Colm’s columns

Colm Rapple
Irish Mail on Sunday October 28th, 2007

One of the most attractive of Fianna Fáil’s pre-election promises was it’s PRSI package. In case you’ve forgotten, it pledged to cut the standard rate of PRSI from 4% to 2% and the self-employed rate from 3% to 2%. Some of the gain is to be clawed back by abolishing the ceiling on employee contributions. This year the ceiling is set at €48,800 and, in the normal course of events, it would rise to €50,700 next year.

But it’s very likely that Brian Cowen will deliver on this promise in the December budget. He has the money to do it if he wants to. It doesn’t have to even spoil his budget arithmetic. He just has to raid the social insurance fund as his predecessor Charlie McCreevy did before him. It would certainly be a popular move but one that we’ll live to regret in the not too distant future.

The social insurance fund is currently showing a healthy surplus. There’s more than enough revenue coming in from PRSI contributions to pay for all the benefits being claimed. But that’s not going to last. A report published this week confirmed that the fund is facing a mounting deficit in the years ahead as reported in this column when the PRSI cuts were initially promised earlier this year.

Mr Cowen had access to that report at the time so the warnings contained in it are not going to deter him now. Which means that you can look forward to PRSI cuts next year but be aware that it’s going to cost you in the long run.

On the face if it, it’s a very equitable proposal. In terms of impact, it’s the type of proposal you’d associate more with Labour or Sinn Féin than Fianna Fáil. It will have the same effect as a cut in the standard rate of tax from 20% to 18% partially paid for an extra tax on those earnings more than €91,000.

There’s no PRSI paid on the first €127 earned each week. Above that and the current rate of 4% is paid by all employees until their annual income goes above €48,800. Earnings above that figure is not liable for PRSI. For someone on exactly €48,800 the gain from halving the rate to 2% will be €848 a year or €16.23 a week.

That’s the maximum saving any employee will get. If you earn less than €48,800 you’ll save less. You’ll also save less if you earn more than €48,800 and the more you earn, the less you save because you are going to be paying PRSI, admittedly at a lower level of 2%, on income than is not currently liable for the tax.

Up to €91,000 and you will still be showing a gain with savings from the rate cut on the first €48,800 offsetting the loss from having the higher income charged to PRSI. But above €91,000 and you start being a net loser.

The self-employed all gain. They already pay PRSI on all of their income. But the rate will come down from 3% to 2%.

So it’s a nice populist proposal. That’s not surprising. It was designed, after all, to win votes. Most people gain and only higher earners lose. It was second on Fianna Fáil’s list of pre-election tax promises. Number one on the list was the indexation of income tax bands and credits. Brian Cowen couldn’t even contemplate not delivering on that. Without indexation the tax burden increases and, in the absence of an absolute recession, that’s not a runner.

Cuts in income tax rates came number three on the promises list after the PRSI changes. The promise made to the electorate by Fianna Fáil was that at some stage during their term in office the standard rate of income tax would be cut from the current 20% to 18% and the top rate cut from 41% to 40%. But unlike the PRSI commitment, these cuts were made conditional on economic circumstances.

With Mr Cowen putting on the poor mouth, it’s unlikely that he will deliver on promise number three this year.

So we’ll get the indexation, or near indexation, of tax credits and bands and we should also get the PRSI changes. Fianna Fáil originally costed the change at €435 million a year. That could come out of the €1 billion plus cushion provided in Mr Cowen’s pre-budget estimates last week but it’s more likely to come out of the social insurance fund which, without the change, is expected to show a surplus of €984 million next year.

So even with the PRSI cuts the fund could accumulate a further €550 million next year to add to a surplus of €3.7 billion carried forward from recent years.

It’s all very tempting but the Mercer report published this week predicts that PRSI contribution rates need to increase by 29% by 2018 just to provide for the expected rise in the number of pensioners and the cost of increasing benefits in line with wages.

Mr Cowen doesn’t deny that the fund is facing a shortfall. He promises to make up the shortfall from tax revenue. That’s a major change of policy that’s likely to favour employers rather than employees. If there was no recourse to an Exchequer bail-out the pressure for increased PRSI contributions would inevitably fall on employers who currently enjoy very low social insurance costs by international standards.

