Colm’s columns

Colm Rapple
Irish Mail on Sunday, July 26, 2009

The State coffers may be depleted but this isn’t the time to be selling off the “family silver”.  Such sales are mooted in the McCarthy report but they are not seen as an alternative to the spending cuts that have grabbed most of the headlines. Unfortunately some politicians may view it differently and promote asset sales as an easy option which, in the short-term, would help to lessen the need to take on powerful pressure groups.

But it would be an exercise in short-termism.

Two large State companies are mentioned in the McCarthy report as possible privatisation candidates, Bord na Mona and Coillte. To describe either as “family silver” is misleading since both are valuable wealth and welfare producing assets that, in the current climate, would only fetch bargain basement prices.

They are not just simply non-producing ornaments.

Bord na Mona made a profit of €23.8 million last year – up €1.3 million on the previous year. It paid over €12 million in dividends to the State. It owns a land bank about the size of County Louth and it provides almost 2,000 good jobs, mostly in areas of the country where there is little alternative employment.

The current chief executive’s predecessor pushed hard for its privatisation. Goldman sacs had identified potential investors and no doubt there are still predators ready to pick up a bargain.

But we don’t want a repeat of Eircom. It may well have been sold near the top of the market but we lost out as the development of the telecommunications network was dictated by short-term profits rather than the national or regional interests.

Coillte is the largest single landowner in the State. Profits last year were down sharply to €9.2 million, mainly as a result of the slowdown in the construction sector. But that figure greatly understates the best benefits accruing from the company. Many of them are intangible but it is possible to put a firm figure on one of them, the carbon that its forests take out of the atmosphere each year.

It’s estimated that our forests are currently taking in about 6.2 million tonnes of CO2 each year. Half of that is released again as a result of timber harvesting and deforestation. The other 3.6 million tonnes is sequestered in our “forestry sink” most of which is owned by Coillte.

Only about 2 million tonnes of that is actually included in the Kyoto protocol calculations and that in currently saving us having to buy about €29 million worth of carbon credits. That’s assuming a price of €14.50 a tonne at which credits are currently selling. But they were fetching almost twice that a year ago and the price is bound to rise again as the world economy recovers.
So our forests are worth a lot more in real money terms than Coillte’s profits indicate. Could we trust private owners to manage this valuable carbon sink in our best interests? The answer is clearly, no. Private owners would, quite rightly, be interested only in the bottom line of the profit and loss account.

Coillte provides many other less tangible environmental benefits the management of which are obviously best kept in public rather than private control. It owns about a million acres of land, equivalent to two reasonably sized counties or almost 7% of the country’s landmass.

The bulk of that is commercial forestry and managed as such.  But Coillte has a broader remit. It puts it like this “Our purpose is to enrich lives locally, nationally and globally through the innovative and sustainable management of our natural resources”.

That could amount to just so much waffle in the mission statement of a private company.  There is a better chance of imposing the reality of that statement on a public company.

Land and forestry is best managed for the long term, something that’s better suited to a public rather than a profit maximising private company.

Far from selling, the Government should be thinking of buying at this time. Landowners pushed the cost of past infrastructural projects sky high with their exorbitant demands. So why not store up some savings for the future by identifying and buying, or retaining in NAMA, the land that’s going to be needed for future projects.

Colm Rapple, Irish Mail on Sunday, JUly 19, 2009

Next year we’ll only be producing as much wealth per head as we were in 2002.  That’s according to the latest forecast from the Economic and Social Research Institute (ESRI). It’s a big drop from where we were at the top of the boom. We are a lot worse off but there is a bright side. By this time next year the ESRI expects the economy to be on a growth path again. It will be slow at first but will pick up momentum if three conditions are met. The banks need to lighten their lending policies after their property loans are passed over to NAMA. We need to continue benefiting from a general recovery in world economic fortunes and the Government finances must be gradually brought back into balance.

They are not particularly onerous conditions. The economic recovery will be all that much faster if the pain of adjusting to our new circumstances is clearly shown to be fairly and equitably spread.  The pain will come in a number of ways, declining incomes, tax increases and cuts in government services.

Pay cuts are inevitable in some areas of the private sector reflecting decreased demand, higher unemployment or, in some cases, an absolute need to remain competitive. But not all of those cuts will be justifiable on economic grounds. The ESRI is forecasting that the national pay bill will fall by 17% between 2008 and 2010 while profits will fall by only 4%.

For every €100 earned in profits last year, €125 was paid out in wages. Next year the ESRI expects that only €107 will be paid in wages for every €100 of profits.

That may not be a bad trend at present given the need to encourage an improvement in business confidence and to maintain investment capacity in the face of risk-adverse banks. But there is a need to boost consumer confidence too.

