Colm’s columns

Colm Rapple
Irish Mail on Sunday, March 7, 2010

Pensions are set to become a hot election issue next time round. The Government can not deliver on the plans it unveiled during the week in advance of the next election that has to take place before July 14, 2012. Only a few of the proposed changes will have been introduced by then. The first increase in pension age isn’t to come into effect until 2014, neither is the proposed auto-enrolment pension scheme for those without private pension cover. There is unlikely to be any change in tax relief before then, either.

So there is plenty of time for the opposition parties to come up with their own variations of the Government’s National Pensions Framework.  There are many alternatives to the proposed changes. The electorate has the right to expect concrete plans and also an indication of how Fine Gael and Labour would reconcile their different approaches. Given their ideological predilections, their proposals will undoubtedly be different.

The electorate should demand concrete rather than fudged proposals. The issues involved are not complicated.

The changes to be introduced by 2012 are not particularly contentious. They include changes in public services pensions. Most will apply only to new entrants. In particular, their pensions will be based on average earnings over their years of service rather than final pay. More contentious is the suggestion that the post retirement increases for all public servants would be related to consumer prices rather than pay rates but that’s obviously open to negotiation with the public sector unions in the context of general public sector reform.

Private sector workers in defined contribution schemes have currently to use the bulk of their depleted pension funds to buy an annuity on retirement. They are to be given the option — already available to the self-employed and in respect of additional voluntary contributions (AVCs) –  of transferring that money into an approved retirement fund and drawing it down as they see fit.

That change is long overdue but there is no mention in the Government proposals of the complementary or alternative option of the State providing annuities at guaranteed rates. This failure is indicative of the overall thrust of the Government’s proposals. They are clearly designed to discommode the private pensions industry as little as possible.

The industry was successful in fighting off compulsory pensions in the past pushing voluntary PRSAs as a way of extending pension coverage to that 50% of workers who have no company or private pension cover. It was evident to anyone that had a bit of sense that it wouldn’t work and it didn’t. But they are still fighting shy of real compulsion and want to retain the management of the funds. The Government has agreed, although there is no reason to believe that this approach will be any more successful than the last.

The auto-enrolment pension scheme will not be compulsory. All workers over 22 who don’t have adequate private pension cover will be automatically signed up but after three months they will be able to opt out although after six months they’ll have to leave their money in the pension fund. That’s not compulsion. Many low income workers are likely to see it as a forced saving scheme providing a lump sum for Christmas or the holidays after three to six months.

For every 4% of pay put in by employees, the employer will contribute 2%. Pay is likely to be defined as anything between €127 and €1,000 a week. That’s a lot less than most employers with occupational pension schemes contribute. So there is a great danger that employers who might have considered setting up their own schemes will opt for this cheaper State version instead while many with existing schemes will close them at least to new entrants.

The end result will be less rather than more pension cover.

It’s right that the contributions should be collected through the PRSI system. Even the pensions industry would agree to that. It’s a cheap and effective collection system. But having collected the money it shouldn’t be transferred over to private pension fund managers. If people are to be encouraged to put money into acquiring pension rights or encouraged to accept a totally compulsory scheme, they need a greater degree of certainty than any private pension fund manager can currently offer.

The solution, which hopefully at least one of the opposition parties will promote and promise to introduce, is a totally pay-related State scheme supplemental to the current PRSI State pension. The extra contributions collected through the PRSI system should be retained and managed by the State to provide a minimum pay-related top-up to the State benefits for all citizens.

The money could be used partially to pay pensions on a pay-as-you-go basis and partially as a pre-funded source of extra finance to cover the inevitable bad years when revenue into the scheme was reduced. The State would, in effect, be guaranteeing basic pensions, partially related to what people had contributed over their working lives and partially related to what society could afford at the time.

That ideal should form the basis of an alternative to the Government model that some political party will hopefully put to the Irish people at the next election.

Colm Rapple
Irish Mail on Sunday February 28, 2010

A high proportion of Irish employers are flaunting employment laws by failing to give their workers pay slips and statements of the terms of conditions under which they are employed. Yet legislation to give extra powers to the National Employment Rights Authority and to establish it on a statutory basis has been languishing in the Dáil for two years.

Survey results published this week by the Central Statistics Office show that only nine out of ten workers get pay slips, and the proportion is significantly lower in some sectors and among low pay workers.

