Colm’s columns

Colm Rapple
Irish Mail on Sunday. September 30, 2007

Over €1 billion paid out by the State in rent supplements in recent years may have gone untaxed. The Revenue are given details of the landlords who benefit from the scheme but were able to trace less than half of them. This is just one of the examples of waste and maladministration highlighted in the annual report of the Comptroller and Auditor General whose office keeps a watchful eye on government spending programmes.

He does a good job but all too often the failures are publicised long after the event. No one is blamed. No one is called to account. Taxpayers are expected to grin and bear it. There has never been any obvious co-relation between the inefficiencies revealed by the Comptroller and the salaries bonuses paid to higher public servants.

In this case the Revenue may be able to make up some of the loss. It is examining how best to track down the tax evaders although given the large number of landlords involved it could take some time and eventually be considered too costly.

But the overall amount involved is quite substantial. For many years rent supplements have been a major component of the State’s social housing policy. They are being slowly phased out by transferring responsibility for housing onto local authorities but that is going to take some years.

At present there are about 60,000 recipients of rent supplements amounting to a total of over €350 million a year. They all live in private accommodation and qualify for the means-tested benefit designed to help pay the rent. The recipient is required to pay at least €13 a week while the rent supplement, subject to upper limits, meets the rest of the cost.

In about a third of cases it is paid directly to the landlord.

The scheme is administered by the Health Services Executive (HSE) and financed by the Department of Social and Family Affairs which is responsible for passing information to the Revenue. An annual return contains details of the tenant’s PPS number but not the landlord’s. When asked “why not?” by the Comptroller, the accounting officer in the Department said that it wasn’t necessary in making a decision on the claimant’s eligibility for the payment.

There is not much sign of joined up thinking there.

But somewhere else in the public service, someone was thinking outside the box and in this year’s Finance Act there was a provision requiring certain public bodies, including the Department of Social and Family Affairs, to get tax reference numbers from their clients.

Even before this change there was nothing to stop it asking for landlords’ PPS numbers. That has been allowed for since 1999. But it obviously couldn’t be bothered and now it is claiming that it may not be able to comply with the new legal requirement.

The Department official told the Comptroller that it presented “operational” problems for the HSE and that there were computer programming issues for the Department. In other words nobody had the foresight to leave sufficient flexibility in a computer programme to allow for the capture of extra data let alone envisage that information on payments to landlords might be of interest to the Revenue Commissioners but only if the landlords could be identified.

It gets worse.

The Comptroller looked particularly at the 2005 data. While €368 million was paid out in rent supplement that year, an initial return only showed payments of €354 million. The missing €14 million was eventually explained.

Without PPS numbers the Revenue had difficulty trying to match the landlords’ names and addresses with its taxpayer records. Over 57% of the 92,000 records could not be matched. They involved payments in excess of €197 million.

Some of these landlords may well have paid tax, of course, although the numbers are likely to be relatively small given that the Revenue had no record of them at the addresses they gave to the HSE. Even allowing for deductible costs the potential tax foregone is significant.

But the Department of Social and Family Affairs which isn’t remiss is tackling its own inefficiencies, can’t see the wider picture. It took 256 criminal prosecutions last year against social welfare recipients but couldn’t be bothered reducing the scope for massive tax evasion by getting the PPS numbers of the landlord beneficiaries of rent supplement payments.

It gets even worse.

The Department does not deduct tax on rent paid to non-resident landlords although there is a legal requirement to do so. While the amounts involved are small – 916 overseas landlords received €3 million in 2005 – a legal requirement is a legal requirement. The Department blamed its computer programme which would require substantial changes to allow such deductions to be made. But the requirement to stop tax has existed since at least 1969.

Colm Rapple
Irish Mail on Sunday, 23rd September 2007

It’s a pity that Northern Rock will probably go down in Irish folk memory as the bank that nearly went bust – even though it never did. But the image of people queuing up outside its Harcourt Street offices to withdraw their savings will stick. The fact that the panic was unnecessary will be forgotten. Also forgotten will be the great service that the Newcastle based bank did for Irish consumers when it took on the cosy informal cartel of Irish deposit takers eight years ago.

