Jeremy Warner's Outlook: Government should look to mote in its own eye before branding O'Leary irresponsible

Inflation: that's the trouble with growth
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The Independent Online

Ian Pearson, the environment minister, has chosen the wrong target in describing Ryanair's Michael O'Leary as the "irresponsible face of capitalism". Had Mr Pearson called the ebullient head of Europe's biggest low-cost airline an unbearable little so-and-so, he might have evoked some public sympathy. Yet it is not Mr O'Leary's free-wheeling ways that are the main mischief when it comes to climate change. Rather, it is the Government's own pathetically inadequate response to it.

Nobody should blame Mr O'Leary for spotting a money- making opportunity and pursuing it as vigorously as he can. To the contrary, he should be applauded and celebrated for his entrepreneurial flair. Nor should he be condemned for arguing his corner with such determination. All businessmen oppose higher taxes on their consumers; it comes with the territory.

What's more, Mr O'Leary makes a perfectly valid point when he highlights the idiocy of cracking down on aviation while so little is done to restrain domestic and agricultural emissions.

Fact. Mr O'Leary's airline may be one of the fastest growing in the world, but because his is a relatively new company, he also uses some of the most fuel-efficient aircraft. In terms of emissions per passenger carried, Mr O'Leary's is actually one of the more environmentally friendly airlines around. Should he be condemned as "irresponsible" for producing a better, cleaner and cheaper airline? I don't think so.

Yet though one might quarrel with the manner in which he did it, Mr Pearson is at least right to raise the issue. Air travel is growing like topsy, and aviation emissions with it. According to one estimate, if air travel keeps growing as it is, it will by 2050 be using up Britain's entire carbon allocation, assuming the Government's target of a 60 per cent cut from current levels is achieved. There would be nothing left for lighting, heating, cars or industrial activity. Something plainly has to be done to check this growth.

Yet before lashing out at Mr O'Leary, the Government should look to the mote in its own eye. Ministers talk the talk on the environment, but beyond hot air there's little to show for it. Last month's pre-Budget report was a case in point. This was billed as Gordon Brown setting out his "green" credentials. Nothing could have been further from the truth. Beyond a rise in air passenger duty, which in truth was much more of a revenue-raising device than a well-targeted piece of green taxation, and some jiggery-pokery on excise duties, this was scarcely a green budget.

As things stand, air travel enjoys some extreme tax advantages over other industries and forms of transport. There's no tax at all on aviation fuel, nor is there any VAT payable on airline tickets. Mr O'Leary cannot be faulted for resisting these things, nor indeed for opposing aviation's inclusion in the EU emissions trading scheme. He's a businessman, and he's hardly likely to vote for his own funeral.

Yet quite plainly the playing field with other forms of transport needs levelling. Nobody is trying to stop people from flying with Ryanair. Rather, the intention is to ensure that if they do, they are made to pay for their environmental costs.

Nor, as Mr O'Leary frequently argues, would this be an unprogressive tax on the poor, for whom he claims to have made airline travel affordable. According to Chris Huhne, Liberal Democrat spokesman on the environment, 80 per cent of low-cost flights are taken by people in the top half of income distribution. The average income of Ryanair's passengers is £50,000. Mr O'Leary's growth is not based on catering to the poor. Rather it is on flying the middle classes more frequently. These are people easily capable of paying their carbon costs.

Mr Pearson can whinge on all he likes about the obstinacy of the airlines, yet the real fault lies in his own lack of political backbone. It's easier for him to blame it all on Mr O'Leary, Lufthansa and British Airways than to risk a few votes by actually trying to do something about it. Mr O'Leary is not being irresponsible at all; he's only exploiting the Government's own paralysis, for which, as long as it lasts, he deserves our sneaking admiration.

Inflation: that's the trouble with growth

Just in case you hadn't noticed, there is an inflationary boom going on. To the delight of the Treasury, the economy is firing on all cylinders, with the service sector - which makes up two-thirds of the economy - posting its sharpest acceleration in growth since Labour came to power almost 10 years ago.

Yet paradoxically, unless you happen to work in the City or the higher echelons of industry and commerce, few are feeling any better off. To the contrary, while the economy is growing strongly, disposable incomes are falling. Three factors lie behind this squeeze.

One is higher taxation, which in theory is a payment for services but rarely seems that way. What a pity it is for the Government that so few of us seem to appreciate how much benefit we are deriving from our higher taxes. Come to think of it, looking at the disaster of Iraq, what exactly is that benefit?

A second factor is rising interest rates, leading to higher mortgage and credit card costs. But perhaps the most important of these influences is rising levels of inflation. Some of this is to do with things outside the influence of policymakers, in particular rising energy costs.

But quite a lot of the other things which count as non-discretionary spending, such as the cost of public transport and university fees, are rising strongly too. Changing weather patterns have meanwhile led some seasonal food prices to jump sharply. It's only if you happen to be buying a new car, a flat-screen television or a laptop computer, that you notice that some things are becoming a lot cheaper.

As this column has been pointing out for some years, hardly anyone's cost of living conforms to the "average" reflected in the Government's official inflation indices. Higher-income earners in London and the South-east are experiencing much higher rates of inflation. Low-income groups including poorer pensioners, where a relatively high proportion of disposable income is spent on non-discretionary items such as utility bills, food and housing, will also be feeling the pinch. It all depends on how you spend your money.

In a rare show of independence from its paymasters in Government, the Office for National Statistics has finally agreed to establish a personal calculator that will allow individuals and families to assess their own rates of inflation. For many it will prove what they know already from their bank balances - that their cost of living is rising a great deal more swiftly than their disposable incomes.

The calculator promises to make for an interesting conversation during the annual pay bargaining round. Most pay deals are loosely based around the retail price index. In future, those with higher personal rates of inflation may want to forgo collective bargaining altogether, and instead strike out on their own. It may also have a quite perverse effect on inflationary expectations, for it is those with the highest personal rates of inflation that are likely to make the most noise. Disaggregation could, for policymakers, turn out to be a quite dangerous thing.

Yet even judged by the official inflation indices - which are based on collective, national spending patterns - prices are rising strongly. The RPI for last month is expected to have broken through the 4 per cent barrier for the first time in eight years. The targeted Consumer Price Index is rising strongly too, again threatening the Governor of the Bank of England, Mervyn King, with the humiliation of having to write a formal letter to the Chancellor explaining why inflation is so far adrift of target.

In my view, the City has almost certainly got it wrong in thinking we are already at the top of the interest rate cycle. Higher growth almost always means higher inflation and, never mind about the effect of globalisation on labour costs, higher inflation will always mean higher wage demands.