Michael Taft: Pat McArdle celebrates the fact that the Fianna Fail government has taken up the austerity cudgels:
‘With hindsight, we were fortunate to have gone down the road we did. The alternative of job creation schemes or expansionary measures would have been disastrous.’
Let’s run through some comparative data to see just how ‘fortunate’ we have been and how we avoided ‘disaster’. These cover the years 2007-2010 – three years of recession (for Ireland, anyway). The Euro zone data and estimates come from the EU Statistical Annex. Irish data and estimates come from the recent ESRI Quarterly Report (except for Irish domestic demand which comes from the EU estimates).
• Euro zone GDP is estimated to fall by -2.7 percent. Irish GNP is estimated to contract by -13.3 percent.
• Euro zone GDP per capita is estimated to fall by -4 percent. Irish GNP (for the domestic economy) per capita is estimated to fall by -16.1 percent.
• Euro zone domestic demand is expected to fall by -2.3 percent. In Ireland it is expected to fall by -19.3 percent
• Euro zone consumer spending will hardly fall at all: -0.4. In Ireland, consumer spending will fall by -8.8 percent.
• Total investment in the Euro zone is projected to fall by -12.8 percent. In Ireland, the fall is projected to by -51.7 percent.
• Non-property investment is estimated to all by -17.7 percent in the Euro zone. It is estimated to fall by -38.9 percent.
• In the Euro zone, employment is projected to fall by -3 percent. In Ireland it is projected to fall by -12.7 percent.
Pity those other Euro zone countries with their ‘job creation schemes and expansionary measures’. We’re just ‘fortunate’ that Fianna Fail is in power.
Friday, 12 February 2010
A pessimistic Stiglitz
Today's Guardian carries a deeply pessimistic interview with Joseph Stiglitz, who notes that "Plans to re-regulate the financial markets have run into a political quagmire and there has been a resurgence of deficit fetishism", and goes on to express surprise at at how fast the forces in favour of the pre-2007 status quo have re-grouped. "The optimist in me is hopeful we won't need another crisis to finally motivate the political process," he said. "The pessimist in me says it may need to happen."
You can read the full interview here.
You can read the full interview here.
Falling prices and low-income households
"Price deflation for low income families will be experienced at the lower rate of 2.2% and will do little to compensate for the real drop in incomes produced by Budget 2010. Indeed for many families household income will reduce further as a consequence of the increased costs of education, energy, health and transport.
In this context any change to either the Minimum Wage or pay rates agreed through Registered Employment Agreements will have the effect increasing hardship for those individuals and families currently living on or below the Governments income poverty line"
You can read the rest of Eoin O'Broin's post on Politico here.
In this context any change to either the Minimum Wage or pay rates agreed through Registered Employment Agreements will have the effect increasing hardship for those individuals and families currently living on or below the Governments income poverty line"
You can read the rest of Eoin O'Broin's post on Politico here.
Thursday, 11 February 2010
Basel III, pensions and the recapitalisation of Irish banks
An Saoi: Wednesday’s Financial Times had a very interesting article on proposed changes in banking rules under Basel III. Sensibly, the Bank of International Settlements is proposing that pension deficits should be deducted when calculating net Tier One capital. The pension obligations are long-term liabilities and should of course be deducted from core assets, as they are a core liability.
British Banks are up in arms over the proposal as many have huge deficits. What is the position of the Irish banks?
Bank of Ireland had a deficit of €1,478M at 31st March 2009 and Allied Irish Banks admitted to a deficit €1,263M at 30th June 2009. It appears that these two banks will require perhaps a further €3,000M, on top of current estimates, which the Government and the Governor of the Central Bank has glossed over to date. Certainly the failure of Dr. Honohan to bring the BIS’s proposal to the attention of the Irish public in his utterances about recapitalisation raises many questions in relation to his impartiality.
This additional cost to ensure that the pensions of the fat cats who got us into this trouble are secured is surely one step too far?
British Banks are up in arms over the proposal as many have huge deficits. What is the position of the Irish banks?
Bank of Ireland had a deficit of €1,478M at 31st March 2009 and Allied Irish Banks admitted to a deficit €1,263M at 30th June 2009. It appears that these two banks will require perhaps a further €3,000M, on top of current estimates, which the Government and the Governor of the Central Bank has glossed over to date. Certainly the failure of Dr. Honohan to bring the BIS’s proposal to the attention of the Irish public in his utterances about recapitalisation raises many questions in relation to his impartiality.
This additional cost to ensure that the pensions of the fat cats who got us into this trouble are secured is surely one step too far?
Wednesday, 10 February 2010
Spring Alliance ...
Paul Sweeney: In 2009, the Spring Alliance was established with the four key civil society groups within the European Union: the European Environmental Bureau, the European Trade Union Confederation, the Social Platform and CONCORD, the body representing NGOs in Europe.
Spring Alliance has set out an agenda for the next decade, laid down in their Spring Alliance Manifesto. It has already had two debates with President Barroso on the results, and this manifesto formed the background for many contributions to the consultation on the EU-2020 Strategy being debated by the Commission.
The see five major challenges facing Europe:
The first challenge: climate change and loss of biodiversity and natural resources.
The second challenge: global inequalities between North and South are growing, and fundamental rights violations remain widespread.
The third challenge: the EU’s focus on competitiveness and deregulation has failed to serve the public good.
They argue that, since 2005, the EU has made a push to increase the deregulation of its markets, including its labour market, in accordance with its “Lisbon” growth and jobs strategy. This has had a detrimental effect on European society, causing a rise in low-quality work and failing to reduce poverty. The Lisbon strategy, with its strong emphasis on competitiveness, also had an adverse effect in the environmental domain, by halting or slowing down the adoption of legislation, including in the area of climate change.
In addition to these trends, today we’re facing a global economic crisis that has been triggered by the same philosophy of deregulation, which gave rise to irresponsible lending and negligence on the part of weak regulatory bodies. As a consequence, unemployment is now rising, and public debt is increasing.
The fourth challenge: inequalities in wealth distribution are increasing, putting the cohesion of our societies at risk.
The Spring Alliance notes that “79 million people in the EU are living in poverty, affecting one child out of five. Although many of these people have full-time jobs or receive pensions or benefits, their income is still too low to stop them from falling into poverty.”
Finally: the gap is widening between the EU and its citizens
It is stated by Spring Alliance that “The majority of the EU population feels disconnected from EU decision-making processes. National politicians often consider “Brussels” as an external power, and sometimes use it as scapegoat for unpopular decisions. This further undermines the EU’s credibility and its capacity to lead its citizens through difficult times.”
The Spring Alliance suggests ways in which these challenges can be addressed with the EU taking a lead. Further information is available on their website.
Spring Alliance has set out an agenda for the next decade, laid down in their Spring Alliance Manifesto. It has already had two debates with President Barroso on the results, and this manifesto formed the background for many contributions to the consultation on the EU-2020 Strategy being debated by the Commission.
The see five major challenges facing Europe:
The first challenge: climate change and loss of biodiversity and natural resources.
The second challenge: global inequalities between North and South are growing, and fundamental rights violations remain widespread.
The third challenge: the EU’s focus on competitiveness and deregulation has failed to serve the public good.
They argue that, since 2005, the EU has made a push to increase the deregulation of its markets, including its labour market, in accordance with its “Lisbon” growth and jobs strategy. This has had a detrimental effect on European society, causing a rise in low-quality work and failing to reduce poverty. The Lisbon strategy, with its strong emphasis on competitiveness, also had an adverse effect in the environmental domain, by halting or slowing down the adoption of legislation, including in the area of climate change.
