Who's Going to Pay?

Yesterday was “budget day” here in the UK, a day of huge significance to the British calendar and psyche with events lasting the whole week. Whereas in the US the budget is usually unveiled without a whole lot of fanfare or media attention (with the notable exception of Obama’s first budget this year), in the UK there’s a big hullabaloo around it, with the Chancellor of the Exchequer (for the most part the equivalent of the treasury secretary in the US) walking from 11 to 10 Downing Street clutching a ceremonial briefcase containing the all-important document, which will by that point already have been ceremonially presented to the Queen the day before. He then delivers an address to the parliament which is the first public unveiling of the plan, and that evening he makes a televised speech to the nation explaining his rationale. This is followed the next several nights by speeches from the leaders of the opposition parties.

It’s perhaps telling that yesterday’s budget day was so momentous and yet as usual, St. George’s Day today (England’s patron saint's day) was completely ignored. I didn’t even realize it was St. George’s Day until I happened to notice a sad little steel drum performance celebrating it in Hammersmith this afternoon while getting lunch.

Budget Day is always a big deal here, but this year it was attracting a particular amount of attention. Everyone knew that this was going to be a momentous budget, both in terms of the dire state of the economy the Labour government would have to reveal and in terms of the drastic measures everyone assumed were going to need to be taken. But despite being primed for eye-popping numbers by the bank bailouts last year, The City seemed to be absolutely shocked by the astronomical amount of debt Chancellor Alistair Darling announced yesterday. UK debt was set to reach a whopping £1.4 trillion in 2009 - equivalent to almost 80 per cent of the UK’s economy. Collapsing tax revenues, the chancellor admitted, will mean he will have to borrow £175 billion in 2009,12.4 percent of GDP. That will be the biggest annual deficit for the UK ever in peacetime.

And yet Darling seemed to offer little in the way of spending cuts or tax rises in order to pay off that debt. His announcement of a tax hike to 50 percent for people making over £150,000 may have raised eyebrows (while not uncommon on the continent such a tax rate in the UK hasn’t been seen in a very, very long time), but cynics in the UK suspected it was a cheap ploy to distract the media from the larger issue – the huge amount of debt announced. The budget included no rise in the tax rate for the middle class, and the reality is that those who make large sums of money are usually pretty adept at getting out of paying tax rises, so the 50% tax rate is likely to raise little revenue. The British media seems to have almost uniformly assumed that the Labour Party will not be in power much longer, but perhaps the real question now is what exactly will the Tories be inheriting if they take over the government next year? Eventually someone’s going to have to pay for all this expenditure, as necessary as it may be, and who is going to deliver the bad news to the middle class that they are going to have to chip in? It’s a surefire election loser, but with his plummeting poll numbers it would have been interesting to see Brown fall on his sword and broadly raise taxes to pay for the debt, knowing it would guarantee a Labour defeat in the upcoming election.

Tea-Bagging Across the Pond

Interestingly, the same issue is being wrestled with across the pond in the US. Barack Obama’s budget will allow the Bush tax cuts on the rich to expire, and will increase the tax burden on the top two percent of income earners. The rest of the population will either see their tax rate remain the same or decrease. Of course this didn’t stop legions of blue-collar “tea-bagging” protesters from turning out on the streets last Wednesday (“tax day,” in the US, a day perhaps of equivalent symbolic importance to ”budget day” in the UK) to decry Obama as a fascist who will tax all Americans into oblivion. Left-leaning media outlets have been at lengths to point out that 99 percent of the people out at those protests won’t see their taxes go up at all under Obama’s plan (although the people organizing those protests, Fox News and lobbying groups like Freedom Works – which interestingly enough also represents AIG – will). The American left used to scream in frustration that the working class was being hoodwinked by Republicans who used an appeal to social issues to get the working class to vote against their own economic interest. Now with the tea-bagging protests, the left has been observing is disbelief that Republicans now seem to be able to convince them to vote against their own economic interest based on an appeal to economic issues somehow as well. It's a strange country.

But despite the left's dismissal of them as mindless sheep, perhaps the tea-bagging protesters are on to something. While it is true their taxes aren't going up right now, they know that with the huge amount of expenditure being spent to rescue the global economy from collapse, someone's going to have to pay for it. And really, why not the tea-baggers? More than a few people have pointed out that these are the same people who enthusiastically supported the Iraq War and the huge expansion of the government with the establishment of the Department of Homeland Security. Now they're taking to the streets to protest the fact that they might possibly be asked to pay for it.

These are extraordinary times, and they will likely call for extraordinary levels of sacrifice from all people. Sooner or later, the middle class is going to have to contribute financially to solving the mess. The problem, on both sides of the Atlantic, is that nobody wants to be the one who has to tell them that.

One Letter and Six Months

Following the rioting in Iceland this week resulting from the country's economic collapse, the cruel joke making the rounds in Europe right now is that Ireland, its Atlantic island neighbor, is just one letter and six months away from being Iceland itself.

