Business podcast: April 7th
This week with ECB rates on the rise we look at what it might mean for already cash-strapped consumers; how to make your wardrobe make you money and venture capitalists in Silicon Valley are still flashing the cash.
Current Account »
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One-to-one: Brian Whelan of Airtaxrefund.com
Ciarán Hancock talks to Brian Whelan, founder of Airtaxrefund.com, a company that helps air passengers get refunds on their taxes and charges if they buy an airline ticket but don’t actually fly.
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Business podcast: Budget 2011 special
John Collins hosts a special Irish Times business podcast on Budget 2011 with Dan O’Brien, economics editor, Conor Pope, Pricewatch editor and business reporter Laura Slattery
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Business podcast: Budget 2011 and taxes
Robert Dowley, tax partner with KPMG, talks to John Collins about the significant changes to the tax regime included in Budget 2011
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Business podcast: Budget 2011 and pensions
Dominic Coyle, deputy business editor of The Irish Times, talks to John Collins about how the Budget will impact on pensions in the public and private sector.
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Luxury car market still in good health
So what do you think was the best selling new car in Ireland last month? The modest Toyota Yaris? The functional Volkswagen Golf? The ever-reliable Ford Fiesta?
Not a bit of it. While all those models sold well, it was actually the 5-series BMW – with a price tag of between about €42,000 and well over €100,000 depending on model and configuration – that was the best selling model. Analysis of the car registration figures by Motorcheck.ie shows that 350 of these luxury cars were registered in July. In comparison the second place model, the Toyota Yaris, managed just 198 registrations.
While the vast majority of people are still feeling the economic downturn the figures clearly show there is a sizeable minority of people out there who are still doing very well.
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Your reaction: What do you think of Budget 2010?
There were few surprises in the most leaked Budget in history: cuts to public sector pay, the heralding of the carbon tax era, plus lower rates of jobseekers’ payments and Child Benefit. They were “very difficult choices”, according to Minister for Finance Brian Lenihan – but were they right ones? In short, what did you think of Budget 2010?
A painful but necessary economic correction after October 2008’s missed opportunity, or a galling exercise in picking on the powerless and vulnerable? Can things only get better, or will you have nightmares that we’ll have another emergency Budget inflicted upon us halfway through 2010?
Should we put the egregious policy errors of the past to the side and judge this Budget solely on its ability to provide an escape route from our alarmingly indebted predicament? Or is this Budget infused with the same “growth before fairness” logic that led us to this mess in the first place? What did the Government get right and what did they get wrong?
And finally… Is it time to knock back a (now cheaper) bottle of whiskey, cancel Christmas, riot on our streets and/or hold a general election?
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Budget countdown: poverty and poverty traps
It is naturally politically expedient to make admirable-sounding noises about resolving potential long-term problems when doing so eases a short-term issue, but when fixing a long-term problem creates short-term pressures on the State’s coffers, you might as well just forget about any kind of grand intentions and leave it to fester as usual. That’s what struck me reading the Department of Finance report Replacement Rates and Unemployment, which it published without fanfare on Friday.
The proximity to the Budget suggests that it’s a softening mechanism for some harsh welfare cuts on Wednesday; and that the words “poverty traps” and the avoidance thereof will precede Budget speech references to cuts to jobseeker’s benefit and allowance, a harsher means test for the jobseeker’s allowance and possible changes to rent supplement and one-parent family allowance.
The report considers replacement rates – the percentage of a person’s take-home pay that they would receive in social welfare benefits if they become unemployed. A replacement rate of more than 70 per cent is considered “excessive”, it noted: in other words, it would make the attractions of working somewhat limited. Result: long-term unemployment. The replacement rate should also fall the more you earn; if it doesn’t, something has gone wrong within the tax and benefits system, generating a poverty trap.
On the surface, it all sounds very reasonable: there should be some reward for working. Working full-time should result in higher household income than working part-time. And earning two-thirds of average industrial earnings should mean you have more cash in your pocket than you would do if you were on the national minimum wage.
In practice, however, governments only start talking about the need to avoid poverty traps and “incentivise” participation in the labour market at times when they need to save money, and that tends to happen right about the same point that the labour market is banjaxed. People who depend on welfare payments have their entitlements slashed with the excuse that it’s to encourage them to hunt for jobs that don’t exist (rather than the more honest reason that we’ve completely drained the kitty). It’s like throwing someone into the ocean from a boat with no ropeladder, then puncturing their lifejackets in the apparent hope that it’s the only thing that will make them want to climb back on board.
The case of single parents and the Community Employment (CE) scheme exemplifies the kind of misery that can be caused by applying pure economic concepts such as replacement rates to real life predicaments. According to the Department of Finance, the high replacement rate for recipients of the one-parent family allowance on the CE scheme needs examination. Essentially, what it says is that because the income of single parents on the benefit-assisted CE scheme is more than 70 per cent of that which they would receive in low-paid employment, there is a disincentive to move from the CE scheme back to the regular labour market.
No shit. But it’s not always about money. As Karen Kiernan, director of single parent support/lobby group One Family, says, the CE scheme is popular with single parents because it’s often the only kind of part-time / flexible employment that they can find and survive on. It’s not that there is a “lack of incentive” to move back into the benefit-free mainstream labour market because they would only be marginally better off by doing so. It’s that there’s a lack of opportunity within the mainstream labour market to do work part-time / flexible hours - the kind of hours that by definition are the only ones many lone parents can do.