In addition to these trends, today we’re facing a global economic crisis that has been triggered by the same philosophy of deregulation, which gave rise to irresponsible lending and negligence on the part of weak regulatory bodies. As a consequence, unemployment is now rising, and public debt is increasing.
The fourth challenge: inequalities in wealth distribution are increasing, putting the cohesion of our societies at risk.
The Spring Alliance notes that “79 million people in the EU are living in poverty, affecting one child out of five. Although many of these people have full-time jobs or receive pensions or benefits, their income is still too low to stop them from falling into poverty.”
Finally: the gap is widening between the EU and its citizens
It is stated by Spring Alliance that “The majority of the EU population feels disconnected from EU decision-making processes. National politicians often consider “Brussels” as an external power, and sometimes use it as scapegoat for unpopular decisions. This further undermines the EU’s credibility and its capacity to lead its citizens through difficult times.”
The Spring Alliance suggests ways in which these challenges can be addressed with the EU taking a lead. Further information is available on their website.
Tuesday, 9 February 2010
A disastrous approach to disaster capitalism
Colm O'Doherty: The captivation of our Fianna Fail-led government by the Milton Friedman /Chicago School policy trinity of privatization, government deregulation and reduced social spending is critically harming our well-being. Our economic crisis has allowed free marketeers to instigate orchestrated raids on the public sphere. The crisis opportunism of disaster capitalism is activated through networks of rule which underpin the governance strategies facilitating our so- called recovery. Economic ideology masquerading as technical and uncontentious adjustments has been engaged to finesse this asymmetrical relationship between power and rationality - power produces rationality and rationality produces power, but power has the upper hand in the dynamic and overlapping relationship between the two.
The hallmark of disaster capitalism - economic shock treatment - is manifested through coercive policies which decouple individual well-being from social well-being, and privilege private gain over common good. The atmosphere of crisis generated by the failed policies of successive Fianna Fail-led administrations has paved the way for an economic settlement which overrules the expressed wishes of citizens and has handed the country over to economic technocrats. As Naomi Klein puts it in the Shock Doctrine (2007,140,) “If an economic crisis hits and is severe enough – a currency meltdown , a market crash, a major recession –it blows everything else out of the water , and leaders are liberated to do whatever is necessary (or said to be necessary) in the name of responding to a national emergency”.
Thus, our recession has provided those economic zealots in thrall to the fundamentalist doctrine (Capitalism and Freedom ,1962) of Milton Friedman with an opportunity to reduce all regulatory obstacles to profitmaking , sell off all public assets , cut back funding of social programmes and keep taxes low. The dominance of this ideological vision is strongly reflected in the competiveness, securitisation and flexibility discourses filling the airwaves.
Fianna Fail and their coalition partners have articulated these political rationalities in a populist idiom - the idiom of frontier politics. Here, politics finds expression through economic sequestration of social citizenship. Abolition of social rights is viewed as a pragmatic “structural adjustment”, and the task of politicians is to follow the money from crisis to crisis. Opposition to frontier politics within the political system is finite, as Fine Gael is also in thrall to economic fundamentalism and Labour lack political muscle. Civil society is the only real opposition, and civil society in Ireland has been shaped and nurtured by the very politicians it now has to challenge and oppose. The capacity of civil society to act as a counterweight to the economic shock therapy now being administered has been undermined by the cut backs and closures imposed on community development/family support projects, and by the tightening of revenue streams for voluntary service providers.
The trade unions are the only remaining force in civil society capable of challenging the Government’s disaster capitalism doctrine, as the Catholic Church’s power has been compromised. However, the trade unions are now engaged in a form of action which is focused on some of the symptoms of our political malaise rather than its root cause. Industrial action which, in the main, impacts on fellow citizens will further weaken civil society and plays into the hands of the Government. What is needed here is a co-ordinated, strategic political campaign organized and directed by the trade union movement targeting Fianna Fail and their coalition partners. Solving our political crisis by confronting a Government who are bent on protecting the wealthy by impoverishing large sections of the population should, logically, be the first step in reforming our ailing economy.
The hallmark of disaster capitalism - economic shock treatment - is manifested through coercive policies which decouple individual well-being from social well-being, and privilege private gain over common good. The atmosphere of crisis generated by the failed policies of successive Fianna Fail-led administrations has paved the way for an economic settlement which overrules the expressed wishes of citizens and has handed the country over to economic technocrats. As Naomi Klein puts it in the Shock Doctrine (2007,140,) “If an economic crisis hits and is severe enough – a currency meltdown , a market crash, a major recession –it blows everything else out of the water , and leaders are liberated to do whatever is necessary (or said to be necessary) in the name of responding to a national emergency”.
Thus, our recession has provided those economic zealots in thrall to the fundamentalist doctrine (Capitalism and Freedom ,1962) of Milton Friedman with an opportunity to reduce all regulatory obstacles to profitmaking , sell off all public assets , cut back funding of social programmes and keep taxes low. The dominance of this ideological vision is strongly reflected in the competiveness, securitisation and flexibility discourses filling the airwaves.
Fianna Fail and their coalition partners have articulated these political rationalities in a populist idiom - the idiom of frontier politics. Here, politics finds expression through economic sequestration of social citizenship. Abolition of social rights is viewed as a pragmatic “structural adjustment”, and the task of politicians is to follow the money from crisis to crisis. Opposition to frontier politics within the political system is finite, as Fine Gael is also in thrall to economic fundamentalism and Labour lack political muscle. Civil society is the only real opposition, and civil society in Ireland has been shaped and nurtured by the very politicians it now has to challenge and oppose. The capacity of civil society to act as a counterweight to the economic shock therapy now being administered has been undermined by the cut backs and closures imposed on community development/family support projects, and by the tightening of revenue streams for voluntary service providers.
The trade unions are the only remaining force in civil society capable of challenging the Government’s disaster capitalism doctrine, as the Catholic Church’s power has been compromised. However, the trade unions are now engaged in a form of action which is focused on some of the symptoms of our political malaise rather than its root cause. Industrial action which, in the main, impacts on fellow citizens will further weaken civil society and plays into the hands of the Government. What is needed here is a co-ordinated, strategic political campaign organized and directed by the trade union movement targeting Fianna Fail and their coalition partners. Solving our political crisis by confronting a Government who are bent on protecting the wealthy by impoverishing large sections of the population should, logically, be the first step in reforming our ailing economy.
Monday, 8 February 2010
"Soaring jobless, plunging benefits ..."
"Ireland has experienced near-depression conditions over the past 18 months, and the expectation that budget cuts will lead to spontaneous recovery through which the private sector will compensate for the retreat of the public sector is unproved. Indeed, there is a considerable risk that removing spending power from the economy will lead to more companies going bust and deter the survivors from investing more".
You can read the rest of Larry Elliott's take on Irish economic policy in today's Guardian here.
You can read the rest of Larry Elliott's take on Irish economic policy in today's Guardian here.
Government policies
Tom O'Connor: The exchequer figures published last week show that government tax revenues have fallen by €700 million from €3.7 billion in January 2009 to €3 billion in January 2010. Also, the CSO published figures this week showing unemployment had risen sharply by 13,341 in one month. We are also now led to believe that NAMA may result in very little lending by the banks, according to media reports on a leaked memo by the IMF to Brian Lenihan at the NAMA instigation stage.
These results and revelations are very bad. However, a new spin has been put on them by government to show the opposite. Brian Lenihan has said that the fall in tax revenues is in line with the government’s expectations, and the sharp rise in unemployment was also what they expected. He assured the public on the media that there isn’t any problem simply because he expected it!