Once hailed as the "Celtic Tiger" for its economic power performance after joining the EU, Ireland today finds itself in bad economic straights. Yesterday the government announced that it would nationalize Anglo Irish Bank, the country's third largest lender. The government is also considering reducing the pay of public sector workers as it scrambles to find money anywhere, a decision which could lead to massive and possibly violent demonstrations in Dublin. In six months, Ireland could be in the same situation as Iceland.

Of course there is one key difference between the two: Ireland is on the Euro, Iceland is not. Many economists are saying that the fact that Ireland is in the euro zone is the only thing that has enabled the country's economy to stay afloat during these trying times. Though the economy is in big trouble, investors still consider the country safe because it is part of the euro zone, and its credit rating has not been downgraded.

This fact has seemed to make a few Euroskeptics across the Irish sea more than a little defensive. The British pound has virtually collapsed over the past six months, dropping today to its lowest level against the dollar in 23 years. It's fallen from $2.00 to one pound in July to $1.34 to one pound today. And the pound has lost 20 percent of its value against the euro in the same time, with the two currencies now almost equal in value. Today the UK also officially entered a recession, with commentators noting that the fact that 3/4 of the UK's economy is dependent on the services industry (the most harshly affected industry in the current global crisis) means that the country will likely be the hardest hit of any during the global downturn. And without the stability of being part of a larger currency block, it is thought the UK may have to go crawling to the International Monetary Fund begging for money, because it won't be able to finance the massive level of debt it is taking on with its currency so devalued.

This might explain the peculiarly hostile questioning the Irish finance minister received on the UK program Newsnight last night about whether it had been "too early" for the country to join the euro zone. The presenter insisted that the country's "hands are tied" by the Eurozone since it will be unable to set its own interest rates in response to the crisis (interest rates for the euro zone are set centrally by the European Central Bank in Frankfurt). The minister, Brian Lenihan, seemed hardly able to disguise his bemusement at the absurd question, pointing out that before Ireland joined the Euro its currency was pegged to the pound, and since the country has never freely floated its currency it has never been able control its own currency measures anyway. That shut the presenter up. But Lenihan must have taken a bit of satisfaction in then being able to tell the lecturing presenter that the Euro, "is the currency of our trade with many of our European partners. With the United Kingdom of course, we are at some disadvantage now because we're far stronger than sterling." Oh snap! "Small countries which have their own currencies tend to be speculated against," he continued. "We don't want to put our country in that position, so we linked to a stronger currency." Lenihan had cause for the comparison. Although the Irish economy is hurting, in the long run it may be in better shape than the UK ecnomy.

A New UK Euro Debate?

The prospect of the UK joining the Euro has long been dead in the water, but the current situation might revive the idea, particularly now that the pro-Europe Tory politician Ken Clarke has been brought back to the front benches. Rather than defending the British pound, however, British Euroskeptics seem to have fired an opening salvo by attacking the decisions of other countries to join. An opinion piece by Ruth Lea in today's Telegraph calls the euro zone "dysfunctional" and says the 'one size fits all' interest rate policy has been a disaster for smaller economies like Spain, Italy and Greece. She even blames the recent downgrading of Spain's credit rating on the Euro, seeming to suggest the Southern European economies will imminently drop out of the zone in order to devalue their own currencies out of the crisis.

But in reality, the Fitch ratings agency has kept Spain's credit rating as triple A because it's on the Euro. As the Wall Street Journal Europe pointed out today, Fitch affirmed Madrid's triple-A rating partly because "Spain's membership of the euro area supports its rating, as it eliminates the risk of a currency crisis." The Journal also points out that being part of the euro zone has kept these Southern European economies' budget deficits lower than 3 percent of GDP (or at least made them try to do so), making many euro zone countries now in a better position to absorb their rising deficits. Futher, the idea that these countries would suddenly leave the zone doesn't make sense. Aside from the enormous cost involved in converting the bills and the national debts back to the old currency, such a move would lead to massive wage inflation. And the concerns about national defaults would still exist to the same degree, only now the counties wouldn't have the security of being in thre euro zone to protect their credit rating. Perhaps it is just euroskeptic wishful thinking to think the euro zone is about to fall apart.

Celtic Tiger Laid Low

Many have been speculating on what effect the new economic reality in Ireland will have on the re-vote to be held in the country on the ratification of the EU Reform Treaty. Last night Lenihan seemed pretty confident that the crisis has made the Irish realize how much they have benefited from membership in the EU and adoption of the Euro. One of the explanations analysts had given for the no vote last year was that, although Ireland had historically been very pro-Europe, its economic success over the past decade had given the Irish the confidence to spurn the EU, thinking they could go it alone if they needed to. The recent months have certainly been humbling for the tiny country, and perhaps they will be thinking differently this time around when they enter the voting booths. That's the hope in Brussels at least.