Colm’s columns

Colm Rapple
Irish Mail on Sunday, 29th June 2008

Don’t blink or you might miss the recession. If it happens – and it might not – it won’t last for long. Of course, it is going to be painful for some and you might need to keep your eyes closed for a bit longer than a blink to avoid all of the adverse fall-out. But the actual recession predicted by the Economic and Social Research Institute (ESRI), will be short-lived.

That’s the view of the ESRI itself, as presented in its quarterly economic bulletin published during the week. But that part of the forecast got scant attention from most commentators. The word “recession” was latched onto without very much thought of what it really means in this context.

There are recessions and recessions. The impact depends on how deep they are and how long they last. Technically an economy goes into recession when output in one period is less than in the previous period and the ESRI expects output this year to be down about 0.4% on 2007. So, if the forecast is even marginally wrong, we may not be in recession at all.

The ESRI has been more pessimistic than most this year. In March it was expecting the economy to grow by only 1.8% although a month later the Central Bank was forecasting a 2.4% growth rate. In April the EU put the figure at 2.3% while the IMF was forecasting 1.8%. Earlier this month the OECD forecast that the economy would grow by 1.5% this year

Forecasting isn’t a very exact figure but supposing that the ESRI economists are right,  it’s going to be a very shallow recession from which the economy is expected to bounce back next year with a 2% growth rate.

So for every €100 of wealth created in the economy last year, the ESRI expects us to produce €99.6 this year and €101.6 next year. That’s in real terms, and not a money value which would be higher because of the impact of inflation.

An individual suffering such a set-back wouldn’t feel too hard done by. It would simply means an 0.4% drop in purchasing power one year followed by a 2% increase the year after. Such a reversal is, of course, a bit more serious for an economy. But the problems should not be overstated.

There will be fewer at work. But the extend of the job losses predicted by the ESRI is relatively small. Average employment levels next year are expected to be only 13,000 down on this year and 59,000 above the 2006 level. Actual job losses will exceed 13,000 but that’s relatively small when set against total employment of 2.1 million.

That doesn’t ease the pain, of course, for those affected – a fact that highlights the need, recognised by the ESRI, for targeted action by state agencies on education and retraining.

The prospect of a return to net emigration has hit a emotional cord in some people. The ESRI expects a net outflow of 20,000 in 2009 but that must be seen in the context of the massive immigration of recent years. Many of the immigrants are here to stay but many others, particularly in the construction sector, consider themselves as internationally mobile. They expect to move to where the jobs are.

It’s not quite the same as the emigration of the past which stultified both Irish society and the economy for far too many years.

Those who keep their jobs may suffer a drop in income but it shouldn’t be too severe. On the basis of the ESRI figures, national income per head will fall by 1.9% this year after rising by more than 6% over the past two years. It’s expected to rise again by 1.5% next year.

Other incomes will also take a hit as consumers and businesses spend less. The impact will be that much worse if the Government’s takes fright imposing unnecessary cuts in public spending while depressing consumer confidence with demands for pay freezes.

There will certainly be less money in the State coffers and it’s at times like this that Governments try to trim out the fat that they allowed to accumulate in spending programmes during the good years. Undoubtedly there is waste that could be eliminated without affecting the quality or quantity of many state services.

Ideally it should have been tackled in better times but it wasn’t, through a mixture of bad management and political cowardice.  It’s possibly better late than never provided the cuts don’t got further than the fat and bite into the flesh. There’s no need to.

In the medium term it will be necessary to increase taxes in order to finance the level of state services to which we aspire. There will be no return to the revenue bonanza that was provided by the overheated property market of recent years. On the back of that flood of money, successive government curried favour with the electorate with tax cuts that aren’t sustainable in the long-term.

But this isn’t the time to raise taxes. As outlined in this column last week, there is no need to. If the Government doesn’t want to resort to too much borrowing, it could always tap the National Pension Fund to help fund its capital investment programme in infrastrutural projects.

