Colm’s columns

Colm Rapple
Irish Mail on Sunday, Oct 25, 2009

Many private sector workers have suffered a drop in income not because of any cut in basic pay but rather because they are working fewer hours. So why not achieve a reduction in the public pay bill in exactly the same way. Paying for two less hours a week would provide a saving of over 5% in the overall pay bill. Indeed if some of those savings were at overtime rates the overall saving could well exceed the 6.8% reduction targeted by Finance Minister, Brian Lenihan.

There are, of course, some areas in the public sector which couldn’t function on lower staffing levels. But two hours a week is less than half-an-hour a day. There are few workplaces, in either the private or public sectors, that are so stretched that that loss could not be made up with a little extra flexibility and productivity.

It would be preferable in the cut in working hours could be applied selectively, exempting the lower paid and those whose duties require direct interaction with the public. It might be difficult, for instance to cut back the hours of firemen without leaving gaps in the coverage.

But any such exemptions could be offset by greater cuts in the work hours in areas where there is obvious over capacity.  That would encourage flexibility in accepting transfers into areas, such as social welfare, that are understaffed.

The change could be viewed as temporary. Basic pay rates and pension rights could be left unchanged. In time the working week might be increased again although the trend is toward a shorter working week. Nurses have had their week reduced from 39 to 37.5 hours while the new consultants’ contract sets their working week at 37 hours.

But, whatever about the length of the working week, the increased productivity and flexibility would hopefully take some time to be eroded.

That’s for the future. This is now and in the current climate this is an option that must be more palatable to the unions than enforced pay cuts and staff reductions. Basic pay rates are retained and there is no cut in employment.

While they can be some debate over the timing of the adjustments needed to achieve balance in the public finances, there is no doubting the need for lower spending or increased revenue. The only alternatives to achieving a reduction in the public sector pay bill are either increased taxes or a cut in the quality or quantity of public services, including social welfare benefits.

If they are to gain and retain of their private sector colleagues, the public sector unions need to show a willingness to do more than simply say No!

A carbon tax will be the only new tax in the December budget, according to Brian Lenihan, but he didn’t rule out an increase in existing taxes although he believes that there is little or no scope to impose extra taxes on the higher paid. He’s wrong, of course.

We need higher taxes, not to offset the targeted reduction in the public sector pay bill, but rather to avoid cuts in the level of State services – social welfare, health, education and justice.

Mr Lenihan was at pains to point out that 4% of taxpayers account for about 48% of income tax receipts.  What he didn’t say, however, is that that 4% of taxpayers account for over a quarter of all income reported to the Revenue. Nor did he point out that the 98,000 taxpayers who reported income of more than €100,000 in 2006 earned a total of €19.8 billion between them and paid only 17.5% of that in income tax.

It is true that these taxpayers face a marginal tax rate a lot higher than 17.5% but that’s the average rate of tax. Pushing that average rate up by 5 percentage points would raise almost €1 billion a year and those high earners would still be only paying 22.5% of their income in tax.

That might be a bit much but it shows that Mr Lenihan’s claim that there is no pot of gold to raid is far from the truth. And if he doesn’t want to hit high incomes, how about wealth?

Colm Rapple
Irish Mail on Sunday, Oct 18, 2009

We need a property tax but not the type proposed in the new Fianna Fáil/ Green programme for government. It’s far too complicated and riddled with the potential for inequalities and anomalies. It will be very difficult to introduce and is likely to still be simply a proposal when the manifestos are being prepared for the next general election.

At that stage Fianna Fáil can dump it and the Greens will be left in glorious isolation. One doesn’t have to be too cynical to believe that that’s what the Fianna Fáil negotiators had in mind.

The Greens have been pushing for a site valuation tax  since well before the property and fiscal crises. But since it seemed to be no more than a pious aspiration it was never given the critical analysis that it deserves. Indeed it’s not even clear what it entails except that it will be a tax on land rather than the property that is built on it.

As a tax on development land and vacant sites etc., it may have something going for it but not as a tax on residential property. A failing of all such taxes is that they don’t take account of a person’s ability to pay. That’s a problem that can be overcome. But a site tax suffers from the other glaring anomaly that it doesn’t even take account of the value of the property but only of the site on which it stands.

