Colm’s columns

Colm Rapple
Irish Mail on Sunday, August 22, 2010

Ireland has one of the most expensive legal systems in the developed world. It’s almost twice as expensive to enforce a business contract through the Irish courts as it is in the US according to a World Bank survey conducted last year. The process is time consuming as well as costly. It takes 515 days on average to resolve a case here compared with 399 in Britain, 300 in the US and 462 on average in OECD countries.

Our poor showing is partly down to a continuing acceptance of a self-regulatory legal regime and partly due to the imposition of rules and regulations that inhibit competition.

There have been numerous reports outlining what needs to be done, the most comprehensive of which was published by the Competition Authority in 2006. There have been some minor changes since then but the Authority is still of the view that the legal profession needs a root and branch reform.

So, while attention is currently focused on financial regulation and energy regulation, let’s add regulation of the legal system into the mix. The reform is long overdue and while it is too late to stop the tribunal gravy train, there is time to ensure that the legal profession don’t enjoy another bonanza arising from the banking crisis, NAMA and the inevitable associated legal disputes.

The potential for overcharging was highlighted recently when the court appointed Taxing Master, Charles Moran, who adjudicates disputes over legal costs, ordered a reduction from €2.1 million to €393,000 in the fee charges in a judicial review case.  The instructing solicitors in the case, Patrick V Boland & Son of Newbridge, Co. Kildare had their claim for High Court instruction fees reduced from €975,000 to just €86,000. A claim of €10,000 for postage, copying and paper etc. was cut to €1,000.

Two barristers, Paul Gardiner SC and former attorney general, Harry Whelehan SC had their High Court brief fees reduced from a claimed €75,000 to €16,670.

Mr Morgan described the level of costs claimed as “revolting in the extreme” and expressed “disgust and bewilderment” at the claims.

There is no suggestion that the lawyers did anything wrong but the case does highlight the wide range of charges that legal professionals may see as justified.  In this case the claims were referred to the Taxing Master but in most cases they are not.  It’s obviously very easy for consumers to pay more than they need to.

But it is very difficult to shop around. The Competition Authority has made a few specific recommendations that could easily be enforced and would undoubtedly bring down costs.

Barristers are currently forbidden to give direct advice to personal or business consumers. They have to be approached through a solicitor. That ban should be lifted. They should also be allowed to form partnerships and businesses rather than having to operate as sole traders.

Those restrictions are imposed by the Bar Council and could be lifted by it. It doesn’t require any change in the law.

Solicitors claim a common law right to hold onto a clients files thereby making it difficult, if not impossible to switch to another solicitor. That right should be removed and easy switching procedures introduced as they have been with bank accounts. The Law Society could initiate that change although it would require a change in the law to abolish the right altogether.

Legal fees are still often charged as a percentage of whatever award is achieved. Yet the required workload may have little or nothing to do with the size of the claim or the award. Legal fees should be based on the work done. That a change could be encouraged by the Taxing Master.

You don’t need to be a fully trained solicitor to do conveyancing work on property transactions. Yet it tends to be the preserve of solicitors. The Competition Authority would like to see a new profession of conveyancers introduced to compete with solicitors.

But overall what’s needed is a new independent Legal Services Commission that would replace the self-regulatory role currently enjoyed by the Bar Council and the Law Society. The Competition Authority envisages that this body would have overall responsibility for regulating the profession putting the interests of consumers first.

The current regulators, as representatives of the legal professionals, face a clear conflict of interest. No other profession continues to enjoy such freedom from independent overview. It’s time for a change and there is no good reason to delay it any further. We can no longer afford to continue feeding the sacred cows.

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, 4th July 2010

There are 2.2 million people in the Irish labour force. One in five of them are signing on for benefit at social welfare offices. Not all of those 452,882 people are included in the official unemployment figures but if they are not fully unemployed, they are undoubtedly under-employed. The official unemployment rate is 13.4% but the real rate is nearer to 20% and the end of the recession is not, of itself, going to bring any immediate respite for those affected.