It would seem that the 436, 936 workers signing on the live register at the moment needn’t worry because Brian Lenihan expects them to be there. Because he expected unemployment to rise, he obviously expected tax receipts to be down, which may mean that more cutbacks will be necessary. But that would seem to be o.k. Why? Because Brian Lenihan expected it.
This type of economic reasoning will do nothing to reduce unemployment and will leave poverty-stricken families, many on the verges of having their homes repossessed; exasperated, frustrated, angry and fearful for the future of their families. It sends a clear message to them that the government doesn’t care.
However, there is a very clearly discernible economic policy at work here: Brian Lenihan is content because he knows that the draconian cutbacks for this year may still help stabilise the economy, despite the fall in tax receipts. He has clearly chosen to ignore making any serious efforts to solve unemployment and get tax receipts up, simply because he is implementing enough cutbacks in the coming year.
Why would a government not prioritise reducing unemployment, virtually give up on tax receipts and instead go for a one-dimensional solution of cutting back government expenditure? The answer is well-known in economic models: Lenihan is implementing a classical monetarist, expectations-augmented Phillips Curve solution to the Irish economy.
These fancy words mean that: the government is taking the view that,, with huge unemployment workers expectations will be very modest and they will feel they are lucky to have a job at all. In fact, they will be softened up in to accepting wage cuts.
This softening-up exercise was confirmed last Monday with Colm Mc Carthy stating that his ‘Mc Carthy Report’ was simply a ‘political exercise’. For those whose jobs have been lost due to the government accepting the veracity of Mc Carthy, they now know that it was a political exercise to soften up the population for cuts in all directions.
In order to shock the population in to accepting lower wages, you will need the recession and a huge army of unemployed people to carry this through, with workers expecting pay cuts to stay in a job. The next stage in this reasoning is that, once workers have become more ‘competitive’, than the conditions will be ripe to hire more of them.
In addition, severe cutbacks in public services allow the government to stay in a strong bargaining position by not relying on increased tax receipts due to cutback savings. It further increases the supply of nurses, speech and language therapists and special needs assistants so that they will accept lower wages if they are lucky enough to be re-employed in the future.
Then, with workers wages significantly reduced in both the public and private sectors, sufficient economic incentives will be restored to employers who may then employ some workers to produce increased amounts of goods and services. At this stage, economic growth, employment and tax receipts grow again and this has the knock-on effect of improving the government’s finances.
There are huge problems with this approach: firstly, it is in effect an IMF type structural adjustment programme and has no respect for the social hardship it creates. The fact that speech and language therapists, occupational therapists, nurses, special needs assistants and other personnel are being laid off is seen as a necessary part of the plan, even though thousands of children and sick adults urgently need them. In some cases, it is a matter of life and death.
Secondly, once the plan is complete and some workers are re-hired, they will have to accept wages which may be so low as to force them in to poverty. They may also have to work more hours to make the same wages they made previously, either with their old employer or with an added part-time job just to pay the mortgage. This is exactly what has happened in the USA in the past 20 years, where low-skilled workers have to work two minimum wage jobs to afford the cost of living in a trailer.
The third point is that it is economically unsustainable. This approach is not really about inventing any new, highly productive and highly skilled well paid jobs. It is about making the economy competitive without moving towards the knowledge economy. The problem here is that with 50% of taxpayers earning less than 30,000, and 25% who haven’t completed a leaving cert, the government is trying to force these to accept less by competing for wages in an increasingly low cost environment.
These workers will not be able to compete with low cost countries. Instead, they need to be re-trained and redeployed in high skilled areas where wages can still remain at the level of the economically developed countries of the EU. This requires state investment in both retraining and productive capacity.Wages can be reasonably good if the worker has increased productivity and skills gains to give her a competitive advantage over workers in cheaper, low skilled countries. To achieve this, the government needs to invest in technologically advanced infrastructure, high skilled industries and in high grade services areas. Increased productivity levels for those at the higher end of the income distribution also need to happen in both the public and private sectors.
Fourthly, by leaving unemployment to rise, to achieve, what is in effect, a rather merciless agenda, the government will almost certainly cause unemployment to stay stubbornly high for at least five years after 2010, and will cause the emigration of tens of thousands of workers whom the government itself has spend thousands training. It also continues to ignore 30,000 families whose homes are in danger of being re-possessed, many of whom are out of work.
Fifthly, these policies are the antithesis to investing in the productive and competitive capacity of the economy to stay competitive and allow for decent wages. For example, the government’s huge investment in research, if not mainstreamed, will result in hundreds of incubated companies being bought out by huge global high knowledge companies who will subsequently reap the rewards of billions of state money. They will also take hard earned ideas, technological advances and associated personnel of the Irish universities and Institutes of Technology.
Sixthly, even though social partnership has been pronounced dead, the current policies do little for any of the social partners. Several businesses are closing every day, banks are not lending, the government has reined in its investment in the economy. Businesses are suffering. Workers are suffering. Community groups are suffering. Farmers are suffering from lower prices on the grounds of depressed consumer demand. In addition to the opposition parties, large numbers of FF TDs do not favour the current agenda. We are left with the cabinet and less than a half dozen academic advisors pushing this agenda. So much for democracy Irish style.
In short, Brian Lenihan’s approach is economically and socially retrograde and will serve the economy and society very badly unless changed. To make matters even worse, in the light of noises coming from the banking sector itself in recent months and the news of the IMF memo to Brian Lenihan on NAMA, there is a clear need to reverse the irresponsible policy of structural adjustment and the associated complacency on the part of the government in running down of the economy and accepting continued increases unemployment.
If not, any growth in the second half of the year will be too little, too late to avoid misery for hundreds of thousands of people, and the skills/productivity weaknesses in the economy will persist for many years afterwards. In doing nothing right now, the government is burying its head in the sand.
These results and revelations are very bad. However, a new spin has been put on them by government to show the opposite. Brian Lenihan has said that the fall in tax revenues is in line with the government’s expectations, and the sharp rise in unemployment was also what they expected. He assured the public on the media that there isn’t any problem simply because he expected it!
It would seem that the 436, 936 workers signing on the live register at the moment needn’t worry because Brian Lenihan expects them to be there. Because he expected unemployment to rise, he obviously expected tax receipts to be down, which may mean that more cutbacks will be necessary. But that would seem to be o.k. Why? Because Brian Lenihan expected it.
This type of economic reasoning will do nothing to reduce unemployment and will leave poverty-stricken families, many on the verges of having their homes repossessed; exasperated, frustrated, angry and fearful for the future of their families. It sends a clear message to them that the government doesn’t care.
However, there is a very clearly discernible economic policy at work here: Brian Lenihan is content because he knows that the draconian cutbacks for this year may still help stabilise the economy, despite the fall in tax receipts. He has clearly chosen to ignore making any serious efforts to solve unemployment and get tax receipts up, simply because he is implementing enough cutbacks in the coming year.
Why would a government not prioritise reducing unemployment, virtually give up on tax receipts and instead go for a one-dimensional solution of cutting back government expenditure? The answer is well-known in economic models: Lenihan is implementing a classical monetarist, expectations-augmented Phillips Curve solution to the Irish economy.
These fancy words mean that: the government is taking the view that,, with huge unemployment workers expectations will be very modest and they will feel they are lucky to have a job at all. In fact, they will be softened up in to accepting wage cuts.
This softening-up exercise was confirmed last Monday with Colm Mc Carthy stating that his ‘Mc Carthy Report’ was simply a ‘political exercise’. For those whose jobs have been lost due to the government accepting the veracity of Mc Carthy, they now know that it was a political exercise to soften up the population for cuts in all directions.
