Colm’s columns

Colm Rapple
Irish Mail on Sunday January 18th, 2009

“Told ya so!” reads the balloon caption emanating from the picture of Karl Marx gracing the mug I got as a Christmas present. But Marx, were he still alive, would doubtless have more than that to say. However, there are plenty of other “told ya so’s” out there and, like Marx, most of them didn’t get it completely right. In so far as they did, it had more to do with luck than with economic insight, research or experience.

There was a general realisation that the property bubble had to bust at some stage. But most commentators, including the prestigious Economic and Social Research Institute, predicted a soft rather than a hard landing. That was the central forecast in the ESRI’s medium term outlook published only eight months ago based on fair assumptions built into a very sophisticated economic model.

There were those who warned about a more traumatic busting of the bubble but no-one foresaw the combination of global economic shocks which hit us at the same time as the inevitable slow-down in the domestic economy as the property boom came to its inevitable end.

We were always going to have an economic downturn but without the external shock it would certainly not have been as bad as it has turned out to be. And no one is claiming to have foreseen the extent of the world financial crisis.

But whether the downturn was going to be slight or severe, we should have been preparing for it.

It was all too clear that the tax base was not adequate to deal with any kind of downturn in the property market, whether great or small. But few commentators were critical of the ideologically motivated erosion of the tax base.  The Celtic Tiger preceded the tax cuts and while it may have been encouraged on its way by some of the cuts that followed in its wake, they clearly went too far.

In 2000 income tax rates were lowered from 24% and 46% to 22% and 44%. Now they are down at 20% and 41%. Were they back up at even 22% and 44% the Exchequer would be about €2 billion a year better off – the amount that the Government is committed to saving by its current round of pay and spending cuts.

The tax cuts did little or nothing to promote economic growth during the good years. They were part of the return we got from the Celtic Tiger, paid for from the exceptionally buoyant tax yield from the property sector. But in retrospect we would have been just as well off without them. We might have avoided the mad spending sprees that pushed asset prices to clearly unsustainable levels. Certainly the State finances would now be in a much healthier state.

But there were very few who argued, as this column has consistently done,  against the tax cuts. To do so, required a vision of sustainable social and economic growth far removed from the liberal free market model that was so seldom questioned by commentators during the go-go years, not least by some of those who now claim to have predicted the current recession.

Until relatively recent times, there were few voices raised in protest at the laxness of the regulatory systems supposedly charged with ensuring the effective operation of  free markets in areas such as financial services, telecommunications and energy supply where owners and managers have long experience of circumventing attempts to impose competitive pressures on their operations.

The cosy relationship between Financial Regulator and financial institutions, often enough raised in this column, was seldom questioned elsewhere until the horse had effectively bolted.

No one seemed to have studied why our energy costs, which were amongst the lowest in Europe when ESB and Bord Gais operated monopolies, are now, in a supposed free regulated market, amongst the highest. Ironically the truth is that, in order to entice new entrants into the market, the Regulator was forced to not only concede buy to actually demand higher prices.

Those who forecast the recession can claim to have long advocated cut-backs in  Government spending. But that was mainly because it’s a natural part of the liberal, free market, reduced government, agenda to which most subscribed. So it’s not surprising that it is currently being pushed as a primary solution to the Government’s budgetary problems.

But the truth is that we need not only to raise taxes but also more Government spending, at least in the medium term. Higher taxes, even on the wealthy and higher paid,  just might impact adversely on confidence at this time although the risk is possibly worth taking.

Government spending needs to be prioritised, made more efficient and effective, even possibly cut in some areas. But we spent far less of our national income on public services than other euro-zone countries. If we want the type of state services that we deserve and demand, we’re going to have to spent a lot more.

According to figures included in a euro-zone economy commentary published by the OECD during the week in 2006 we were spending 34% of GDP on state services. The next lowest was Spain at 39% while Belgium, Finland, Austria, Italy and France were all spending more than 48% of their GDP on state services.

