Colm’s columns

Colm Rapple
Irish Mail on Sunday, July 25, 2010

Each Irish child at birth is saddled with over €40,000 of debt according to one economic sound bite currently doing the rounds. The figure is a bit exaggerated, but even if true, it is meaningless when taken in isolation. It tells us little about the State of the economy and nothing about the prospects of each individual child.

Being born in Ireland confers a host of benefits that more than offsets that liability. If each child is liable for a share of the national debt, then each child must be credited with a share of the national wealth. That wealth is considerable. We face major economic difficulties but we are still among the richest countries in the world.

Our health and social services may not be ideal but they are far better than those available to most of the world’s population. Each child born in Ireland is fortunate by world standards, with an entitlement to practically free health care and free education. State services could, of course, be improved. Waste could be eliminated, management improved and, if our debt servicing costs were lower, we could spend more.

Those are real concerns. But let’s not forget what we have.

If we were to divi out the national assets, each child would also be entitled to a shares in a number of very profitable State companies, the ESB, Bord Gais, Coillte, Bord na Mona. We can all also claim a share in the very valuable and extensive economic infrastructure owned by the State. We have plenty of assets to set against our national debt.

The economic situation is bad, but making it sound worse than it is, or trying to express it in popular sound bites, doesn’t help. It only serves to dampen the prospect of a renewed confidence that is essential to economic recovery. It doesn’t help people to understand what needs to be done to tackle our current difficulties.

Ireland’s national debt is not out of line with the Eurozone average. Of course, it is too high, but according to estimates compiled by the National Treasury Management Agency from the latest EU and Irish Government forecasts, we are currently fourth in the Eurozone league table behind Greece, Italy and Belgium.

Our total government debt stands at 86.9% of gross national product compared to a Eurocone average of 84.7%. That’s on the basis of total Government debt as a proportion of gross national product. That’s taking account of the €17 billion put into Anglo Irish and Irish Nationwide but it doesn’t take account of the offsetting €22 billion of assets in the National Pension Reserve Fund.

At end-2009 Government debt stood at €104.7 billion. That works out at about €24,000 per head of population or €18,000 per head when the pension fund money is taken into account. The €40,000 per head quoted by one economist includes provision for other potential debts arising from the banking crisis but they are not included in any of the official estimates of debt. In any case, it’s not the level of debt, but the cost of servicing it that’s important in the short-term.

We are not going to be paying anything off the debt for the foreseeable future. The debt will be increasing and we’ll be paying increasing amounts of interest leaving less money available to fund State services. Interest payments this year will take 17.4% of tax revenue according to the latest estimates. That’s a big imposition although it is not unprecedented. The figure was over 20% for most of the 1970s. It peaked at 35% of tax revenue in 1985, dropped to 27% in 1990 and didn’t come down below 17.4% until 1997.

It dipped to 3.4% in 2007 and has been rising rapidly since. According to the National Treasury Management Agency it will go over 20% in 2013. But national debt servicing costs as a proportion of both national income and tax revenue will still remain well below the levels experienced in the early 1990s.

Our national debt will continue to increase as the Government borrows, albeit at a declining rate, to finance its budget deficit. We can assume that living standards will decline further, the tax burden will increase, spending on State services will be cut and more people will lose their jobs.

It is those real economic effects that we need to be zoning in. The level of debt and the level of interest payments are, of course, important, but of far greater importance is how the burden can be minimised and more equitably spread. That’s what the economic debate should currently be about, particularly in the run-up to a budget which seems increasingly likely to hit the poorest and more vulnerable the hardest.

Colm Rapple
Irish Mail on Sunday, July 17, 2010

A residential property tax, which seemed to be ruled out as a budgetary option this year, is very much back on the agenda at the Department of Finance. And so it should be. Finance minister Brian Lenihan continues to stress that there is a lot of preparatory work to be done before such a tax could be introduced. But the government needs extra revenue and a well devised property tax could supply that need in a fair and economically efficient way.

The opposition to the last property tax was led by those who were most able to pay it and it was easy to built up popular support for their views. No one likes paying tax and we seem to have a particular aversion in Ireland to taxes on property. But what are the alternatives?

Those opposed to such a tax need to have an answer to that question. Let’s have a look at some of the alternatives.

Spending cuts are not an alternative. We are going to get them in any case. Ideally the cuts will be targeted solely at eliminating waste but that is unlikely. Some waste will undoubtedly be eradicated but suppliers of State services are very adept at protecting their own positions and inevitably front line services will be curtailed.