But extra borrowing shouldn’t be ruled out. Our national debt as a proportion of national income is about half the EU average and unlike some other eurozone countries we’ve never before exceeded the 3% deficit guideline.

Let’s not panic.

Colm Rapple
Irish Mail on Sunday, 21st June, 2008

Over €2 billion was written off the value of the National Pension Fund during the first three months of the year and further severe losses will be revealed next month by the National Treasury Agency which is responsible for managing this national nest egg.

It’s our money, so we are all sharing in the losses, and those losses have been substantial. The loss up to March works out at about €500 per head of population. I don’t want to make you feel any poorer than you are. There’s enough doom and gloom around already and it is adding to our economic woes by dampening consumer confidence and thereby demand.

So, let me stress that while these losses are very real, they only exist on paper for the moment and it will be years before they hit anyone in the pocket. But there is a need to question the whole rational behind the National Pension Fund and consider whether we should continue to put 1% of national income into it each year and not touch it until 2025.

That was how Charlie McCreevy set it up in 2001. The Dáil agreed. The legislation was passed and it will take another vote to change it. This maybe the time to do just that.

Between this year and next some €4.5 billion is due to be put into the Pension Fund. With tax revenue falling far short of expectations, that money could be better used to maintain spending on the National Development Plan and on social programmes.

If the money is put into the Pension Fund it will have to be borrowed and that doesn’t make a lot of sense. The fact that the fund has been incurring losses simply underlines the case for at least taking a short holiday for these pension fund contributions just as any individual would do during a cash flow crisis.

Many individuals are, of course, facing sharp downturns in their own pension fund values but at least they’ll have had the initial benefit of tax relief on their contributions. That doesn’t reduce the losses but at least they may still be showing a reasonable return on their net contributions.

The return on the National Pension Fund has been abysmal.

The Government has poured over €18 billion of our money into the fund since 2001. But the fund managers, who have been getting very well paid to look after it, have been falling down on the job. All they have produced is an average annual return of a little over 4%. That could have been achieved by simply putting the money on deposit.

The National Treasury Agency is taking a long term view and would argue that, despite short-term volatility, stock market investment tends to yield a good return in the longer term. That’s true but good fund managers should be able to smooth out some of the volatility by selling when markets are turning down and buying on the upswing.

Only the lucky, of course, manage to sell at the top and buy at the absolute bottom but it’s hard to understand how only 3.9% of the fund was held in cash at the beginning of the year. That had increased to 6.4% by March but it still represents only a very small proportion of the fund.

Stock markets have plummeted over the past six or nine months. The Dow Stoxx600 index of European share values is down about 17% this year while US markets are down about 15% since last October. Other markets are similarly affected.

Of course, they will come back up again and the return on the fund will improve. But it’s not unfair to take the return over the past seven years and describe it as abysmal. There has been a fair mix of boom and bad years during that period.

The whole scheme was flawed from the beginning as Charlie McCreevy’s brain-childs often were. He foresaw the mounting exchequer surpluses and wanted to ensure that his successor wouldn’t be tempted to overspend. Mr McCreevy believes in curtailing government spending as far as possible. That’s why he got the Dáil to agree that the fund could not be touched until 2025

This is another flaw in the overall concept of the scheme. While we are all contributing to the fund through our tax euros, the first, and maybe only, claimants will be public servants whose pension entitlements are, quite rightly, copper fastened by work contracts. Social welfare pensioners, who get their annual increases simply by grace and favour, will be at the back of the queue.

It was initially proposed to have two separate funds but undoubtedly the civil service advisers who were promoting it, recognised that a single fund was better since they’d have first call on it, in any case.

But perhaps the most telling criticism that can be made of the whole Pension Fund concept is that the money is invested on the basis of strictly commercial criteria. Most of the money is invested abroad. There’s no doubt that it would yield a far better return if invested in social and economic infrastructure here at home. That’s what the Government could do if it took a moratorium on contributions for at least a couple of years.

Colm Rapple
Irish Mail on Sunday, 15th June 2008

There is little or nothing the Government can do to prevent the spiralling increase in oil prices but there is a lot it could be doing to help ease its social and economic impact. The quicker the better.

