Colm’s columns

Colm Rapple
Irish Mail on Sunday June 24, 2007

Very few first-time home buyers are going to benefit from the stamp duty change to be passed into law before the politicians go off for their summer recess. But the minimalist nature of the Fianna Fáil proposal was well documented before the election.

But there is some good news. The Programme for Government contains a commitment that wasn’t specified in the election manifesto. There is going to be a further increase in the amount of mortgage interest that can qualify for tax relief. It will only apply to first-time buyers but that includes anyone who has bought for the first-time in the past seven years. So if you bought five years ago you can still qualify for two-years of this additional relief.

It is one of the good news money items in the Programme for Government that may help to lift spirits now that mid-summer is over and the days are getting shorter. Although hopefully you won’t be relying entirely on these government promises to keep you cheerful.

The limits on mortgage tax relief were raised in last December’s budget. Finance Minister Brian Cowen believes that this is the best way to help first-time buyers facing, if not higher house prices, then certainly higher interest rates.

The promise is to raise the maximum interest on which tax relief can be claimed from €8,000 to €10,000 for an individual borrower and from €16,000 to €20,000 for a couple.

A couple with a mortgage of €320,000 at an interest rate of 5% are currently paying about €16,000 in interest each year so a couple with a mortgage in excess of that is not getting tax relief on the top slice of their loan and will benefit from the change. The bigger the mortgage the more they can benefit up to a maximum of €800 a year for those with loans in excess of €400,000.

It’s not a lot but it will help to offset the impact of rising interest rates. Rates are expected to rise by another quarter per cent and maybe a half per cent by the end of the year.

Of course, like the change in stamp duty it will confer most benefit on those with the most money. Only those first-time buyers who can afford to buy fairly expensive second-hand homes will benefit from the change in stamp duty and only couples with mortgages in excess of about €320,000 will benefit from the change in mortgage tax relief which won’t take effect, in any case, until next January.

There is another mortgage related promise in the Programme for Government but it’s not certain when it will apply. That’s to maintain the tax relief on qualifying mortgage interest at 20% even if the standard rate of tax drops below that level. And the hope is that it will. Such a change was part of the tax package promised in the Fianna Fáil manifesto and it’s in the Programme for Government.

The current €48,800 ceiling on employee PRSI contributions is to be abolished and the rate cut from 4% to 2%. That will benefit all workers earning less than €97,600 although up to that level the more you earn, the less you’ll gain. The self-employed, who already pay PRSI on all of their income are to have their rate cut from 3% to 2%.

It will mean less money going into the social insurance fund but the Government is promising to make that up from the general Exchequer. Hopefully that commitment will be backed up by some statutory requirement that can’t be renaged on.

Those PRSI changes will almost certainly apply from next January while the promised income tax changes may have to wait. If and when there’s money to spare the standard rate is to be cut to 18% and the top rate cut from 41% to 40%.

There’s also a commitment, presumably at the behest of the Greens, to look at the possibility of reducing the VAT rates on certain unspecified environmental goods and services.

There has been some signs that the Greens’ commitment to the carbon tax, outlined in this column last week, may not be as strong as first assumed. If it does come it’s likely to be late in the Government’s term of office. Indeed it might suit Fianna Fáil to blame it on the Greens close to the next election.

But there will certainly be a car tax change in next December’s budget. That’s to meet an EU requirement but it was unclear whether the revised tax rates favouring lower-emission cars would apply to VRT on new cars or to annual road tax or both.

According to the Programme for Government it is going to apply to both. So while you may be able to avoid the extra VRT on a new gas guzzler by buying before next December’s budget, you’ll almost certainly face higher road tax. There is no need to raise extra tax from these changes so the higher tax on some cars can, and most likely will, be passed back to consumers in lower taxes on greener cars.

The Congress of Trade Unions is effectively given the two-fingers with a commitment in the Programme for Government to further extend the Business Expansion and Seed Capital Schemes that offer significant tax relief to high earners willing to invest in new start-up ventures.

Congress wants the EU to ban the schemes but the Government, including the Greens, obviously aren’t particularly worried.

It seems that those who judge a government by the amount of tax taken from their pay will find no reason in next December’s budget to be disappointed at the people’s electoral decision.

