simple terms, that means a carbon fund. At the moment we have E290 invested in it. In opposition, the Greens railed against it saying that Ireland was essentially buying its way out of its Kyoto commitments. But even with the new political dispensation, we may still need to rely on it. Note the subtle use of language in Gormley’s Dáil speech:

“I recognise – as Al gore did when he was in Dublin last weekend –that the flexible mechanisms are an integral part of the Kyoto Protocol agreement and an important instrument in promoting low emissions investment in developing countries. Notwithstanding this, the Government is committed to ensuring Ireland is able to fulfil its commitments by emission reductions.”

The message is: we may have to resort (reluctantly, sure) to the fund.

There were positives yesterday. The new measures that will phase out traditional incandescent lightbulbs in favour of energy-efficient ones; the new motor tax system that will be based on emissions not engine size; and the mandatory environment label system for cars (very similar to the labelling system used for white goods).

But it’s partly Lord Make Me Green but not yet. The new system for light bulbs will not be introduced until 2009. And despite the changes in vehicle registration tax being flagged in last year’s budget, they won’t be introduced until July. John Gormley didn’t really have a decent explanation for this yesterday; nor did he for the fact that the new motor taxes won’t be introduced until July.

And it’s generally been recognised that to achieve a 3% reduction in Co2, the Government will have to introduce a carbon tax. This was in the 2002 Government’s programme but was ditched in 2004. Now it’s back on the agenda. But Brian Cowen announced on Wednesday that it that the issue has been kicked to touch, with a Commission for Taxation being established to explore etc etc etc. When will it decide? How long is a piece of string?

Still, yesterday was a good start for the Greens and for Gormley. It will mean that a person buying a gas-guzzling car will be paying the top rate of 36% in VRT and the maximum E2,000 in motor tax. That means that the VRT for a high-powered car selling for E75,000 will be in the region of E24,000 with a E2,000 per annum tax bill.

As the AA’s Conor Faughnan pointed out yesterday:

“A mid range car emits 173 grams per carbon dioxide per km (an example would be a Ford Mondeo 1.6 litre petrol which emits 177g). I suggest within a short space of time the general public will be as familiar with these figures as they are with miles per gallon.”

Faughnan made a fair point that the motor tax was also a revenue raising operation (raising E83 million for the local government fund), which he considered unfair:

“Because it was called a Green Budget the Government was able to get away with increases in car tax of between 9 and 11%. There was no environmental dividend but there was a revenue dividend,” he said.

It was an undramatic yet promising start. There is still a long way to go on the road to reach the targets but at least the Government has at last got its hands on a road map.

INSIDE POLITICS - BUDGET 3

Translate the following comment of Tánaiste Brian Cowen into English:
“Over recent months the dynamics of the housing market have fundamentally changed… The conditions then (before the election) would have destabilised the market. (The Mullingar Alliance’s) so-called solution would have harmed the market. I have always said that stamp duty could only be looked at within the budgetary cycle. We need to support the market and not destablilise it.”

It looks tricky doesn’t it at first glance? But the translation is very simple.
It can be boiled down to one phrase: “A perfectly executed 180 degree u-turn”.

If Brian Cowen had turned up yesterday looking tanned and well five years after his smashed-up canoe was found on a shore on the North-East of England he would have caused less of a stir than his announcement on stamp duty.

Six months after he accused Fine Gael and Labour of proposing stamp duty changes that would destabilise the market, Cowen himself yesterday announced stamp duty changes that were broadly similar. The reason? Oddly enough what would have destabilised the market six months ago was not being introduced to stabilise the market you follow his logic? Erm, not quite.

Twelve months ago Cowen was portraying stamp duty as a non-issue and talking about a ‘soft landing’ in the housing market. A year later the landing experienced by the construction industry could be described more as ‘crash’ than ‘soft’. And forced by a collapse in revenue from property taxes, especially stamp duty, the Tánaiste has essentially being forced into a 180 degree turn – or as he describes it, a ‘step change’ or overhaul of the system.

His reason for this is inarguable. During his 50 minute Budget speech to the Dáil, he said: “Activity is slowing somewhat and there is some uncertainty as to where prices will settle. The housing market is an important aspect of our overall economy and the sustainability of economic activity can be assisted or impeded by the efficiency of that market.”

And it does make for fundamental change. No duty until E125,000. And the 7% on the balance up to E1million. And over E1 million, it rises to 9% for the portion of the purchase price that is over E1 million. The scheme, as announced, is not all that different from that announced by the opposition parties and by the PDs (though a little simpler). The net is that the two stamp duty initiatives announced by the Government this year will cost E270 million (E81 million for first-time buyers; and E190 million for this year.

It will be welcomed by everybody from home owners (those purchasing a E650,000 will spend a whopping E21,750 less in stamp duty) to the construction industry but also leaves the Government very vulnerable to charges of gross political misjudgement, doing too little too late to prevent the housing slump.

“He waited for the housing market to collapse before he address the need for reform in stamp duty,” said Fine Gael deputy leader Richard Bruton.

Labour deputy leader Joan Burton said that he had allowed the housing market to slump and also argued that the reforms would favour the very rich more than the very poor.
The debate between Government and opposition on this is a simple if polar one. One says the measures should have been introduced while the price curve was going upwards; the other says that it could only be introduced when it was going down, or “countercyclical” to borrow Cowen’s ugly word for it.