A case can be made for borrowing more in order to lessen the need for extra taxes but there is a limit imposed by the almost certain reaction that it would provoke from the international lenders and decision makers on whom we increasingly rely.

Extra taxes are inevitable. So who should bear the burden?

There are many people who have come through the recession relatively unscathed. High earners in secure jobs may have suffered a small drop in income and a drop in the value of their assets. But they are still well off.  There was plenty of profit made on property deals during the boom years and not all of it was lost on subsequent investments.

The money borrowed from mortgage lenders didn’t just disappear. For every home bought at an inflated price there was a home sold at an inflated price. The loans, that many home-buyers are now struggling to repay, were pocketed by builders and land owners.

Some of it has been lost in a spiralling round of speculation but much of it must have been salted away and is reflected in the current high level of savings.

Unfortunately this wealth is hard to pinpoint and is too easily moved. So it’s hard to tax. High income could be subject to some type of sur-tax but the Government is set against it. The argument is that it would yield too little revenue to justify the impact it might have on the willingness of high earners to stay and work in Ireland.

So where is the Government to get extra money?  The target is to reduce the budget deficit by €3 billion next year with the measures equally divided between cuts in day-to-day spending, cuts in capital spending, and higher taxes. That figure could change for the worse but not for the better.

If we rule out a wealth tax or extra tax on high earners, then the only other alternatives are taxes on the low and middle-income group or a property tax. Extra spending taxes are a possibility but unlikely. The gap between the standard Irish and UK VAT rate will be greatly narrowed when the UK rate goes up from 17.5 to 20% next January. But that hardly justifies an increase in our 21% rate.

Any increase in spending taxes, and ours are already very high, hits the poorest hardest.

There’s no doubt that the income tax burden is to be increased with the rationalisation of the current levies and curtailment of some tax credits. Such changes would bring more people into the tax net and are likely to be regressive, bearing more on those on lower incomes.

Pensioners may also be targeted with their tax exemption limits of €20,000 single and €40,000 married abolished.

All of these possibilities are unpalatable and inequitable. A property tax must be seen as a fairer alternative. It needs to be related to the value of the property, or more properly to the equity that the owner has in the property. The ideal is an income tax on the notional rental income that a property would yield with account taken of mortgage costs. As an income tax, income would automatically be taken into account. Those not liable for income tax wouldn’t have to pay it. Those paying top-rate tax would pay proportionately more.

There are good data bases on rental values that could be used for valuation purposes.

Consideration might also be given to providing special relief for those who paid stamp duty on a house in recent years, since ideally a new annual tax would be a replacement rather than an addition to the current stamp duty.

A property tax may not be nice but it’s the fairest option.

Colm Rapple
Irish Mail on Sunday, November 29, 2009

Before last year’s budget Finance Minister, Brian Lenihan was advised even if he raised income tax rates and imposed income levies, Irish workers would continue to be among the lowest taxed, not only in the EU but also among the 30 advanced economies that are members of the OECD.  He didn’t raise income tax rates but did introduce an income levy from January 1. That was increased from April and higher health levies introduced.

Those additional measures were designed to bring in an extra €3.6 billion in a full year. Even if the actual tax-take is falling a little short of that, it was a big tax imposition. These big figures are almost impossible to conceptualise but for comparative purposes, remember it is not far short of the €4 billion that Brian Lenihan is pledged to find in his current budgetary endeavours.

An easier way to conceptualise €3.6 billion, of course, is to think of it on a “per head of population” basis. Since there’s about 4.5 million of us, it amounts to €800 per head. That’s a measure of the extra taxes we are paying this year simply as a result of the tax changes introduced last April and it is a lot of money.

But we are still among the lowest taxed countries in the world. Figures produced by the OECD during the week provide ample evidence that Brian Lenihan is wrong when he claims that there is very little scope for increasing taxes. The fact is that we need higher taxes and there should be public support for any politician brave enough to say so and to outline how such taxes could be effectively and efficiently spent.

Good public and social services have to be paid for. We need to recognise that fact and decide whether or not we are willing to pay the price.

It may well be possible to provide the current level of State services at a lower cost by cutting out waste, reducing the remuneration of those who are clearly paid too much and increasing the productivity of those who are under performing, mainly as a result of bad management.

But if we aspire to the high levels of public service that we have the right to expect as citizens of a rich European country, then we will have to accept higher taxes. There is no good reason why we shouldn’t. We are still among the richest countries in the world and, as this week’s OECD figures clearly show, we are among the lowest taxed of the rich countries.

