Wednesday, May 28, 2008

Carbon Taxes? I don't think so.

There seems to be little doubt now that we’re in a serious economic downturn. While it’s not a recession, the implications for Govt Income/Expenditure are quite significant and will require difficult political choices.

This week, Davy Stockbrokers has produced some dramatically revised economic forecasts
- GNP growth: 1% in 2008, 2% in 2009
- New houses: 45k in 2008, 25k in 2009
- Commercial construction: 10% reduction in 2009
- Unemployment: 4.6% in 2007, 6.1% in 2008, 7% in 2009
- Exchequer Deficit: €1.6bn in 2007, €8.3bn in 2008, €10.3bn in 2009
- House Prices: -10% in 2008, -7% in 2009

Net Result:
Reduced tax inflows, particularly as construction/housing market slows dramatically.
Reduced tax inflows and increased benefit outflows as unemployment rises dramatically (+50% in 2 years).

Rising Energy Prices
Driven by global demand/output e.g. oil @ $135 and on a rising curve, Northern Ireland Electricity has announced a 14% price increase for July 2008, and BBC reports a further 15% increase expected later in the autumn (partially driven by weak sterling).
However, we too can expect rising electricity and gas prices, to go with the already rising petrol/diesel prices.
This will all add to inflation - pushing up the costs to households, business and increasing wage demands.

Expect a winter of discontent from the public sector, who already feel aggrieved that their previous national agreement failed to keep pace with inflation, compounded by the failure of Benchmarking Phase II to deliver anything for most public sector employees (excluding the cabinet).

The insatiable demand from that perennial black hole that is the Health Service is unlikely to abate. A permanent political banana skin.
And the perpetual under investment in the school infrastructure, exacerbated by a rising rather than falling intake in primary schools, will only add to the Govt’s woes.

Carbon Taxes?
Against that background, how likely is it that Biffo will be willing to add to the electorate’s woes by introducing Carbon Taxes, particularly against a background of already rapidly rising fuel/energy prices? With rising domestic bills and industry struggling, how much can the public bear?

But if Biffo does introduce Carbon Taxes, I’ll wager they won’t be “revenue neutral” , as promised by the Greens.
Biffo will see them as a way to reduce the projected Exchequer Deficit (€10.3bn 2009) by adding such carbon tax revenues to the general taxation pot, safe in the knowledge that the Greens will be a political lightning rod for most of the inevitable public backlash.

Green Party reaction?
How will the Greens react to such a(nother) betrayal?

Recent opinion polls show falling support for the Greens, the glás has gone off their early poll ratings in Govt. An early election, with little tangible achieved in Govt but many core policies & principles sacrificed, could be catastrophic for them.

I suspect they’ll swallow hard and perform another policy u-bend (they’re long past u-turns, it’s now flushed straight out of the system) to stay in office at any cost.

An interesting year ahead.

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