Cowen’s Fourth Budget was unusual in that it veered away from his usual low-key approach and had a bit of the ghost of Charlie McCreevy about it. For one, there was the stamp duty stunt, a very Charlie gesture. And secondly, it was a much more expansive budget than anybody expected from the usually conservative Cowen.

The overall economic climate has deteriorated dramatically in recent months and the Finance Minister was forced to pick up the pieces after any Government’s most torrid six months, certainly since 2002, and maybe since 1995.

“It is right and appropriate that we should run budget surpluses when the economy is performing very well. It is equally right and appropriate that we borrow when the growth outlook is less favourable,” he said in the opening passages of his Speech.

But in the run-up to yesterday, he talked about modest borrowing and ambitious growth. But the borrowing was certainly not all that modest. The Exchequer will require to borrow E4.9 billion next year. As a point of fact, Bruton pointed out yesterday that the turnaround since 2006 has been “the biggest in the history of the State.”

Then Ireland had a Exchequer balance of E2.3 billion in the black. Next year, it will be almost E5 billion in the red, a turnaround of a stunning E7 billion in fortunes in recent years.

Cowen’s thinking yesterday was clear. By borrowing to invest in the National Development Plan, he was spending wisely to reap plenty in the long term. The GDP increase will be much more modest next year at 3% but it is still better than many other EU countries. If the decline corrects itself, perhaps that will be prudent. But it does mean that the National debt will increase by a significant 50% by 2010.

The net effect of such a dip into the red is that nobody really loses and there aren’t any cutbacks. Capital spending will increase by 12% next year while current spending will rise by a more modest 8.2%. It means overall spending will be E53 billion, a relatively modest increase of E1.7b.

But there are what the opposition will portray as stealth taxes. The drug refund threshold increases to E90 per month; there are rises in bed and A&E charges, and widening the eligibility of medical cards has essentially been kicked into touch for another year to allow some review to take place.

Oh yes, and motor tax will be increased by between 9 and 11% from February (raising E83 million per annum).

Ah motor tax! The stamp duty furore almost completely eclipsed the fact that yesterday witnessed the world’s first ‘Carbon Budget’. A lot of the thunder was stolen from the Green Party’s biggest gain by the fact that the details of the Vehicle Registration Tax were leaked a fortnight ago. Still, the announcement that this year’s C02 equivalent emission of 70 million tonnes will be 63 million tonnes while hardly headline-grabbing is very significant.

Because Estimates were included there were dozens of minor sub-plots, all of them worth of mention, all of them affecting citizens of one hue or another. The E35 million increase in cancer care was a huge disappointment.

There were a couple of eye-catching initiatives like the tripling of income thresholds for family with a child under 18 with intellectual disabilities. Cowen has looked after the lowest earners and those on social welfare, though many of the increases were at a rate just above inflation. Cigarettes went up more than expected by 30c a packet; while there was some vague prose about measures that would favour low-alcohol drinks over high-alcohol ones.

And Section 481 for the film industry was extended another four years until 2012 without any of the resistance McCreevy showed four years ago.

And of course, the Government also had to take a couple of (fully deserved) swipes on the grandiose pay rises they awarded themselves, top civil servants, judges and the rest of the top brass in our society. Oh sorry, there is an efficiency review of the public service promised for next year but it has all the woolly imprecise language we have come to expect since benchmarking.

Fine Gael’s Bruton found the best put-down of it: “(Cowen) joins the solemn chorus, calling for wage restraint and for reform. But like the armchair general ordering his troops over the to into the teeth of enemy machine guns, Mr. Cowen and his pampered colleagues will be a safe distance away. When it comes to their own interests there is no demand for reform or frugality.”

No danger of a U-turn there, was there?

INSIDE POLITICS - BUDGET 2

Well, he moved big on stamp duty. A huge overhaul to tackle a market in which he said the "dynamics had changed" (the opposition translated that as a 'slump'.

Senator Eoghan Harris sitting in the senators' section at the top of the chamber looked like the cat that got the cream - expect a big dose of triumphalism in the Sunday Indo next weekend.

Elsewhere there were few surprises. Anything that could have been a surprise (motor tax and VRT) were already flagged. Most of the stuff that was eye-catching (reduction on duties on credit and debit cards at the expense of the banks; 30c increase on cigarettes; tripling of the income threshold for medical cards where there is a child under 18 with intellectual disabilities) will not cost a huge amount either way; and were gestural rather than substantial.

The macro picture was as he predicted. Overall there will be an increase of 8.6% in spending (8.2% in current spending; 12% in capital spending)mistake in l. He has prioritised the NDP, the health services, education (especially to cater for the 13,000 new schoolchildren coming on stream this year) and R and D.

Cowen's priorities have always been tilted more to the lower paid (more than his predecessor that is). And so the increases in tax credits; widening of bands, and above-inflation increases in social welfare.

As for the Green Budget, it just didn't have the impact it should have had. A couple of colleagues felt that the Greens didn't get as much as they should have and that stamp duty eclipsed. My own belief is that a huge mistake was made when somebody in Government leaked the Vehicle Registration Tax (VRT) details to two Sunday newspapers a fortnight ago. That completely removed the element of surprise from the Carbon Budget, rendering it a bit of an anti-climax.