Croatia and the EU: more questions than answers

Post for ShiftingGrounds
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As preparations gathered pace in Split for Sunday’s celebrations, marking Croatia’s membership of the EU, the city’s local radio stations provided a fitting soundtrack. ‘Go West’ by the Pet Shop Boys seemed to play almost on loop throughout the day, filtering out of nearly every restaurant or coffee shop you walked by.

The country’s newspapers had been counting down the days. Despite public scepticism, there is a sense at least that Croatia has taken up its rightful place. The journalist Jenine di Giovanni wrote in her 2004 book on the Balkans:

“…this colourful image [of the Balkans] was exactly the sort that the Croats did not want to promote. They were not really Balkan people; they often told you they were Southern Austrians. The Croat denial fostered a sense of mixed identity in Zagreb. The people dressed in Armani but lived in apartments without central heating. They carried the latest Nokia phones but had no money in their bank account…

Their biggest grievance was belonging to a Balkan group they did not want to be part of. They saw themselves as a Western democracy.”

Yet identity and pride aside, it’s hard not to wonder what question the country’s EU membership is the answer to – not least when considering the way its political class has prioritised it over the last ten years (hence much grievance from them, too, on the extensive vetting the European Commission subjected Croatia to).

True, it – or rather the prospect of it – has been good for the region’s fragile peace, helping to hold the Dayton settlement in place. The scale and horror of Serb atrocities in Bosnia and Herzegovina often obscure Croatia’s own crimes in the same country just two decades ago. It was the Zagreb government, after all, who connived with Bosnian-Croat forces to turn brutally on their Bosniak allies, aiming to tear off parts of Bosnia for their own, in pursuit of a lesser but still stark Croatian imitation of Milosovic’s expansionism.

Here Brussels has dangled EU membership effectively. It has used it to ensure Croatia properly complies with the International Criminal Court’s investigation into war crimes during the 90′s. The same incentive has also played a role in dissuading Zagreb from resuming support for still restless Bosnian-Croat secessionists.

But even still, in the long term it’s far from clear that the Bosnian question is totally settled. Leaders in Bosnia’s Republic Srpska – the Serb state within a state created at Daytan – have made obvious their own desire to secede. One of the main barriers to this at present is the lack of support they’re likely to enjoy from Belgrade, who are also on their best behaviour under promise of EU membership.

However, once this promise becomes a reality and the incentive disappears, that could easily change. In the ensuing melee, who knows how the Croats – now a member not a prospective one – would react. They may again see a opportunity to claim what isn’t theirs, especially given Bosnian-Croats have a (not insignificant) vote in Croatian elections. This is unlikely under the current SDP government, who don’t rely on those votes, but could be feasible if the centre-right HDZ returned. Certainly far right Croatian nationalism hasn’t totally gone away, as the uncomfortable amount of fascist graffiti scrawled across Split can attest to.

More immediately, however, there’s the prospects for the Croatian economy. Croatia’s bid for EU membership was kick started 12 years ago, when Western free-market capitalism – which post-Maastricht the EU has become the standard bearer for – was in its pomp. Entry to the EU represents in many ways the completion of long efforts by Croatia’s political elites to ‘harmonise’ the country’s economy with European orthodoxy.

Croatia’s economy today is thus completely deindustrialised (albeit this was aided by war damage); it is in large part a service sector economy, dependent on tourism and retail – which struggles to provide adequately for a lot of the country. Most of its growth in the early 2000′s was driven by consumer credit.

Sadly, between Croatia’s application and accession, the flaws of that model have been horribly exposed across Europe. Its economy is consequently stuck in our recession; at 20%, Croatian unemployment is worse only in Greece and Spain in EU terms (youth unemployment is over 50%). Its banks, largely foreign owned and piled high with European debt, are vulnerable. Household debt has shot up, as has government debt.

The dichotomy that di Giovanni wrote about has seemingly continued – though new shopping complexes have continued popping up across Croatia’s cities, absolute poverty has almost doubled over the last decade.