We paid 28.3% of national income (GDP) in tax in 2008 according to the OECD figures.  That compares with 35.7% in Britain, 36.4% in Germany, 43.1% in France, 43.2% in Italy and 48.3% in Denmark. The EU average is close to 40%.

Even the Slovak Republic was more highly taxed at 29.3% and Turkey, at 23.5% wasn’t too far behind us.

Allowing that the tax take will be higher this year as a result of the additional income and health levies, we are still clearly a very under taxed country by international standards.

Our social insurance contributions, PRSI, are particularly low.  The latest OECD figure relate to 2007 but our international ranking won’t have changed much since then and we are clearly out of step with our neighbours. As a proportion of national income we contribute less than half the EU average in social insurance – 4.7% as compared with 11.5%.

The figure for Britain is also relatively low at 6.6% but that’s still significantly higher than our figure. In Germany the proportion of national income going on social insurance is 13.2%. In France it’s 16.1%. In Spain it’s 12.1% and in Portugal it’s 11.7%.

Both employer and employee social insurance contributions are lower here than in any other EU country. Employer PRSI accounts for 3% of national income here as compared with an EU average of 6.7%, 10.9% in France, 6.3% in Germany, 7.6% in Portugal and 8.9% in Spain and Italy.

Employers can rightly claim that PRSI is effectively a tax on labour, a disincentive to hire workers and a cost on business that can adversely impact on competitiveness. All that is true but Irish employers currently enjoy a major competitive advantage in this regard. The so-called “tax wedge” which is a measure of the cost in PRSI and tax of employing workers is far lower in Ireland than in any other EU country for those on or about the average wage.

Indeed before last April’s budget it was the lowest of any OECD country according to figures prepared for Brian Lenihan. The extra levies are unlikely to have changed our rating in this regard.

A case can certainly be made for increasing PRSI contributions and extra revenue could be raised without dampening the prospects of economic recovery. Lifting the current €75,036 ceiling on employee contributions is the easiest change to make. It would only affect individuals earning more than €75,036 and would be similar to an extra income tax of 4% on all income above that level.

An increase in employer PRSI is also clearly justified but ideally it shouldn’t be imposed on payroll but rather on capital intensive firms that make sizeable profits per worker employed. The extra tax on highly profitable, mostly foreign owned firms, could be partially used to provide PRSI reduction for labour intensive businesses.

It would be a sensible move but maybe Brian Lenihan and his Government are ideologically wedded to the notion of a low-tax economy so beloved by the now defunct PDs.

Colm Rapple
Irish Mail on Sunday, November 22, 2009

There are now over 22 million people unemployed in the European Union. That’s almost one-in-ten workers and that underestimates the number of people affected by joblessness.  That’s an official Eurostat figure and it only includes people who are available for work and actively seeking it. It doesn’t include their families and dependants who suffer from the loss of income that unemployment brings.

Unemployment on this scale is not just an indicator of deprivation and potential poverty, it’s also a measure of economic incompetence and loss.  There is plenty of work that could be done, products that could be produced and services that could be provided. If our economies were properly managed, those 22 million people could create a lot of wealth and welfare.

Ireland is suffering more than most EU countries with 282,000 people out of work. That’s about 12% of the labour force and the number of jobless is expected to rise by over 40,000 before peaking sometime next year. Nobody knows for sure. Some are more optimistic and others less so. But all agree that unemployment will be slow to fall.

That’s the real economic crisis. Unemployment is not only a waste of a valuable resource, it also results in greater inequality, increased social tensions and a general loss in welfare. Economic output is expected to start rising again next year but the inevitable growth in employment is expected to significantly lag the growth in output.

So while average incomes will start to rise again next year, the gap between the haves and the have-nots is bound to widen. Profits will rise, those with jobs will tend to gain and those without jobs will at best stand-still.

It’s not surprising that the Organization for Economic Cooperation and Development, in its latest economic review published during the week, devoted its prime editorial comment to  a paper by Director, John Martin on “Preventing  the jobs crisis from casting a long shadow”.

As usual it was the think-tank’s economic forecasts that got most media attention and the news is good but the report stresses that recovery on its own is not going to provide a quick solution to the current jobs crisis. What’s true for the OECD as a whole is equally true for Ireland. Indeed our problems are even more severe.

The OECD figures puts our jobless rate at 12.2% against an EU average of 8.9%. Of the other EU countries only Spain at 18.1% is suffering a higher rate. The average across the 30 OECD member countries is 8.3%. But that is expected to rise to 10% by the end of next year, higher than at any time since World War II.