Colm Rapple
Irish Mail on Sunday, June 17, 2007

All of the revenue from the carbon tax inserted into the new programme for government at the behest of the Greens is to be channelled back into the economy but it is not going to be cost free. There are bound to be winners and losers.

If introduced at the level proposed when it was first mooted a few years ago it will dramatically increase the price of energy products hitting household budgets and eroding the competitiveness of many businesses. It was estimated at the time that the proposed tax would push up the cost of electricity by over 11% and the price of natural gas by 16%. The price of a bale of peat briquettes would jump by 28%.

Imposing a tax on carbon emissions is easy. But its not so easy to make sure that the costs don’t outweigh the benefits. The tax promised in the programme for government is to be revenue neutral. But it’s not easy to devise ways of  compensating those who have to pay the tax given that the objective is to create an incentive to cut emissions.

The tax will increase the cost of energy. That will bear heaviest on the poor who spend a larger proportion of their income on energy than their higher earning neighbours. The top ten percent of income earners spend only about 4% of their disposable income on fuel while the lowest ten percent spent about 16%. Those are ESRI figures from a few years ago and, if anything, the gap is wider now  that energy prices are higher.

Higher social welfare payments and fuel allowances could help to compensate those hardest hit by the higher energy costs but some people would undoubtedly fall through the cracks.  There will be similar difficulties in compensating businesses whose competitiveness will be eroded. The costs could be high for what, some are predicting, could be a fairly insignificant cut in greenhouse gas emissions.

That risk is particularly high given that the heaviest polluters in the country may be exempt from the tax. They are the companies already involved in the EU wide emissions trading scheme.

There is about a hundred of them and combined they account for an estimated 75% of our industrial greenhouse gas emissions. Under the emissions trading scheme they were given free licences covering most, if not all, of their CO2 output. That give away was overseen by minister, Martin Cullen and will impose a far greater cost on taxpayers than his ill fated attempt to introduce electronic voting.

He was criticised at the time for not selling or auctioning the emission quotas rather than given them away free. The criticism still stands and its justification will become more obvious as we fail to meet our emission targets under the international Kyoto Agreement and have to buy in emission quota from abroad or pay hefty fines.

In any case these companies are only likely to have to pay the proposed carbon tax on emissions above the generous quotas they already enjoy.

It was for these reasons that the then Finance Minister Charlie McCreevy abandoned plans for a carbon tax in 2004 having initially proposed it in December 2002. At internal civil service meetings the tax was heavily promoted by the Department of the Environment but strongly opposed by the Department of Enterprise, Trade and Employment and questioned by a number of other Departments.

It’s obvious from the reports of the civil service Tax Strategy Group that there were concerns that the actual impact of a carbon tax couldn’t be predicted with any degree of certainty. Submissions were sought and Mr McCreevy subsequently reported that over half of those who expressed a view were opposed to the tax and many of the others sought special treatment or total exemption if the tax was introduced.

Explaining his decision to abandon the plan Mr McCreevy  claimed that the tax would only have cut CO2 emissions by 0.5 million tonnes a year and that this meagre environmental benefit would not justify the difficulties that would arise, particularly for households. That estimate for CO2 reduction was for the first year when the tax was being phased in but even at the best estimates some civil service advisers felt the likely benefit was far too high to justify the cost.

Mr McCreevy also pointed out that even without any additional tax consumers were facing increased energy prices and that that would provide an incentive to cut back on usage and look for alternatives.

The same arguments still apply and presumably are backed up by documentation in the relevant ministries. An agreement to introduce a carbon tax is only the first and very small step. It won’t be as easy to get agreement on the level of the tax or how the significant revenue that it would raise will be recycled.

Mr McCreevy’s original proposal was to introduce the tax at a level of €7.50 per tonne of CO2, rising to at least €20 over a few years.  A €20 tax was expected to increase the price of motor fuel  by 8%, electricity by 11%, the price of gas by 16%, briquettes by 28%, heating oil by 19%, coal by 21% and turf by a massive 28%.

The impact on the consumer price index was expected to be between about 0.6% and 0.8%. If those with emission quotas are exempted the tax could yield about €500 million and it’s the division of that money that will certainly cause friction at the cabinet table. Getting a broad proposal into the Programme for Government is likely to prove much easier than getting it implemented.