Despite the vague hopes of Croatia’s President, Ivo Josipović, it is hard to see how formal acceptance into the European club helps all this. Indeed in at least one sense it’s made it worse: one of the ugliest components of Croatia’s EU ‘preparations’ was the sight of Brussels forcing the privatisation of the country’s shipyards, which still make up a sizeable chunk of Croatia’s exports. In Split alone – across town from the palm-treed, tourist friendly promenade that hosted Sunday’s celebrations – this has seen over 1,000 people lose their jobs. The jobs of the remaining 2,000 workers hang in the balance, but if the private company which now owns the yard do take them back on, many will be on a part time or temporary contracts.

All of which leaves you with the feeling that a great country has been rather led astray. Croatia stumbles into the EU mired in recession, with falling living standards, and in desperate need of a new model of economic growth. The Commission needn’t have worried; it will fit in all too well.

The myth of the millionaires' exodus over the 50p tax rate

Blog for HuffPost
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The myth of the millionaires' exodus 

This week the Treasury spin machine went into overdrive in response to Labour's push to highlight the cut in the 50p top rate of tax.

The centrepiece of their case was that the 50p tax had reduced the number of millionaires paying tax in the UK by 10,000 from 16,000 to just 6,000. The Telegraph faithfully reported their argument, informing us that "two thirds of millionaires left the UK to avoid 50p tax". The Mail did likewise, publishing unquestioningly Harriet Baldwin's extrapolation that this cost the UK "£7 billion in lost tax revenue".

This narrative has been accepted by the right - of proof of the age-old maxim that taxing the rich proves counter-productive - and even by the left, as a cause for despair. It's also reached the other side of the Atlantic, giving succour to the Republican blogosphere in their argument against Obama's case on the 'fiscal cliff'.

The trouble is, it isn't true. Or at least there is no credible proof that it is.

The figures used have been worked up on the same basis as the HMRC's report on the 50p tax back in the Spring - and they're disingenuous for that same reason.

As I argued in a piece for LibCon back in March, this report was fatally - and probably intentionally - flawed, seemingly fixed to reach the conclusion George Osborne wanted it to. Primarily, this was done by isolating the top rate tax yield for tax year 2010/2011 - the year the 50p tax was introduced. The report showed a significant drop in top rate revenue for 2010/2011 from 2009/2010, and this was the main basis of the argument that the 50p tax 'raised no money' which justified it's abolition.

A gaping hole in this argument is that by the HMRC's own admission, a great deal of this drop was accounted for by (the non-PAYE paying) super-rich bringing bringing forward their income ('forestalling') and declaring it in 2009/2010 tax year instead, ahead of the pre-announced 50p tax rise. The key point is, by its nature forestalling can only happen once - those who did so could not have kept doing it in the years after; they would have had to have paid up. The 2010/2011 yield was thus artificially deflated; totally anomalous, and unreliable as a baseline. There may have been other more permanent forms of evasion in the mix, but the only way of knowing this - and the true effectiveness of the 50p tax - for sure would have been to wait for 2011/2012 returns. Which is presumably by Osborne avoided doing just that (given there was good evidence it raised a significant sum of money).

And so to yesterday's numbers. They too take 2010 figures, on the number of people declaring an income above £ 1 million, compare it to 2009 and note a drop - leaving the Telegraph and Mail to argue without evidence that they have all moved abroad. But just as with the tax yield, these figures are highly distorted and unreliable, given we know many top rate payers moved their income for 2010 forward to 2009 (this is especially likely to be the case with millionaires, as few would be on PAYE).

Treasury sources go on to state that the number of millionaires is now 10,000 - and shamelessly attribute this to Osborne's announcement of his intention to cut the 50p tax. In reality, it's much more likely that this increase is simply those who forestalled in 2010 returning, as they inevitably have to (a large part of the remaining gap between this figure and the mid-to-late 2000s numbers is likely explained by the financial crisis).

There remains little to no evidence that high earners have, or are planning to, move abroad in response to high tax regimes. For people on the right and left to take such blatantly skewed figures at face value does a real disservice to the level of debate an area as totemic as tax policy should demand. Sadly, I doubt the sleight of hand will stop here. My guess is the next trick will likely come a year before the election. Given the cut in the 50p tax has been pre-announced, it's possible that some income will be delayed being declared until after the cut - some chartered accountants are already advising the super-rich on just that. This will artificially inflate the 45p rate 2013/2014 revenue, allowing Osborne to compare it to 2010/2011 and announce the top rate cut a great success in getting the rich to pay more. If the debate on this issue so far is anything to go by, it's likely he will go unchallenged.

