Slump Coalition’s greatest myths; Part 1; “We all benefited from the boom”

The above sound byte is frequently used in the media by neo-liberal economists, bankers, builders, property developers, FF and their Green and independent patsies. This statement is never challenged.
A small number of property developers amassed enormous land banks for the purposes of development. To aid them the FF & PD government incentivised building. The construction sector needed domestic customers for housing so mortgage lending criteria were relaxed, second homes and buy to let schemes
incentivised. Profiteering saw the average price of a house climb under Ahern & Harney between 1994 and 2007 from €73k to over 320K! During the same time inflation in the building sector suggested the average house price should be just €132k. The difference between the 2 is accounted for by profiteering. To keep up with rising prices, the value of mortgages rocketed and while wages grew they couldn’t keep pace with profiteering in the building industry do it became more difficult for ordinary people to get their foot on the property ladder.

A hysteria resulted where even reality TV programmes got in on the act to find properties for first time buyers, in one case a government TD acted as a judge and newspaper property supplements bulged with seductive ads for new developments.

So let’s not confuse higher pay with any putative direct benefits from the boom, unless you think that it’s somehow a privilege to own your own home! Many of the houses built in the boom were distant from where people worked and involved a long commute usually by car, expensive child-care and when the child goes to school above average pupil teacher ratio.
When Bertie Ahern proposed to increase his salary by €38K per annum he ignored the reality that for 1.5M in the state €38K was their total household income! Many in the workforce have little or no pension provision for their retirement. At the same time total tax reliefs in the state were valued at 25% of the total tax take! The top 1% when you leave out residential property own 34% of Irelands wealth. During the Ahern period when a wealthy person could find tax shelters to invest in (private hospitals, hotels, 3rd level facilities, nursing homes, holiday camps, student apartments, park and ride facilities, car parks, and refurbished flats), childhood poverty rates were at 7.5%, just 21k social houses built, pupil teacher ratios were among the highest in Europe, hospital waiting lists grew, marginalisation grew as Michael McDowell said he believed in inequality as a motivator in society.
At the same time state assets such as Telecom Eireann, Aer Lingus were flogged off to the market, cash reserves depleted to an extent that investment in broadband significantly lags most EU countries. In the case of the electricity market, prices were driven upwards so as to make the industry more profitable for new entrants. This policy is being encouraged by the greens to an extent that price of power is now a key expense in SME’s.

Consumption replaced production in our economy. Ireland has now nothing to sell on an international market other than low tax to attract company accounts to the IFSC. Unemployment is now set to hit a record 500K this year, 4 businesses are going bust a day, tax take has slumped, social welfare and spending cuts are a reality. The party is over. Like any party the guests are gone leaving the clear up to the hosts.

The price of everything and the value of nothing

The last day of the legal term sees the builder’s bail out hovering on the precipice. The refusal of examinership to Liam Carroll’s group of companies will strengthen the arm of ACC Rabobank in their campaign to hold on their AAA credit status and muscle the government into a bank buy back while rescuing some liquidity for themselves. Ironically almost 20 years ago the Dail was recalled from a summer recess to put through examinership laws to rescue then FF supporter Larry Goodman. Now another recall is on the cards to bailout more FF supporters, the top 50 developers in the country and their lending institutions through NAMA. The best endorsement for NAMA that explains it to most people was the Green Party description of it as "the best least worse option". Make no m,istake about it the Dail will be back early as the inertia wears down what's left of the specualtors bubble.

Basically it works like this. Bank sells bad (toxic) loans to NAMA and is paid in bonds at a reduced price (discount). NAMA gets to work through these loans with the developer. The theory is that the tax payer won’t be hit because the developer will then be able to draw down money from the bank to complete construction while paying off NAMA. In theory at the end of the day the government thinks it will get back whatever it puts in.

But will this work in practise? When tribunals were being set up we heard that they would raise cash because findings would be actionable by Revenue. The problem was that those with a vested interest trot off to the High Court at the drop of a hat to protect their interests. Costs soared and the tax payer was hit. A developer may well go to the High Court to challenge a move by NAMA or indeed the very legislation that sets up NAMA.