Brian Cowen and his colleagues have a very good idea what needs to be done. Government departments have been studying the matter for long enough with regard to the proposed carbon tax and the hike in oil prices is simply a carbon tax writ large. The truth is that the potential impact of a carbon tax pales into insignificance against the effect of the actual price increases imposed by market forces over recent months.

Debates on the carbon tax have centred around a rate of about €20 per tonne of CO2. Some have suggested far lower rates and very few have suggested anything higher. Yet €20 per tonne of CO2 is equivalent to less than 10c per litre of motor fuel – the type of increase we’ve been getting on a monthly if not a weekly basis in recent times.

There has been plenty of discussion on how to minimise the effects of a carbon tax on both socially and economically vulnerable sections of the community. We have had economic studies, a Green Paper, and published submissions from all and sundry dealing with the issues involved.

There’s general agreement that the Government would need to provide some form of direct help for those most affected by the price hikes resulting from the imposition of a carbon tax. The suggestions include social welfare increases, grants to enable and encourage a switch to cheaper methods of home heating, and offsetting subsidies for public transport and some vulnerable businesses.

But, if such initiatives are acceptable in the context of a carbon tax, why is the Government doing nothing at this time to help those hurting badly from the effects of higher fuel prices? The carbon tax is already with us in another form. The time for action is now.

•  Poorer families must be helped with fuel costs long before next December’s budget. The first priority must be, of course, to ensure that poorer households get some assistance with their fuel costs this winter. Fuel and light accounts for 4% of the average household budget. But poorer households spend 10% of their weekly income on fuel and light.
• These poorer households, which comprise one out of every ten, also spend a higher proportion of their income on food which has, like fuel, been rising sharply in price. They are facing a bleak winter if they are not helped.

There is no easy way of targeting the most vulnerable but an increase in mean’s tested social welfare benefit is likely to catch most of those in need. It’s not the ideal long-term solution but it may be the best that can be done in the short term and action is required long before the December budget.

• Those economic sectors most vulnerable to the effects of oil price increases need to be quickly identified and assisted in whatever way possible. It’s clearly not simply a matter of throwing money at the fishermen and/or hauliers. Oil prices are going to remain high, hopefully considerable lower than at present but still high by international standards. So obviously any subsidies decided upon should be aimed at promoting change and greater efficiency. But decisions are needed sooner rather than later.

Those are the immediate imperatives but a reassessment of a far wider range of government policies in the light of the higher oil prices is overdue. Such a reassessment should include at least the following:

• The case for a carbon tax needs to be revisited. Oil based products are dear enough to encourage a cut-back in their usage and a switch to less polluting alternatives. The trend could be accelerated by the introduction of suitable grants towards any capital costs required to make use of alternatives and some price control actions to ensure that the suppliers of alternative fuels don’t simply jack up their profit margins and prices.

• The greatly enhanced value of the Corrib gas field needs to be appreciated and a much harder line taken with Shell and its associates to ensure the best possible deal for this country. At current retail prices, the estimated 30 million cubic metres of gas in the field is worth about €14,000 million. It may not be possible to renegotiate the deal under which Shell’s predecessor, Enterprise Oil got that gas for nothing but Shell could be forced to spend a little of its ill-gotten gains on ensuring that its Erris development is as environmentally friendly as possible. It’s time for Government Departments, local authorities, and local grandees to stop doffing the cap to Shell. It’s not doing us any favours. The opposite is very much the case.

• New terms for the issue of offshore exploration licences were introduced earlier this year but they need to be quickly reassessed so do the terms at which onshore licences for mineral exploration are issued. Our natural resources are soaring in value and we’ve been giving them away at bargain prices.

Those are just some of the issues requiring urgent attention. There may be no easy answers but policies clearly need to be changed to suit the new realities.

Colm Rapple
Irish Mail on Sunday, 8th June 2008

It was a great week for the Cassandras who delight in predicting economic doom and gloom. They found rich pickings in the latest outlook from the prestigious Organisation for Economic Co-operation and Development and doubtless had their despondency confirmed when the European Central Bank warned that it might have to raise interest rates again to combat inflation.

