Colm’s columns

Colm Rapple
Irish Mail on Sunday, July 25, 2010

Each Irish child at birth is saddled with over €40,000 of debt according to one economic sound bite currently doing the rounds. The figure is a bit exaggerated, but even if true, it is meaningless when taken in isolation. It tells us little about the State of the economy and nothing about the prospects of each individual child.

Being born in Ireland confers a host of benefits that more than offsets that liability. If each child is liable for a share of the national debt, then each child must be credited with a share of the national wealth. That wealth is considerable. We face major economic difficulties but we are still among the richest countries in the world.

Our health and social services may not be ideal but they are far better than those available to most of the world’s population. Each child born in Ireland is fortunate by world standards, with an entitlement to practically free health care and free education. State services could, of course, be improved. Waste could be eliminated, management improved and, if our debt servicing costs were lower, we could spend more.

Those are real concerns. But let’s not forget what we have.

If we were to divi out the national assets, each child would also be entitled to a shares in a number of very profitable State companies, the ESB, Bord Gais, Coillte, Bord na Mona. We can all also claim a share in the very valuable and extensive economic infrastructure owned by the State. We have plenty of assets to set against our national debt.

The economic situation is bad, but making it sound worse than it is, or trying to express it in popular sound bites, doesn’t help. It only serves to dampen the prospect of a renewed confidence that is essential to economic recovery. It doesn’t help people to understand what needs to be done to tackle our current difficulties.

Ireland’s national debt is not out of line with the Eurozone average. Of course, it is too high, but according to estimates compiled by the National Treasury Management Agency from the latest EU and Irish Government forecasts, we are currently fourth in the Eurozone league table behind Greece, Italy and Belgium.

Our total government debt stands at 86.9% of gross national product compared to a Eurocone average of 84.7%. That’s on the basis of total Government debt as a proportion of gross national product. That’s taking account of the €17 billion put into Anglo Irish and Irish Nationwide but it doesn’t take account of the offsetting €22 billion of assets in the National Pension Reserve Fund.

At end-2009 Government debt stood at €104.7 billion. That works out at about €24,000 per head of population or €18,000 per head when the pension fund money is taken into account. The €40,000 per head quoted by one economist includes provision for other potential debts arising from the banking crisis but they are not included in any of the official estimates of debt. In any case, it’s not the level of debt, but the cost of servicing it that’s important in the short-term.

We are not going to be paying anything off the debt for the foreseeable future. The debt will be increasing and we’ll be paying increasing amounts of interest leaving less money available to fund State services. Interest payments this year will take 17.4% of tax revenue according to the latest estimates. That’s a big imposition although it is not unprecedented. The figure was over 20% for most of the 1970s. It peaked at 35% of tax revenue in 1985, dropped to 27% in 1990 and didn’t come down below 17.4% until 1997.

It dipped to 3.4% in 2007 and has been rising rapidly since. According to the National Treasury Management Agency it will go over 20% in 2013. But national debt servicing costs as a proportion of both national income and tax revenue will still remain well below the levels experienced in the early 1990s.

Our national debt will continue to increase as the Government borrows, albeit at a declining rate, to finance its budget deficit. We can assume that living standards will decline further, the tax burden will increase, spending on State services will be cut and more people will lose their jobs.

It is those real economic effects that we need to be zoning in. The level of debt and the level of interest payments are, of course, important, but of far greater importance is how the burden can be minimised and more equitably spread. That’s what the economic debate should currently be about, particularly in the run-up to a budget which seems increasingly likely to hit the poorest and more vulnerable the hardest.

Colm Rapple
Irish Mail on Sunday, July 17, 2010

A residential property tax, which seemed to be ruled out as a budgetary option this year, is very much back on the agenda at the Department of Finance. And so it should be. Finance minister Brian Lenihan continues to stress that there is a lot of preparatory work to be done before such a tax could be introduced. But the government needs extra revenue and a well devised property tax could supply that need in a fair and economically efficient way.

The opposition to the last property tax was led by those who were most able to pay it and it was easy to built up popular support for their views. No one likes paying tax and we seem to have a particular aversion in Ireland to taxes on property. But what are the alternatives?

Those opposed to such a tax need to have an answer to that question. Let’s have a look at some of the alternatives.

Spending cuts are not an alternative. We are going to get them in any case. Ideally the cuts will be targeted solely at eliminating waste but that is unlikely. Some waste will undoubtedly be eradicated but suppliers of State services are very adept at protecting their own positions and inevitably front line services will be curtailed.

A case can be made for borrowing more in order to lessen the need for extra taxes but there is a limit imposed by the almost certain reaction that it would provoke from the international lenders and decision makers on whom we increasingly rely.

Extra taxes are inevitable. So who should bear the burden?