What’s often forgotten is that many of the bad loans handed out are in relation to foreign property investments. I see no value to our economy in bailing out these however the reality is that with many of these in the north or Britain, they have more potential for recovery on the loans than many of the Irish properties destined for NAMA. As Jack O’Connor asks what will be the social role for NAMA in housing? Will the residential property be used to house those on the housing list by the state? My feeling on the matter is that with other econmies set to enter recovery before Ireland’s emigration will increase further reducing the demand for housing and depressing prices and demand. As a consequence to remove the overhang would it not make sense for the state to take up empty residential units as part of the charge to developers within the NAMA basket?
What about completed developments where no purchaser is interested? What should be done with the entirely speculative properties that were built and will not be filled? In the 19th century free market liberal economics meant that Ireland had deserted villages after the famine. Has our economic thinking moved on in 160 years? I doubt it!
My biggest concern with NAMA is in relation to the values put on properties. Which values determine the value on which the discount is established? Are these values the ones when NAMA was set up or when the market was at its peak or when the loans were taken out? I’m worried at what may ensue behind closed doors when it comes to the negotiations to set values. Already we've seen Carroll been accused by the judge of guilding the lily when it comes to values which he claimed were independently established. Can you trust any of these developers who specualted on sentiment as if it was hard currency and how can you protect the taxpayer at the same time?
Either way the tax payer will either give the developer a soft deal and have to compensate the banks or else bail out the banks and effectively re-ignite property speculation based on a tax payer subsidised depression of property prices. Heads they win, tails we lose!

BaFFled by the BluFFer spin?

Today’s Irish Independent gives over 2 pages to an attack on Labour Party Leader Eamon Gilmore TD. Unusual that, today they could have led with 320 jobs set to go at IBM and Boston Scientific or indeed they could have covered the rally in Waterford in support of the Glass factory or the crystal workers sit in at Deloitte’s Dublin offices. However, such news mightn’t go down well at Castlemartin.
No, the “Indo” attacked Eamon Gilmore because in their words he refuses to outline proposals to cut €2B from public spending while attacking the government. Think about that for a moment, this government told us in July “re-adjustments” would be sufficient to keep spending in line with the 08 budget. They did a U turn and brought forward Budget ’09 to October then did a U-turn on their plans. In December they set out their vision in a revised economic plan. In January they still were off course so they announced a series of cuts that will in all likelihood fail to turn public finances around.
So the 2 page tirade obviously begs the question if the government with their civil servants have failed in 4 attempts to tackle the problem, why tackle Labour about the alternative given that the party leader isn’t being briefed on day to day developments? Fine Gael have effectively shadowed Fianna Fail in their wish to protect banks and speculators and called for a pay freeze in the public sector. Indeed one wonders how far you’d call Fine Gael’s view as an alternative, cutting Dublin Bus, ending decentralisation and letting 5K staff go.
So fair enough what would Labour do? Here’s a few things for starters; stop the haemorrhaging of construction jobs by building schools and insulating homes. Save €1B by scrapping the Harney plan for private hospitals on public land. Introducing new taxes to target the wealthy who spend much of their time outside away from their stately Irish homes (like Castlemartin?). Abolish interest relief for landlords on rental properties and save €80M, Introduce an Earn or Learn scheme to retrain our workforce for the new jobs in the new economy we’ll build. Re-engineer the Anglo Irish as a vehicle to draw down cash from the European Investment Bank designed for small business. There’s lots can be done to get the economy right and re-boot public finances as a result. You don’t need the speculators from the Galway Tent for everything. A small temporary cut in VAT would restore consumer confidence.
A recent poll showed that not even a majority of Fianna Fail or green voters think that this government can turn things around. Today’s article comes from the same stable that ran the infamous “Its Pay Back Time” against Labour in 1997. Pay back is on its way back but this time it’ll be Fianna Fail who’ll be getting it in spades, especially from building workers. This reality is beginning to sink in Middle Abbey St.
But surely those who live in glasshouses shouldn't throw stones. Independent Newspapers' share price has slumped, last month it's owner was insisting his investment in Waterford Wedgewoood would suceed. Who's bluffing now?