Some 35% of workers in the agricultural, forestry and fishing sector have to accept their pay on face value with no written indication of what tax, PRSI or other deductions have been made. That applies equally to some 16% of workers in the construction industry and to a similar percentage in the hotel and restaurant sector.

By law, dating back to 1991, all employees are entitled to a payslip outlining gross pay, net pay and details of all deductions. The need for such information is obvious if only to check that the calculations have been properly made and to provide some assurance that tax, PRSI and other deductions are being made and paid over to the State, health insurance or pension fund.

Workers are also entitled, by law, to a written statement of terms and conditions. It’s supposed to be provided within two months of a worker taking up employment or moving to a new job with the same employer. But according to the CSO figures, one-in-three employers fail to comply with the law.

The CSO survey zoned in on workers who had taken up new jobs during the previous two years. Presumably that was because there was a greater chance that other workers might have difficulty remembering whether or not they got a statement of terms and conditions. Of those surveyed only 65% confirmed that their bosses have complied with the law, while 31% said that they hadn’t. The other 4% did not know.

That’s a worryingly low level of compliance with the law and the situation is even worse in the construction industry where over half of those surveyed, 51%, said that they hadn’t been given a statement of terms and conditions. The figure was a slightly lower 48% in the hotels and restaurant sector.

It was to ensure a greater level of compliance that the National Employment Rights Authority was established early in 2007 as a separate entity within the Department of Enterprise, Trade and Employment. Initially it was simply a change of name although it is intended to establish it as a statutory body. But it has been given extra functions over the past couple of years including answering the current heavy volume of queries about delays in processing the State element of redundancy payments. It also took on an enforcement role in relation to employment permits.

No doubt its resources are under pressure but it did undertake almost 9,000 inspections last year – not much down on the previous year.  But only 69% of those surveyed were found to be in full compliance with the law. That confirms that the results of the CSO survey, which was carried out in 2008, have not been overtaken by events.

The upgrading of the National Employment Rights Authority to a statutory body and the provision of extra powers to enable it to more easily carry out its functions were promised as part of the “Towards 2016” social partnership agreement. An early draft of the legislation, The Employment Law Compliance Bill 2008, did get a second reading in the Dáil but numerous amendments are expected. The expectation that it would be enacted helped to gain trade union support for the Lisbon Treaty in the face of worries over some European Court judgements.

But it seems to have been long-fingered and may never make it to the statute book. Fine Gael is opposed to many of its provisions so if it dies with the Dáil it may be some time before it is resurrected. Until it is passed the work of the Authority is hampered by the lack of adequate powers to enforce employment law and the regulation of immigrant work permits.

There is also currently inadequate protection for workers who report non-compliant employers. One of the provisions of the proposed legislation is designed to protect whistleblowers.

But instead of getting additional power and extra staff the National Employment Rights Authority is facing cut-backs. The McCarthy “Bord Snip” report recommended that it be merged with the Health & Safety Authority. McCarthy estimated that some 33 jobs could be trimmed from the combined operation providing cost savings of at least €5 million a year.

That may come in the near future as part of a restructuring of Government departments and services. But the Authority’s budget has already been cut this year. The savings related totally to pay costs. Staff numbers are down from 128 in 2008 to 113 this year and, of course, pay rates are down.

Getting employers to comply with the law is clearly not a Government priority yet in the current economic climate workers need more, rather than less, protection.

Colm Rapple
Irish Mail on Sunday, January 24, 2010

When it comes to formulating pensions policy, Ireland doesn’t have a monopoly on stupidity, nor on accepting inequity, nor on too readily accepting the self-serving arguments of the pension industry. That much is clear from a comprehensive study of personal pension provision in some nine European countries and the US published during the week.

Edited by Jim Stewart and Gerard Hughes of the School of Business, Trinity College the study “Personal Provision of Retirement Income” comprises the contributions made by a range of international experts at a conference in France in December 2007.  Far from negating its relevance the global economic melt-down that has occurred since only adds weight to many of the issues raised.

It’s a depressing read, outlining how all too many countries have been cutting back on both public and State pension entitlements in the mistaken belief that personal pension plans can provide the top-up necessary to ensure adequate income in retirement.

Pensions are an essential social benefit and we have been moving backwards in its provision. There was a time, before the Celtic Tiger was a cub, when it was acceptable to promote the vision of a pension scheme that would confer on all citizens, the security of knowing that they could look forward to an adequate income in retirement.

As far back as 1976, the then junior minister at the Department of Social Welfare and subsequent Labour Party leader, Frank Cluskey, published a green paper promoting the concept of a national income-related pension scheme.  Unfortunately we have moved far away from that ideal and at an increasing pace in recent years.