The Central Statistics Office is always at pains to stress that the “live register” of those signing on, is not designed to measure unemployment since it includes part-time and casual workers who are entitled to jobseekers’ benefit or allowance for the days they don’t work. It also includes people who are claiming jobseekers’ allowance but are not really looking for work often because they have been out of work so long that they have become disillusioned and discouraged.

But by definition, if you are eligible to sign on for unemployment benefits, you are unemployed and that is the case with those 452,882 people. Some 92,000 of them are under 25 and a growing number of them have been out of work for a year or more.  These are real people enough to fill Croke Park to capacity five and a half times. That’s not counting their families who are in most cases equally affected by their enforced unemployment.

This week’s national income figures that revealed the end of the recession, take no account of these victims of the recession. But the recovery should be measured in terms of unemployment growth and not simply in terms of output growth. The emphasis of economic policy should be on maximising employment as an end in itself and not simply relying on output growth to slowly produce more jobs. The cost of unemployment is too high in terms of wasted assets and personal suffering for it not to be tackled as a major objective in itself even if the costs don’t show up in the national income tables.

Output during the first quarter of the year was a sharp 2.7% higher than in the previous quarter. It’s a movement in the right direction but even on this measure there’s a long way to go. That increase was in Gross Domestic Product (GDP) which includes the income due to the foreign owners of Irish enterprises. Gross National Product, which is what’s left for Irish residents, was actually down 0.5% on the previous quarter and down 4.2% on the first quarter of 2009.

But there is an improving trend and the hope is that it will accelerate and spread out to the domestic sector. The more optimism that can be engendered, the greater and the quicker will be the recovery and there is some reason for optimism.

Measured in constant money terms GNP last year was marginally higher than it was in 2004 and we didn’t consider ourselves particularly poor in 2004.  GNP per head is back to about where it was in 2002 and we weren’t poor then either. In the intervening eight years, of course, we soared to dizzy heights and we have come down with a bump, but Ireland is still an income rich country.

Those who have lost jobs have suffered a sharp drop in income. Many of those who still have jobs have suffered a fall in the value of their assets. All of them feel poorer although the worst hit are those who invested at or near the top of the boom. But the money borrowed to buy properties at grossly inflated prices didn’t just disappear. For every buyer there was a seller.

The buyers have been left with debts and properties worth far less than they paid for them. The sellers, for the most part, simply pocketed the money. Some of it was undoubtedly lost on foolish investments but much of has been stashed away.

It’s a mistake to believe that everybody lost.  Of course, we are all poorer now than we were three years ago but there are many, particularly those who sold land and property at inflated prices, who are far better off now than they were before the boom. There is wealth there to be tapped for the State coffers although it would not be easy to identify and tax it.

But the real victims of the recession are easy to identify. They are the unemployed and those who borrowed to buy assets, particularly homes, at inflated Celtic Tiger prices. The improving national account figures shouldn’t be allowed to mask the need for pro-active policies to help them.

Colm Rapple
Irish Mail on Sunday, December 27, 2009

There is a good economic reason for not giving Christmas presents according to an eminent American economist, Joel Waldfogel. He holds the chair of business and public policy at the University of Pennsylvania so his views carry some weight. He’s been capitalising on this particular nugget of wisdom with a book “Scroogenomics: why you shouldn’t buy presents for the holidays”. He has been getting plenty of publicity for it in recent weeks.

Sorry about the timing but bringing you this news sooner might have upset your Christmas spending and that wouldn’t have been good for the economy. In any case, the Professor’s assertion that presents are a waste of money is a load of nonsense. It’s based on an over simplistic view of the value of economic transactions.

It’s only worth refuting because, if accepted, it’s faulty logic can be used to make the case for minimal government spending. If you accept the simplistic premise that the consumer knows best, then the Government should tax and spend as little as possible. That’s nonsense too.

Professor Waldfogel’s case is easily stated.

If you buy something for yourself for €50 then that is what it’s worth to you. But if you spent €50 on a present for someone else, there is every possibility that it won’t be quite what he or she wants, or needs. Therefore it may not be worth €50 to them.

On average, he claims, on the basis of some surveys, it is likely to be worth 20% less.