What’s the difference between Ireland and Iceland?

There’s a running joke in business circles to this effect. Set against the backdrop of Wexford being covered in snow, I can see more than the economic parallels however there are key differences, Our currency isn’t under threat, interest rates and inflation are low. As a result what passes for political leadership in Dublin is still in denial as to the real underlying causes in the hole in our government finances.
The Icelanders on the other hand have turned to the Social Democrats to haul themselves out of the mess. They deserve to suceed. Their new PM it seems is a former air hostess, now there’s someone who could perhaps put Michael O’Leary in his box. Perhaps putting someone from a left wing perspective in charge here maybe something that we could do here, after all the people who created the mess are now saying that they have a cunning plan to take us out of it! Their problem is that they have no credibility with the electorate, market sentiment or trade unions.
Later today the government will unveil its plan to cut spending. This will include a unilateral move on either public service pay, pensions or both.
Later we’ll know how many of the government’s kites will take off There’s been a month of media guessing about government plans as Fianna Fail and the Greens float ideas to see how the public respond. This approach failed dismally in the run up to the budget as they assumed no opposition to the change in OAP medical cards. It may well fail again. Greena Fail have floated cuts in the carers allowance, the Back to School Allowance, Ministers for state, public service pay, pensions, child care supplement and numbers working in the public service, introduction of domestic rates, property taxes, new upper tax bands and domestic water charges. They’re just the ones that come to my mind. To make matters worse for those on low incomes there’s no guarantee that all social welfare rates will be maintained rather the minister is saying is that her budget will be increased.
So what would Labour do that’s different? Well if pay freezes are in fashion why not cap salaries in banks that expect tax payers to bail them out? Why not pass on the full reduction in interest rate to all mortgage holders? Why not guarantee nobody in arrears on their mortgage will be evicted? Why not address the recent Forfas report that shows prices in the republic should be no more than 5% above those in the north? Why not ensure those on low pay do not have a pay cut? You know when you hear business leaders taking about sharing the pain I often wonder where were these people when it came to sharing the profits during the boom? Probably sipping Sancerre on a veranda in the sun!
Well best of luck to the new PM in the land of the midnight sun. I hope Iceland joins the EU, we have a lot in common with them and maybe after a general election we might have more, a Labour Taoiseach?

Brian’s Big Budget starts to hit home.

Happy New Year! Or maybe on second thoughts commiserations, we’re here in 2009. After the pre-Christmas gloom and the festive cheer we’re where Brian Lenihan and Brian Cowen wanted us in 2009. I wonder last October were they at one stage counting down the days to January 1 so that the budget increases would take hold?
Lets look at a few and see how they may pan out. Well the increase of excise duty on petrol looks on the face of it to be painless however that combined with the currency crisis, another problem that FF and the Greens have ignored and hope will go away has eroded the competitive edge on petrol and now forecourts along the border are rapidly becoming quieter places. At its height this trade brought in an extra €100M to the coffers. The extra 0.5% VAT increase came in a month ago and it will add to inflation and while I accept that the figure in January should be down because of the sales and reduced demand, it will have the effect of increasing some prices at a time when incomes in PAYE households are going in the opposite direction.
The €100 A&E charge came in at midnight. Initially it’ll have the effect of making people think twice about going to A&E if you haven’t got the medical card and also sending patients first to the GP’s to get a letter of referral so as to avoid paying the charge. As sure as light follows day once GP surgeries are choc-a-bloc they in turn will raise their charges to €100 too so as to reduce pressure. Other charges for long stay patients will rise too by 26%, these apply in long stay hospitals and for those in psychiatric care.
Health expenses are now only allowable against tax at the standard rate, thus saving €120M. 50 cent was also added to a bottle of wine and while in supermarkets you can get 3 bottles for €20 up north you can get 3 for £10 or almost €10.
The 1% income levy on all incomes also kicked in at midnight. I believe that the Revenue Commissioners were making quiet inquiries about whether some on the €20 border line may in fact be above the limit thus catching them in the net. Meanwhile if you’ve a family business there’s always the loophole where you can transfer your business earnings to other family members engaged in the business and hey presto everyone in the family is below €20K thereby avoiding the levy. While you’re at it claim rent-a-room tax relief on money handed up by family members towards their keep!