The State is rowing back on the commitments it is willing to make with regard to State and public sector pensions.

Employers are no longer willing to accept the open-ended commitments inherent in defined benefit schemes where the pension is based on final pay and years of service. Even the best of employers no longer offer entrance to such guaranteed schemes to new employees and many have curtailed the entitlements of existing members.

Poor investment returns have completely undermined any trust that people might have had in defined contribution schemes where the pension depends on investment performance. The risks have been highlighted by the volatility of pension fund values over recent years. The massive gains of the early Celtic Tiger years have been totally eroded and average Irish fund values are back to where they were about ten years ago.

Risk engenders insecurity which reduces personal welfare and makes a nonsense of the notion that voluntary participation in personal pension plans can provide a solution to the problem societies face in providing retirement pensions for their members.

All of these issues are evident in the book’s studies of pension experiences across Europe. It is not a polemic and does not seek to even suggest solutions. But it is difficult to avoid the conclusion that for Ireland, at least, the solution lies in society as a whole accepting responsibility for pension provision.

It has become almost fashionable to demand that banks be nationalised, so let’s take it a step further and call for the nationalisation of the pensions industry.  It doesn’t have to be taken over or bought out. The development of an adequate national pension scheme would over time diminish the importance of the private pensions industry.

All of the elements of a national pension scheme are already in place. There’s the PRSI network for collecting contributions at little or no additional marginal cost. There’s a payment system in place. There’s also the national pension fund, if it is considered appropriate to pre-fund some of the future liabilities.

There is a case for widening the role of the fund to allow for investments that will boost the economic potential of the State rather than simply the direct return to the fund. But that’s already recognised in the use of some of the reserves to bail out the banks.

TASC, the independent think-tank, which hosted the book launch took the opportunity to launch a revision to its pension proposals. It’s advocating a significant increase in the basic social welfare pension financed by curtailing the tax relief on private pension contributions.

It wants the basic State pension increased to 40% of the average industrial wage over the next five years. This guaranteed income would replace both the current contributory and non-contributory pensions and be payable to everyone over 65 who satisfied minimum residency requirements.

A compulsory pay-related contributory State scheme would bring the guaranteed pension up to 50% of final earnings up to a specified maximum.

These improvements would be partially financed by curtailing tax relief on pension contributions. The Government is expected to standardise the tax relief at somewhere between the standard and top rates of tax with rates of anything between 30% and 38% suggested. TASC would limit the tax relief to the standard rate of tax up to an earnings ceiling of €75,000.

The Government is expected to publish its final proposals within the next few months. But it’s clear that the debate hasn’t really started.

Colm Rapple,
Irish Mail on Sunday, January 10, 2010
Health insurers are not allowed to vary their premiums on the basis of a customer’s age or risk of illness. That’s the principle known as “community rating”. It’s a principle that few are willing to criticise, certainly not in public. Yet it is coming under increasing pressure.  Announcing an 8% hike in premiums this week, Jimmy Tolen, chief executive of the VHI put the position very starkly.

“It is becoming inevitable,” he said, “that older members of society will pay significantly more than younger members of society for their health insurance”.

The VHI has a vested interest in raising the scare but Mr Tolen’s warning rings true. The trend has been obvious for some time. There is little doubt that private health insurers would like to see the end of community rating in favour of a market free for all. And there must be a suspicion that despite her public support for the concept of community rating, Health Minister Mary Harney, is ideologically opposed to it.

Unless she does something soon that ideologically driven alter-ego may win out.

Medical insurance claims rise with age. In 2008 VHI paid out an average of €745 per customer. But the average for those in their 60s was €1,678. That rose to €2,699 for those in their 70s and to €3,040 for those aged 80 or over.

A high proportion of VHI’s customers are elderly. Its overall market share is about 70% but it has a 90% share of those over 70 and 97% of those aged 80 or over.  Since it can’t charge extra to those customers who will, on average, cost it more in claims, it operates at a competitive disadvantage against the newer insurers who have marketed their plans aggressively at the younger age groups. Although they can’t turn anyone away and must charge all comers the same premium for the same plan, but they don’t go out of their way to attract older customers.

Initially it was planned to equalise these market forces by a system of “risk equalisation”. The new companies with a younger customer base would be required to pay a subsidy to the VHI which had an older and most costly customer base. It was a sensible, and market friendly idea, but the courts thought otherwise.

