The profile of Irish investment preferences discovered by Barclays Bank in preparing their latest issue of Wealth Insights is depressing.  According to press reports, their research shows that Irish high-net-worth individuals (HNWIs) hold an amazing 55 per cent of their wealth in property, despite the collapse in property values in the past 5 years.  This is a higher proportion than any other nationality.  Irish HNWIs also hold 18 per cent in cash, 16 per cent in financial investments and 7 per cent in assets such as collectables.  And just how much private wealth do you think is invested in enterprise or business, the sector which is arguably the most vital to our economic future?  A pitiful 2 per cent.

A long legacy of under-taxation of property assets and transactions, only partly being addressed now, is an important factor in this mis-allocation of investment funds.  We all continue to pay a price for past policy failings in this area.

Historic factors are often also quoted as an explanation for our obsession with property. There is a pithy phrase in the famous Vanity Fair article by Michael Lewis (“When Irish Eyes Are Crying”) about how we crashed our economy:

Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons.

That sums it up nicely.

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More economic nonsense from the Society of the Irish Motor Industry, reported in the Irish Times:

The motor trade is seeking a new incentive scheme, based on trade-ins rather than scrapped cars, to boost new-car sales next year. Work is under way on a submission to the Government seeking the introduction of a “swappage scheme”, in which motorists who trade in cars more than five years old would receive rebates of the order of €2,000 on the vehicle-registration tax due on the new cars.

The aim, according to Alan Nolan director general of the Society of the Irish Motor Industry, is to kick-start new-car sales and so increase the Government’s tax income.

“The Government’s tax take from the motor sector in 2007 was close to €1.8 billion. This has slipped to about €500 million. Meanwhile, employment in the sector has fallen from 50,000 to roughly 34,000. By boosting the sale of new cars we not only reduce the average age of the fleet but increase the tax take for the Government and secure thousands of jobs,” he says.

As I have noted before, this is the siren song of special-interest groups trying to derail proper financial governance, and promote their own causes at the expense of everybody else’s, just like Bastiat’s candlestick makers.

To quote Colm McCarthy from June 2011:

A good example of the futility of this line of thinking was the car scrappage scheme, recently phased out. This scheme directly subsidised imports, doubtless saved a few jobs in car showrooms temporarily but would have had its greatest impact in France, Germany and Italy, where they make the cars. A subsidy on foreign holidays would stimulate a few extra jobs in travel agencies too, but is hardly the most promising job-creation strategy. The car scrappage scheme was a similar mistake.

And here he is again from March 2010

Car Scrappage: Car sales have collapsed and some car dealers have gone out of business. The same has happened with €1,000 handbags, and some handbag retailers are struggling. Ireland manufactures neither cars nor handbags. The Car Scrappage Scheme will spend taxpayer money to sustain, temporarily, the retail distribution network for an imported consumer durable. Why not a Handbag Scrappage Scheme? This scheme is plain daft for Ireland. …… These ‘Something Must be Done’ schemes provide harmless entertainment for economists, fodder for the 24-hour news cycle and a playpen for lobbyists. But they contribute nothing to sustainable employment, cost the Exchequer money and hinder the necessary post-Bubble adjustment.   In contrast, the Economics of Doing Nothing is that this is often the best policy, and the cheapest.

SIMI’s proposed new incentive scheme is a blatant and brazen attempt to feather their own nest at the expense of everybody else’s.  The trouble is that few politicians are clued in enough to see this reality.

Just whose side is ICTU on?

6 December, 2012

A letter was published in today’s (London) Financial Times from Paul Sweeney, Chief Economist with the Irish Congress of Trade Unions.  Ostensibly it was an attempted rebuttal of a provocative opinion piece called “the best reform of Corporation Tax would be its abolition” which the FT had the temerity to publish last Tuesday.  The writer of the article was Michael Devereux of the Oxford University Centre for Business Taxation.

