Colm’s columns

Colm Rapple
Irish Mail on Sunday, October 26, 2008

It’s about time we recognised and accepted that the tax cuts went too far. Opposition politicians may like to pretend that the Government’s financial difficulties can be overcome by simply eliminating waste and cutting back on public sector employment. But, if they were honest, they’d demand higher taxes. Such honesty could well yield high dividends from an electorate whose confidence in the political system has been badly shaken.

Of course, there is scope for eliminating waste but any attempt at cutting back on public sector employment could be very costly in terms of redundancy payments and, more importantly, service levels.

But it became very clear during the week that State services are valued and that the attempts to force an American style free market health service onto the Irish people has about as much support nation-wide as the now defunct PDs have. Yet the Government, despite all the reversals of the past week, are holding on to that free market ideal.

The Exchequer is now going to save so little money from the removal from the over-70s of their current automatic right to a Medical Card, that the failure to abandon the proposals entirely reflects either a bull-headed refusal to acknowledge public opinion or, more likely, an ideologically based drive against the concept of universality in the health service.

The claim that the cost of providing free medical care to the over-70s is not affordable in the longer term doesn’t stand up to scrutiny. Of course, it will cost more as the population ages but it’s a cost that most people seem willing to bear for the security of knowing that they will definitely have access to medical care in their latter years.

So where do we raise the taxes now? I suggested some options in this column last week. But it’s time for the politicians to nail their colours to the mast. It’s no good saying that they are against cut-backs in this area or that area without explaining exactly how they would raise the money needed to eliminate the need for such cut-backs.

It’s easily forgotten that the top rate of income tax was 42% until January 2007. So we can’t attribute any part of our Celtic Tiger successes to the 41% top rate that we have enjoyed now for less than two years.  Indeed it could be claimed that that tax cut pushed us into recession. Of course, that’s stupid but no more so, than attributing the Celtic Tiger years to a policy of cutting taxes. It has been well documented now that the rapid economic growth came first, the tax cuts later.

There was a case to be made for not raising taxes next year in an attempt to maintain business and consumer confidence. But if the aim was not to damage confidence, then the Government went the wrong way about it. They could hardly have damaged confidence any more than they have.

So why didn’t they increase the top rate of tax back up to 42%. It’s only an extra one percentage point, the same as the new income levy and it would only apply to the top slice of income and only to about a third of all taxpayers. But it would have yielded almost €300 million in a full tax year.

It mightn’t be a very popular suggestion but it may be that the standard rate of tax was also reduced too far. It has been as high as 35% in the past but was 24% in the late 1990s. It was reduced to 22% for a couple of years and has been down at 20% since.

Increasing the rate by just one percentage point to 21% would raise over €600 million a year.

So increase both rates by just one point to 21% and 42% would have provided the exchequer with over €900 million. Set that against the €100 million that the original Medical Card proposal was suggested to save.

Wouldn’t it be great if some politician actually came out and said that he or she favoured higher taxes.

If they are fearful of recommending higher taxes on income, they could always recommend higher capital taxes. Why not a small levy on holdings of wealth as an adjunct or alternative to the small levy on income.

Or why not an increase in the rate of Capital Gains Tax. Brian Lenihan raised the rate from 20% to 22% in an effort to claw back some of the €180 million that he gave to developers by reducing the stamp duty on transfers of commercial property from 9% to 6%.  That Capital Gains Tax increase is going to yield €160 million in a full year. A further increase to 23%, equivalent to the new rate of DIRT to be charged on the interest on even small savings,  would raise about €80 million.

Making capital gains subject to the same tax regime as income would possibly raise hundreds of millions of euro. There are plenty of choices there for politicians and others opposed to the Government’s plans who want to do the honest thing and propose alternatives to the many spending cuts that were hidden away in the small print of the budget.

There’s a lot more hidden in the spending estimates that are normally published well before budget day but this year were published with the budget. Details of some of the cuts, those affecting farmers for instance, were not immediately evident but have since emerged. And we ain’t seen nothing yet.