Recognising that “community rating” is not possible in the Irish market without some cross subsidisation of VHI, the Department of Health came up with a short-term solution. All insurers pay a levy on each customer and the money raised is returned by way of tax relief which is linked to the age of the customer.

It’s €200 for those in their 50s, rising to €1,250 for those aged 80 or over.

It is risk equalisation by another route but Jimmy Tolan claims that these extra tax reliefs would need to be more than doubled to fully compensate VHI for its older customer base. In the meanwhile it is losing money despite having raised premiums by 23% this time last year and now by another 8% this year. As a State owned company it can carry those losses but it is being groomed for privatisation and is being forced to become a profit seeking company.

That’s being blamed on EU requirements but the pressures from Brussels could have been successfully resisted by anyone with the vision, and lack of ideological hang-up, to see that Ireland’s medical insurance needs can best to served by a single State owned insurance company. It would easily be regulated, like Bord Gais and the ESB, while still forcing competition in the supply of medical services.   That’s where competitive pressures could yield sizeable dividends in lower costs and better services.

It’s not too late to adopt such a policy. The conventional wisdom with regard to banking is being rewritten so why not also rewrite that related to insurance and, indeed, pension provision.

The alternative at this stage seems to be the privatisation of VHI and the ending of community rated medical insurance as it used to be conceived. The law doesn’t prevent companies from segmenting the market and charging higher premiums for those plans specifically suited to elderly customers. It’s already happening.

VHI, for its part, has seen its reserves diminished and it needs over €200 million in additional capital to meet the solvency ratio being imposed by the Financial Regulator. It would be all too easy, in the current financial climate, for Mary Harney to use this as an excuse to privatise the operation. We’d all be the losers if she gets away with it.

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
Irish Mail on Sunday, Oct 25, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Colm Rapple
Irish Mail on Sunday, Oct 18, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Colm Rapple
Irish MAil on Sunday August 9, 2009

Can a gas find currently valued on the open market at no more than €1.5 billion, generate €1.7 billion in tax revenue for the State? According to junior minister Conor Lenihan, it can, and no doubt he is right. But this take on the Corrib Gas field off the Mayo coast is misleading in the extreme, all smoke and mirrors as Mr Lehihan’s mentor Bertie Ahern might have said.

The figures are not comparable. The value put on the field is what someone is willing to pay now for a stream of income that could extend over the next twenty years. Indeed on the basis of the tax revenue estimate the field is likely to generate profits in excess of €10 billion. It’s against that figure that the expected €1.7 billion tax revenue has to be considered.

Comparing the current value put on a company with a stream of tax revenue that won’t start flowing into the exchequer for perhaps ten years and won’t be fully collected for maybe twenty years is like comparing apples and oranges as the clever Mr Lenihan well knows.

Firm figures are hard to come by in the offshore hydrocarbon business. But it hard to get anything firmer than the price a company is willing to pay for a find or a stake in it. That’s what we now have for Corrib. This week the Canadian based Vermillion Energy Trust announced that it was paying up to $400 million (€280m) for the 18.5% stake in the Corrib field owned by Marathon Oil.

Vermillion is essentially buying a flow of income, having taken a view on the likely gas reserves and made some assumptions on the future trend in gas prices. In making such a valuation a discount rate is applied to future income and a 10% rate is not uncommon. That means that €100 which won’t accrue to the company until this time next year is valued at only €90 or €81 if it has to wait two years. Using a 10% discount rate, a €100 payable in ten years time is currently only worth €14.

That’s how companies put a current value on a future flow of income and that’s how Vermillion undoubtedly calculated the price it was willing to pay for the Corrib stake. On the basis of the €280 million it paid for an 18.5% stake, the Corrib field as a whole is worth €1.5 billion. But the actual profits that will be made will be multiples of that.

Putting a current value on a future flow of tax revenue is easy mathematically if we knew when that estimated €1.7 billion was going to flow into the exchequer. But we can guess. Shell and its partners won’t be paying any tax for many years. It can write off all of its exploration and developments costs and even the cost of eventually abandoning the find before declaring a taxable profit. So it could be ten years before they pay a cent in tax.

On the assumption that the tax would come in evenly over the following ten years, the current value of that estimated €1.7 billion tax revenue using a 10% discount rate is only €380 million.