In order to shock the population in to accepting lower wages, you will need the recession and a huge army of unemployed people to carry this through, with workers expecting pay cuts to stay in a job. The next stage in this reasoning is that, once workers have become more ‘competitive’, than the conditions will be ripe to hire more of them.
In addition, severe cutbacks in public services allow the government to stay in a strong bargaining position by not relying on increased tax receipts due to cutback savings. It further increases the supply of nurses, speech and language therapists and special needs assistants so that they will accept lower wages if they are lucky enough to be re-employed in the future.
Then, with workers wages significantly reduced in both the public and private sectors, sufficient economic incentives will be restored to employers who may then employ some workers to produce increased amounts of goods and services. At this stage, economic growth, employment and tax receipts grow again and this has the knock-on effect of improving the government’s finances.
There are huge problems with this approach: firstly, it is in effect an IMF type structural adjustment programme and has no respect for the social hardship it creates. The fact that speech and language therapists, occupational therapists, nurses, special needs assistants and other personnel are being laid off is seen as a necessary part of the plan, even though thousands of children and sick adults urgently need them. In some cases, it is a matter of life and death.
Secondly, once the plan is complete and some workers are re-hired, they will have to accept wages which may be so low as to force them in to poverty. They may also have to work more hours to make the same wages they made previously, either with their old employer or with an added part-time job just to pay the mortgage. This is exactly what has happened in the USA in the past 20 years, where low-skilled workers have to work two minimum wage jobs to afford the cost of living in a trailer.
The third point is that it is economically unsustainable. This approach is not really about inventing any new, highly productive and highly skilled well paid jobs. It is about making the economy competitive without moving towards the knowledge economy. The problem here is that with 50% of taxpayers earning less than 30,000, and 25% who haven’t completed a leaving cert, the government is trying to force these to accept less by competing for wages in an increasingly low cost environment.
These workers will not be able to compete with low cost countries. Instead, they need to be re-trained and redeployed in high skilled areas where wages can still remain at the level of the economically developed countries of the EU. This requires state investment in both retraining and productive capacity.Wages can be reasonably good if the worker has increased productivity and skills gains to give her a competitive advantage over workers in cheaper, low skilled countries. To achieve this, the government needs to invest in technologically advanced infrastructure, high skilled industries and in high grade services areas. Increased productivity levels for those at the higher end of the income distribution also need to happen in both the public and private sectors.
Fourthly, by leaving unemployment to rise, to achieve, what is in effect, a rather merciless agenda, the government will almost certainly cause unemployment to stay stubbornly high for at least five years after 2010, and will cause the emigration of tens of thousands of workers whom the government itself has spend thousands training. It also continues to ignore 30,000 families whose homes are in danger of being re-possessed, many of whom are out of work.
Fifthly, these policies are the antithesis to investing in the productive and competitive capacity of the economy to stay competitive and allow for decent wages. For example, the government’s huge investment in research, if not mainstreamed, will result in hundreds of incubated companies being bought out by huge global high knowledge companies who will subsequently reap the rewards of billions of state money. They will also take hard earned ideas, technological advances and associated personnel of the Irish universities and Institutes of Technology.
Sixthly, even though social partnership has been pronounced dead, the current policies do little for any of the social partners. Several businesses are closing every day, banks are not lending, the government has reined in its investment in the economy. Businesses are suffering. Workers are suffering. Community groups are suffering. Farmers are suffering from lower prices on the grounds of depressed consumer demand. In addition to the opposition parties, large numbers of FF TDs do not favour the current agenda. We are left with the cabinet and less than a half dozen academic advisors pushing this agenda. So much for democracy Irish style.
In short, Brian Lenihan’s approach is economically and socially retrograde and will serve the economy and society very badly unless changed. To make matters even worse, in the light of noises coming from the banking sector itself in recent months and the news of the IMF memo to Brian Lenihan on NAMA, there is a clear need to reverse the irresponsible policy of structural adjustment and the associated complacency on the part of the government in running down of the economy and accepting continued increases unemployment.
If not, any growth in the second half of the year will be too little, too late to avoid misery for hundreds of thousands of people, and the skills/productivity weaknesses in the economy will persist for many years afterwards. In doing nothing right now, the government is burying its head in the sand.
Usury
Nat O'Connor: One of the interesting minor features of the Finance Bill 2010 is that certain changes were made to Irish law to make it easier for banks following versions of Shari'a/Islamic law to operate here. The need for change is that Shari'a regards charging interest on loans to be a sin: usury.
One commentator in the Irish Independent (Friday 5 Feb 2010, p.11) made a mistake in claiming that: "The Finance Bill contains measures to tax Islamic financial transactions in a similar way to Christian finance."
The mistake is that, clearly, there is no such thing as "Christian finance". The law that governs finance in Ireland is secular, and passed by the Oireachtas. In recent years, the Finance Bill has become a highly complex document filled with references to the annually modified original law. It weighs in at 230 pages this year and makes the Lisbon Treaty look like bedtime reading. These are the rules that hide numerous tax loopholes and special arrangments that successful lobbyists have persuaded successive governments to include. These are also the rules that continue to permit extortionate, exploitative borrowing. For example, legal moneylenders here can charge over 100 per cent on loans.
Theological scholars will also be quick to point out that Christians, including several popes, also outlawed usury over the ages. Plato and Aristotle condemned usury, and Ancient Rome capped interest at 8.33 per cent (see Jonathan Freedland's interesting article on usury in the Guardian).
In Ireland, Section 35 of the Finance Bill 2010 allows certain payments by Islamic banks to be treated as interest for tax purposes. (The explanatory memo gives quite clear details about this). This is welcome, in so far as it allows more international commerce and it is of benefit for Muslims living in Ireland (and others) who would like to avail of alternatives to interest. However, tinkering with the small print of the labyrinthine finance legislation will simply allow these banks to operate in parallel to our existing norms.
We are long way away from reigniting the argument here on how much is reasonable profit from a loan, and at what point does exploitation (usury) begin.
One commentator in the Irish Independent (Friday 5 Feb 2010, p.11) made a mistake in claiming that: "The Finance Bill contains measures to tax Islamic financial transactions in a similar way to Christian finance."
The mistake is that, clearly, there is no such thing as "Christian finance". The law that governs finance in Ireland is secular, and passed by the Oireachtas. In recent years, the Finance Bill has become a highly complex document filled with references to the annually modified original law. It weighs in at 230 pages this year and makes the Lisbon Treaty look like bedtime reading. These are the rules that hide numerous tax loopholes and special arrangments that successful lobbyists have persuaded successive governments to include. These are also the rules that continue to permit extortionate, exploitative borrowing. For example, legal moneylenders here can charge over 100 per cent on loans.
Theological scholars will also be quick to point out that Christians, including several popes, also outlawed usury over the ages. Plato and Aristotle condemned usury, and Ancient Rome capped interest at 8.33 per cent (see Jonathan Freedland's interesting article on usury in the Guardian).
In Ireland, Section 35 of the Finance Bill 2010 allows certain payments by Islamic banks to be treated as interest for tax purposes. (The explanatory memo gives quite clear details about this). This is welcome, in so far as it allows more international commerce and it is of benefit for Muslims living in Ireland (and others) who would like to avail of alternatives to interest. However, tinkering with the small print of the labyrinthine finance legislation will simply allow these banks to operate in parallel to our existing norms.
We are long way away from reigniting the argument here on how much is reasonable profit from a loan, and at what point does exploitation (usury) begin.