There will be 57 million people unemployed in the 30 so-called advanced countries of the world. In single file they’d stretch round the world at least once.

That’s the bad news and if you can imagine those 57 million jobless as individuals with talents, ambitions and families you can get a better idea of just how bad it is. The good news, on which it is more difficult to put a human face, is that the world is coming out of recession faster than expected.  Last June the OECD area as a whole was expected to achieve only an 0.7% growth next year. The forecast has now been raised to 1.9%, rising to 2.5% in 2011.

But that growth will be slow to translate into more jobs and the OECD, which is better known for its liberal capitalist tendencies than its social concerns, is clearly worried about the potential fall-out from the jobs crisis. It’s a worry that has yet to be given the priority it deserves in our own Government’s economic pronouncements.

The OECD’s John Martin describes the potential costs very succinctly. “High and persistent unemployment brings in its train major social and economic costs: poorer health, lower living standards and less life satisfaction for the unemployed and their families: increased crime and lower growth potential for society.”

He is critical of the low level of resources being put into measures to help people back into work. Even in the face of budgetary difficulties, such measures can be cost effective, he says, and various studies have clearly indicated the type of measure that works.

The report stresses the need to provide effective employment services to ensure that the most vulnerable of jobseekers don’t simply drift into long-term unemployment. It recommends a range of policy options including an increased emphasis on training  and a temporary reliance on public-sector job creation schemes.

It also warns against badly targeted job subsidisation schemes. The cost, it says, can be unduly high since many of the jobs subsidised are not at risk while efficient businesses, that hold the key to future growth, are put at a competitive disadvantage.

Hopefully the OECD’s research and experience in this area is informing whatever policies Tánaiste Mary Coughlan is bringing to cabinet. But so far there has been little indication that job protection and job creation is receiving the attention that it deserves. Fás seemed to be particularly badly prepared for the task it currently faces. We are cutting public sector jobs rather than looking for way in which the jobless could be usefully employed in providing needed services at little or no net cost to the Exchequer while Ms Coughlan’s job subsidisation scheme has yet to prove itself cost effective and productive.

These are issues every bit as important as cutting the budget deficit.

Colm Rapple
Irish Mail on Sunday, November 15, 2009

The bottom 21% of income tax payers, between them, earn less than 3% of the total income declared to the Revenue. They don’t pay much tax, only €3.4 million between them in 2006.   Indeed the bottom 30% of taxpayers account for only 6.3% of total income and between them they pay only 13 cent out of every €100 of income tax collected.

They don’t pay much tax because they don’t earn very much. Back in 2006 that 30% of taxpayers accounted for 690,000 out of the total of 2.2 million on the Revenue’s books.

The fact that so large a group of taxpayers earn so little and pay so little tax explains why the top 3.8% of taxpayers – or 4% as Finance Lenihan put it – account for 40% of the income tax raised. But he didn’t add that they also account for over 20% of the income declared to the Revenue and that’s after various deductions including capital allowances and, more importantly, pension contributions.

So while the bottom 30% share only 6.3% of total income, the top 4% get over a quarter of the total. It’s little wonder that they are asked to pay more tax. They could pay more.

We are all going to be asked to pay more. That’s clear from the budget arithmetic published during the week. The broad outline was already known but now we know the detail behind that declared need to trim €4 billion off the budget deficit next year.

It can be argued that the yawning gap between  revenue and spending could be tackled in a more gradualist manner than proposed by Mr Lenihan, but there is much validity in the claim that the sharper the shock, the quicker that the purse strings will be loosened,  consumer spending boosted and a domestic impetus given to an economy recovery that will initially have to be driven by export growth.

If that is accepted, the big question that remains is how to save that €4 billion. Mr Lenihan proposes to cut €750 million off capital spending. That should be relatively painless. If the cuts are carefully targeted with the emphasis on financing more labour rather than capital intensive projects and getting better value for money, the impact on employment could be kept relatively small.

The only other target that we are sure of is the €1.3 billion being looked for in the public sector pay bill. Talks are ongoing and a deal is possible around the concept of accepting pay cuts in the short-term to be reversed as increased productivity is achieved in the future.

That’s not too far removed from the suggestion made in this column some weeks ago that the bulk of public sector workers should agree to a shorter working week while maintaining the current basic pay rates. As little as two hours a week would provide savings of almost 6% on the pay bill, enough to meet Mr Lenihan’s target.

In future years many might view the shorter working week as a better option than a pay increase. The four day week might again emerge as an objective.