It’s a neat argument that fits in nicely with the common experience of unsuitable presents that never get used. But it ignores the fundamental fact that if someone spends €50 on an item either for own use or as a present, then at the time of purchase that item was worth €50 to the buyer.

That buyer got €50 worth of satisfaction from the item either as a result of using it or giving it. The recipient had the satisfaction of getting it, knowing that he or she was thought of, irrespective of whether or not it was something needed or wanted.

Of course, it would be better if it was the ideal gift but the same type of argument can be applied to all spending. We don’t only waste money on gifts.

Almost a hundred years ago the British neo-classical economist Alfred Marshall advanced the notion that all lotteries involve a loss of human satisfaction. His argument went something like this: if a million people put up €1 each to produce a prize of €1 million, the value of that prize to the winner is worth significantly less than the sum of all the €1s put up by the other ticket holders. That has to be true. The last euro of that prize was certainly worth more to the person who put up the stake than it is to the winner – one euro out of a million wouldn’t be missed.

But Marshall’s argument missed out too crucial point. Each of the stakeholders enjoyed the hope of winning. That in itself was worth the euro stake even accepting that it might be offset, to some extent, by the disappointment of not winning. So lotteries actually create value.

The hope value that lotteries create is similar to the intangible satisfaction of giving or receiving a gift, a satisfaction that Professor Waldfogel argument ignores.

So you needn’t feel guilty if the presents you gave were not the items or services that the recipients would have spent their own money on. You got a satisfaction from giving and they got a satisfaction from receiving. And, as a bonus, you helped to keep the economy ticking over. You helped add to that other intangible, consumer confidence.

The anecdotal evidence suggest that consumer spending was higher than expected this Christmas. It seems that consumer confidence got a boost from the fact that the budget was no worse than anticipated and also from a belief in Brian Lenihan’s claim that the worst is over.

There was a note of optimism in the latest ESRI Quarterly Review published on Wednesday. The expectation is for a return to economic growth in the second half of 2010 with a quickening of pace in 2011. Export sales is benefiting from the quicker than expected recovery in Germany, France, Japan and the U.S. and while demand at home will continue to decline, the drop in consumer spending is levelling out. The expectation is that it will fall by only 1% next year with some draw down of savings compensating for lower incomes.

Much depends on how fast confidence returns. While questioning some of the detail, the ESRI takes the view that Brian Lenihan’s general budgetary stance has been right.

But the worst isn’t over for everyone. Jobs will continue to be lost although at a slower pace than was feared earlier in the year. But even this latest more optimistic forecast envisages the average number at work next year will be down 76,000 on the 2009 level. Even assuming that a net 40,000 people will leave the country, the number unemployed is expected to rise by 40,000 to 298,000.

These are the people most affected by the recession and the Government’s effectiveness in 2010 must be judged primarily on how they fare during the year.

BEST BUYS

Savings

Keep an eye on the interest rate you are getting on your savings in the New Year. It’s all too easy to shop around for the best rate when putting money on deposit and then to forget that interest rates do change. Banks make a lot of money from their customers’ inertia. Rates have been particularly volatile in recent months and the trend is sure to continue, maybe even intensify.

Regular Savers accounts were offering very good rates earlier in the year. Some offered guarantees that expire either after twelve month or at a set date. Don’t assume that you are still getting the rate you first signed up for. Check what you are getting now.

The rates payable on demand deposit accounts are seldom guaranteed and can change overnight. Irish Nationwide and Halifax are both paying 3.75% on deposits. The Irish Nationwide pays that rate, which includes a bonus of 1.25% on sums up to €20,000. That bonus is guaranteed to continue until the end of 2010. Halifax pays that rate on the first €10,000 and it is guaranteed for 12 months from the time the deposit is made.

If you have a deposit with Halifax when does your guarantee run out?

Anglo Irish Bank was offering one of the highest rates earlier in the year. But at 3.1% it is not longer the best.

Don’t forget that DIRT is now charged at 25%. For those liable to pay DIRT, that higher rate adds to the attractions of Post Office Saving Bonds and Certs, the returns from which are paid tax-free.

And if you can put your money away for a few years watch out for the launch of the new Government Solidarity Bond that was promised in the budget.

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.