We trailed most of the others in practically every area except health where we actually topped the league table. In 2006 we were spending 7.7% of GDP on health compared with 6.3% in Germany, 6.8% in Belgium and 7.2% in France.

Clearly we could be getting better value for some of our money but the case for massive spending cuts is based on assumptions every bit as unsound as those on which  some of those economic forecasts were based.

Colm Rapple
Irish Mail on Sunday, January 11th, 2009

If you are 30 and starting to save for your retirement the Pensions Board estimates that you need to put aside about 18% of your pay each month to fund a pension of two-thirds final pay when you are 65. That two-thirds of final pay would include your social welfare pension.

That’s only an estimate, of course. There are no certainties. It’s based on an assumption that you’ll earn an average 5% annual return on your accumulating pension fund.

Of course, you might. But recent fund performance wouldn’t inspire you with any confidence. Irish pension funds fell by between 30% and 39% in value last year wiping out all of the gains made during the good tiger economy years. They are now valued at much the same levels as they were ten years ago. Fund values would need to have risen by 40% since 1998 just to maintain the purchasing power of the invested money so in real terms values have fallen by 40% over the ten years.

Of course past performance can not be taken as a guide to future performance, and it is possible that starting from their current low ebb, pension funds may achieve an average return of 5% over some future period, as they have over many past periods. There were individual years when returns of over 20% were achieved so over the long-term an average annual return of 5% is certainly achievable.

But it is by no means certain, and we now have ample evidence of the very real risk involved in pension fund investment which, of its nature, involves a fixed or almost fixed maturity date.

Tax relief can help to cushion that risk, particularly for top-rate taxpayers, but it is still a major risk which fewer and fewer people are going to be willing to take. And this at a time when the Government is planning pension initiatives aimed at encouraging people to save more for their retirement.

It’s little wonder that the long-awaited Government policy document on pensions, which was to be published last year, has still not being finalised. According to the Department of Social and Family Affairs, which is responsible for preparing the proposals that will go to Government, it is still being worked on. But the hope is that it will be published “early this year”.

The need for a radical change in pension policy has been obvious for years but all we’ve got has been a succession of study after study, report after report. The present system suited a range of influential interest groups ranging from the pension industry to the public sector mandarins. Decisions were long overdue even before the onslaught of the current financial crisis.

But if the lessons from the current financial turmoil are built into the long-term national pension strategy, the long delays may have served a useful purpose.

It’s now very clear that no amount of regulation can reduce to an acceptable level the risks inherent in current private pension schemes. Markets have proved to be too volatile, funding standards inadequate in the face of that volatility. Those risks are going to become increasingly obvious to those already in pension scheme and effectively scupper hopes of encouraging those currently outside the pensions net from ever joining.

Even the best defined benefit pension scheme operated by larger companies are not immune from risk as Waterford-Wedgwood workers in Ireland, Britain, Germany and Japan unfortunately realised this week.

The latest group accounts show that there was an estimated deficit of €148 million in the group’s pension funds on April 5 last. At that stage almost half of the €705 million assets of the funds were invested in equities which have suffered very sharp downturns since. Total fund liabilities amounted to an estimated €853 million.

There is a hope that new owners will take over the pension fund liabilities but no doubt they’ll look for other concessions in return. The extent of any Irish shortfall is not itemised in the accounts which combine all the pension scheme together. In Ireland, unlike Britain, we don’t have a compensation fund to cover such shortfalls. Any shortfall will be borne by those still in employment.

It’s too late to start shutting that particular stable door and the problem is not going to be solved by putting greater obligations on those companies with defined benefit scheme to meet their open-ended obligations. Such pressure would only result in pension schemes being closed off.

The only sensible solution is for the State to take over total responsibility for pensions. It might sound like a loony left solution but then only a few months ago so too did the nationalisation of banks.

Most of the submissions on the Government’s discussions paper issued a couple of years ago urged some degree of State involvement. There were calls for a new system of tax relief, improved social welfare pensions, guaranteed annuity rates,  compensation funds etc. etc.