But it wasn’t all bad news. There is plenty to be optimistic about. The underlying messages are, in fact, good. OK, so the immediate outlook is bleak – we already knew that. But the odds are that the worst of the financial market turmoil is over, according to the OECD, and the recovery is less than a year off. It will be led by the US economy, which after a flat 2008, is expected to gradually recover and be growing at its full potential by the end of next year.

The Irish economy isn’t expected to get back to its full potential next year but 2009 will be better than 2008 and it’s onwards and upwards after that. The OECD is forecasting a growth rate of 3.3% for next year, well ahead of the 1.4% predicted for the Eurozone as a whole. And despite job losses, the number at work is expected to continue rising.

That’s broadly in line with our own ESRI’s medium term forecast published a few weeks back. It expected the worst to be over within eighteen months or so with a return to rapid economic growth thereafter – not as rapid as in the best of the Celtic Tiger years but good enough to provide ever improving living standards for a growing population.

There was nothing in this week’s OECD review to cast doubt on that broadly optimistic outlook.

But in general it wasn’t presented that way, a pity given that pessimism feeds on itself and could slow the inevitable recovery by dampening consumer confidence.

While there was plenty to be optimistic about in the OECD report, provided you looked for it, there was little positive that could be said about the European Central Bank’s warning of a possible interest rate hike next month. But even that is not as bad as it seems. It may prove to be no more than a warning and it was stressed that any increase would be minor – possibly no more than a quarter of one per cent.

Even if the rate is increased, there is every hope that it won’t get passed on to home buyers. In recent months Irish mortgage rates have been determined more by the market than by the underlying ECB rate so, of itself, a quarter point increase in the Bank rate need have no impact on retail mortgage rates.

There is no need to get too worked up about the poor exchequer figures either. Tax receipts are falling short of expectations and the shortfall at €1.2 billion sounds big and, if current trends continue, it could rise to €2 billion by the end of the year, but that represents only about 1% of national income.

It’s not likely to be any higher than that and added to the €1.8 billion deficit predicted in the budget it would put the total government deficit at less than 2% of national income. That shouldn’t cause anyone sleepless nights.

This deficit needs to be put in context. The Government expects to invest over €11 billion this year in infrastructural projects. Even with the shortfall the vast bulk of that capital investment will still be funded out of tax revenue. A sound economic argument could be made for borrowing all of the necessary funds. It certainly makes sense to borrow some of it.

There is no suggestion that this year’s budget needs to be revisited. In other words we are not going to have a mini-budget. The budgetary position is sure to be tighter next year but if the OECD growth predictions get built into the Department of Finance’s revenue forecasts for 2009, finance minister Brian Lenihan won’t have to be too Scrooge-like with his first budget.

He’ll hardly be throwing money around but it won’t be as bad as he would like us to expect.

The good news on the tax front is that income tax receipts are ahead of expectations. The explanation was obvious from the latest employment figures released by the Central Statistics Office on Thursday. While the number at work did fall during the first quarter of the year, there are still 55,800 more people employed now than there were a year ago.

Our jobless rate at 4.6% of the labour force is still well below the EU average of 6.8% and expectations are that it will remain so. There are more jobs being created than are being lost and there is some evidence that net emigration is replacing net immigration. Over the past six months the labour force has declined by 16,100.

Cheer up, it’s not as bad as some people are making out. There are good times ahead.

By the way, did you hear about the man who told the Revenue that the money he had accumulated in a deposit account had been won on the horses? You didn’t? No doubt you will when the Revenue start studying the bank account information they’ll be getting in September.

Colm Rapple
Irish Mail on Sunday, 1st June 2008

EU Commissioner Charlie McCreevy this week highlighted the most cogent reason yet for voting “No” to the Lisbon Treaty. It wasn’t his intention, of course, but that’s what he did.