Down in Ringsend in John Gormley’s own constituency there are small cottages close  to new blocks of high rise apartments. A cottage might be on a site four times as large as the footprint of one of the apartments. It might be inhabited by a couple of pensioners who have lived there all their lives from well before the time that it became a fashionable area. The apartments might be popular with high flying financial dealers from across the river.

Yet on the basis of site value, the pensioners would be paying four time as much tax as they would.

Are the pensioners going to be forced out of their cottage so that the site can be redeveloped? Will there is any “hope” element built into the site valuations?  What factors will be included?

What about rural areas? It’s common enough to see an old farmhouse beside a Celtic Tiger built multi-bedroomed mansion. The farmhouse is likely to be on a larger site than the mansion, so it would be liable for a higher tax. It doesn’t make sense. Neither does the claim that taxes on the properties themselves would discourage people from improving them.

The logical property tax is one charged on the rental value of the property itself. The tax is applied to the value that the property confers on the owner. If I invest €500,000 in shares or put it on deposit in a bank, I pay tax on the return I make on that money. If I use it to buy a house and rent it out to someone I pay tax on the rent I receive.

Yet if I use it to buy a house for myself and live in it, I pay no tax on the benefit I enjoy by not having to pay rent.

If an employer supplied me with a house rent free, I’d be liable for a benefit-in-kind tax. Farmers who buy land pay tax on the income they get from that land. Yet no tax is paid on the benefit people get by investing in their own homes.

This type of tax did exist in Ireland up until the 1970s and it has been repeatedly recommended as the logical way to tax residential property.

Rental values would be far easier to calculate than site values. The Revenue and the Private Residential Tenancies Board have a wealth of detail on rental properties including the rents currently being paid. A number of private companies such as Daft.ie have extensive information of the rents being sought on properties. It wouldn’t be too difficult to create a data base against which to check the veracity of a self-assessed rental value.

Since the benefit would be considered to be income and taxed as such it would be payable at a taxpayers top rate of tax. Those not liable for tax would automatically be exempt.

Colm Rapple
Irish Mail on Sunday

With consumer prices down 6.5% over the past year, the case for cuts in social welfare benefits may seem to have some validity. But it doesn’t. The drop in the cost of living has been far less marked for those on social welfare and low incomes. Even if that wasn’t the case, cutting the incomes of the poorest and most vulnerable in our society should be way down the list of ways to get the State finances back in balance – so far down, indeed, that it need never be reached.

Consumer prices have fallen by 6.5% over the past year. But that’s an average. The price of most goods and services has fallen but some items have gone up in price. The real impact on a household’s cost of living depends on how they spend their money, how close to the average they are.

In broad terms, those with big mortgages have experienced the biggest gains while those on low incomes, particularly those on social welfare, are likely to have gained less than the average.

Mortgage interest payments have almost halved over the past year. Anyone who was paying out half of their income in mortgage interest this time last year are now only paying out a quarter of their income. Their cost of living has dropped by at least 25%. Ok, most people aren’t that heavily burdened but when mortgage interest is taken out of the equation, the drop in other customer costs over the past year has been not 6.5%, but only 3%.

Even that overstates the impact that falling prices have had on the living costs of most social welfare recipients. Their spending patterns are likely to be far removed from those of the average household. A larger proportion of their income is spend on the very good and services which have bucked the general trend and actually risen in price over the past year.

Poorer households tend to spend more of their income on fuel and light and a high proportion of the heating bill goes on solid fuel and bottled gas which have both gone up in price over the past year. Solid fuel is up 6.2% and bottled gas by 3.8% while fuel oil is down 36% and natural gas down 11.3%.

The average household spends just under 4% of its income on fuel and light. But it’s 11% for those in the very lowest income category (lowest ten percent) and over 7% for those in the next lowest category.

Solid fuel, coal and turf, will get the biggest hit from any carbon tax that may be introduced in the December budget. They are the most polluting but their users face the highest costs in switching to cleaner alternatives. Have the Greens thought this one through?

Petrol and diesel have both fallen in price over the past year but bus and rail transport on which social welfare recipient are more likely to rely are both up. Bus fares are 12% higher than a year ago while rail fares are up 8.7%.  Transport costs overall are actually down 4% and that is what’s reflected in the index but for those relying on public transport the costs are up significantly.