Colm Rapple
Irish Mail on Sunday, 12th October 2009

The Government’s decision to divest the over 70s of their medical cards confirms, if confirmation is needed, that the PD philosophy is alive and well and that Mary Harney is still punching above her weight. Her ideal is clearly a market led health service with individuals paying their own way and the State’s role confined to providing a safety net for those at the bottom. The original decision to give out medical cards to the elderly irrespective of means was informed by an entirely different ideology.
Of course, taken in isolation, it doesn’t seem fair to provide free medical care to all over 70s irrespective of income. But it’s perfectly justifiable if seen as one small step towards achieving an ultimate objective of free medical care for all. That’s not an impossible dream. If a poor country like Cuba can do it, there’s no reason why we shouldn’t at least aspire to do likewise. And it has nothing to do with the political system.
It’s not an objective that could be achieved overnight and perhaps never. There would always be a need for some charges, if only to discourage waste and abuse, and the tax system used to fund the benefits would have to be accepted and seen as equitable. But, on the basis of the PD’s electoral support and the reaction to Mr Lenihan’s Budget day announcement, there’s a lot more support for a universal health care system than there is for the free market model. We should at least be trying to move in that direction.
Why shouldn’t medical care be free at the point of delivery. Much of it already is, just as many other State services are provided free of charge. Householders don’t have to pay for their water supply or their waste water disposal. You can walk down the street or enjoy a stroll in the local park without charge. Individuals don’t get electricity bills for their street lighting and free education is available to all irrespective of their incomes or wealth.
The notion that this draconian change was needed to save cash is simply not sustainable. The €100 million saving that it’s is supposed to yield in a full year could be raised in many different ways. It’s a relatively small sum in the context of the overall budget.
Capital Gains Tax has gone up from 20% to 22%. The change came into effect from midnight on Budget day. Brian Lenihan felt that he has to excuse the increase, justifying it as a quid pro quo for the stamp duty concession he had handed developers by cutting the top rate on commercial property transactions from 9% to 6%.  The stamp duty change will cost €180 million a year while the capital gains tax change will bring in €160 million.
The developers are going to gain more on the swings than the Exchequer gains on the roundabouts. So why didn’t Mr Lenihan go that little bit further. Raising the gains tax rate to 23% would yield an extra €80 million and the rate would still only be equal to the new rate of DIRT that even small savers will have to pay on their deposit interest. Putting it up to 24% would yield an extra €160 million, more than enough to make the medical card change unnecessary.
That would have been a simple and equitable option. But there are plenty of other alternatives. Putting an extra 1% on the top income tax rate would yield almost €300 million in a full year. That would only bring the top rate back to where it was in 2006. It was only reduced to 41% in January 2007.
And had he really wanted to catch those who gained most from the Celtic Tiger, Mr Lenihan would have introduced a new surtax rate of anywhere between 45% to 50% on  the top slice of high incomes. Combined, those changes could well have yielded enough additional funds to replace the inequitable levy on all income.
Indeed that would have the added benefit of clawing back some of the gains made by those doctors who have done so well from the medical card scheme over the years while also taking money off the high court judges, ex-ministers and property tycoons that Government spokesmen have been so anxious to take medical cards off.
If none of those alternatives suited, the easiest and least painful option would have been to deduct €100 million from the €1.7 billion contribution earmarked for the Pension Reserve Fund next year. Of course he’d have been better taking a contribution holiday and using all of that money to ease his budgetary problem.
In effect the €100 million that will be saved by taking medical cards off the over 70s will be given to the National Treasury Agency to be invested on the world’s stock markets and not touched until 2025.  At that stage it is more likely to be used to finance civil service pensions. Public sector pensioners will certainly have first call on it.
The €100 million certainly isn’t being used to extend medical card coverage to other more “deserving” medical card applicants. The means test thresholds for the under 70s are not being increased. They haven’t changed since July 2006, so those who were on the borderline at that time will now find themselves ineligible because of a small pay increase. So it’s not only the over 70s who will be losing their medical card entitlements.
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Colm Rapple
Irish Mail on Sunday October 5, 2009

Irish Nationwide is to pay a fine of €50,000 for embarrassing the Financial Regulator, the Central Bank and the Government.  The official line is that the building society breached the Regulator’s Consumer Protection Code. But the fact is that it didn’t put any consumers at risk in its attempt to attract deposits from abroad in the wake of the Government’s decision to totally guarantee Irish bank liabilities. It’s offence was to do, in a much too public way, what other financial institutions were undoubtedly doing in less obvious ways.