If the pay bill is cut, the capital budget trimmed and perhaps a net €450 million  generated from a carbon tax, Mr Lenihan will be left looking for about €2.5 billion.

He keeps stressing that the scope for raising taxes is very limited and he is not for turning. It used to be said that the three big areas of Government spending, were health, education and social welfare. Now the three are said to be pay (36%), social welfare (35%), and the rest (29%).

Trimming 6% off “the rest”, which is Government spending other than pay and social welfare, would save almost €1 billion. This broad category covers everything from paper clips,  to farm subsidies, to heat and light costs.

Mr Lenihan stressed at a press briefing during the week that since consumer prices have fallen by 6.6% over the past year, such savings should be possible. He didn’t specify where but it seemed that he wasn’t only talking about social welfare recipients.

Indeed the case for broad social welfare cuts is less sustainable. Consumer prices are down 6.6% on a year ago. But if you take out the cut in mortgage interest, the drop is only 2.2% and even that overstates the likely benefit that those on low incomes have enjoyed.

Fuel oil is down over 30% in price on last year but fuels most used by low income families have risen in price. Solid fuel, coal and turf, is up 6.2% while bottled gas is up 3.8%. Petrol and diesel are down in price but bus fares are up 12%. Food prices in general are down by 5.3% but basic foodstuffs, the former grocery order items, are down only 3.8%.

But there is no doubt that some social welfare payments go to people who don’t need them. Many with very good company pensions also get State pensions, for instance. But they can rightfully claim to have paid their social insurance contributions over the years and be entitled to those benefits irrespective of their means.  In any case if they are well off they are paying tax on the benefits.

So they’ll be left alone.

Child benefit is the obvious target. Minister Mary Hanifin seems to see three categories of recipient. One group are low income families, either on social welfare or Family Income Supplement who presumably will keep the full benefit. At the other end of the scale are high income families who the Revenue Commissioners are being asked to identify. There are all sorts of difficulties. For instance should a two income couple on a joint €100,000 be considered on a par with a single income family on €100,000? Should the age of the child be taken into account?

There is, however, no doubt that many recipients of child benefit who haven’t suffered job loss and are on reasonable, if reduced, incomes, could well afford to have their benefits reduced or eliminated. It shouldn’t be beyond the Minister ken to target the right people.

Colm Rapple
Irish Mail on Sunday, Oct 25, 2009

Many private sector workers have suffered a drop in income not because of any cut in basic pay but rather because they are working fewer hours. So why not achieve a reduction in the public pay bill in exactly the same way. Paying for two less hours a week would provide a saving of over 5% in the overall pay bill. Indeed if some of those savings were at overtime rates the overall saving could well exceed the 6.8% reduction targeted by Finance Minister, Brian Lenihan.

There are, of course, some areas in the public sector which couldn’t function on lower staffing levels. But two hours a week is less than half-an-hour a day. There are few workplaces, in either the private or public sectors, that are so stretched that that loss could not be made up with a little extra flexibility and productivity.

It would be preferable in the cut in working hours could be applied selectively, exempting the lower paid and those whose duties require direct interaction with the public. It might be difficult, for instance to cut back the hours of firemen without leaving gaps in the coverage.

But any such exemptions could be offset by greater cuts in the work hours in areas where there is obvious over capacity.  That would encourage flexibility in accepting transfers into areas, such as social welfare, that are understaffed.

The change could be viewed as temporary. Basic pay rates and pension rights could be left unchanged. In time the working week might be increased again although the trend is toward a shorter working week. Nurses have had their week reduced from 39 to 37.5 hours while the new consultants’ contract sets their working week at 37 hours.

But, whatever about the length of the working week, the increased productivity and flexibility would hopefully take some time to be eroded.

That’s for the future. This is now and in the current climate this is an option that must be more palatable to the unions than enforced pay cuts and staff reductions. Basic pay rates are retained and there is no cut in employment.

While they can be some debate over the timing of the adjustments needed to achieve balance in the public finances, there is no doubting the need for lower spending or increased revenue. The only alternatives to achieving a reduction in the public sector pay bill are either increased taxes or a cut in the quality or quantity of public services, including social welfare benefits.

If they are to gain and retain of their private sector colleagues, the public sector unions need to show a willingness to do more than simply say No!

A carbon tax will be the only new tax in the December budget, according to Brian Lenihan, but he didn’t rule out an increase in existing taxes although he believes that there is little or no scope to impose extra taxes on the higher paid. He’s wrong, of course.