Another major plank courtesy of the Green Party is the tax on parking space at work. While private employers may be entitled to charge €5 per annum for the parking space thereby ensuring the employee won’t have to pay the charge it’s highly unlikely that public servants will have such a benevolent approach from the minister for the Public Service who is one Brian Lenihan TD.
It won’t be too long until tax equity once more becomes an issue in the Irish work place. Loopholes are there to be exploited and the more taxes or levies FF & The Greens bring in, the more work there is for accountants to creatively shelter the cash from the perfect fiscal storm that threatens. PAYE workers have no such sanctuary for their earnings, even if you put into an account DIRT has gone up by 3% to 23%.
The new payment regime for child benefit with respect to those over 18 in full time education starts today, so this year it’s half the rate while next year it’s nothing!
Equity is a buzzword for FF and the Greens and their charges reflect this. No matter how old or young your patriotic duty requires sacrifice. So, it’s goodbye to the Early Childcare Supplement at 5 and a half. Not to mention how schools will be affected by education cuts. Farmers young and those hoping to retire, as well as those in disadvantaged areas are cut too. Labour has not in the past reached out to the farming community, given that the multi-nationals can move abroad while financial services can go down the swanee, should we not pay more attention to agriculture and its potential?
So sorry to have brought you back to the real world with a bang, 2008 may well be looked at with some benevolence in years to come judging by the way that Fianna Fail and the Greens leave it till the last moment to notice that they’ve made the mess as big as possible!

FF in charge, Buy now while money lasts!

So there I was complaining about supermarkets starting the Christmas rush early and what do you know? Along comes Brian Lenihan with some festive cheer in the form of an October budget but as Brian says there’s no panic, the measures only take affect from January 1 with regard to taxation. That may be so but any increase in excise duty, VAT or petrol can be brought in immediately so buy now while money lasts may well be early and good advice for those on low incomes. I’m sure speculation will centre on which stealth taxes will be introduced. I wonder will FF have to swallow their opposition to Carbon tax and will there be a trade off with the Green Party so as to stimulate the car market? Its obvious that there’s an overhang in the supply of housing but with regard to cars we’re still below the EU average. Will the government try to revive car sales?

Interestingly the pressure will now be on to conclude a national wage agreement and such a deal may well indicate what the minister will do on personal taxation especially for those at the lower end of the scale. But the need to introduce 2009 budget now as an emergency budget undermines one big claim Fianna Fail made at the 2007 General Election and that is that when you have an economic downturn they are the best party to be in charge. Clearly that claim is seen now as a dead duck, particularly in the light of Bertie Ahern’s comment that if he was in charge still the recession would not have happened. The reality is that Fianna Fail look rudderless with no real vision as to how to restore our economic fortunes. That’s why some commentators expect this recession to last much longer.

But it’s not the only reason. As one of the economies that is most globalised, Ireland is more vulnerable to international economic changes. The credit crunch is squeezing our banks, Banks are lending more than they’re bringing in, lenders find it more difficult to get mortgages, buyers hold back waiting for prices to fall further, Builders cannot borrow to open up their burgeoning landbanks. That’s just what’s happening in housing, Confidence in an economy built solely on a building boom has evaporated. Retail spending has collapsed, Multiples are closing their branches and retail development has stagnated. During the summer the Irish Stock Market index performed better than only the Vietnamese Stock Market.

Our over reliance on oil makes us susceptible to fluctuations in prices, food is rising in price, while the Euro is overpriced in relation to the dollar and Sterling. Our economy is split equally between the UK, US and EU.

That’s also why Labour has called for a retraining programme for those who’ve lost their jobs, investment in education and infrastructure such as schools, broadband and transport. This type of investment will leave the economy better placed to capitalise when recovery comes. Its time the government built something that people wanted not investors want. I hope for all our sakes that Cowen, Coughlan & Co are all up to the job but at the back of my head I have that sinking feeling that the Slump Coalition won in '07.