There are many people who have come through the recession relatively unscathed. High earners in secure jobs may have suffered a small drop in income and a drop in the value of their assets. But they are still well off.  There was plenty of profit made on property deals during the boom years and not all of it was lost on subsequent investments.

The money borrowed from mortgage lenders didn’t just disappear. For every home bought at an inflated price there was a home sold at an inflated price. The loans, that many home-buyers are now struggling to repay, were pocketed by builders and land owners.

Some of it has been lost in a spiralling round of speculation but much of it must have been salted away and is reflected in the current high level of savings.

Unfortunately this wealth is hard to pinpoint and is too easily moved. So it’s hard to tax. High income could be subject to some type of sur-tax but the Government is set against it. The argument is that it would yield too little revenue to justify the impact it might have on the willingness of high earners to stay and work in Ireland.

So where is the Government to get extra money?  The target is to reduce the budget deficit by €3 billion next year with the measures equally divided between cuts in day-to-day spending, cuts in capital spending, and higher taxes. That figure could change for the worse but not for the better.

If we rule out a wealth tax or extra tax on high earners, then the only other alternatives are taxes on the low and middle-income group or a property tax. Extra spending taxes are a possibility but unlikely. The gap between the standard Irish and UK VAT rate will be greatly narrowed when the UK rate goes up from 17.5 to 20% next January. But that hardly justifies an increase in our 21% rate.

Any increase in spending taxes, and ours are already very high, hits the poorest hardest.

There’s no doubt that the income tax burden is to be increased with the rationalisation of the current levies and curtailment of some tax credits. Such changes would bring more people into the tax net and are likely to be regressive, bearing more on those on lower incomes.

Pensioners may also be targeted with their tax exemption limits of €20,000 single and €40,000 married abolished.

All of these possibilities are unpalatable and inequitable. A property tax must be seen as a fairer alternative. It needs to be related to the value of the property, or more properly to the equity that the owner has in the property. The ideal is an income tax on the notional rental income that a property would yield with account taken of mortgage costs. As an income tax, income would automatically be taken into account. Those not liable for income tax wouldn’t have to pay it. Those paying top-rate tax would pay proportionately more.

There are good data bases on rental values that could be used for valuation purposes.

Consideration might also be given to providing special relief for those who paid stamp duty on a house in recent years, since ideally a new annual tax would be a replacement rather than an addition to the current stamp duty.

A property tax may not be nice but it’s the fairest option.

Colm Rapple
Irish Mail on Sunday , July 11, 2010

There wasn’t a lot of good news for struggling home-buyers in the report of the Government’s expert group on mortgage arrears issued during the week. The proposals boil down to little more than imposing a model of best practice on lenders. They are going to be told to give borrowers every chance to pay before taking legal action. Not a big deal! That’s what lenders should already be doing, if only in their own self interest.

There is little in the proposals to hurt them.  They will be barred from imposing penalties on borrowers who are meeting new agreed repayment schedules. But few lenders are doing that in any case. The only other major imposition on lenders is that they charge no more than the average variable rate to borrowers who are availing of Mortgage Interest Supplement. That shouldn’t be a major problem for reputable lenders. The average variable rate is relatively high and all lenders will benefit from a proposal that the State provided Supplement should, in future, be paid directly into the borrowers mortgage account.

Apart from those proposals on penalties and the maximum interest rate payable by those getting Mortgage Interest Supplement, borrowers will gain little from the proposals. The small protections offer, won’t come free. In order to benefit, borrowers will have to comply with the lender’s resolution process supplying full financial details, income, expenditure, assets and liabilities and then accepting whatever solution the lender comes up with, subject only to appeal to the Financial Ombudsman.

Some borrowers will also lose significantly from the proposed changes in Mortgage Interest Supplement. There are a few pluses but they are well outweighed by the negatives. Married couples will be able to qualify in future even if one is still employed but subject to a means test which will include both incomes.

But borrowers are not to qualify for the Supplement for six months after they have suffered a drop in income and it will only be payable for a fixed period at the end of which the claimant will be considered for social housing.  Another negative is that the Supplement will not be payable if the lender has recourse to a guarantor, for instance a parent who guaranteed a child’s loan.

In essence, lenders have a lot to gain from these proposals. All they have to do is adopt the flexible approach to mortgage arrears that they should always have had. Flexibility in this context doesn’t include debt forgiveness or interest rate cuts. That may come but not yet. Later this year the Law Reform Commission is to recommend changes in bankruptcy and debt enforcement laws that may allow people to more easily walk away from debt but it could take years for the law to be changed.

In Britain there is provision for those in debt to enter individual voluntary arrangements with their creditors as an alternative to bankruptcy. This allows individuals to negotiate debt reductions and gain court protection. Up to 75% of an individual’s debts can be written off.