It entered the Irish market with a low cost operation offering deposit rates well in excess of those then on offer from Irish banks and, unusually for the time, it didn’t limit the good rates to those depositing sizeable sums or willing to give long notice of withdrawals. Deposits could be opened with as little as €1,000 and the money accessible on demand.

While the best rates ere, and are, paid on its innovative internet accounts, it was also offers very competitive rates to those accessing their accountsby phone or post.

It shook up the market although not as much as it might have done if Irish consumers were a little more adventurous or inclined to shop around. The consumers’ worst enemy is inertia, a tendency to stick with the familiar while ignoring the opportunities for shopping around. But even those who didn’t move to Northern Rock are gained from its entry to the Irish market. There is no doubt that deposit interest rates have been higher on average ever since, had it not entered the Irish market.

There were, of course, other developments since. RaboDirect, a subsidiary of the large Dutch Rabo Bank, entered the Irish market with an initial offering similar to Northern Rock. It’s rates tended to lag a little behind those of its British competitor although more recently it has been offering better rates on smaller sums – up to €15,000.

The larger Irish retail banks have not tried to compete in this market presumably because most of their long-term customers are willing to leave their money with them at lower rates of return. It’s the inertia factor again and up to now it is unlikely that it had anything to do with attitudes to risk. There has been no perception of risk attaching to institutions such as Anglo Irish Bank, Irish Nationwide or First Active that continue to offer better than average deposit rates.

Unfortunately that may have changed as a result of the Northern Rock debacle.

There is a real danger that competition in the banking sector will be stultified as consumers fight shy of the unfamiliar. The winners will be the retail banks with their large customer bases. Consumers will be the losers as these banks see less need to compete on price.

The truth is, of course, that depositors were not taking a significant risk
by putting their money with Northern Rock even before the British guarantee was put in place. After suffering a run on its deposits and accumulating a costly liability to the Bank of England, it remains a profitable bank. Investors still believe that it has more than enough assets to cover all liabilities and still leave something over for shareholders.

Rabo Bank is larger than Bank of Ireland and AIB combined and much more broadly based than Northern Rock. It may well be the safest of the banks operating in Ireland but none of them are particularly vulnerable. So depositors should continue to shop around and get the best deal possible but it’s going to be hard to get that message across to consumers.

The financial regulators both here and in Britain seem to have been taken by surprise at the “panic” that gripped Northern Rock depositors. There was similar surprise among commentators at the way depositors ignored the soothing statements from central bank officials and politicians. RTÉ even got a psychologist to explain why depositors had reacted the way they did. But it doesn’t take a lot of explaining.

People who keep significant sums of money on deposit are generally risk adverse. Even the 4.5% gross (3.6% after tax) paid by Northern Rock on internet accounts is not enough to keep pace with inflation. The accumulating interest is not enough to prevent depositors from suffering a drop in the purchasing power of their nest eggs but they are willing to accept that to eliminate risk. Deposit accounts tended to be viewed as practically risk-free.

They still are although many people will find that hard to accept in the future.

All too many of them will be pensioners etc. who need to get the best possible return on their savings but may be discouraged from doing so because of a fear of loss.

There’s a need to re-establish a sense of reality in order to alleviate understandable worries among all depositors and also to maintain interest rate competition among the deposit taking institutions. Otherwise many people will opt for low interest accounts that they perceive as secure or even go back to keeping their money under the mattress

It’s a job for the Financial Regulator and maybe even for the EU which dictates that guarantees are limited to no more than 90% of a deposit up to a maximum of €20,000. That threshold needs to be significantly increased. Finance Minister Brian Cowen could also help to promote competition by improving the rates on An Post Savings Bonds which currently offer a less than competitive guaranteed annual tax-free return of 2.6% over three years. It would greatly enhance the attractiveness of the scheme if at the very least an equivalent gross rate of 3.25% was paid to those many pensioners who are not liable for DIRT.

Colm Rapple
Irish Mail on Sunday, 9th September 2007

Investing borrowed money is a risky business. It increases the potential return but greatly increases the risk of loss. It’s not for the faint hearted nor for those who can’t afford to lose all or a significant proportion of their investment. For that reason its worrying that a high-risk property investment is going to be promoted at road shows around the country.