Saturday, 6 February 2010
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If possible, Admin will contact the commenter asking him/her to rephrase the comment. If this is not possible, the comment will be rejected.
At present, comments are being moderated. However,we will try to keep the moderation queues as short as possible, and hope to revert to unmoderated status soon.
Any queries regarding moderation may be addressed to aklemm@tascnet.ie
Friday, 5 February 2010
Any initial thoughts on the Finance Bill 2010?
Nat O'Connor: I'm still reading through the Finance Bill, but I want to put up this post to give readers a space to post any comments over the weekend about their own impressions so far of the Bill, any interesting coverage, any likely implications, etc.
Uno duce, una voce
Nat O'Connor: I cannot allow two recent stories in the papers to go by without comment.
Today's Irish Independent reports (in a story about Enda Kenny) that "Brian Cowen's handlers are issuing instructions to the media about what questions the Taoiseach can be asked."
The report goes on to say:
"Mr Cowen is objecting to being questioned about national issues when he travels around the country.
"In an unprecedented move, the Fianna Fail press office yesterday issued a schedule for Mr Cowen's trip to Cork this afternoon with the instruction 'the Taoiseach will only take questions related to his visit to Cork'.
"Mr Cowen's spokesman said the Taoiseach would rather focus on the topics he is dealing with on the trip."
In a democracy, and not only during an unprecedented national crisis, it is the right of citizens and journalists to ask the Taoiseach any question that they believe to be of public interest.
Meanwhile, a controversy rages between the Minister for the Environment, Heritage and Local Government and the ESRI. In particular, the Minister is quoted as saying:
"I do regret that they have been drawn into what is clearly a public relations campaign on behalf of Dublin City Council and Covanta and it is no coincidence that the report was released today and it is simply to undermine Government waste policy,”, and
“Certainly in my time in public life, I’ve never come across anything like this where ESRI is used in that way and I think they departed from their normal standards in that regard,”
It is welcome that the Minister's consultants (Eunomia) should argue with the ESRI about the method used, the data included, etc. That's healthy. Many people on this blog also argue with the ESRI about methods and data.
But for the Minister to accuse the ESRI of public relations campaigning for Dublin City Council and "departure from professional standards" undermines the role of evidence in informing policy-making. That doesn't just undermine the ESRI, it undermines any organisation that presents evidence and reasoned arguments for or against policy, particularly when the issues are complex, and different theories and models can be used.
If the Taoiseach is not to be questionned and the Minister for the Environment is not to be disagreed with, what next? Uno duce, una voce?
Today's Irish Independent reports (in a story about Enda Kenny) that "Brian Cowen's handlers are issuing instructions to the media about what questions the Taoiseach can be asked."
The report goes on to say:
"Mr Cowen is objecting to being questioned about national issues when he travels around the country.
"In an unprecedented move, the Fianna Fail press office yesterday issued a schedule for Mr Cowen's trip to Cork this afternoon with the instruction 'the Taoiseach will only take questions related to his visit to Cork'.
"Mr Cowen's spokesman said the Taoiseach would rather focus on the topics he is dealing with on the trip."
In a democracy, and not only during an unprecedented national crisis, it is the right of citizens and journalists to ask the Taoiseach any question that they believe to be of public interest.
Meanwhile, a controversy rages between the Minister for the Environment, Heritage and Local Government and the ESRI. In particular, the Minister is quoted as saying:
"I do regret that they have been drawn into what is clearly a public relations campaign on behalf of Dublin City Council and Covanta and it is no coincidence that the report was released today and it is simply to undermine Government waste policy,”, and
“Certainly in my time in public life, I’ve never come across anything like this where ESRI is used in that way and I think they departed from their normal standards in that regard,”
It is welcome that the Minister's consultants (Eunomia) should argue with the ESRI about the method used, the data included, etc. That's healthy. Many people on this blog also argue with the ESRI about methods and data.
But for the Minister to accuse the ESRI of public relations campaigning for Dublin City Council and "departure from professional standards" undermines the role of evidence in informing policy-making. That doesn't just undermine the ESRI, it undermines any organisation that presents evidence and reasoned arguments for or against policy, particularly when the issues are complex, and different theories and models can be used.
If the Taoiseach is not to be questionned and the Minister for the Environment is not to be disagreed with, what next? Uno duce, una voce?
Thursday, 4 February 2010
Finance Bill 2010
Finance, NTMA and FOI
Nat O'Connor: The Story (freedom of information blog) offer an insight into why the Minster for Finance transfered powers to the NTMA yesterday:
"One thing that stands out like a sore thumb is the fact that unlike the Department of Finance, the NTMA is not subject to the Freedom of Information Act. Indeed the Department have said to me several times of the past few months that my requests for information were being delayed because the Department was so busy with NAMA, and with other FOIs. Now, it seems, much of the decision making will be made in secret anyway."
You can read the original here.
"One thing that stands out like a sore thumb is the fact that unlike the Department of Finance, the NTMA is not subject to the Freedom of Information Act. Indeed the Department have said to me several times of the past few months that my requests for information were being delayed because the Department was so busy with NAMA, and with other FOIs. Now, it seems, much of the decision making will be made in secret anyway."
You can read the original here.
Lies, damned lies and statistics: car scrappage scheme
An Saoi: On Tuesday morning Alan Nolan of the Society of the Irish Motor Industry was on Morning Ireland and made reference to the increase in car sales in January of approx. 5%. He uttered some of the same phrases that were mentioned about shopping in the run up to Christmas, which as the January VAT returns showed did not conform to the facts. He said that there was “great footfall in dealerships and great interest”.
Car sales are a serious source of tax revenue and in the interest of commenting accurately on tax issues, I decided I had better have a look at the SIMI National Vehicle Statistics, which are provided from figures prepared by the Revenue Commissioners.
Right enough, there was a 5.04% increase in new car sales but a 9% decrease in new car registrations because the number of used imports had fallen by nearly 46%. Now when a used car is imported VRT and Vat must be paid, just as with a new car. SIMI have helpfully provided the number of new cars sold by marque and it is clear that sales of larger cars, Mercedes, Audi, BMW etc. have been particularly badly hit. It appears that most of the cars sold fall into the less polluting group, with much reduced VRT and possibly the scrappage grant payable also.
As all cars are imported, it makes little difference to the State whether the car a person buys is used or new when it is imported. The tax yield may be slightly higher on a new car - that is all. There seems to be little if any benefit to the country from the scrappage scheme, or am I missing something? It looks like a serious waste of money.
Car sales are a serious source of tax revenue and in the interest of commenting accurately on tax issues, I decided I had better have a look at the SIMI National Vehicle Statistics, which are provided from figures prepared by the Revenue Commissioners.
Right enough, there was a 5.04% increase in new car sales but a 9% decrease in new car registrations because the number of used imports had fallen by nearly 46%. Now when a used car is imported VRT and Vat must be paid, just as with a new car. SIMI have helpfully provided the number of new cars sold by marque and it is clear that sales of larger cars, Mercedes, Audi, BMW etc. have been particularly badly hit. It appears that most of the cars sold fall into the less polluting group, with much reduced VRT and possibly the scrappage grant payable also.
As all cars are imported, it makes little difference to the State whether the car a person buys is used or new when it is imported. The tax yield may be slightly higher on a new car - that is all. There seems to be little if any benefit to the country from the scrappage scheme, or am I missing something? It looks like a serious waste of money.
Tuesday, 2 February 2010
Where have all the taxes gone?