PRSI looks like becoming a major political issue.

Colm Rapple
Irish Mail on Sunday, October 21, 2007

We are not exactly on our uppers Finance Minister Brian Cowen admitted on Thursday when launching his pre-budget outlook. You’d be forgiven for thinking otherwise from the spin being put on the forecasts contained therein.

The admission that we are far from being a basket case was rung from him by a suggestion that it was an exaggeration to claim, as he did, that he’s facing a very tight financial situation in framing next year’s budget. The finances were very tight, he countered, relative to recent years – just, I suppose, as a millionaire is poor relative to a billionaire.

But despite those admissions, Mr Cowen and his mandarins managed to get across their desired message that public spending will have to be curtailed. That way we are less likely to be disappointed on budget day and the Department of Finance is in a better position to fight off the spending demands of other government departments.

Of course, we need to curtail wasteful spending and ensure best value for money. But you don’t have to mislead people about the level of finance available to achieve that aim.

The plain fact is that there is no shortage of money.

The budgetary figures produced during the week confirm that for anyone who takes the time to analyse them. There is always a need to cut back on wasteful spending and to ensure that we are getting the best possible value from public spending programmes. That can be achieved with good management. It doesn’t necessarily require any reduction in the amount of money being spent. Indeed it would justify spending more.

We can afford to.

It’s true that the economy is going to grow at a slower pace over the next few years. Most economic commentators accept that. The Department of Finance is forecasting that output (gross national product) will grow by 4.75% this year slowing to 3.25% next year, then rising to 3.5% in 2009 and up to 4% in 2010.

It’s a slow-down in the rate of growth, not a reversal, and still leaves Ireland ahead of our main trading partners. The international forecast are that GDP in the euro zone will grow by 2.5% next year. The British economy is expected to grow by 2.7% and the U.S. economy by 2.8%.

So we are doing well at 3.25%. Relative to the Celtic tiger years, it may be slow growth but relative to other developed countries, it’s a high level of growth.

The employment outlook is also good. Relative to the recent past it represents a slow-down but if the Department of Finance is right the number at work will have risen by about 73,000 this year and is expected to rise by a further 26,000 in each of the next two years. That’s nothing to be too pessimistic about.

On the assumption that there will still be some net immigration, the number out of work could rise by about 10,000 next year but the unemployment rate is not expected to exceed 5.5%, a rate that many countries would be very pleased with. It could well be lower if, as some commentators believe, there’s increased emigration with eastern European workers taking advantage of job opportunities in London, as it prepares for the Olympics, or in their home countries.

The slow down in economic growth will inevitably cause a slow-down in tax revenue. But it’s not a reversal. Tax revenue will continue to grow. True, it will be growing at a slower pace than in recent years but there’ll be plenty of money flowing into the State coffers and there is plenty of scope for borrowing.

Of course, money should not be borrowed to throw at inefficient or wasteful projects or to continue to featherbed public sector employees. The problem is not one of money. It’s one of management. The objective must be to eliminate waste and provide good public services and not simply on cutting spending.

The financial situation facing Mr Cowen as he prepares his budget is far from tight. The figures published during the week shows estimates of the cost of maintaining existing levels of services during 2008. They take account of pay increases and the impact of inflation on goods and services bought-in. They also take account of the full year cost of improvements introduced during this year, for instance the full years cost of the extra 5,700 people employed in the health sector, the extra 2,300 recruited in education and the extra 600 gardaí.

Also provided for is the impact of our rising population including the cost of building and running the promised new schools that are to come on stream next year.

All of those items are provided for in these spending estimates and an extra €1.5 billion is added in to take account of, as yet, unknown needs including initiative announced on budget day. In addition there’s an extra €1.1 billion provided for unspecified capital projects which will also be announced on budget day.

The take from existing taxes could pay for all of that, provide €1.6 billion for the pension reserve fund and leave Mr Cowen with a deficit of only €770 million which represents a minuscule 0.4% of national income. He could well afford to borrow a multiple of that given that he’ll be investing over €13 billion in capital projects or pension funds that can be expected to yield good returns.