Colm Rapple
Irish Mail on Sunday June, 10, 2007

It’s almost twelve years since Esat Digifone was awarded its mobile phone licence and its seven years since its sale to BT netted Denis O’Brien some €300 million. Having used that seed capital skilfully over the years Mr O’Brien is now ranked as Ireland’s fourth richest individual with assets of €2.3 billion.

It’s no wonder that he’s getting a bit weary at the continuing enquiries of the Moriarty tribunal which is now in it’s tenth year. Having dealt with payments to the late Charles Haughey, it is currently examining the financial affairs of Michael Lowry who was Minister for Communications when the Esat licence was issued.

It may be years before the Tribunal decides if there was anything improper about the issue of that second mobile phone licence. But improper or not, it was certainly a scandal that the Irish taxpayer gained so little while individual investors and foreign based companies did so well.

The State charged Esat Digifone only €19 million for the licence when it was issued in November 1995. Four years later, in January 2000, Esat was sold to BT for €2,400 million and it was accepted that the bulk of that price related to the company’s mobile phone operation.

Until proven otherwise we must accept that there was no impropriety involved in the issue of the licence. But there was certainly incompetence. Unfortunately there is no tribunal enquiring into that.

The licence could have been auctioned to the highest bidder. But it wasn’t. Instead selection criteria were laid down, applications sought and the winner picked by way of a so-called beauty contest. The licence fee was set at a maximum of €19 million.

The decision to go that route was taken by the then minister Michael Lowry and the Government of the day but they relied on the advice of civil servants and consultants who must all share the blame. There has been some attempt to shift responsibility to the EU Commission which raised questions about an earlier decision to put the licence up for auction. But there is little doubt that any issues raised by the Commission could have been overcome.

Whatever the Tribunal finds we already know of two scandals.

The first was the issuing of a licence for a fraction of its true worth to the significant detriment of Irish taxpayers. It’s clear that the mobile phone licence was worth at least €2,000 million to BT in 2000 and some of that value related to the customer base built up by Esat over the previous four years. But that hadn’t been a particularly difficult task for a lean new entrant taking on a old hide-bound concern like Eircom.

The licence issued in 1995 for €19 million was clearly worth at least €1,000 million to the successful bidder. There is no way of knowing if anyone would have had the foresight to bid that much at the time but they certainly would have bid much more than €19 million. It has been suggested that Esat would have been disadvantaged in an auction by its lack of resources but there were other applicants with deeper pockets.

The second scandal can also be attributed to incompetence. Those who decided to issue the licence on the cheap may have believed that the benefit would be passed on to customers in cheaper call charges and that that would encourage competition and speed the roll out of the new network. But they should, at least, have recognised that it mightn’t work like that. So as a fail-safe they should have recommended some mechanism for clawing back any windfall profits made by the Esat or its promoters. They didn’t.

The simplest way would have been to build some conditions into the licence terms. It could have been a tax levied on turnover as Sweden did with its 3G mobile licences or a straightforward right to claw back a proportion of any capital gain made on the transfer of the licence if it was sold on or if the ownership of Esat changed significantly.

But the Department of Finance didn’t even bother taking a fresh look at its Capital Gains Tax legislation with the result that Denis O’Brien sought to avoid an estimated €50 million tax on the capital gains he made from the sale of Esat by moving to Portugal. He may have been successful. He failed in an attempt to censor media comment on his tax affairs and it is known that he appealed a tax assessment but the determination of the Appeals Commissioners has never been made public.

The facts that he could try and actually did try to avoid tax on the windfall gain he made at the expense of the Irish taxpayer is a double scandal worthy of as much attention as the suspicions of impropriety surrounding the issue of the licence. Incompetence and greed can be every bit as contemptible as impropriety.

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Having tried to ignore the obvious for months, the trade union mandarins have at last admitted that they got it very wrong when they recommended the current pay deal to their rank and file members. But they are a little late in demanding government action to curb inflation when it was clear from the very beginning that the agreed increases averaging 4.6% a year were never going to be enough to keep pace with inflation.

Even before the pay deal was agreed this time last year the trend was evident and as outlined in this column a few weeks ago official statistics have now confirmed that most workers suffered a real decline in take-home pay in 2006. That trend is continuing with no reason to believe that the headline inflation rate will fall below 5% over the coming months.