An Saoi: Today’s tax figures were a shock, even to me. Perhaps I shouldn’t have been so surprised as the Central Bank’s report for December had already told us that spending on credit cards was over 14% below the 2008 level. This is reflected in the nearly 18% decline in VAT. As taxes are paid in arrears, these figures give us a snapshot of the economy to December and do not reflect activity in January.
All through December we were fed a bunch of misrepresentations by the Irish media, which was so succinctly described by David McWilliams in last Sunday’s Business Post. Newspapers & RTÉ happily talked up an economy, which we now see is still in tatters.
Looking at the detailed figures, we see a consistent pattern of decline. On the consumption side, Customs duties down 17%, Excise down 16% & VAT down 18%. On the taxes on income side, the year on year decline in Income Tax of just 10% was helped by the Income Levy. The cuts in Public Sector pay will feed into considerably lower tax payments from next month. The 66% decline in Corporation Tax may be down to pre Christmas refunds and it is hard to draw any conclusions from it. Next month’s figures are far more important. The fall away of CAT is not surprising given the state of the housing market. The declines in Stamp Duties and CGT are slightly surprising as they had been quite good in December. I mentioned last month that the introduction in E-Stamping by the Revenue had perhaps energised many solicitors into getting their affairs in order.
However there remain two imponderables, which may have made a material difference to this month’s figures.
1. We have no idea as to the levels of unpaid taxes and by how much they are increasing each month.
2. There is no summary of outstanding repayments. Delaying or expediting large repayments from month may affect the monthly outcome. This is particularly true for VAT return months such as January.
Delaying repayments may partially explain the better than expected figures in December. However this is a very dangerous game as anyone who has juggled paying their bills and credit cards knows.
The figures suggest that the Government will struggle to achieve their very modest targets, which it should be noted are below those of 2003. February will tell us far more about the state of the economy. The Government published their 2010 Tax Profile today and are expecting February 2010 to come in at €1,726M, €298M below Feb. 2009.
Within the global figure, they are expecting Income Tax to come in close to 2009 figure, €891M against €915M, which seems very optimistic. Corporation Tax is expected to come in at just €90M against €290M last year. This is partly down to the change in preliminary tax rules, but there must be some big losses also expected from companies with a 31st March accounts year. It is not a VAT return month with just VAT collected by Direct Debit and on imports due. A bounce is expected in Excise, which includes VRT increasing from €310M in 2009 to €344M this month. Time will only tell. I will make my estimate of the end of year outturn after the March figures, but it is hard at this stage seeing the figures break €30,000M by year-end.
All through December we were fed a bunch of misrepresentations by the Irish media, which was so succinctly described by David McWilliams in last Sunday’s Business Post. Newspapers & RTÉ happily talked up an economy, which we now see is still in tatters.
Looking at the detailed figures, we see a consistent pattern of decline. On the consumption side, Customs duties down 17%, Excise down 16% & VAT down 18%. On the taxes on income side, the year on year decline in Income Tax of just 10% was helped by the Income Levy. The cuts in Public Sector pay will feed into considerably lower tax payments from next month. The 66% decline in Corporation Tax may be down to pre Christmas refunds and it is hard to draw any conclusions from it. Next month’s figures are far more important. The fall away of CAT is not surprising given the state of the housing market. The declines in Stamp Duties and CGT are slightly surprising as they had been quite good in December. I mentioned last month that the introduction in E-Stamping by the Revenue had perhaps energised many solicitors into getting their affairs in order.
However there remain two imponderables, which may have made a material difference to this month’s figures.
1. We have no idea as to the levels of unpaid taxes and by how much they are increasing each month.
2. There is no summary of outstanding repayments. Delaying or expediting large repayments from month may affect the monthly outcome. This is particularly true for VAT return months such as January.
Delaying repayments may partially explain the better than expected figures in December. However this is a very dangerous game as anyone who has juggled paying their bills and credit cards knows.
The figures suggest that the Government will struggle to achieve their very modest targets, which it should be noted are below those of 2003. February will tell us far more about the state of the economy. The Government published their 2010 Tax Profile today and are expecting February 2010 to come in at €1,726M, €298M below Feb. 2009.
Within the global figure, they are expecting Income Tax to come in close to 2009 figure, €891M against €915M, which seems very optimistic. Corporation Tax is expected to come in at just €90M against €290M last year. This is partly down to the change in preliminary tax rules, but there must be some big losses also expected from companies with a 31st March accounts year. It is not a VAT return month with just VAT collected by Direct Debit and on imports due. A bounce is expected in Excise, which includes VRT increasing from €310M in 2009 to €344M this month. Time will only tell. I will make my estimate of the end of year outturn after the March figures, but it is hard at this stage seeing the figures break €30,000M by year-end.
McCarthy on fiscal correction - advice to Scotland
Slí Eile: Never shy to expound, economist Colm McCarthy, of Bord Snip fame imparted wit and neo-liberal orthodoxy last week in Edinburgh. See an account of his address here. (Does anyone have the full text somewhere?) He declared:
It’s getting public opinion and the opposition parties and the broadsheet media on board and getting them to accept and understand that we’re not doing this for fun, that we’re in a hole and that the quicker we start dealing with it the better and that there has to be a fiscal consolidation and all this kind of stuff.Looks as if this approach had a large measure of success in 2009 - except that the fiscal deficit is still hanging where it is and the prospect of more deflation, more unemployment and more spending cuts will see to a continuing debt trap.
Greek Tragedy II - and the tax dimension
Michael Burke: In today's Financial Times, two economists from the Breugel think-tank in Brussels argue that the best course for Greece is to call in the IMF.
The Greek economy and financial markets are bearing the brunt of concerted pressure in the Euro Area, and there are fears that a collapse there could lead to renewed speculative pressure on a number of countries including Ireland.
The possibility of an IMF intervention ought to be shameful for the architects of Europe's fiscal and monetary arrangements, since the Euro was touted as an instrument that would protect the economies of Europe from speculative pressures. 'European Solidarity' has proved a mirage. Worse, leading EU institutions have played their part in Greece's difficulties. As the authors of the FT piece note,
"One reason why things have sharply worsened is that the ECB has said that by the end of 2010 it will tighten quality requirements for bonds pledged as collateral – which risks excluding Greek bonds from repurchase agreement operations. This, and Greece’s inability so far to present a credible fiscal plan, explains the alarm in financial markets."
This unilateral move by the ECB seems wholly misplaced. If the ECB is concerned about the deterioration of asset quality in a tiny part of its portfolio, it should make its own determination about which assets can be pledged. Outsourcing this to the largely discredited ratings agencies seems like a wholly unwarranted measure, designed to increase the pressures on a Greek government which has inherited a crisis not of its own making.
Nor is the Commission blameless, having been apparently hoodwinked over a number of years by the previous Greek governmet about the size of the deficits (and debt!) in a manner that would make a primary schoolteacher blush.
The new government has bemoaned the endemic corruption in Greek society, includig government bodies, and its effect on reducing tax revenues. Perhaps the Commission could provide greater assistance as tax collectors than as macroeconomic advisers, or even auditors. In the period 1997-2006, Greek tax revenues as a proportion of GDP were 5.5% below the Euro Area average. Even in 2008, they were 4% below the average. Closing in on the average level would make a major dent in the deficit and, once the economy recovers, the debt stock too.
This low taxation is a common feature of those Euro Area countries currently in the cross hairs of the financial markets. In 2008, Spain's tax revenues were 37% of GDP, 7.8% below the Euro Area average. By contrast, in Germany they were 43.7% and in France they were 49.3%.
Of course, in 2008, Ireland's tax revenue GDP ratio was the lowest of all in the Euro Area, at 34.9%, and fully 10% below the average (Table 36). Closing in on the Euro Area average would see Ireland's deficit melt away to nothing.