It won’t suit Mr Cowen to be generous in December but he has no need to be miserly.

Colm Rapple
Irish Mail on Sunday, October 14, 2007

The great oil and gas give away continues. This week Providence Resources unveiled a oil find off the Waterford Coast, estimated by some to be worth almost €4 billion. But just four weeks ago our new green Energy Minister, Éamon Ryan gave the company extra rights to an adjoining 150 square miles on which a number of prospective oil and gas pockets have been identified.

So the good news of the oil find must be tempered by a realisation that the main beneficiaries are going to the shareholders in Providence and its partners. Media magnate Tony O’Reilly senior is the larger single shareholder in the oil company of which his son, also Tony, is chief executive.

The find is not a new one but it has been better delineated and is coming closer to commercial exploitation. Analysts this week estimated that this particular reservoir could contain between 50 and 63 million barrels of recoverable oil. At $80 a barrel that could be worth up to €3,800 million before costs.

But the costs will be relatively modest. The find is not in particularly deep water and is only 30 miles off the Waterford coast or 80 miles west of Milford Haven. That latter point may or may not be significant since our licensing terms don’t require companies to land any finds in Ireland.

The oil is described as “sweet”, in other words it can be refined into the higher value products such as petrol, aviation fuel and heating oil. That could be done at Whitegate but equally well in Wales.

The Hook Head prospect was first drilled in the 1970s by Marathon Oil which found the Kinsale Head gas field. There have been other finds in the area since then although none of them were proved commercial. But given this reappraisal of the Hook Head field on the basis of fresh drilling by Providence, a number of these other finds, even if confirmed as small, could well prove commercial when fed into whatever infrastructure is put into place for the Hook Head find.

That will certainly be true of any other oil finds of which there are already a few. Close by are the Helvick and Dunmore prospects, both of which yielded oil flows in exploratory drilling. Back in 2000 the Helvick find was considered commercial for a time with potential reserves estimated at between 18 and 28 million barrels but it was subsequently decided that it was too small to be viable on its own.

That was before oil prices took off so even without the economics of scale that the Hook Head find will lend to its development, Helvick might well be currently commercial. A little to the south of Helvick there was a gas find on the Ardmore structure and to the south-west in the so-called Blackrock area drilling for oil proved inconclusive despite high hopes of a very large find.

All of these finds look a lot more encouraging in the light of the latest results from Hook Head. According to a report from Davy stockbrokers, the oil is of good quality, and the reservoir is of high porosity which means that the oil should flow well. Technical problems meant that actual flow tests were limited but Davy is confident that all is well.

It concludes that the find is of a scale sufficient to warrant development by itself and will also improve the viability of other finds in the area. It should also encourage more exploration in the area.

It seems that a number of targets have already been identified including some within that 150 square mile area beside the Hook Head Licences over which Providence was last month given an option. That option gives it first claim to an exploration licence over the area at a paltry cost of about €10,000 a year.

Granting that option just weeks before Providence announced the results of its test drilling doesn’t make sense. The Department had nothing to lose by waiting until the results were in or even longer. So why did Minister Ryan approve the deal? It wasn’t announced by the Department and there doesn’t seem to be any record of it on it’s very extensive web site.

It was left to Providence to reveal its good fortune which it did on September 13. While the Department gained nothing, it’s clear that Providence gained a lot. The Davy report says that “ regional mapping carried out by Providence over the area has indicated a number of significant leads and prospects at a similar level to those that are hydrocarbon bearing in the Hook Head structure”.

When Providence exercises its option and gets an exploration licence any find is likely to be subject to the new terms announced a few months ago. They are a bit more onerous than the old terms that will apply to production from any of the existing finds which are subject to the old 1992 terms.

But the State take won’t be all that much greater and no oil or gas will flow from this new acreage for at least a decade. In the meanwhile Providence will simply bank it.

The sensible thing would have been for the State to keep the acreage to either explore and exploit any finds itself or eventually issue at more advantageous terms than it feels able to currently apply to licences. The decision to give it to Providence and its partners is nothing short of scandalous.