If Sweeney had restricted himself to the central issue dealt with by Devereux, that would have been fine.  But he goes on to say “Ireland, Luxembourg and Holland, which exploit so-called “tax competition” to reduce taxes for corporations and rich people, must be persuaded to co-operate with other states in the EU if the single market is ever to be a level playing field for all businesses…..The dividing line between “business friendly” and “the public  good” was crossed years ago in the area of corporation tax. The imbalance of taxation, which weighs heavily on citizens and lightly on multinationals,  has been set by the agents of multinationals, their professional advisers and, in turn, their professional bodies, taxation “institutes” and commissioned “research” ”.

It is (to put it mildly) disappointing to find ICTU trying to undermine our 12.5% Corporation Tax rate in such a manner.  At a time of crisis in our national finances, some might even call it treasonable.

Ahern remains delusional

19 October, 2011

Apparently the press is to blame for the collapse of the Irish economy.  At least that appears to be the latest line being spun by Bertie Ahern.  Unbelievable. You couldn’t make it up.  See details of an interview with our dodgy, delusional, and disgraced former Taoiseach here.

A flavour of his ramblings:-

Former Taoiseach Bertie Ahern has called for an investigation into the media for what he said were failures to follow the economy because journalists were more concerned with following his dealings with the Mahon tribunal.

Mr Ahern said that from the time he began evidence to the tribunal, the media “just stopped following the economy”.

In an interview on Dublin City University’s radio station DCU FM, he said: “There should be an investigation into it. They should have been following the economy from August 2007, but they weren’t, they were following me. I think a lot of these guys really should have looked at themselves.

“The government were following the economy but the media weren’t. It was a very poor job by the media really. They were shown to be incompetent and that was the trouble – everything was on me.”

When will he ever recognise that the ultimate responsibility for the well-being of citizens came with the job of being Taoiseach, and it wasn’t just about lining his own pocket and being nice to his developer pals?  Trying to deflect responsibility to the media for our economic problems is beyond a joke.

Please, Bertie, get off the stage.

Dan O’Brien had a good piece in Saturday’s Irish Times about house prices in Ireland.  But a couple of comments should be made.

Firstly, Dan (or the sub-editor) gave the piece the title “How low can house prices go?”  While the article was interesting in many respects, I don’t recall him answering that particular question.  OK, so headlines are always making false promises which the actual article fails to deliver;  not exactly Man Bites Dog.  Also, if you read the article expecting to see Dan’s own view, you would have been disappointed.

In fairness he does say “If the 2011 rate of decline in residential property prices continues for another 12 months, prices will fall by about 15 per cent from their current level. Given the headwinds facing the market, that is more likely than not.”  And he also notes that the Banks’ Stress Tests had a baseline assumption “that prices will fall by a further 20 per cent before the market hits bottom. In their worst-case scenario, the decline would be almost 30 per cent. That would bring the fall from the 2007 peak to 59 per cent.”

But it would have been nice to have the personal view of the Economics Editor of the Irish Times on the matter.

Secondly, and more surprisingly, Dan doesn’t seem too hot on the calculation of percentages.  Two sentences in the article offer contrasting views on the extent of the rise in Irish house prices during the bubble phase:

Compare “In the decade from the index’s start date, in early 1997, Irish property prices quadrupled” with “Although the US did not look out of the ordinary in the property-price rises it experienced from 1997 to 2006 (130 per cent compared with Ireland’s 400 per cent), it has suffered the second-worst rich-world crash (after Ireland)…”

Surely Dan doesn’t think that if a number quadruples, it has risen by 400%?  Surely he knows that it has only risen by 300%?  Must be an error by the pesky sub-editor again.

You may have read about a report prepared by Amárach Research which said that if consumers were to spend as little as €4 extra a week on Irish-produced goods then over 6,000 new jobs could be created. Minister for Enterprise and Jobs Richard Bruton formally launched the research in Dublin last Monday.

This prompted an Irish Times editorial urging us to Buy Irish, and the editorial was in turn criticised by a letter to the editor of 8th September .

