Colm’s columns

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, December 20, 2009

The carbon tax is a nonsense. It will have scant impact on our carbon emissions. It’s inequitable, in so far as it will bear heaviest on low income earners. And it is economically inefficient in that it will adversely affect the competitiveness of many Irish businesses. It will also give a massive boost to cross border shopping, not for groceries and drink but rather for solid fuel.

It’s another example of the good intentions and woolly thinking that has informed much of the Green Party’s input to Government.

With some honourable exceptions, there seems to be a reluctance to criticise this tax, perhaps because of a fear of being accused of killing polar bears. Or perhaps there was so much in the budget that it has just got sidelined.

There was widespread opposition to the tax when it was first mooted by Charlie McCreevy some years ago, some of it from within the civil service. In a submission presented to Charlie McCreevy at the time, the Department of Transport maintained that a carbon tax could cause significant economic damage without any corresponding economic benefits. It argued that the tax would have little or no impact on the behaviour of transport users or on the level of emissions from the transport sector.

That latter point is not even disputed by Green Minister, Éamon Ryan. Demand for fossil fuel products is, as he put it himself,  relatively inelastic. In other words even a large increase in price doesn’t have much impact on the amount purchased. That’s particularly true of motor fuels, which will be bearing almost two-thirds of the carbon tax burden.

The ESRI estimated that a €20 carbon tax — €5 higher than is being imposed – would reduce fuel consumption in the transport sector by only 1.1% over eight years. The plain fact is that there is limited opportunities for fuel switching. It will take more than a few cent on the litre to discourage private motorists from driving.

Too much of the tax burden imposed on private motorists is charged on the actual vehicle through VRT and VAT and too little on the actual process of driving. The logical approach would be to cut the tax on cars and greatly raise the tax on fuel. That  might encourage a shift to public transport.

But not, of course, if public transport gets more expensive. Yet the current tax will bear more heavily on rail transport than it will on cars. Auto-diesel has gone up by 4.4% in price as a result of the carbon tax. The price of the marked gas oil used by Iarnród Éireann will go up by 8.7% when the tax is imposed in May.

Consumer prices have on average fallen sharply over the past year. But not the cost of public transport. Rail fares are up 8.3% while bus fares are up a massive 11.7%. The carbon tax will exacerbate the upward pressure on prices.

That will impact not only on passengers but also on freight services. There is not much more that road hauliers and Iarnód Éireann can do to become more efficient. The haulage fleet is relatively new and Iarnód Éireann has replaced most of its older locomotives. So the carbon tax isn’t going to have any significant impact on emissions. But it will have an impact on competitiveness. The extra cost will be passed on to businesses and inevitably to consumers.

It’s little wonder that the Department of Transport strongly recommended that all public transport operations including rail, bus and taxies be exempt from any carbon tax. A full exemption should also apply to rail freight operations while licensed road hauliers and own account operators, it recommended, should be subject to a preferential rate of tax.

No doubt Brian Lenihan will continue to be under pressure to grant such exemptions over the coming months.

The difficulties of imposing a hefty tax on coal and turf, will also be brought home to him. He has delayed imposing this element of the tax to allow “a robust mechanism to be put in place to counter the sourcing of coal and peat from Northern Ireland where lower environmental standards apply”.

But lower prices are likely to be a greater problem than lower environmental standards. Arigna Fuels Ltd, which operates about 25 miles from the border, estimated that a price differential of €10 would be enough to send its retail customers north to shop. The carbon tax will put up the price of coal by about €45 a tonne, an increase of 11%. Briquettes will go up by about 40c or 10%.

The Revenue Commissioners have pointed out that while it can exercise control under EU agreements on cross border movements of alcohol, tobacco and oils, there isn’t much it can do to prevent the movement of other goods. That’s why the excise duties on matches, mineral waters and video players were abolished.

The arguments used for abolishing those taxes, apply equally to any new tax on coal for domestic use, the Revenue Commissioners warned. There is a danger, they added, that imposing the tax on domestic use of coal could “lead to such control difficulties as could undermine, to some extent, the credibility of the tax”.

Those 4 X 4s will come in useful.

Colm Rapple

It’s wrong to accuse Brian Lenihan of not having a vision of Ireland in the future. Unfortunately there is every sign that he has a vision and it’s not a particularly edifying one. It’s of a low tax economy with a limited, not over generous, social welfare system. It’s a vision that owes more to Washington than Copenhagen, to the philosophy of the now defunct PDs than to that espoused by the founders of his own party.

It’s evident, not only in the provisions of this week’s budget but also in what’s promised for this time next year. The ground was well prepared to lessen the shocks of this week’s offering. There were some very able spin doctors at work in leaking the bad news by degrees in order to reduce the impact.