That’s the figure that Conor Lenihan should have used this week if he really wanted to compare the potential tax revenue from Corrib with its current value as determined by the Marathon sale. And it’s a pittance. The Irish people, who actually own the gas, will get only 20% of the taxable profits made by the Shell consortium. Shell will be pocketing profits for many years before a cent in tax is paid.

The debate over where the gas refinery should be sited and where any onshore pipeline should be laid is really only a side show to this greater scandal. Instead of falling over themselves trying to made things easy for Shell, it’s time that the State agencies from the Minister down recognised just how good a deal Shell is getting and how much more it could be forced to contribute. It should at least be forced to be more environmentally and people friendly while a strong case can be made for a windfall profits tax. It’s an insult for Conor Lenihan to pretend that the Irish taxpayer isn’t being short-changed.

Colm Rapple
Irish Mail on Sunday January 18th, 2009

“Told ya so!” reads the balloon caption emanating from the picture of Karl Marx gracing the mug I got as a Christmas present. But Marx, were he still alive, would doubtless have more than that to say. However, there are plenty of other “told ya so’s” out there and, like Marx, most of them didn’t get it completely right. In so far as they did, it had more to do with luck than with economic insight, research or experience.

There was a general realisation that the property bubble had to bust at some stage. But most commentators, including the prestigious Economic and Social Research Institute, predicted a soft rather than a hard landing. That was the central forecast in the ESRI’s medium term outlook published only eight months ago based on fair assumptions built into a very sophisticated economic model.

There were those who warned about a more traumatic busting of the bubble but no-one foresaw the combination of global economic shocks which hit us at the same time as the inevitable slow-down in the domestic economy as the property boom came to its inevitable end.

We were always going to have an economic downturn but without the external shock it would certainly not have been as bad as it has turned out to be. And no one is claiming to have foreseen the extent of the world financial crisis.

But whether the downturn was going to be slight or severe, we should have been preparing for it.

It was all too clear that the tax base was not adequate to deal with any kind of downturn in the property market, whether great or small. But few commentators were critical of the ideologically motivated erosion of the tax base.  The Celtic Tiger preceded the tax cuts and while it may have been encouraged on its way by some of the cuts that followed in its wake, they clearly went too far.

In 2000 income tax rates were lowered from 24% and 46% to 22% and 44%. Now they are down at 20% and 41%. Were they back up at even 22% and 44% the Exchequer would be about €2 billion a year better off – the amount that the Government is committed to saving by its current round of pay and spending cuts.

The tax cuts did little or nothing to promote economic growth during the good years. They were part of the return we got from the Celtic Tiger, paid for from the exceptionally buoyant tax yield from the property sector. But in retrospect we would have been just as well off without them. We might have avoided the mad spending sprees that pushed asset prices to clearly unsustainable levels. Certainly the State finances would now be in a much healthier state.

But there were very few who argued, as this column has consistently done,  against the tax cuts. To do so, required a vision of sustainable social and economic growth far removed from the liberal free market model that was so seldom questioned by commentators during the go-go years, not least by some of those who now claim to have predicted the current recession.

Until relatively recent times, there were few voices raised in protest at the laxness of the regulatory systems supposedly charged with ensuring the effective operation of  free markets in areas such as financial services, telecommunications and energy supply where owners and managers have long experience of circumventing attempts to impose competitive pressures on their operations.

The cosy relationship between Financial Regulator and financial institutions, often enough raised in this column, was seldom questioned elsewhere until the horse had effectively bolted.

No one seemed to have studied why our energy costs, which were amongst the lowest in Europe when ESB and Bord Gais operated monopolies, are now, in a supposed free regulated market, amongst the highest. Ironically the truth is that, in order to entice new entrants into the market, the Regulator was forced to not only concede buy to actually demand higher prices.

Those who forecast the recession can claim to have long advocated cut-backs in  Government spending. But that was mainly because it’s a natural part of the liberal, free market, reduced government, agenda to which most subscribed. So it’s not surprising that it is currently being pushed as a primary solution to the Government’s budgetary problems.

But the truth is that we need not only to raise taxes but also more Government spending, at least in the medium term. Higher taxes, even on the wealthy and higher paid,  just might impact adversely on confidence at this time although the risk is possibly worth taking.

Government spending needs to be prioritised, made more efficient and effective, even possibly cut in some areas. But we spent far less of our national income on public services than other euro-zone countries. If we want the type of state services that we deserve and demand, we’re going to have to spent a lot more.