We need higher taxes, not to offset the targeted reduction in the public sector pay bill, but rather to avoid cuts in the level of State services – social welfare, health, education and justice.

Mr Lenihan was at pains to point out that 4% of taxpayers account for about 48% of income tax receipts.  What he didn’t say, however, is that that 4% of taxpayers account for over a quarter of all income reported to the Revenue. Nor did he point out that the 98,000 taxpayers who reported income of more than €100,000 in 2006 earned a total of €19.8 billion between them and paid only 17.5% of that in income tax.

It is true that these taxpayers face a marginal tax rate a lot higher than 17.5% but that’s the average rate of tax. Pushing that average rate up by 5 percentage points would raise almost €1 billion a year and those high earners would still be only paying 22.5% of their income in tax.

That might be a bit much but it shows that Mr Lenihan’s claim that there is no pot of gold to raid is far from the truth. And if he doesn’t want to hit high incomes, how about wealth?

Colm Rapple
Irish Mail on Sunday, Oct 18, 2009

We need a property tax but not the type proposed in the new Fianna Fáil/ Green programme for government. It’s far too complicated and riddled with the potential for inequalities and anomalies. It will be very difficult to introduce and is likely to still be simply a proposal when the manifestos are being prepared for the next general election.

At that stage Fianna Fáil can dump it and the Greens will be left in glorious isolation. One doesn’t have to be too cynical to believe that that’s what the Fianna Fáil negotiators had in mind.

The Greens have been pushing for a site valuation tax  since well before the property and fiscal crises. But since it seemed to be no more than a pious aspiration it was never given the critical analysis that it deserves. Indeed it’s not even clear what it entails except that it will be a tax on land rather than the property that is built on it.

As a tax on development land and vacant sites etc., it may have something going for it but not as a tax on residential property. A failing of all such taxes is that they don’t take account of a person’s ability to pay. That’s a problem that can be overcome. But a site tax suffers from the other glaring anomaly that it doesn’t even take account of the value of the property but only of the site on which it stands.

Down in Ringsend in John Gormley’s own constituency there are small cottages close  to new blocks of high rise apartments. A cottage might be on a site four times as large as the footprint of one of the apartments. It might be inhabited by a couple of pensioners who have lived there all their lives from well before the time that it became a fashionable area. The apartments might be popular with high flying financial dealers from across the river.

Yet on the basis of site value, the pensioners would be paying four time as much tax as they would.

Are the pensioners going to be forced out of their cottage so that the site can be redeveloped? Will there is any “hope” element built into the site valuations?  What factors will be included?

What about rural areas? It’s common enough to see an old farmhouse beside a Celtic Tiger built multi-bedroomed mansion. The farmhouse is likely to be on a larger site than the mansion, so it would be liable for a higher tax. It doesn’t make sense. Neither does the claim that taxes on the properties themselves would discourage people from improving them.

The logical property tax is one charged on the rental value of the property itself. The tax is applied to the value that the property confers on the owner. If I invest €500,000 in shares or put it on deposit in a bank, I pay tax on the return I make on that money. If I use it to buy a house and rent it out to someone I pay tax on the rent I receive.

Yet if I use it to buy a house for myself and live in it, I pay no tax on the benefit I enjoy by not having to pay rent.

If an employer supplied me with a house rent free, I’d be liable for a benefit-in-kind tax. Farmers who buy land pay tax on the income they get from that land. Yet no tax is paid on the benefit people get by investing in their own homes.

This type of tax did exist in Ireland up until the 1970s and it has been repeatedly recommended as the logical way to tax residential property.

Rental values would be far easier to calculate than site values. The Revenue and the Private Residential Tenancies Board have a wealth of detail on rental properties including the rents currently being paid. A number of private companies such as Daft.ie have extensive information of the rents being sought on properties. It wouldn’t be too difficult to create a data base against which to check the veracity of a self-assessed rental value.

Since the benefit would be considered to be income and taxed as such it would be payable at a taxpayers top rate of tax. Those not liable for tax would automatically be exempt.

Colm Rapple
Irish Mail on Sunday, October 4, 2009

The economic outlook is improving and consumers are beginning to realise it. The faster the doom and gloom is dissipated, the sooner the economic recovery will take hold. Consumer confidence is already improving and that trend will be reinforced by every bit of good economic news disseminated. There was plenty of good news this week but in case you missed it, and need a bit of cheering up, here’s a brief outline.
Unemployment stabilised last month. The number signing on actually fell by 16,417 Such a fall is usual at the end of September as colleges reopen but even when seasonally adjusted the increase was a marginal 600.  This is far better than expected and, even if it is due mainly to increased emigration, it’s going to ease Brian Lenihan’s budgetary problems.  Every 1,000 people on the dole costs the Exchequer an estimated €20 million in social welfare and lost tax.