And in his budget speech Mr Lenihan started preparing the ground for the 2011 budget. We now have a fair idea of his long term plans. They are not particularly edifying but they can, of course, be changed. Securing that change should be part of the trade unions’ agenda for next year. But they may have too narrow a vision of what’s worth fighting for.

The income tax net is going to be widened to catch many low paid workers who currently don’t earn enough to pay tax. Over half of those on the Revenue books won’t be paying income tax next year. Mr Lenihan described them as “earners” but that figure includes many pensioners.

While broadening the base he also wants, he says, to make the system simpler and fairer. But it’s clear from his actions this year that he has no stomach for increasing the tax take on the higher paid. And if your objective is to reduce the overall tax burden it’s very hard to see how you can make the system fairer by bringing more low earners into the net.

One of his fellow ministers let the cat out of the bag when he defended the decision not to exempt any low paid public servants from the pay cuts. If you want to save a billion euro you can’t exempt the lower paid, he said. He didn’t elaborate but that is only true if you preclude the possibility of imposing extra cuts on the higher paid.

If that logic is applied to the income tax plans, then the extra tax taken from the lower paid will be used to reduce the tax burden of higher income earners. That’s the only way you can broaden the tax net while reducing the overall income tax burden.

That is the objective. The Commission on Taxation was charged with keeping the overall tax burden low, enhancing the rewards to work and increasing the fairness of the system. The “fairness” came last and wasn’t very evident in the Commission’s final report which broadly reflected the sectional interests of  its members.

It may be that the extra tax from the lower paid will be used to reduce the burden of the middle income groups but it would have to be thinly spread and will hardly compensate for water charges and the proposed property tax.  Unfortunately the first may be introduced simply because the EU and the Greens are demanding it, while the property tax is likely to be long fingered until the election and then dropped.

The notion of investing some €60 million installing water meters in order to impose a new tax on households is nonsensical. We have no need to ration water and while there is nothing wrong with a household tax to help finance local government there are many easier and less expensive ways of imposing it. But sin sceal eile.

The meters are unlikely to be installed in sufficient quantities to impose the tax for 2011. So back to what is certain.

There will be major changes in how PRSI and the levies are collected. They are all to be combined into a new “social contribution” which will be paid by everyone at a “low rate on an wide base as a collective contribution to public services”.

Whatever about the low rate, the rest of that described from Mr Lenihan’s budget speech could describe any tax. All taxes are social contributions so why separate this one. Is it the intention to abolish the idea of social insurance. Is the social insurance fund to be abolished?  We don’t know but the PRSI and levy system is not particularly progressive at present.

A worker on full rate PRSI pays 10% on the first €75,036, 9% the next €100,000 and 11% on income above €174,981. That’s including levies. The total imposition is much the same irrespective of income.

If the rate of contribution is to be lowered, the base has to be widened. The new tax could, like the income levy, be charged on a wider definition of income to include pension contributions, capital allowances etc. But better still there could be a charge on the profits of capital intensive firms.

Over €7 billion will be raised from PRSI in 2010. About half as much again will be raised from the health and income levies. How that money is raised and how the burden is shared is a matter of some importance to all taxpayers. Mr Lenihan should at the very least promote a discussion on the options in the interests of the equity that he espouses.

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

With consumer prices down 6.5% over the past year, the case for cuts in social welfare benefits may seem to have some validity. But it doesn’t. The drop in the cost of living has been far less marked for those on social welfare and low incomes. Even if that wasn’t the case, cutting the incomes of the poorest and most vulnerable in our society should be way down the list of ways to get the State finances back in balance – so far down, indeed, that it need never be reached.

Consumer prices have fallen by 6.5% over the past year. But that’s an average. The price of most goods and services has fallen but some items have gone up in price. The real impact on a household’s cost of living depends on how they spend their money, how close to the average they are.

In broad terms, those with big mortgages have experienced the biggest gains while those on low incomes, particularly those on social welfare, are likely to have gained less than the average.

Mortgage interest payments have almost halved over the past year. Anyone who was paying out half of their income in mortgage interest this time last year are now only paying out a quarter of their income. Their cost of living has dropped by at least 25%. Ok, most people aren’t that heavily burdened but when mortgage interest is taken out of the equation, the drop in other customer costs over the past year has been not 6.5%, but only 3%.

Even that overstates the impact that falling prices have had on the living costs of most social welfare recipients. Their spending patterns are likely to be far removed from those of the average household. A larger proportion of their income is spend on the very good and services which have bucked the general trend and actually risen in price over the past year.

Poorer households tend to spend more of their income on fuel and light and a high proportion of the heating bill goes on solid fuel and bottled gas which have both gone up in price over the past year. Solid fuel is up 6.2% and bottled gas by 3.8% while fuel oil is down 36% and natural gas down 11.3%.

