With the bad news about to be unleashed, it’s a good day for gallows humour, so check out Ronan Lyons’s musical tribute to our embattled finance minister (music here). Almost brought me to tears so it did.
Author: Karl Whelan
Fine Gael have released their budget proposals (though presumably not in time for the government to adopt many of them). The detailed financial breakdown of the proposals is at the bottom of the press release. There are a lot of proposals in here and they are, inevitably, a bit of mixed bag. For now, I will merely brandish a yellow card for unsportsmanlike behaviour at the idea that we can “save” €500 million in infrastructure spending by funneling it through an off-balance sheet vehicle.
I’ve criticised Pat McArdle on a couple of occasions recently so I’m happy to say that this article on tax makes some useful points. In particular, the following points are correct and are simply not being said enough by our economic and political commentators:
Income taxes are both too high and too low. Too high because marginal rates have gone above 50 per cent – Irish people seem to be averse to parting with more than half of their extra euro. Too low because half the population does not pay any tax.
The problem is not just high rates but, critically, the low levels at which they kick in. It is astonishing that a PAYE earner on a lowly €40,000 has a marginal rate of 51 per cent.
And
From now on, the challenge is to broaden the income tax base not increase the rates.
Perhaps unsurprisingly, there some points of emphasis in the article I’d disagree with. That the 2009 tax yield has fallen below its 2008 level despite tax rate increases is not proof that “we’re into negative Laffer curve territory”. It’s proof we’re in a very severe recession. But yes, the top marginal income tax rates are too high and they could be pushed into Laffer curve territory if we’re not careful.
Moreover, whatever about the upcoming budget, it will be essentially impossible for the government to stabilize the public finances over the next few years without finding extra tax revenue. Hopefully, this can be done, as McArdle recommends, by broadening the income tax base and by implementing some of the revenue-raising recommendations of the Commission on Taxation, such as a property tax. But getting these measures through won’t be made easier by comments such as McArdle’s jibe here that “tax increases are the last resort of a weak Government.”
There were some entertaining media reports last week about the appearence of AIB and Bank of Ireland executives before the Oireachtas Committee on Finance and the Public Sector. I decided at the time not to comment on these reports because the full transcripts of these meetings eventually get put online and these are a better way to judge what was said.
The transcript is now online here. The most insightful aspects of the committee meeting were the exchanges relating to what the banks were going to do with the NAMA bonds given to them by the Irish government.
Anyone following the NAMA debate over the past few months will have regularly seen and heard members of the government explain how NAMA was going to get credit flowing: NAMA would take ownership of the banks’ property loan portfolios in return for government bonds, which the banks would then use as collateral to get repo loans from the ECB and then these funds would be loaned out to Irish firms and households.
The statements made at the committee meeting by CEOs Richie Boucher of BOI and Eugene Sheehy of AIB did not at all conform with this story. Indeed, the general tone of their statements was that there would be very little swapping of NAMA bonds for ECB loans. Instead, as illustrated by Sheehy’s already infamous “trickle-down” comment, the only benefit to getting credit going in Ireland would be a lower cost of market funding for Irish banks which might get passed on to customers.
I have been sceptical all along about the government’s decision to use €7 billion of public money to purchase preference shares in AIB and BOI earlier this year at a time when the combined market value of these banks had reached a low point of about €1 billion.
When I appeared before the Oireachtas Committee on Finance and the Public Sector in May, I argued that the Irish banks would not have the resources to pay back these preference shares and that they would end up being converted into ordinary shares.
My recent presentation to the Labour Party also argued that the government’s preference shares were most likely going to be converted to ordinary shares, thus foregoing the automatic eight percent annual divided associated with these preference shares.
AIB’s statement in relation to its negotiations with the EU Commission brings us close to this event.