The Greek economy and financial markets are bearing the brunt of concerted pressure in the Euro Area, and there are fears that a collapse there could lead to renewed speculative pressure on a number of countries including Ireland.
The possibility of an IMF intervention ought to be shameful for the architects of Europe's fiscal and monetary arrangements, since the Euro was touted as an instrument that would protect the economies of Europe from speculative pressures. 'European Solidarity' has proved a mirage. Worse, leading EU institutions have played their part in Greece's difficulties. As the authors of the FT piece note,
"One reason why things have sharply worsened is that the ECB has said that by the end of 2010 it will tighten quality requirements for bonds pledged as collateral – which risks excluding Greek bonds from repurchase agreement operations. This, and Greece’s inability so far to present a credible fiscal plan, explains the alarm in financial markets."
This unilateral move by the ECB seems wholly misplaced. If the ECB is concerned about the deterioration of asset quality in a tiny part of its portfolio, it should make its own determination about which assets can be pledged. Outsourcing this to the largely discredited ratings agencies seems like a wholly unwarranted measure, designed to increase the pressures on a Greek government which has inherited a crisis not of its own making.
Nor is the Commission blameless, having been apparently hoodwinked over a number of years by the previous Greek governmet about the size of the deficits (and debt!) in a manner that would make a primary schoolteacher blush.
The new government has bemoaned the endemic corruption in Greek society, includig government bodies, and its effect on reducing tax revenues. Perhaps the Commission could provide greater assistance as tax collectors than as macroeconomic advisers, or even auditors. In the period 1997-2006, Greek tax revenues as a proportion of GDP were 5.5% below the Euro Area average. Even in 2008, they were 4% below the average. Closing in on the average level would make a major dent in the deficit and, once the economy recovers, the debt stock too.
This low taxation is a common feature of those Euro Area countries currently in the cross hairs of the financial markets. In 2008, Spain's tax revenues were 37% of GDP, 7.8% below the Euro Area average. By contrast, in Germany they were 43.7% and in France they were 49.3%.
Of course, in 2008, Ireland's tax revenue GDP ratio was the lowest of all in the Euro Area, at 34.9%, and fully 10% below the average (Table 36). Closing in on the Euro Area average would see Ireland's deficit melt away to nothing.
Taxbreak hotels
Sinéad Pentony: The report by Peter Bacon on the Irish Hotel Industry highlights the sorry state of the industry, which has been insolvent since 2008. By the end of that year, there were a total of 59,000 hotel rooms in the country – and according to the Report, a quarter (15,000) of these rooms need to be closed down urgently. The Report also estimates that €1bn of debt in the hotel industry is not covered by assets. Peter Bacon makes a large number of recommendations in the Report that, if implemented, would effectively restructure the industry. However, it is worth taking a closer look at his recommendations in relation to the accelerated capital allowances for hotels (tax breaks), because it would result in a significant bailout of developers if implemented.
The Report on the hotel industry identifies a number of factors that have contributed to the virtual collapse of the industry. In the first instance, it points the finger at hotel tax breaks and the damage they have caused by distorting the market. The tax breaks resulted in the creation of a huge over-supply of hotels whose viability was questionable from the outset. Bacon concludes that the stock of new hotels has been seriously insolvent since 2005, and the analysis shows that in every year since 2002, new hotels on average have been insolvent from the year of their construction. The economic crisis has compounded the situation and has brought the industry to the brink of collapse.
Secondly, the Report highlights the practices of financial institutions and banks in contributing to the problems in the industry. It would appear that the banks and financial institutions are supporting a large number of insolvent hotels to remain in business. Bacon identifies a number of reasons for this in the Report, including “... the need of hotels to remain open for seven years to allow investors to avail of capital allowances and to avoid the creation of a tax liability due to a clawback of allowances that have been claimed already; the reluctance of banks to realise losses and write off loans granted to hotels with no prospect of recovery because of the additional pressure this would place on the capital adequacy of their own balance sheets; and the reluctance to act in advance of the introduction of NAMA.”
The result of these factors is that the insolvency problem is being spread through the industry, and solvent hoteliers now find themselves having to compete against ‘zombie’ hotels, many of which were created specifically to take advantage of tax breaks, and this is threatening to destroy fundamentally sound businesses. At the same time, the reluctance of banks to provide sufficient working capital is leading to liquidity problems that further undermine the businesses of solvent hotels. Peter Bacon points to the possibility that the banks have less incentive to keep viable hotels with relatively low levels of debt open, than is the case for hotels with high levels of debt, for the reasons stated above – having to realise losses and write off loans.
So how do we solve this problem? The recommendations contained in the Report outline the restructuring that needs to take place within the industry, to put it back on the road to solvency and viability. One of the key recommendations relates to the issue of over-supply and removing 15,000 rooms from the market – it goes on to specify that the reduction of excess capacity should be facilitated by the adjustment of tax regulations concerning tax allowances for new hotels.
Incredibly, the Report recommends “...that a special provision be introduced in the Finance Act 2010 to allow relevant hotels to exit the industry without disadvantaging the initial investors in terms of capital allowance. It is further recommended that an accompanying provision be introduced to the effect that capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue should that hotel exit the industry within seven years”.
Essentially, the Report is recommending that developers who took advantage of tax breaks to build hotels that were never going to be viable should not be subject to the clawback of those capital allowances - because they won’t have an incentive to close these hotels but rather, keep them open for the seven years, which will further undermine the hotel industry. There are two questions that arise here: the first is an economic question, and the second relates to how insolvent hotels continue to be financed.
We live in a market economy and the Report clearly demonstrates the detrimental consequences of market-distorting tax breaks. The economic logic would see the removal of the tax breaks and, if the hotel ceases trading within seven years, tax allowances would be clawed back. The tax breaks for hotels have been discontinued along with other property-based tax incentive schemes. However, the Commission on Taxation Report 2009 notes that many live on for existing projects and “for pipeline projects”, as in the case of hotel accelerated capital allowances (tax breaks).
The recommendation contained in the Report in relation to the treatment of the claw back can only be described as a further market distortion and raises serious questions in relation to ‘moral hazard’, whereby failed investors are in fact freed from the consequences of their actions. If implemented, this recommendation can only be described as a bailout for hotel developers, when they should, in fact, be subject to the same rules as everyone else who operates in a market economy. This leads us to the second question.
How can struggling developers and investors afford to keep insolvent hotels open? The answer is - the banks. The Report identified the actions of banks as being “particularly damaging” because they are avoiding the need to realise losses due to bad loans on hotels that are not viable by providing a “drip feed of working capital”. Meanwhile, hotels with low debt levels and viable businesses are experiencing liquidity problems because they are having difficulty in accessing sufficient working capital. The Report recommends that the banks need to fully recognise bad loans within the hotel sector and face any capital adequacy issues which might follow.
John Power, CEO of the Irish Hotels Federation, in an interview on Drivetime on the 5th January clearly articulated the problem with the banks keeping insolvent hotels open and the detrimental effect this is having on the industry as a whole. But how can the banks, which have such serious liquidity problems afford to keep these insolvent hotels open – when we hear countless stories of viable businesses going into liquidation because of credit restrictions?
We can only assume that part of the capital that has been injected into the banks from the State (€11bn to date) is being used to keep insolvent hotels open, so that they can be transferred to NAMA and/or to prevent the developers from incurring tax clawback liabilities, should the hotel be forced to close within 7 years of being built.