The letter-writer was 100% correct in his scepticism about these developments, for such campaigns constitute a form of “soft” protectionism: if we are consistently willing to favour Irish products which are either more expensive or of lesser quality than the equivalent import, then we allow Irish producers to be less efficient than foreign competitors, and thereby almost ensure that they will not be able to compete with them in overseas markets.  This condemns Irish firms to being small-scale domestic producers.

Any campaign to Buy Irish is against the spirit (if not the letter) of the law governing the Single Market, and we have more to lose than to gain if other EU countries follow suit.

The Irish Times editorial did admit that “long-term prosperity depends on winning in world markets” but asserted that “a shot in the arm for the domestic economy is desperately needed in the short term”.  But what constitutes the short term?  Irish firms cannot postpone the achievement of greater efficiencies for even a short period, and I have no doubt that firms (under pressure from their workforce and the trade unions) will see any indulgence by the Irish consumer as an opportunity to postpone hard decisions.

More importantly, many of the inefficiencies and cost burdens under which Irish businesses toil are directly as a result of Government policy or inaction.  Whether it’s electricity costs, local government charges, unrealistic pay rates, gold-plating of EU directives or monopolistic legal fees, it is the government that is to blame for imposing high costs on Irish businesses, or allowing others to do so.

The “Buy Irish” campaign is a potential distraction from the meaningful reform that is needed to make Ireland competitive once again in the world marketplace; it should be regarded with suspicion, and treated as a red herring.

It’s a commonplace that the Celtic Tiger died in the early noughties, when real growth was replaced by false growth based on inappropriately low interest rates, an over-stimulated construction sector, and excessive pay increases for all sectors.  At the same time, the public sector and its various agencies grew stale and bloated.  Proper management skills withered on the vine, as the solution to every problem became the throwing of money at it.  Those who shouted loudest, or who had an inside track, got an even greater share of the spoils.  Welfare benefits began to outstrip those available almost anywhere else.

And now that the tide has gone out, we see that the State’s finances are in ruins because we have an inflated public sector cost base and welfare budget, but our tax revenues have shrunk dramatically (the bank bailout is not the main reason we are bust).  The fiscal gap will have to be closed by higher taxes, lower public sector costs and decreased welfare benefits, and the process has started.  It is a condition of the bailout deal that we travel down this road, but most of what we are going to do would have to have happened even without the bailout.

We need to look back to a time before things went pear-shaped, to a time when tax rates and yields were sensible, when we got reasonable value for money from our public sector, and when welfare benefit levels were appropriate to our real standard of living as a country.

Realistically, this would be sometime around 2002.  At that time, we hadn’t yet experienced a prolonged period of low Euro interest rates which was to prove such a part of our problem; we hadn’t seen the worst of the crazy pro-cyclical property incentives and unnecessary tax cuts; and the three-card-trick of public sector bench-marking lay in the future.

Did we feel poor as a country in 2002?  Were welfare recipients marching in the streets at the low level of benefits available?  Were civil servants and politicians noticeably underpaid?  Were there PAYE marches as there were in the 1970s?

No, no, no and no.

So let us turn back the clock, fiscally speaking, and revert to a position that is acceptably fair and is affordable.  This will involve further big cuts in pay, pensions and benefits, combined with additional tax increases for all taxpayers, including a substantial annual property tax.  Let’s do it, and do it quickly.   While we are at it, we need to get smart with our policy on the statutory minimum wage by re-setting it every 6 or 12 months at the average of the currently prevailing minimum wage in a “basket” of competitor countries.

And let us be prepared to resist the shouts and roars from politicians, the media, NGOs and commentators that we are being savage in our treatment of this sector or that sector.  After all, all we are doing is trying to reconstitute the sort of economic and fiscal conditions that applied in 2002.  We thought we were doing all right then, and we were.  The social fabric was certainly not collapsing then, in fact we had a bright future ahead of us and, in contrast to the present national mood, optimism was the order of the day.