According to figures included in a euro-zone economy commentary published by the OECD during the week in 2006 we were spending 34% of GDP on state services. The next lowest was Spain at 39% while Belgium, Finland, Austria, Italy and France were all spending more than 48% of their GDP on state services.

We trailed most of the others in practically every area except health where we actually topped the league table. In 2006 we were spending 7.7% of GDP on health compared with 6.3% in Germany, 6.8% in Belgium and 7.2% in France.

Clearly we could be getting better value for some of our money but the case for massive spending cuts is based on assumptions every bit as unsound as those on which  some of those economic forecasts were based.

Colm Rapple
Irish Mail on Sunday, January 11th, 2009

If you are 30 and starting to save for your retirement the Pensions Board estimates that you need to put aside about 18% of your pay each month to fund a pension of two-thirds final pay when you are 65. That two-thirds of final pay would include your social welfare pension.

That’s only an estimate, of course. There are no certainties. It’s based on an assumption that you’ll earn an average 5% annual return on your accumulating pension fund.

Of course, you might. But recent fund performance wouldn’t inspire you with any confidence. Irish pension funds fell by between 30% and 39% in value last year wiping out all of the gains made during the good tiger economy years. They are now valued at much the same levels as they were ten years ago. Fund values would need to have risen by 40% since 1998 just to maintain the purchasing power of the invested money so in real terms values have fallen by 40% over the ten years.

Of course past performance can not be taken as a guide to future performance, and it is possible that starting from their current low ebb, pension funds may achieve an average return of 5% over some future period, as they have over many past periods. There were individual years when returns of over 20% were achieved so over the long-term an average annual return of 5% is certainly achievable.

But it is by no means certain, and we now have ample evidence of the very real risk involved in pension fund investment which, of its nature, involves a fixed or almost fixed maturity date.

Tax relief can help to cushion that risk, particularly for top-rate taxpayers, but it is still a major risk which fewer and fewer people are going to be willing to take. And this at a time when the Government is planning pension initiatives aimed at encouraging people to save more for their retirement.

It’s little wonder that the long-awaited Government policy document on pensions, which was to be published last year, has still not being finalised. According to the Department of Social and Family Affairs, which is responsible for preparing the proposals that will go to Government, it is still being worked on. But the hope is that it will be published “early this year”.

The need for a radical change in pension policy has been obvious for years but all we’ve got has been a succession of study after study, report after report. The present system suited a range of influential interest groups ranging from the pension industry to the public sector mandarins. Decisions were long overdue even before the onslaught of the current financial crisis.

But if the lessons from the current financial turmoil are built into the long-term national pension strategy, the long delays may have served a useful purpose.

It’s now very clear that no amount of regulation can reduce to an acceptable level the risks inherent in current private pension schemes. Markets have proved to be too volatile, funding standards inadequate in the face of that volatility. Those risks are going to become increasingly obvious to those already in pension scheme and effectively scupper hopes of encouraging those currently outside the pensions net from ever joining.

Even the best defined benefit pension scheme operated by larger companies are not immune from risk as Waterford-Wedgwood workers in Ireland, Britain, Germany and Japan unfortunately realised this week.

The latest group accounts show that there was an estimated deficit of €148 million in the group’s pension funds on April 5 last. At that stage almost half of the €705 million assets of the funds were invested in equities which have suffered very sharp downturns since. Total fund liabilities amounted to an estimated €853 million.

There is a hope that new owners will take over the pension fund liabilities but no doubt they’ll look for other concessions in return. The extent of any Irish shortfall is not itemised in the accounts which combine all the pension scheme together. In Ireland, unlike Britain, we don’t have a compensation fund to cover such shortfalls. Any shortfall will be borne by those still in employment.

It’s too late to start shutting that particular stable door and the problem is not going to be solved by putting greater obligations on those companies with defined benefit scheme to meet their open-ended obligations. Such pressure would only result in pension schemes being closed off.

The only sensible solution is for the State to take over total responsibility for pensions. It might sound like a loony left solution but then only a few months ago so too did the nationalisation of banks.

Most of the submissions on the Government’s discussions paper issued a couple of years ago urged some degree of State involvement. There were calls for a new system of tax relief, improved social welfare pensions, guaranteed annuity rates,  compensation funds etc. etc.

It would be better to go the whole hog and simply nationalise the pensions industry. The State already takes responsibility for the pension entitlements of public servants so why not extend that to the private sector. Pension contributions should be made compulsory and collected through the existing and very efficient PRSI system. It would be far more cost effective than the current system and provide a far greater degree of certainty to all involved.