Of course, more jobs are going to be lost and unemployment will rise, as it always does, during the winter and maybe even well into next year. But the outlook isn’t as bad as it was and while 12.6% of the labour force are out of work, the other 87.4% are still beavering away and while incomes may have fallen slightly, that hasn’t prevented people saving a  lot more.

Two years ago we were saving 2.7% of income. Now we are saving 11.5%. There is plenty of spare cash out there. Indeed part of the problem is that we are not spending it. But that’s changing too. That was another bit of good news this week.

Amárach Research includes some questions on consumer attitudes in its monthly omnibus survey. In April 77% of those surveyed believed that the economic situation in Ireland was getting worse. Last month that was down to 50% with 27% saying that the situation had stabilised and 21% seeing some signs of improvement.

Some 46% believe that the worst will be over within a year while 46% feel comfortable enough to make it through the recession.

That optimism  is also evident in the KCB/ESRI consumer sentiment index for August. KCB economist Austin Hughes sees signs that the dramatic pull-back in household spending evident earlier in the year may now be easing. The outlook for the Christmas spending season may still, he believes,  be weak but may not be as bad as previously feared.

The most optimistic note was struck by Davy Stockbrokers. They are now forecasting a return to economic growth early next year, with a rebound to a growth rate of 4% in 2011. The recovery will be led by the faster-that-expected upturn in the world economy but Davy’s economist Rossa White expects some contribution from consumer demand at home which may rise by 1.5% next year as confidence returns and the need to save for a rainy day seems less urgent.

Our fortunes depend mainly on the expected upturn in the world economy and the outlook is looking better by the day. In its latest economic forecast the International Monetary Fund predicts a 3.1% expansion in the world economy next year. As recently as July it was forecasting a growth rate of only 2.5%. It’s mainly down to the success of Government sponsored spending programmes in the U.S., Europe and Asia

The IMF warns that these need to continue for some time yet and that the upturn will be unevenly spread with the Chinese economy expected to grow by a massive 9% next year, the U.S. by 1.5% and the Euro zone by only 0.3%. But it is all growth. The trend is in the right direction.

As in the world at large, so too in Ireland, the recovery must eventually be based on a return of consumer confidence and spending. There is a message in that for the Government in preparing their new programme and, if it survives that, in preparing the December budget.

There is no doubt that the Government’s finances must be brought into better balance and that will have to involve some reduction in disposable income. But if it is done with a degree of fairness and style, remedial measures could serve to boost both consumer confidence and spending rather than depress them.

Colm Rapple
Irish Mail on Sunday, September 6, 2009

Tax is going to replace NAMA as the hot economic topic tomorrow with the publication of the Tax Commission’s report. Much of it has already been leaked and it appears that few of the proposals are going to find their way into December’s budget. The notable exception is a carbon tax, much beloved by the Greens and certain to be introduced if they are still in office.

The residential property tax seems likely to be long-fingered. Changes in income tax are likely but mainly to consolidate and simplify the current mishmash of tax levies and PRSI. A change in the relief on pension tax relief is long overdue and was on the cards even before the Commission was established, and a clear-out of some remaining tax breaks has been signalled.

But the carbon tax seems to be a certainty. At the behest of the Greens, the Programme for Government includes a commitment to phase in a carbon levy and its rapid introduction is sure to be demanded in the current review of the programme.

The big question, however, is how far the initial environmental justification for such a tax is going to be superseded by a desire to raise money for a cash strapped exchequer. If that is going to be the objective, then a carbon tax that will hit hardest at the poorest, fuel inflation and erode competitiveness is not the best way to go about it.

A carbon tax was first proposed in 2002 and abandoned by Charlie McCreevy in 2004 after he published a discussion document and garnered submissions.

The 100 or so largest energy users in the country have were given carbon quotas by the State some years ago. Those quotas cover most, if not all, of their emissions and, although they didn’t have to pay for them, they are free to sell surplus quota on the open market. In total they account for about a third of the country’s total emissions and they are likely to be exempt from the proposed carbon tax.

A tax rate of between €7.50 and €25 per tonne of CO2 was suggested at the time and in its submission the Greens, then in opposition, proposed a rate of €20. The sole objective was to encourage people to switch from more highly polluting and therefore more highly tax fuels, to less polluting options.

