Historical Origins of Ireland’s Low Corporation Tax Regime

Readers might be interested in this analysis of the (bureaucratic and electoral) politics of the introduction of export profits tax relief in 1956, available here. The abstract is as follows:

T. K. Whitaker and Seán Lemass are generally credited with effecting the policy shift from protectionism to outward orientation. Ireland’s low corporation tax regime, however, has its origins in the export profits tax relief (EPTR) measures introduced by the second inter-party government in 1956. EPTR was introduced at the behest of the Department of Industry and Commerce in the face of long-standing opposition from Revenue and the Department of Finance. Industry and Commerce at the same time successfully thwarted the desires of the Taoiseach, the Department of Finance and other state agencies to have restrictions on foreign ownership of industry repealed. These apparently contradictory positions were rooted in the historical legacy of protectionism. The inter-party Taoiseach, John A. Costello, downplayed the connection between EPTR and foreign investment in an apparent attempt to deprive Fianna Fáil of an opportunity for controversy. Its introduction hastened the end of Fianna Fáil prevarication on the issue of foreign ownership.

The importance of the intense electoral competition of the period is also frequently ignored in accounts of the policy shift towards outward orientation. Following sixteen years of unbroken Fianna Fáil rule, the next four general elections brought four changes of government. Along with the depth of the 1950s recession, this forced Fianna Fáil into a comprehensive reexamination of its industrial strategy. The economic thinking of the major political parties co-evolved, and many of the institutional innovations of the period, including the Capital Investment Advisory Committee, the Industrial Development Authority, the early Córas Tráchtála, and, of course, EPTR, were the result of inter-party government initiatives.

The defeat inflicted on Finance by the Department of Industry and Commerce partly motivated Finance’s work on Economic Development, the 1958 publication of which was important in providing political cover for Fianna Fáil’s U-turn on overall economic strategy.

Fine Gael’s “Negative Equity” Proposal

There are a number of good things in the Fine Gael banking document. However, the proposal that has caught the headlines – giving increased mortgage interest relief to the so-called “negative equity” generation of first-time buyers that bought during 2004-2009 – is a pretty terrible policy. Immediate comparisons with previous lamented FG proposals to compensate taxi drivers and Eircom shareholders are perhaps a little harsh but the policy makes little sense.

There are many people in Ireland today struggling to repay their mortgages. Many of these people are also in negative equity and this means that they cannot just sell their home and trade down to less expensive home with a mortgage they can afford. This is a genuinely serious problem and at some point the next government is going to have to work out how to deal with it.

To be fair to the FG document, it does contain some proposals aimed at dealing with the relevant problem of those who cannot pay their mortgages and are in negative equity, such as a new personal insolvency regime. However, the proposal to give every first-time buyer that purchased during this period is a blunderbuss policy that cannot be justified.

This proposal may help some people in negative equity but it will also help people who had lower loan-to-value ratios and are not in negative equity. Even to the extent that it does cover many people in negative equity, the idea that negative equity is, in itself, a problem is misguided. For those who took out a mortgage during this period, can still afford the repayments and don’t plan to move homes, the loss in value of their home has had an equivalent effect to losing money on an investment in shares: They are less wealthy but there is no good reason for the state to be compensating them any more than it should compensate those who lost money on investments in shares (Eircom or otherwise …)

In these straightened times, we simply cannot afford policies that arbitrarily hand out money to people who don’t need or deserve it. This idea should be canned and replaced by a more focused policy to deal with those who cannot cope with their mortgage repayments.

On Renegotiation of the EU-IMF Deal

One of the features of political commentary everywhere is that it tends to be dominated by a smallish cadre of insiders who view themselves as “sensible people” and usually figure they know what needs to be done. For example, Washington DC-based political commentary tends to be dominated by folks (Paul Krugman’s Very Serious People) who think politics should be about bi-partisanship and dealing with a crisis in Social Security. In reality, wide political differences make passing bi-partisan legislation impossible and the crisis in Social Security isn’t such a big deal.

In Ireland today, the sensible people have decided that the election should be about two themes. First, that any talk of renegotiating the EU-IMF deal is simply misleading the electorate, with some columnists resorting to much stronger rhetoric. Second, that the electorate should be focusing on the fact that Fine Gael and Labour have different policies. (I’m not singling out any columnists in particular but a few random selections from the Irish Times opinion page should confirm these points).

On the EU-IMF programme, the sensible people seem to have missed that the deal was going to be up for some type of renegotiation even before the ink had run dry. I’ll offer the following observations:

1. The EU-IMF negotiators knew there was going to be an election when the deal was put together and met the main opposition parties during their time here to prepare for the inevitable change in government.

2. When asked in December about what might happen after an election, the IMF’s Ajai Chopra was very relaxed about the idea of the plan being changed saying “as long as the overall objectives of the program are agreed to by all, and that does seem to be the case, the specific policies as to how to achieve that can be discussed.” At a press conference on Thursday, IMF Caroline Atkinson, Director, External Relations Department, stressed the same message. Atkinson refused the opportunity to say that the deficit targets in the programme must be kept unchanged

3. When Mr. Chopra was asked about whether there was a possibility of the overall interest on the package being renegotiated, his answer was “For the IMF, no. This is the rate that is applied to all member countries.” This answer clearly leaves the door open to the idea that the EU rates could be renegotiated. Also, because Ireland’s IMF quota is just about to increase and is likely to increase substantially further in a year or so, the underlying interest rate at which the IMF will be able to lend to Ireland will be about 100 basis points lower than announced last November. This will make the IMF loan rates at least 100 basis points lower than the EU equivalents, even when controlling for the fact they are variable rather than fixed rates.