It would be better to go the whole hog and simply nationalise the pensions industry. The State already takes responsibility for the pension entitlements of public servants so why not extend that to the private sector. Pension contributions should be made compulsory and collected through the existing and very efficient PRSI system. It would be far more cost effective than the current system and provide a far greater degree of certainty to all involved.

Colm Rapple
Irish Mail on Sunday, January 4th, 2009

We are going to be poorer this year than we were in 2008. That’s generally agreed. But it’s as well to remember that we are still one of the ten richest countries in the world in terms of income. The latest available figures from the World Bank rank Ireland in ninth place with an income just over $27,000 per head of population.

So we may be poorer than we were but we are still better off than most of humanity. According to that same World Bank report some 80% of the world’s population live on less than $10 a day — $3,650 a year. I’m not sure whether that fact should make you feel more or less cheerful but it should, at least, help you to feel relatively better off.

The world’s wealth is very inequitably distributed. Over three-quarters of the wealth produced each year is consumed by the top 20% of income earners while the bottom 20% get only 1.5% between them.

There are about 1,900 million children living in the developing world. A third of those go asleep each night without adequate shelter. One-in-five don’t have access to safe drinking water and one-in-seven have no access to health services.

According to UNICEF, poverty causes the deaths of up to 30,000 children each day and about 28% of all children in developing countries are underweight and under nourished.

Do you still think that you are badly off?

Perhaps you do, and you can hardly be blamed for that. Comparisons with the Third World are seldom taken into account when considering standards of living. Our general perception of poverty seems to have little to do with the absolute level of our living standards. It is related, instead, to our relative position vis-a-vis our neighbours — and we only take our near neighbours into account.

The cer-tainty that you are living like a king compared to a native in Bangladesh may be of less importance than the fact that your next-door neighbour has just taken delivery of a new 2009 reg. car and you cannot afford one.

But at least remember that there are millions of people worse off. If that doesn’t help to make you feel a little better off, then here are a few practical suggestions on boosting your budget over the coming year.

Switch your credit card

Halifax provides six months free credit on both the debt transferred and new purchases and is giving new customers €100 spending money after the first purchase on the new card.

Tesco gives six months free credit on the debt transferred.

Claim a tax rebate

You get some tax credits automatically but many have to be claimed. If you don’t claim them you don’t get them. Claims can be backdated for four years so you can still put in a claim for 2005. Each year is treated separately. Credits that you may have missed include:

Medical expenses – allowed at your top rate of tax.

Trade union subs – a credit of €40 in 2005 and now €70.

Rent – it was €300 per person in 2005 and for 2005 and 2006 it could be claimed by children living at home without imposing an extra tax burden on their parents. In those two years a parent renting a room to a child was exempt from tax on rental income of up to €8,000 a year.

Local charges – upper limit of €400 since 2006.

Shop around for the best phone and broadband deals

Comparing telecommunications packages is very difficult but the Communications Regulator runs a very good interactive web site “callcosts.ie”. You can input you own particular pattern of phone or internet usage and it will provide advice on the best deals for you. There are considerable savings to be made.

Cancel bad value mobile phone and credit card insurance

It’s all too easy to sign up to expansive insurance policies when buying a mobile phone or taking out a credit card and very often it represents very bad value. A phone doesn’t cost very much to replace and no policy covers the trauma of losing personal data. If you haven’t been careless with your credit card, the most you are likely to lose from its loss and fraudulent use is about €50. If you have been careless, then no policy is going to provide cover.

Policies that meet some of your credit card repayment obligations if you lose your job may be worthwhile but it depends on how safe your employment is.

Family income supplement

Most social welfare payments are made to those who are out of work for one reason or another. But Family Income Supplement is paid to families on low pay. The claimant must be working at least 19 hours a week and the family must include at least one child. The weekly payment is calculated as 60% of the difference between the actual income and a set threshold level which is currently €590 for a family with two children.

So a family with two children on say €490 a week qualify for Family Income Supplement of €60 a week – 60% of the difference between the actual pay of €490 and the set threshold of €590.

The threshold for a single child family is €500. For a family with three children it’s €685.