If that was available in Ireland, mortgage lenders might be inclined to do more than simply rearrange repayments while still charging interest on all outstanding balances. Farmers were able to secure major debt write-offs in the early 1980s when the initial EU bubble burst. Property developers are currently hoping to do likewise. But home buyers haven’t sufficient clout.

Many people who are not in financial difficulties and, even some who are, believe that that is as it should be. Why should those who gambled on the Celtic tiger be let off some of their debts because their gamble failed? The Financial Regulator, Matthew Elderfield, is against debt forgiveness for more practical reasons. He recently pointed out that the cost would have to be borne by the taxpayer or other borrowers. It would be impossible to limit the aid to deserving cases and it would only encourage people to renege on their loans.

The mortgage arrears group is now working on its final report which will propose measures for helping those who are beyond the help of short-term solutions such as a switch to an interest only loan, or an extension of the loan term. They will be taking various overseas models for their inspiration. In Scotland, for instance, there is a scheme whereby the home is taken over by a housing association or local authority and rented back to the occupier.

There is another scheme where the Government or the lender takes an ownership stake in the home. The money paid for the part-share is used to partly discharge the mortgage.

Some variations of both of those schemes are likely to be recommended here.  The ideal would be to establish a State property company comprising elements of the local authorities and the Office of Public Works that could manage such residential schemes and the large developments that NAMA is going to end up owning.

Colm Rapple
Irish Mail on Sunday, 4th July 2010

There are 2.2 million people in the Irish labour force. One in five of them are signing on for benefit at social welfare offices. Not all of those 452,882 people are included in the official unemployment figures but if they are not fully unemployed, they are undoubtedly under-employed. The official unemployment rate is 13.4% but the real rate is nearer to 20% and the end of the recession is not, of itself, going to bring any immediate respite for those affected.

The Central Statistics Office is always at pains to stress that the “live register” of those signing on, is not designed to measure unemployment since it includes part-time and casual workers who are entitled to jobseekers’ benefit or allowance for the days they don’t work. It also includes people who are claiming jobseekers’ allowance but are not really looking for work often because they have been out of work so long that they have become disillusioned and discouraged.

But by definition, if you are eligible to sign on for unemployment benefits, you are unemployed and that is the case with those 452,882 people. Some 92,000 of them are under 25 and a growing number of them have been out of work for a year or more.  These are real people enough to fill Croke Park to capacity five and a half times. That’s not counting their families who are in most cases equally affected by their enforced unemployment.

This week’s national income figures that revealed the end of the recession, take no account of these victims of the recession. But the recovery should be measured in terms of unemployment growth and not simply in terms of output growth. The emphasis of economic policy should be on maximising employment as an end in itself and not simply relying on output growth to slowly produce more jobs. The cost of unemployment is too high in terms of wasted assets and personal suffering for it not to be tackled as a major objective in itself even if the costs don’t show up in the national income tables.

Output during the first quarter of the year was a sharp 2.7% higher than in the previous quarter. It’s a movement in the right direction but even on this measure there’s a long way to go. That increase was in Gross Domestic Product (GDP) which includes the income due to the foreign owners of Irish enterprises. Gross National Product, which is what’s left for Irish residents, was actually down 0.5% on the previous quarter and down 4.2% on the first quarter of 2009.

But there is an improving trend and the hope is that it will accelerate and spread out to the domestic sector. The more optimism that can be engendered, the greater and the quicker will be the recovery and there is some reason for optimism.

Measured in constant money terms GNP last year was marginally higher than it was in 2004 and we didn’t consider ourselves particularly poor in 2004.  GNP per head is back to about where it was in 2002 and we weren’t poor then either. In the intervening eight years, of course, we soared to dizzy heights and we have come down with a bump, but Ireland is still an income rich country.

Those who have lost jobs have suffered a sharp drop in income. Many of those who still have jobs have suffered a fall in the value of their assets. All of them feel poorer although the worst hit are those who invested at or near the top of the boom. But the money borrowed to buy properties at grossly inflated prices didn’t just disappear. For every buyer there was a seller.

The buyers have been left with debts and properties worth far less than they paid for them. The sellers, for the most part, simply pocketed the money. Some of it was undoubtedly lost on foolish investments but much of has been stashed away.

It’s a mistake to believe that everybody lost.  Of course, we are all poorer now than we were three years ago but there are many, particularly those who sold land and property at inflated prices, who are far better off now than they were before the boom. There is wealth there to be tapped for the State coffers although it would not be easy to identify and tax it.

But the real victims of the recession are easy to identify. They are the unemployed and those who borrowed to buy assets, particularly homes, at inflated Celtic Tiger prices. The improving national account figures shouldn’t be allowed to mask the need for pro-active policies to help them.