Achieving that, while also bringing the state finances back into order, will be no easy task. Bridging the budgetary gap requires some mixture of improved efficiencies and spending cuts. There is plenty of scope for all three, a fact that must not be forgotten in the debate on the Bord Snip report. It only looked at the spending side of the equation and, only partially at that, since it didn’t examine the scope for cutting or postponing capital spending.

The debate must be extended to include the tax side of the equation. We are still a relatively low taxed country and increased taxes on high incomes, wealth and property need not have any adverse impact on our potential for economic growth. There is no doubt that part of our current difficulties stem from the excessive tax cuts given out to curry political favour during the good years and the failure to broaden the tax base.

Finance Minister Brian Lenihan’s assertion that the bulk of any further adjustment must come from spending cuts rather than tax increases, needs to be seen for what it is – an ideologically based opinion rather than a subjective truth.

We need tax increases and we can afford to impose them. But even with tax increases there will still be a need to cut spending and the McCarthy group highlights a wide range of areas in which greater efficiencies can yield substantial savings. They should be acted on as quickly as possible. But battle lines must be drawn on any attempts to actually cut back on the level or quality of state services. We are still a wealthy country even by European standards and we should aspire to the best in public services. That will require an acceptance of high taxes and the elimination of the feather bedding that has long plagued many areas of the public sector and protected elements of the private sector.

The menu of changes presented in the Bord Snip report is long and varied and, given some tax increases and some cuts in capital spending, the Government has scope for picking and choosing. With a bit of luck and a great deal of commitment, those choices will be made on the basis of what is equitable and most conducive to boosting economic confidence rather than on the basis of who can shout the loudest and threaten the greatest economic and social disruption.

Colm Rapple
Irish Mail on Sunday, July 5th 2009

With a yawning gap developing between tax revenue and Government spending, the prospect of a property tax may well seem preferable to some of the swingeing spending cuts that will be recommended by An Bord Snip Nua. The justification for such a tax was highlighted this week by new official figures on the currently tax-free benefit that home ownership confers.

Put €400,000 into a deposit account and you’ll get a return by way of interest. Use the same money to buy your own home and the benefit comes by way of rent-free accommodation. It’s a benefit that all homeowners enjoy and according to the latest figures from the Central Statistics Office it was worth almost €6 billion last year.

That’s what that rent-free accommodation was worth. In other words that’s what homeowners would have had to pay if, instead of owning their homes, they were renting them.

It is a real benefit that’s included in our official national income figures and it’s of more than simply academic interest. You can expect to see it mentioned in the soon to be published report of the Commission on Taxation as a justification for a property tax on homes.

The economic case for such a tax is over powering. Take the example given above.

The person who puts €400,000 on deposit is liable for tax on the interest earned. Indeed the return earned on most investments is taxable. But invest money in buying a home and you get the benefit of living in it tax-free.

It’s a benefit-in-kind known as “imputed rent” and it is taxed in a number of EU countries: Belgium, the Netherlands, Norway and Sweden.  In the dim and distant past it was taxed in Ireland as well. Other EU countries take different approaches to taxing property but most impose some taxes at either local or national level.

Ireland is one of the few countries that doesn’t.

If the Government is really committed to broadening the tax base, then taxes on property are inevitable. But what is to be taxed and how? The fact that the Government caved in to pressure from mobile home owners and exempted them from the €200 tax on second homes won’t be lost on the many special interest groups who will want exemption from a broader property tax.

But that €6 billion in untaxed benefit that home owner enjoy provides a tempting target. Taxing it all as income at the standard rate of 20% would yield an annual €1,250 million for the exchequer. But it won’t work like that.  The €6 billion is a gross figure that doesn’t take account of mortgage debt.

Homeowners owe about €148 billion. The interest on that at, say, 3.5% amounts to €5.2 billion. That’s a real cost of home ownership. Take that from the gross benefit of home ownership and the net benefit comes down to €800 million.

If that were liable for income tax at an average rate of say 30% the yield would be €240 million a year. That’s after allowing mortgage interest in full against the notional benefit of owning a home. The mortgage interest relief as presently constituted could be abolished producing an additional saving of about €300 million.

Even allowing some extra reliefs for those on low incomes the annual yield could be about €500 million a year.

First time buyers with big mortgages would pay little or nothing since they would be given credit for all of their mortgage interest. The heaviest imposition would be on homeowners with no outstanding debt on their properties. Since it would be an income tax, the rate of tax payable would depend on the taxpayers overall income.

This may well be the model favoured by the Commission on Taxation. But it is only one alternative. The Greens favour a tax on site values rather than on the actual property, which they believe might discourage the upkeep and improvement of houses. Others would see it as unfair to impose an identical tax on the owner of a mansion on a half-acre site, as on the owner of a small cottage on the adjoining half-acre.

The Commission on Taxation will undoubtedly look at all the alternatives and make a recommendation. Then it will up to the Government to convince us that a property tax is more palatable than alternative taxes or more swingeing cuts in State services.

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