The attractions of being in government are diminishing by the day.

Colm Rapple
Irish Mail on Sunday June, 3, 2007

This time last year, in the face of increased competition Bank of Ireland was forced to introduce a free banking option for its personal customers. To qualify you have to either keep a minimum balance of €500 in your account or else make at least 3 online or phone payments from your account during each billing quarter. The promotion has cost the bank money but it didn’t prevent it from increasing pre-tax profits by a massive 28% to just short of €2 billion during the year to the end of March..

Some of that profit came from the sale and lease-back of 36 of its Irish retail branches but even after stripping that out and also ignoring some other small once-off gains, the underlying profit for the year at €1.7 billion was up a sharp 22% on the previous year.

It could well afford to give its personal customers a little break. And it may be only a temporary break. It has maintained its basic charging structure for those who don’t meet the requirements of what it described in this week’s preliminary results statement as a “free banking offer”. That sounds as if it might be withdrawn at some stage.

But for the present the reduction in personal accounts fees has been more than offset by a substantial growth in both credit card income and personal banking fees, the Bank revealed in its preliminary profit statement this week. It seems that customers can’t win but all too often they have only themselves to blame.

It would be great if the Financial Regulator produced a fully interactive website where consumers of financial services could quickly and easily find out which financial institutition offers the best option for their particular needs. As pointed out in this column in the past the Communications Regulators Callcost.ie site provides a model that the Financial Regulator could follow.

Without such a site, consumers need to do a bit of legwork to find the best option and the banks don’t make it easy for them. They have become adept at offering products that are difficult to compare on a like-with-like basis with those offered by competitors. They should be forced to offer at least one basic option in each product area that could be easily compared. But that would be too much like real competition.

It’s not a new idea. That type of standardisation was applied to Personal Retirement Savings Accounts (PRSAs) when they were introduced a few years ago. It could easily be extended to other financial products.

In the absence of the ideal, it is up to consumers to look after themselves. Unfortunately they are not inclined to. There is no other way to otherwise explain why so many credit card customers stay with a bank which charges 16.2% on its standard credit card while three providers, Halifax, Permanent TSB and National Irish all offer cards with rates below 10%.

Or to take another example. Why haven’t all the banks moved to meet the new current account product from the new entrant Halifax which offers fee-free banking, an overdraft rate of 9.5% compared to Bank of Ireland’s 15.4% or AIB’s 14.5%, and an interest payment of 10% on credit balances up to €2,000 provided at least €1,500 a month in lodged to the account. For many people that last condition would be satisfied by the monthly pay cheque.

It seems that the older established banks don’t see the need to compete too seriously on cost. They can rely on customer inertia. It’s easy to say that consumers should shop around. Unfortunately too few of them will take that advice and until more of them actually do, the banks and other financial institutions will continue to coin it at the expense of their customers.

Almost €700 million of the Bank of Ireland’s group profit was made on the Irish retail banking operations, an increase of 27% on the previous year. The competitive pressures mentioned above kept the growth in fee income to a relatively modest 6% but the net income from loans jumped 17% while costs only rose by 6%.

Overall lending increased by 25% with business lending up a sharper 33% and mortgage lending up 22%.

Bank of Ireland, in line with other financial institutions, continues to gain massively from the 10% rate of Corporation Tax introduced to maintain the attractiveness of Ireland for foreign direct investment. The EU couldn’t prevent us from introduced a low rate of company tax but it ruled that it had to apply to all companies. So, although the financial companies were well able to afford a higher rate of tax and wouldn’t have moved out of Ireland in any case, they had to be included in the concession.

Initially the Government imposed a levy on the banks to claw back some of this lost tax but that was abolished a few years ago. The issue was raised again during the election campaign although not given very much attention.

In its manifesto the Greens promised to reintroduce the levy for a period of 5 years with an overall cap of €200 million. With a market share of about 20% the Bank of Ireland’s share of that would amount to about €40 million. It wouldn’t put too much of a dent in its profits. But it’s doubtful if the introduction of such a levy would be one of the Greens’ core demands in government formation talks.

During the year under review the Bank of Ireland incurred an Irish company tax bill of €226 million on Irish profits of €1.6 billion. Retail banking accounts for only about half the profits declared in Ireland.