Brendan Investments which is being promoted by Eddie Hobbs may prove a good investment but the risks involved shouldn’t be underestimated and may not be appreciated by many of those who will be presented with the informative brochure and urged to read it and the 98 page finely printed prospectus before committing themselves.

The geared nature of the investment is not mentioned as one of the risk factors. Yet it’s a major one.

Investors will be buying shares in a company, the share capital of which will be used to buy properties and finance developments in Europe. Each €1 of share capital may be augmented with €3 of borrowing. And, in addition investors are being offered the facility of borrowing half of their investment.

So an investor with €5,000 can borrow a further €5,000 and invest €10,000 in the scheme. On the strength of that, the company may borrow a further €30,000 and use the total of €40,000 in buying an investment property.

So the investor now has a €40,000 interest in a property or properties on the strength of an initial investment of €5,000. If values go up he can do very well but it only takes a 12.5% drop in the property value for all of his initial investment to be wiped out.

Another worrying aspect of the scheme is that its web site includes a copy of an Evening Herald article which quotes Eddie Hobbs as saying that he could quadruple investments for members of the public. That’s the type of speculative forecast that wouldn’t be allowed in the prospectus. The use of it on the website promoting the scheme is questionable.

Colm Rapple
Irish Mail on Sunday, 9th September 2007

The economic pessimists were having a field day this week after the publication of the exchequer returns showing a shortfall in tax revenue. But the doom and gloom was over done. The State finances remain in a very healthy condition and finance minister, Brian Cowen, will be no more constrained in drawing up his December budget than he wants to be.

It suits him and his Department to be putting on the poor mouth at this stage in advance of budget meetings with other government departments. And we may all benefit in so far as it encourages closer scrutiny of spending programmes and the elimination of waste. But the fact is that there is no shortage of money for worthwhile social or economic projects. Nor will there be in the foreseeable future.

This year Mr Cowen expected to run an exchequer deficit of €546 million. Spending was to exceed revenue by that amount. With some economists predicting that tax revenue for the year as a whole could be some €1,000 million less that forecast, that deficit could grow to €1,500 million.

But that’s not as bad as it seems. It can’t be equated with the shortfall that an individual might have on a household budget. It is not calculated on the same basis.

Spending in this context includes not only the cost of day-to-day programmes such as social welfare, education and health but also money put aside into the National Pension Reserve Fund and capital investment in roads, schools, hospitals, airports etc.

The expectation was that day-to-day spending this year would amount to  €39.5 billion while tax and other revenue would bring in €49.6 billion. That would produce a surplus of €10.1 billion. A little over €2 billion of that would be transferred into the Pension Reserve Fund leaving €8 billion to help fund capital investment.

Its hard to really comprehend sums expressed in billions. So let’s put that in terms of a household budget. Let’s reduce the money of noughts.

We can think in terms of a household with a net income of €496 a week, spending €395 on day-to-day expenses such food, heat light clothes, rent etc. and being left with €101 each week to invest. They put €20 of that into a pension fund and the other €81 into some other investments.

Such a household’s finances could hardly be described as unhealthy even if their weekly income dropped by €10 a week.  But that drop of €10 a week in the household budget is equivalent to the drop of €1 billion in the Government’s revenue currently being predicted.

The Exchequer will still be left with a very healthy surplus on its day-to-day account and it will have to borrow to keep up it’s capital programme but such borrowing will be more than justified given that it should greatly increase the wealth producing potential of the economy and yield a return more than enough to cover the interest cost and provide for the repayment of the loan.

So even if revenue does fall a €1 billion short of expectation it won’t be a disaster and shouldn’t constrain Brian Cowen from pursuing whatever spending and tax cutting policies he wants to. He might like to hold back garnering resources for a future splurge before the local elections in 2009 but it’s that rather than a lack of money that will be the constraint.

In any case those gloomy predictions may well be overstated. The self-employed and companies pay the bulk of their tax in the final quarter of the year and while stamp duty receipts are currently trailing, incomes and profits are holding up.