As an accountant Charlie McCreevy knows better that most, that you should never sign anything that you haven’t read, or don’t fully understand. Yet he has been urging us to approve a treaty that “no sane person would want to read”.

This week he took the argument a bit further by likening the treaty to the annual Finance Bill, another unwieldy tome that’s incomprehensible to most people. Few people ever read it, he pointed out, suggesting that this never did us any harm.

If only that was the case. The truth is that there has been many an unforeseen tax change hidden in the fine print of a Finance Act. Some have emerged to subsequently bite us, others have opened lucrative loopholes for the wealthy and informed.

Some of those changes were undoubtedly put there intentionally, and kept from the glare of public scrutiny by a coating of gobbledegook. Some have been included by mistake emerging only after the ambiguities of the fine print had been fully parsed by the accountants, the lawyers and, sometimes, even the Courts.

The new Revenue powers to access details of deposit accounts is a current example of an intentional change slipped into a Finance Act a couple of years ago. It got little notice at the time but is currently causing so much concern that our new Finance Minister, Brian Lenihan, had to issue a statement on Wednesday trying to dampen down the worries that have been surfacing at TD’s clinics throughout the country.

Charlie McCreevy oversaw a number of mistakes during his tenure in the Department of Finance. Many changes created unexpected loopholes including one allowing the wealthy to invest their tax sheltered pension contributions in private yachts and holiday homes.

In some cases it took years to close the loopholes again but at least the provision of a Finance Act can always be reversed by a subsequent Act. That can’t be said of the Lisbon Treaty and there is plenty of scope in its convoluted wording for both hidden provisions and mistakes that could come back to haunt us.

The Treaty contains a wide range of provisions on which there is no disagreement such as the fact that we won’t have an Irish commissioner for five out of every fifteen years, the reduction in Ireland’s voting rights and the extension of qualified majority voting to a wider range of issues in the Council of Ministers.

Facts are facts but many of the Treaty’s provisions seem open to widely different interpretations.  No agreement is possible it seems between the “yes” and “no” protagonists, so the electorate is left wondering who to trust. The following is a random selection of some of the issues in contention. They are by no means minor.

Five days after the Treaty was signed, the European Court of Justice ruled that a Latvian company building a school in Sweden was entitled to ignore locally negotiated wage norms and pay its non-Swedish workers no more than the minimum wage. The result is that an Irish union can not now legally take action against a company undercutting agreed wage rates by employing foreign workers.

This judgement has caused widespread concern across the EU and the obvious answer would be to add a protocol to the Lisbon Treaty that would cause the Court to reverse its decision. The Court in its judgements applies the treaties.

A “no” vote would enable such a protocol to be negotiated.

Then there is the little matter of our Corporation Tax rate. Some say we can veto any attempt to impose an EU wide tax policy on us. Others are less confident. EU regulations already limit our options with regard to VAT and excise duties. The French who take over the presidency in July have already outlined plans for closer harmonisation of EU corporate taxes.

Danish MEP Jens-Peter Bonde has put it like this:

“If I was Irish and interested in a low corporate tax – which I am not – I would propose a strong protocol to protect the low rate. It is not difficult to foresee an attack from another country, or company.”

Then there is the new Charter of Fundamental Rights. There are those who say that this alone is sufficient reason to support the Treaty.  It certainly looks impressive listing the civil, political, social and economic rights recognised by the EU. But are they really new and could they possibly be enforced to our detriment?

The booklet prepared by the Referendum Commission explains as follows:

“The rights set out in the Charter are not absolute. Some are already provided for in the Constitution of Ireland, and/or in EU law and/or in the European Convention on Human Rights. Some are statements of principle rather than specific rights. Some are stated to be subject to, regulated by, or in accordance with national laws.

“The precise effect of the Charter is dependent on the right involved, the limitations on it, the manner in which it is protected by the Charter and the competence of the EU in the area in question.”

There’s clarity for you.

Then there’s the doubt over our ability to veto any proposed world trade deal. Even if we have the right of veto, is it something that we could use? We are supposed to have a veto on the Lisbon Treaty. It’s worth testing.