All the revenue was to be recycled, It was to be evenly split between increasing social welfare payments, cutting VAT, reducing employers’ PRSI and funding grants to promote energy efficiency.

A carbon tax of €20 is estimated to raise consumer prices by about 0.6%. That’s the average but the impact will be far greater on poorer families. It is estimated that about 300,000 households rely on solid fuel ranges or open fires as their main source of heat. The tax could add over 20% to the cost of solid fuels but far less to the cost of gas, heating oil and electricity.

Many of those who rely on solid fuel are on relatively low incomes. The top ten percent of income earners spend only 4% of their disposable income on fuel while the lowest ten percent spend about 16%.

When the Exchequer was awash with money, it was easy to argue that all of the extra revenue from a carbon tax should be spent  ameliorating the impact of higher fuel prices on family budgets and business competitiveness. But will that logic hold in the current climate. And if not, does the carbon tax make any sense at all.

Charlie McCreevy was not always right – far from it – but his reasons for abandoning the carbon tax back in 2004 are worthy of consideration at this time.

He concluded that the environmental gains from a carbon tax could not justify the difficulties created, particularly to households. He pointed out that most of the fuels and other products involved were already subject to excise duties that could easily be increased as an alternative to introducing a new tax.

Even with a complicated array of compensation, revenue recycling and abatement measures, a carbon tax, he believed, would produce adverse social and economic effects.

Colm Rapple, Irish Mail on Sunday, JUly 19, 2009

Next year we’ll only be producing as much wealth per head as we were in 2002.  That’s according to the latest forecast from the Economic and Social Research Institute (ESRI). It’s a big drop from where we were at the top of the boom. We are a lot worse off but there is a bright side. By this time next year the ESRI expects the economy to be on a growth path again. It will be slow at first but will pick up momentum if three conditions are met. The banks need to lighten their lending policies after their property loans are passed over to NAMA. We need to continue benefiting from a general recovery in world economic fortunes and the Government finances must be gradually brought back into balance.

They are not particularly onerous conditions. The economic recovery will be all that much faster if the pain of adjusting to our new circumstances is clearly shown to be fairly and equitably spread.  The pain will come in a number of ways, declining incomes, tax increases and cuts in government services.

Pay cuts are inevitable in some areas of the private sector reflecting decreased demand, higher unemployment or, in some cases, an absolute need to remain competitive. But not all of those cuts will be justifiable on economic grounds. The ESRI is forecasting that the national pay bill will fall by 17% between 2008 and 2010 while profits will fall by only 4%.

For every €100 earned in profits last year, €125 was paid out in wages. Next year the ESRI expects that only €107 will be paid in wages for every €100 of profits.

That may not be a bad trend at present given the need to encourage an improvement in business confidence and to maintain investment capacity in the face of risk-adverse banks. But there is a need to boost consumer confidence too.

Achieving that, while also bringing the state finances back into order, will be no easy task. Bridging the budgetary gap requires some mixture of improved efficiencies and spending cuts. There is plenty of scope for all three, a fact that must not be forgotten in the debate on the Bord Snip report. It only looked at the spending side of the equation and, only partially at that, since it didn’t examine the scope for cutting or postponing capital spending.

The debate must be extended to include the tax side of the equation. We are still a relatively low taxed country and increased taxes on high incomes, wealth and property need not have any adverse impact on our potential for economic growth. There is no doubt that part of our current difficulties stem from the excessive tax cuts given out to curry political favour during the good years and the failure to broaden the tax base.

Finance Minister Brian Lenihan’s assertion that the bulk of any further adjustment must come from spending cuts rather than tax increases, needs to be seen for what it is – an ideologically based opinion rather than a subjective truth.

We need tax increases and we can afford to impose them. But even with tax increases there will still be a need to cut spending and the McCarthy group highlights a wide range of areas in which greater efficiencies can yield substantial savings. They should be acted on as quickly as possible. But battle lines must be drawn on any attempts to actually cut back on the level or quality of state services. We are still a wealthy country even by European standards and we should aspire to the best in public services. That will require an acceptance of high taxes and the elimination of the feather bedding that has long plagued many areas of the public sector and protected elements of the private sector.

The menu of changes presented in the Bord Snip report is long and varied and, given some tax increases and some cuts in capital spending, the Government has scope for picking and choosing. With a bit of luck and a great deal of commitment, those choices will be made on the basis of what is equitable and most conducive to boosting economic confidence rather than on the basis of who can shout the loudest and threaten the greatest economic and social disruption.