The average household spends just under 4% of its income on fuel and light. But it’s 11% for those in the very lowest income category (lowest ten percent) and over 7% for those in the next lowest category.

Solid fuel, coal and turf, will get the biggest hit from any carbon tax that may be introduced in the December budget. They are the most polluting but their users face the highest costs in switching to cleaner alternatives. Have the Greens thought this one through?

Petrol and diesel have both fallen in price over the past year but bus and rail transport on which social welfare recipient are more likely to rely are both up. Bus fares are 12% higher than a year ago while rail fares are up 8.7%.  Transport costs overall are actually down 4% and that is what’s reflected in the index but for those relying on public transport the costs are up significantly.

Food prices are down by 6% on last year and poorer families do spend a higher proportion of their incomes on food but the price of basic foodstuffs has fallen less than the average. The price of those items which used to be controlled under the Grocery Orders has fallen by only 3.4%. These items which shops were barred from selling below cost included sliced pans, breakfast cereal, packets of rashers, tinned vegetables, baby drinks and juices, sugar, flour, baby milk compound, and milk.

There is undoubtedly scope for trimming in one way or another those social welfare benefits which go to people who are not poor. Child benefit is just one example but there is no case on the basis of the consumer price trends or otherwise for any general cut in benefits.

It’s been estimated that the Government’s tax take this year will amount to no more than 28% of national income. The latest available figures for some of our EU neighbours are: Sweden, 48.2%, Belgium 44.4%, France 43.6%, Italy 43.3% Denmark 48.9%, Germany 36.2%, Britain, 36.6%, Spain 37.3%, Portugal 36.6%.

There’s an obvious message there.

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 27, 2009

Who says that Tánaiste Mary Coughlan always gets it wrong? She was certainly right when she said in the Dáil during the week that many of the recommendations in the Bord Snip report don’t make sense. But they don’t have to, since most of them will never have to be implemented.

Colm McCarthy and his committee created a menu from which the Government can pick and choose and while the budgetary problems are severe they are not insurmountable. Unless, of course, Mary Coughlan is right in claiming that her Government need to cut spending by €4 billion next year. But that’s where she got it very wrong.

The targets for easing our way out of the current budgetary difficulties were set down back in April and the target is to cut the budget deficit by €4 billion next year. But it was originally envisaged that day-to-day spending would be cut by only €1.5 billion. Another €750 million would be cut relatively painlessly from capital spending while €1.75 billion would be raised in taxes.

Recent comments from the two Brians, Lenihan and Cowen, suggest that they want to ease up on the tax hikes and get more of the savings from spending cuts. That certainly doesn’t make a lot of sense because there is ample scope for raising some extra tax particularly from those who did very well from the Celtic Tiger and are currently among the recession proof.

They may be keeping a low profile, but they are there. Every asset that was bought at an inflated price during the boom years, was sold at an inflated price and the sellers pocketed the money.

Tax revenue of €1.75 billion wouldn’t be too hard to find.  To put that figure in context, the extra taxes announced in the April budget are set to raise €3.6 billion in a full year while the changes announced last October are expected to raise almost €2 billion this year.

If €1.75 billion can be raised in extra taxes, the necessary spending cuts are a lot more achievable. The €1.5 b target for day-to-day spending cuts represents less than 30% of the potential cost savings of €5.3 billion identified by Bord Snip and, to put that in context, it’s not much greater that the €1.2 billion expected to be achieved in a full year from the cuts unveiled in the April budget.

So what’s needed are cuts on a slightly larger scale than those announced in April. Given the amount of waste identified in the Bord Snip report, that should be achievable without cutting into the quality or quantity of public services. It should be possible to shave €1.5 billion off the Government’s spending budget without any across-the-board reductions in social welfare benefits or public sector pay.

Private sector pay has undoubtedly fallen behind, and the size of the gap is amplified by the enhanced value that the recession gives to the security and pension rights of public sector workers. But trying to impose pay cuts on any but the higher echelons of public servants risks a backlash that could cause more damage to the economy than any benefits that payroll savings could ever provide.

Far better to achieve higher productivity, increased flexibility and extra revenue from a fairer distribution of the €1.4 billion pension levy that would reflect the real value of pension rights for the different grades and types of civil servants. Gardaí, for instance, would have to contribute over 32% of their pay to buy their pension rights while nurses would only have to contribute 13% and some low paid civil servants even less.

The pension levy doesn’t take accounts of such differences.

There is a budgetary gap to be bridged and that can’t be done without pain. Choices have to be made but they must not be made on the basis of assuaging those who shout loudest. It has become very evident that many interest groups believe that those who shout loudest and wave the biggest sticks will win. And they will unless the politicians start showing a willingness to put country before political advantage.

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.