THE GERMANS ARE an intelligent people, and it wasn’t by chance that Dr Merkel – with her PhD in chemistry, quantum chemistry to be even more impressive – suggested that the Greeks hold not one, but two elections on 17th June, one to elect parties to government and the other to stay in the eurozone (EZ).
She was in effect telling the Greeks that you can’t have your cake and eat it, or rather you can’t vote for anti-bailout parties and still expect to stay in the EZ. Yet this apparent contradiction is the Greek position, it seems likely that anti-bailout or more accurately, anti-Memorandum, parties will feature amongst the most successful in Greece’s election in two weeks but the overwhelming majority of Greeks want to stay in the EZ. Having your cake and eating it.
We can sit back and tut tut at the Greeks with their stereotyped corrupt and lazy ways, sure in the knowledge that it is indeed human nature to want it all, but before we get too self-righteous, we might want to stand back and take a look at our own finances and near-term economic future. We don’t need a crystal ball; thanks to the EU/IMF we have a Memorandum of Understanding which sets out the adjustments that have to be made to the country’s finances between now and 2015.
It’s not pretty. We need adjust by €3.5bn in 2013, an additional €3.1bn in 2014 and an additional €2.0bn in 2015. So in 2015 we will have – in that one year alone – €8.6bn of an adjustment compared with today. Apportioned to the 1.7m households in this State and that’s €5,000 per household in that one year alone. The adjustment won’t all be new taxes and charges, it will be reductions to social welfare and to public services, but an average of €5,000 it will be. In a state where research shows that nearly half of all households have less than €1,200 per year of discretionary income, you can readily see the nightmare that lies ahead.
And just to hammer home the seriousness of the adjustment, capping the adjustment at €8.6bn requires us to grow our economy, in GDP terms, by 0.7% in 2012 and 2.2% in 2013 and 3% in 2014 and 3% in 2015. According to the back of the envelope calculations on here, we will not see any growth in GDP this year following downgrades to UK, US and EU forecasts of growth. Who knows about 2013-2015? It could be better than forecast but you would have to say at this stage, it could also be worse.
And despite these facts – and they are facts, just consult the IMF/EU Memorandum of Understanding, though the GDP growth projection is an estimate – it seems that no group, corporate or social, in Ireland seems to be receptive to the adjustment coming from their income, be it income taxes, charges like property and water, social welfare, public sector pay, wealth tax or corporate tax – yes corporate tax. So tut tut for the Greeks wanting to stay in the euro but at the same time wanting an anti-Memorandum government, but tut tut also for ourselves for thinking we can have it both ways as well, that we think we can freeze our standard of living at its peak and not offer up one step to retreat from that peak standard of living.
The usual reaction to governments trying to make adjustments which might target YOUR pocket is to group together, protest and resist, both before and after an adjustment is made. And that oftentimes works – witness the success of unions, of old age pensioners, of disabled groups and less visibly the legal, medical and accounting professions in this country. But when the adjustment required is so great, and when it comes on the back of five austerity budgets, the result is going to be EVERYONE takes a hit. And that means:
1. Wealth tax The next time you get hold of a United Left Alliance politician, rub their noses in the Sunday Times or Independent rich lists and demand that they tell you how they would tax wealth on individuals whose names, photographs and sources of wealth are chronicled in these “Rich Lists”. The truth is that for most of the super-wealthy, their wealth is either outside Ireland to begin with, or is mobile.
Once you get down to the common-or-garden wealth of €10-20m, you’re usually looking at individuals whose companies have been successful, and the wealth is tied up in the company. How do you get at that wealth? You can tax corporate profits more than at present, but that is a touchy subject or you can tax shareholdings. Do the latter and you will quickly find the shareholdings transferred outside the State. Of course you can try to stop the movement of wealth, but if you find a way of doing it, there are 100+ countries around the world which will want to hear from you, because from the US to the UK, from China to South Africa, ALL governments want to hold onto control over taxation on their citizens’ wealth but none has been able to effectively stop the mobility of wealth.
Maybe the ULA has a novel approach, but unless it involves turning Ireland into a police state, it ain’t gonna happen. Or at least not on the €10bn per annum scale suggested in some quarters. More modest taxing may be acceptable and economists and political parties have produced “plans” which might see €1bn a year extra collected.
2. Income tax I can tell you now that this Government was talking out of its backside when it gave a commitment not to raise income tax. You can expect to see increases to rates or reductions in allowances, or changes to tax bands. It is going to happen. Equity would suggest that the higher paid be taxed first and most. And in both France and Italy there have already been increases to the taxes of the well-paid. In Ireland, even the curmudgeonly Ryanair boss, Michael O’Leary has conceded he might have to pay more tax, but he has also been clear that if you tax people too much, particularly the very well paid, and they’re outtahere.
In the UK, they have recently REDUCED the top rate income tax from 50% to 45%, despite the UK’s deficit being at the same vertiginous level as ours, at nearly 9%. Are the Brits economic illiterates or is it just Tory Toffs instinctively protecting their own? Or is there a calculation which shows that a reduction in the top rate of tax encourages more income generation and more income tax, or that it encourages earners to locate in the UK and spend their income here? So you can expect the higher income earners to pay more than at present, but in the end we will need tax the average earners getting €30-40,000 a year, more also.
3. Social welfare If the standard weekly unemployment benefit in this country is €188 in three years time, when the projections are that we still have 11% unemployment, then you’ll know we’re stuffed. That’s not to say that €188 per week is an adequate benefit in an advanced society, but when it is twice the level of our neighbour’s which has unemployment of 8.5% today or 6.5% in Northern Ireland, the sad truth is that needs must, and we can’t afford such a large bill to support economic inactivity.