There are evidently parts of the Government intent on fighting a war on behalf of the richest 1% in our society. The first casualty of that war looks to be the truth about the 50p tax.

Cameron strikes some nice notes, but plays the wrong tune

Post for Shifting Grounds

Cameron strikes some nice notes, but plays the wrong tune

There’s no doubt that David Cameron’s speech to Tory party conference yesterday was one of his better ones since becoming Prime Minister. In some ways it was his most Presidential, not just in the personal touches woven in throughout, but in his attempts to transcend national politics and sketch out a vision of a new frontier – in this case, the new global economy – and place Britain at the heart of it  (sometimes called a ‘moon shot’ in US politics). We are, he said, in a “global race” with new countries on the rise, “sink or swim. Do or decline”.

Cameron also had strong dividing lines on welfare and schools – two issues Labour has no settled position on, but will clearly need to have in the next few years.

But the speech had a fatal weakness. At its core was a diagnosis of a country full of budding businessmen and women and ‘can do’ creatives, being held back by a bloated state and unreformed public services. The solutions that flowed from this were predictable enough – hack back the state, reform welfare, get the deficit down, liberalise school provision. Growth will naturally follow.

But this fundamentally misreads British politics today. Most people won’t become ‘entrepreneurs’, and most don’t want to. They just want to get on, get a good job, earn decent money, provide for their family, and lead happy and fulfilling social lives. The biggest impediment to this in 2012 is not the welfare system or planning laws, but an enormous squeeze in living standards and an economy that only works for those at the top. Wages are stagnating, jobs hollowed out, yet utility bills, rents, train fares, tuition fees and mortgage deposits are all rising (this is the true face of ‘Britain on the rise’ under the Tories). And so are bankers’ bonuses and executive pay, all the while SMEs – a real engine of jobs – can’t get access to finance, and young couples can’t get on the property ladder.

Even those traditionally upwardly mobile parts of the population – at whom the speech was clearly aimed – are suffering from this squeeze. Polling for Southern Discomfort Again showed that between 41%-47% of floating voters in key middle class marginals say they are now not confident they have enough money to make ends meet. As Lord Ashcroft’s polling shows, a key feature of the ‘suspicious strivers’ group he identified is economic insecurity and precariousness.  The squeeze is also having obvious effects on demand and consumer confidence – without which all the “diplomatic showrooms” and ankle flashed to multinationals matters not one jot. Economically and electorally, post-crash Britain is defined more by strugglers than it is by strivers.

To this backdrop, a speech about the ‘global race’ in the new world economy, or unleashing a nation of Steve Jobs style entrepreneurs, is a little arid and far off. It’s not irrelevant, it’s just remote; a bit mid-1990s. On the real day-to-day challenges and anxiety facing people already in work, Cameron had little to say. Bank reform did not feature once in his speech, nor energy companies, or even the words ‘bills’ or ’wages’. The Prime Minister may have struck some nice notes along the way, but he played the wrong tune.

The truth is, most of the obstacles holding back prosperity in the UK and our place in the world come not from an unreformed public sector, but an unreformed private sector. That a Conservative Prime Minister, who came to political maturity in the age of neoliberalism, feels uncomfortable talking to that challenge is not surprising. But it ultimately leaves him unable to connect with the lives of people he needs to reach to win.

It is this divide that Labour needs to put the Tories on the other side of. The party needs to find a consistent line on welfare and schools, but it can’t allow the election be fought on this ground. They need to make 2015 an election about living standards and the squeezed middle; who wants an economy which puts money in the pockets of ordinary people, and who only looks out for the top 1%. Making banks and energy companies work for people, an active industrial strategy, even tax cuts at the bottom or middle paid in part by rises at the top – all, among others, have a role to play. On this divide, the Tories are extremely vulnerable – because they simply don’t grasp Britain’s living standards crisis to begin with. However eloquently delivered, David Cameron’s speech yesterday proved that.