The Report puts the costs to the Exchequer of removing this barrier to exit the industry at zero. Hotel-related capital allowances which remain to be claimed have an estimated value of €527 million to investors. More importantly, allowances already claimed, which potentially could be clawed back by the Revenue, have a value estimated at €1bn. The total potential loss to the Exchequer adds up to over €1.5bn.
The Finance Bill is due to be published in the coming days, so we will have to wait and see if hotel developers are next in line to be bailed out by the taxpayer. Hotel developers would not be able to keep these hotels open were it not for the support of the banks, who in turn, have questions to answer - in relation to continuing to finance insolvent hotels and the extent to which capital injected by the State is being used to support this activity. It would appear that the taxpayer is being used to prop up the whole system and is keeping the banks, speculative developers and other vested interests afloat.
But who is propping up the tax payer?
Sinéad Pentony is Head of Policy at TASC
The Report on the hotel industry identifies a number of factors that have contributed to the virtual collapse of the industry. In the first instance, it points the finger at hotel tax breaks and the damage they have caused by distorting the market. The tax breaks resulted in the creation of a huge over-supply of hotels whose viability was questionable from the outset. Bacon concludes that the stock of new hotels has been seriously insolvent since 2005, and the analysis shows that in every year since 2002, new hotels on average have been insolvent from the year of their construction. The economic crisis has compounded the situation and has brought the industry to the brink of collapse.
Secondly, the Report highlights the practices of financial institutions and banks in contributing to the problems in the industry. It would appear that the banks and financial institutions are supporting a large number of insolvent hotels to remain in business. Bacon identifies a number of reasons for this in the Report, including “... the need of hotels to remain open for seven years to allow investors to avail of capital allowances and to avoid the creation of a tax liability due to a clawback of allowances that have been claimed already; the reluctance of banks to realise losses and write off loans granted to hotels with no prospect of recovery because of the additional pressure this would place on the capital adequacy of their own balance sheets; and the reluctance to act in advance of the introduction of NAMA.”
The result of these factors is that the insolvency problem is being spread through the industry, and solvent hoteliers now find themselves having to compete against ‘zombie’ hotels, many of which were created specifically to take advantage of tax breaks, and this is threatening to destroy fundamentally sound businesses. At the same time, the reluctance of banks to provide sufficient working capital is leading to liquidity problems that further undermine the businesses of solvent hotels. Peter Bacon points to the possibility that the banks have less incentive to keep viable hotels with relatively low levels of debt open, than is the case for hotels with high levels of debt, for the reasons stated above – having to realise losses and write off loans.
So how do we solve this problem? The recommendations contained in the Report outline the restructuring that needs to take place within the industry, to put it back on the road to solvency and viability. One of the key recommendations relates to the issue of over-supply and removing 15,000 rooms from the market – it goes on to specify that the reduction of excess capacity should be facilitated by the adjustment of tax regulations concerning tax allowances for new hotels.
Incredibly, the Report recommends “...that a special provision be introduced in the Finance Act 2010 to allow relevant hotels to exit the industry without disadvantaging the initial investors in terms of capital allowance. It is further recommended that an accompanying provision be introduced to the effect that capital allowances that have already been claimed in respect of any hotel should not be subject to any claw back by the Revenue should that hotel exit the industry within seven years”.
Essentially, the Report is recommending that developers who took advantage of tax breaks to build hotels that were never going to be viable should not be subject to the clawback of those capital allowances - because they won’t have an incentive to close these hotels but rather, keep them open for the seven years, which will further undermine the hotel industry. There are two questions that arise here: the first is an economic question, and the second relates to how insolvent hotels continue to be financed.
We live in a market economy and the Report clearly demonstrates the detrimental consequences of market-distorting tax breaks. The economic logic would see the removal of the tax breaks and, if the hotel ceases trading within seven years, tax allowances would be clawed back. The tax breaks for hotels have been discontinued along with other property-based tax incentive schemes. However, the Commission on Taxation Report 2009 notes that many live on for existing projects and “for pipeline projects”, as in the case of hotel accelerated capital allowances (tax breaks).
The recommendation contained in the Report in relation to the treatment of the claw back can only be described as a further market distortion and raises serious questions in relation to ‘moral hazard’, whereby failed investors are in fact freed from the consequences of their actions. If implemented, this recommendation can only be described as a bailout for hotel developers, when they should, in fact, be subject to the same rules as everyone else who operates in a market economy. This leads us to the second question.
How can struggling developers and investors afford to keep insolvent hotels open? The answer is - the banks. The Report identified the actions of banks as being “particularly damaging” because they are avoiding the need to realise losses due to bad loans on hotels that are not viable by providing a “drip feed of working capital”. Meanwhile, hotels with low debt levels and viable businesses are experiencing liquidity problems because they are having difficulty in accessing sufficient working capital. The Report recommends that the banks need to fully recognise bad loans within the hotel sector and face any capital adequacy issues which might follow.
John Power, CEO of the Irish Hotels Federation, in an interview on Drivetime on the 5th January clearly articulated the problem with the banks keeping insolvent hotels open and the detrimental effect this is having on the industry as a whole. But how can the banks, which have such serious liquidity problems afford to keep these insolvent hotels open – when we hear countless stories of viable businesses going into liquidation because of credit restrictions?
We can only assume that part of the capital that has been injected into the banks from the State (€11bn to date) is being used to keep insolvent hotels open, so that they can be transferred to NAMA and/or to prevent the developers from incurring tax clawback liabilities, should the hotel be forced to close within 7 years of being built.
The Report puts the costs to the Exchequer of removing this barrier to exit the industry at zero. Hotel-related capital allowances which remain to be claimed have an estimated value of €527 million to investors. More importantly, allowances already claimed, which potentially could be clawed back by the Revenue, have a value estimated at €1bn. The total potential loss to the Exchequer adds up to over €1.5bn.
The Finance Bill is due to be published in the coming days, so we will have to wait and see if hotel developers are next in line to be bailed out by the taxpayer. Hotel developers would not be able to keep these hotels open were it not for the support of the banks, who in turn, have questions to answer - in relation to continuing to finance insolvent hotels and the extent to which capital injected by the State is being used to support this activity. It would appear that the taxpayer is being used to prop up the whole system and is keeping the banks, speculative developers and other vested interests afloat.
But who is propping up the tax payer?
Sinéad Pentony is Head of Policy at TASC
AIB makes case for increased public spending
Peter Connell: Encouraging news from AIB. In its Economic Outlook for 2010 published last month the bank agrees with many of those writing on PE on the issue of Ireland’s sovereign debt.The report points out that ‘Ireland has one of the lowest debt ratios in the EU: 51% at the end of 2009, allowing for cash balances’ – which it states amounts to €22 billion (slide 12 in the presentation linked above). Like many on this blog, the bank argues that this relatively positive picture provides the State with options regarding investment and public spending.
Virtually all mainstream commentators argue that there is no alternative to fiscal consolidation, so this is important information as it is emanating from an unexpected source and certainly one not naturally sympathetic to the kind of analysis you’ll read on this blog. But, it’s there in black and white. AIB says it’s OK for the State to increase public spending. Let me see, how exactly does the report put it? Ah yes, ‘low public debt gives the State the capacity to support the banking sector’ (see slide 12)….
Virtually all mainstream commentators argue that there is no alternative to fiscal consolidation, so this is important information as it is emanating from an unexpected source and certainly one not naturally sympathetic to the kind of analysis you’ll read on this blog. But, it’s there in black and white. AIB says it’s OK for the State to increase public spending. Let me see, how exactly does the report put it? Ah yes, ‘low public debt gives the State the capacity to support the banking sector’ (see slide 12)….
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