4. Public sector, salaries, allowances and pensions need to fall and redundancies will need to be centrally managed and not left to individual choice. The Ireland of the €30-40,000-including-allowances-a-year garda, the €35-45,000 nurse and the €45-55,000 teacher will not survive the next three years. Nor will the €200,000 a year consultant or €160,000 a year county manager. But if anyone thinks it will just be the senior public sector workers that will shoulder the adjustment, then the numbers just don’t add up and savings from those on €100,000 salaries won’t be enough. That means the Croke Park Agreement needs earlier intervention than is planned when it expires after 2014.
5. Charges and levies Forget the blether about the new charges and levies being to expand and enhance existing services, the truth is they are to help fill the deficit gap, though promoting the charges with a fig leaf of some social justification is seen as a political necessity.
There is no rule that the Property Tax should be an average of €300 or €1,000 per annum. It’s simply a part of the mix to close the gap and might be lower or higher. Before water metering is implemented, it should be proven by the Government that reduction in average consumption outweigh the cost of metering, otherwise we should just have a flat charge and if needs be, invest in the treatment, distribution and disposal of water.
6. Bank debt Despite the blether since last Friday about the “Yes” vote in the referendum “paving the way” to a deal on bank debt – so far we’ve shelled out €68bn, or 40%-plus of GDP, 50% plus of a more representative GNP, on bailing out our banks – the view on here is that we are in a weaker negotiating position today that we would have been with a “No” vote.
We might benefit from a scrap that falls from the German-Spanish negotiations, but aside from that, there is little scope for a debt-writedown and as for the cost of the debt, we’re paying 3.5% on bailout funding and just over 4% generally on Ireland’s debt serving, so aside from getting a second bailout to fund future promissory notes or debt rollover, there is little scope for relief here and even if we get a second bailout, it won’t be significant for the cost of current borrowing. So what now? The Government needs to provide answers, facts and detail but the view on here is that our prospects have taken a turn for the worse with the “Yes” referendum.
7. Legacy personal debt including mortgage debt – it is ridiculous to impose further austerity on people who already are totally insolvent, and in the Irish case, the insolvency is mostly a function of the property boom and negative equity is likely to affect 400,000 out of 1.7m households today. Personal Insolvency legislation which is reforming, accessible and in line with developed-country international standards is required now. Bad news for banks and creditors, better news for the indebted and society at large.
8. Corporate tax – 12.5%, that’s the Irish standard corporate tax rate. But it’s more than a rate, it’s a brand and has been defended at great cost. Why is business so lightly taxed? Because in our country which bypassed the Industrial Revolution – thanks Britain! – we have some catching up to do, and we calculate that the ancillary benefits of employment creation, the attraction of international expertise and innovation, the creation of hubs in the Information Age and the domestic benefit of spend on everything from premises to VAT all outweigh the light tax take.
Of course this upsets our bigger European neighbours. But will Ireland in 2030 still compete as a low tax economy, or will the country have developed a domestic economy which is not reliant on multi national Information Age investment? A year ago, I would have said it was taboo to contemplate raising corporate tax rates, but with such a huge deficit to close, does this country have a choice?
9. The cost of politics Leadership in the battle that lies ahead to close the deficit should come from the top, and there is little evidence of sacrifice in our political system where our politicians earn more than those in countries providing THIS country with its first bailout. As with every other tribe, there will be resistance to cuts and reforms, but if, in three years time, a TD in this country is earning €93,000 a year, plus unvouched expenses plus political pension rights plus the incurred expenses for constituencies which average 30,000, then we’ll know we are stuffed.
10. Put a rocket up the backside of the National Consumer Agency (NCA) One of the areas that should be cushioning the colossal adjustment that lies ahead should be the reduction in consumer prices. A year ago, the Minister for Jobs, Enterprise and Innovation, the almost deliberately laid-back Richard Bruton announced the merger of the NCA with the Competition Authority.
Not only has that not happened but we still live in a country where there is little or no competition for mortgages for those in negative equity and there are still amazing differences in prices between this State and Northern Ireland. It seems we might need antitrust action on a scale of that in the US in the early 20th century to deal with our legal, medical and accounting professions. We are just now seeing consumer prices declining in line with the reduced circumstances of the nation.
There needs to be a national conversation now about the shape of future cuts. You might expect Labour to seize the opportunity today to lead that conversation, as it is that political party that will face a wipe-out at the next general election on the back of austerity. The train has left the station for the Labour party, and already it has passed 1990s-ville in the polls, next stop is GreenParty-ville, so it is this party that has most to lose and should be arm-twisting its partner in coalition to deliver a united message about the colossal challenge facing the country, and to deal with the adjustment in an efficient and equitable manner.
Remember the above adjustments depend on a 10 per cent economic growth between now and 2015, and growth is vital, but growth alone will not close such a colossal gap. But you can expect snake-oil salesmen and women to deflect attention from the budget adjustment in coming months, with the distraction of growth. But when we can’t borrow more and where we can’t increase our deficit, it is difficult to see where we can source or attract the funds for growth.
We can run down our strategic National Pension Reserve Fund which still has €5bn in it, though if we do, we have nothing to act as a buffer at the end of 2013, we can try to encourage private pensions to invest more in Ireland but in that, we face the same challenges as every other country trying to corral its pension funds for the national benefit, we might get a few hundred million from the European Investment Bank and we might get a couple more billion out of NAMA which will need to be repaid by 2020, but even if all of that creates 50,000 jobs, we’ll still have 12% unemployment equating to about 250,000 and we’ll still have 380,000 on the Live Register. Government generated growth just won’t be enough.
Time for an honest national conversation to start, because in the real world you just can’t have your cake and eat it.
NAMAwinelake is an anonymously written blog covering developments in Nama, property, banking and the economy. This post originally appeared here.
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