Food prices are down by 6% on last year and poorer families do spend a higher proportion of their incomes on food but the price of basic foodstuffs has fallen less than the average. The price of those items which used to be controlled under the Grocery Orders has fallen by only 3.4%. These items which shops were barred from selling below cost included sliced pans, breakfast cereal, packets of rashers, tinned vegetables, baby drinks and juices, sugar, flour, baby milk compound, and milk.

There is undoubtedly scope for trimming in one way or another those social welfare benefits which go to people who are not poor. Child benefit is just one example but there is no case on the basis of the consumer price trends or otherwise for any general cut in benefits.

It’s been estimated that the Government’s tax take this year will amount to no more than 28% of national income. The latest available figures for some of our EU neighbours are: Sweden, 48.2%, Belgium 44.4%, France 43.6%, Italy 43.3% Denmark 48.9%, Germany 36.2%, Britain, 36.6%, Spain 37.3%, Portugal 36.6%.

There’s an obvious message there.

Colm Rapple
Irish Mail on Sunday, October 4, 2009

The economic outlook is improving and consumers are beginning to realise it. The faster the doom and gloom is dissipated, the sooner the economic recovery will take hold. Consumer confidence is already improving and that trend will be reinforced by every bit of good economic news disseminated. There was plenty of good news this week but in case you missed it, and need a bit of cheering up, here’s a brief outline.
Unemployment stabilised last month. The number signing on actually fell by 16,417 Such a fall is usual at the end of September as colleges reopen but even when seasonally adjusted the increase was a marginal 600.  This is far better than expected and, even if it is due mainly to increased emigration, it’s going to ease Brian Lenihan’s budgetary problems.  Every 1,000 people on the dole costs the Exchequer an estimated €20 million in social welfare and lost tax.

Of course, more jobs are going to be lost and unemployment will rise, as it always does, during the winter and maybe even well into next year. But the outlook isn’t as bad as it was and while 12.6% of the labour force are out of work, the other 87.4% are still beavering away and while incomes may have fallen slightly, that hasn’t prevented people saving a  lot more.

Two years ago we were saving 2.7% of income. Now we are saving 11.5%. There is plenty of spare cash out there. Indeed part of the problem is that we are not spending it. But that’s changing too. That was another bit of good news this week.

Amárach Research includes some questions on consumer attitudes in its monthly omnibus survey. In April 77% of those surveyed believed that the economic situation in Ireland was getting worse. Last month that was down to 50% with 27% saying that the situation had stabilised and 21% seeing some signs of improvement.

Some 46% believe that the worst will be over within a year while 46% feel comfortable enough to make it through the recession.

That optimism  is also evident in the KCB/ESRI consumer sentiment index for August. KCB economist Austin Hughes sees signs that the dramatic pull-back in household spending evident earlier in the year may now be easing. The outlook for the Christmas spending season may still, he believes,  be weak but may not be as bad as previously feared.

The most optimistic note was struck by Davy Stockbrokers. They are now forecasting a return to economic growth early next year, with a rebound to a growth rate of 4% in 2011. The recovery will be led by the faster-that-expected upturn in the world economy but Davy’s economist Rossa White expects some contribution from consumer demand at home which may rise by 1.5% next year as confidence returns and the need to save for a rainy day seems less urgent.

Our fortunes depend mainly on the expected upturn in the world economy and the outlook is looking better by the day. In its latest economic forecast the International Monetary Fund predicts a 3.1% expansion in the world economy next year. As recently as July it was forecasting a growth rate of only 2.5%. It’s mainly down to the success of Government sponsored spending programmes in the U.S., Europe and Asia

The IMF warns that these need to continue for some time yet and that the upturn will be unevenly spread with the Chinese economy expected to grow by a massive 9% next year, the U.S. by 1.5% and the Euro zone by only 0.3%. But it is all growth. The trend is in the right direction.

As in the world at large, so too in Ireland, the recovery must eventually be based on a return of consumer confidence and spending. There is a message in that for the Government in preparing their new programme and, if it survives that, in preparing the December budget.

There is no doubt that the Government’s finances must be brought into better balance and that will have to involve some reduction in disposable income. But if it is done with a degree of fairness and style, remedial measures could serve to boost both consumer confidence and spending rather than depress them.