The Government guarantee was no secret and foreign bankers and would be depositors were obviously going to be attracted by it and transfer money into Irish accounts. But drawing attention to that fact was considered to be an unprofessional act threatening the integrity of the market.

The Financial Regulator was hardly expecting financial institutions to resist from their ever-constant aim of maximising profits. No, it was just expecting them not to broadcast the fact that it was still business as usual.

Obviously the powers that be were upset. The Financial Regulator is not known for imposing fines willy nilly. It very seldom imposes monetary sanctions on the financial institution or individuals that it regulates. Indeed this is the first time ever that a fine has been imposed for a breach of the Consumer Protection Code.

Yet, while the Code only came into effect in July 2007, there have been plenty of instances of the abuse of consumers. Some have been highlighted by the Financial Ombudsman, others should be obvious to anyone able to take some time to examine the operations of the banks. That’s supposedly what the Financial Regulator does.

But the plain fact is that the Regulator has always been more concerned with the health of the financial system as a whole than with the treatment of consumers. By all accounts it hasn’t been very successful in that first role and has also fallen down badly on the second.

The Consumer Protection Code is prefaced with twelve general principles. Irish Nationwide was adjudged to have breached the first of those which requires financial institutions and regulated individuals to “act honestly, fairly and professionally in the best interests of its customers and the integrity of the market”.

They are also required to “act with due skill, care and diligence in the best interests of customers” and “not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service”.

Those are just three of the principles which we all know were regularly breached in the past and are undoubtedly still being breached.

It has become common practice for banks to cut the interest rates on existing savings products while offering better rates to new customers. Existing customers can always switch, of course, but they are seldom told of the advantages of so doing. Similarly new credit cards with lower interest rates are often marketed to new customers while existing customers are left with poorer value products.

Personal Retirement Savings Accounts (PRSAs) are still being sold to young people who would be better off putting their money into regular saver accounts that would allow them access to their money when they need it for a house deposit.

The many instances of banks encouraging customers to over borrow could hardly be said to be in the best interests of those customers and the integrity of the market.

Those are some of the general practices which could be claimed to breach the Consumer Protection Code. There are also many specific cases, some of them outlined in the reports of the Financial Ombudsman.

He considered a total of 4,534 complaints last year and found in favour of 2,675 of them.. They included complaints of misselling of investment products, over charging, and maladministration.

The Ombudsman normally orders the payment of compensation when he finds in favour of a complainant. But that doesn’t preclude the Financial Regulator from deciding that the financial institution or individual involved was in breach of the Consumer Protection Code and imposing a fine. The Regulator also has the power under the 2004 Central Bank Act to direct that a person, or persons, should be disqualified from managing a regulated financial service.

So the Financial Regulator doesn’t lack the power to take action in the consumers’ interest. But the move against the Irish Nationwide was the first to be taken for breach of the Consumer Protection code and it was hardly a consumer matter. In a better climate the building society might have appealed the Regulator’s decision and might well have won.

Such appeals are heard by the Irish Financial Services Appeals Tribunal,  a low profile body whose members are appointed by the President. It has only ever heard one case and that from a company that had been refused a licence to transmit money abroad. It’s not that people readily accept the decisions of the Financial Regulator. It’s just that it doesn’t apply many sanctions and when it does it’s usually by agreement.

Indeed it only announced the Irish Nationwide fine after the building society agreed that it was in breach of the code. It possibly felt that this wasn’t the right time to dispute the matter.

It has become very evident that former minister Michael McDowell was right when he fought very hard for a Financial Regulator completely independent of the Central Bank.   He failed and it was simply hived off from the Central Bank complete with the culture of banks first, customers second.