4. The argument that Ireland cannot unilaterally renegotiate the interest rate on the EU loans is, of course, correct but the implication that the interest rate shouldn’t be discussed in the campaign is a little silly. We are borrowing from the EFSF and EFSM at the rates that these organisations have set for their lending operations and so these organisations would have to change the rates that they set for all countries, not just Ireland. However, right now, they are only lending to Ireland and, at a time of great change in European institutions, the next Irish government would be remiss if they did not raise the issue of lowering the interest rate.

5. Much was made about Jean-Claude Trichet’s comments at his press conference this week that Ireland needs to “apply the plan”. Some seem to interpret this as somehow meaning that the man in charge of the EU-IMF programme had just said that nothing could be changed in the plan but this is simply not correct. M. Trichet is, of course, very keen to see key aspects of the plan implemented, particularly the banking sector measures, and so one wouldn’t expect him to say anything else. However, the ECB does not set the interest rates on the EFSF or EFSM loans and, frankly, I doubt if M. Trichet cares very much about this or about whether there are small adjustments to the fiscal plan.

On the other point being pushed by the sensible people, that Fine Gael and Labour have (gasp!) … different policies, it might be worth pointing out that the last time an Irish election produced an overall majority government was 1977. Coalitions, featuring programmes for government thrashed out between parties with different policies, are now the norm in Ireland. Since Fianna Fail have no chance of forming an overall majority government, perhaps it might be worth also emphasising that they too have different policies than any of their potential coalition partners.

Bertie Ahern Regrets…..

My contribution to this week’s Farmers Journal:

 Bertie Ahern used his last full day in the Dail, on Thursday January 27th., to offer his reflections on a career which included long spells in senior ministries, including Finance, and 11 years as Taoiseach. Reporters seemed genuinely shocked at Mr. Ahern’s lament for his lost Bertie Bowl, which unbelievably he identified as his greatest regret from his time in office. He also protested that nobody had told him about the problems in the banks.

 

The Bertie Bowl, described by Mr. Ahern as a national ‘infrastructural’ stadium, whatever that means, was as daft a project as ever issued from the fertile brain of an Irish populist politician. The city of Dublin contains two fine stadiums at Croke Park and Lansdowne Road, both rebuilt in recent times with substantial taxpayer support. The Bertie Bowl would have been a third. At one stage, no less than four stadium projects were under consideration, the fourth being the FAI’s Eircom Park. But during the period when Lansdowne Road was closed for reconstruction, only Croke Park was available and comfortably catered for the full GAA programme plus all the rugby and soccer internationals, as well as numerous concerts. That it was able to do so reflects the simple reality that there are not that many big matches to be accommodated. There are rarely more than about 12 or 15 big GAA match-days per annum, and not many more between rugby and soccer combined. One stadium was enough for three full years. Neither Croke Park nor Lansdowne Road will be intensively utilised in the years ahead and it is debatable whether the city needs two big venues never mind three. 

 

But Mr. Ahern wanted a third, at a cost of around €700 million. It was one of the very few of his spending schemes that did not go ahead, because the late lamented Progressive Democrats pulled the plug after the 2002 election and can at least claim to have spared us a ghost stadium to go with the ghost estates. The vigorous campaign against Ahern’s curious project got little support from the Fine Gael and Labour benches, mesmerised by the popularity at the time of Ireland’s first celebrity Taoiseach. Jimmy Deenihan of Fine Gael, who should know a thing or two about stadiums from his days in the Kerry jersey, and Labour’s Pat Rabbitte, are the only exceptions I can recall.

 

Given the current condition of the country there is something profoundly disturbing about Mr. Ahern’s choice of the demise of the stadium project as his greatest career disappointment. Fate, or the forces of darkness, deprived him of the opportunity to waste €700 million. But his protestations about the failure of others to warn him about the credit bubble are even more extraordinary. As far back as 2001, the former head of Bank Supervision at the Central Bank, Willie Slattery, who had departed for the private financial sector, warned publicly, and in very blunt terms, about the risks emerging in bank balance sheets. Mr. Slattery’s speech was widely reported and caused quite a stir at the time, given his career background and knowledge of the banking business. There were numerous other public warnings from commentators around this time about the emerging housing bubble and the excessive growth in public spending. In October 2004, the influential Economist magazine devoted a cover story to Ireland which received extensive media coverage here. The story described the Irish bubble in unambiguous terms and warned of the risks. It is simply untrue to assert that no warnings were given. There were plenty of warnings, and in public. By the time Mr. Ahern addressed the Irish Congress of Trades Unions in Bundoran in July 2007, he had begun to hear what was being said and responded to his critics in the following terms:   

 

‘Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don’t know how people who engage in that don’t commit suicide because frankly the only thing that motivates me is being able to actively change something.’

 

His ‘suicide’ remark, a subsequent YouTube hit, was warmly applauded by the assembled trade union brethren. Mr. Ahern subsequently apologised and quite properly, to groups representing relatives of suicide victims. He never apologised to the targets of his remarks, of course. By the time Brian Cowen replaced Mr. Ahern in May 2008 the damage was well and truly done and it has been downhill ever since. The electorate blame Fianna Fail for both the genesis and the handling of the crisis and they will have their revenge it would appear. But having run the country from 1997 to 2008, this is unambiguously Bertie Ahern’s crisis. And his greatest regret is not having wasted even more money on a stadium folly. Planet Bertie indeed.

Quarterly Financial Accounts for Ireland

The Q3 2010 results in this new data initiative are now available from the Central Bank: the summary is here.