Even in the good times, this was true. But rather than “incentivise” employers to change this, there now seems to be a strong possibility that the Government will follow the recommendation of the McCarthy report and cancel the entitlement of future CE scheme participants to the one-parent family allowance – it’s a double payment, so goes the argument.
Isn’t there a risk that rather than encouraging single parents to choose the regular labour market over a CE scheme, such a move would simply force single parents to stop participating in work, education and training programmes completely? Rather than removing a poverty trap, it could leave a group of people stuck in long-term unemployment – long after their children have grown up.
Mimimising this risk costs rather than saves money in the short term, so it’s not the kind of long-term issue we officially care about. Hey, we’re out of money. But let’s not let any politician or economist away with pretending they’re deeply concerned about potential poverty traps where it suits them to find them right at the same time as they take steps to guarantee actual, immediate and persistent poverty.
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Should borrowers be forced to opt for bankruptcy-lite IVAs?
Prize-winning economist Joseph Stiglitz told The Irish Times last week that a percentage of the debt of mortgaged-to-the-hilt people in negative equity should be lopped off. This, he said, would assist economic activity, by alleviating the sense of entrapment that people feel. It’s an easy stimulus that would also create more realistic bank balance sheets. (Read Colm Keena’s interview with Stiglitz here.) It also sounds attractively like getting a voucher for money off after you’ve paid for the (overpriced) goods. Please quote the promotional code “NAMA”.
One day later and the renewed Programme for Government proposed by Fianna Fail and the Green Party were touting the arrival of IVAs, or individual voluntary arrangements, a kind of court-free bankruptcy-lite process currently available to UK residents. Under an IVA, debt-riddled consumers can get a certain percentage of their debts written off if they come clean and – via the mediation of an insolvency adviser (a private company!) – successfully persuade three-quarters of their creditors to agree to a new schedule of reduced repayments. If they do, this is then binding on all the creditors.
Hmmm. This is just not the same thing at all. Sure, it might mean that some people who would be evicted from their homes under the current system would live to pay another loan repayment. Superficially, it seems like a good deal for bedraggled borrowers if they can get 62 per cent of their debts written off (the average last year in the UK). But IVAs can be insidious voluntary arrangements, too. For a start, it stands to reason that lenders would not agree to an IVA if they didn’t think they would work in their favour.
In the middle, a swathe of licensed insolvency advisers take their cut (in the UK, this is usually a couple of grand). That might generate a spot of employment for some out-of-work mortgage brokers: IVAs become next season’s debt consolidation deals. But are commercial insolvency practitioners really the kind of jobs that we want to create? Needless to say while others are enriching themselves on the back of the difficulties you’ve suffered as a result of the mismanaged economy, your credit rating will be flushed down the toilet (not that banks will be lending to anyone anyway).
The scheduled repayments, which typically last three to five years, are rigid, formal agreements: if you can’t keep to it, you are plunged into the very bankruptcy you were hoping to avoid. I know, that sounds a lot like a mortgage or any other loan. But borrowers were motivated by the desire for security (not greed) when they signed up to a mortgage. Sign your name to an IVA and you are effectively admitting culpability: your debt, your problem. That may be fine, but it does absolve the Government from having to force Ireland’s zombie banks to reduce borrowers’ debts in a manner that admits their culpability.
The Government is “overpaying” for the Nama assets by some €7 billion over the current market value. Asked why, Minister for Finance Brian Lenihan said this: “We’re talking about distressed loans, we’re talking about a distressed market, and you are entitled to make some allowance for long-term value… After all, if you look at it from the point of view of the bank – which is not a popular way to look at it, I accept that – why wouldn’t they just hold onto the loans and work them out themselves, if there was absolutely no premium involved?”
If you’re feeling a little shivery reading that, then it’s probably because you know you’re not going to get your “premium”, even though you’re a part of that distressed market too. Instead, you’ll be getting an economy marred by cuts to wages and welfare that will only increase the real value of your debts. Without a corresponding reduction in your loans, this painful slump will last a lot longer for everyone.
Of course, existing court debt enforcement procedures are Dickensian and individual voluntary arrangements – key word “individual” – as they exist in the UK will help reform this particular problem and spare some misery. But they are not the right mechanism to prevent Ireland’s zombie banks from breeding zombie consumers.
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Apt report or APT nightmare? Has the tax commission got it right?
Annual property tax. A third rate of income tax. The abolition of dozens of tax reliefs. A carbon tax on fuel. A “user/polluter pays” principle on water charges. The taxation of child benefit… Are you feeling queasy yet? Or will you be delighted to see the back of iniquitous “special case” reliefs? Are you glad that the burden of taxation is set to shift from the nation’s wage packets to its property wealth, or sick to the stomach at the thought of the worthless shack you bought at the peak of the property market costing you even more money?
The Commission on Taxation, charged with the task of assessing the “structure, efficiency and appropriateness” of the Irish taxation system, has come back with a 550-page document, for the Government to adopt wholeheartedly or distance itself from as it sees fit. But while Brian Cowen may not be ”wedded” to the idea of property tax, it seems increasingly likely that in years to come, homeowners will enjoy nothing more than a grumble about their APTs – not their apartments, but their annual property tax.
Forget hyping up the value of our properties, estate agent-style: soon we’ll all love nothing more than downplaying what our home is worth in order to save on tax. Never mind the attic conversion, we’ll be telling the professional valuer, look at this rising damp. Not that tenants will find much to enjoy in the Commission’s report either - rent relief is just one of the many tax reliefs up for the chop.
According to Frank Daly, the Commission’s chairman, the compensation for this extra pain will be lower income taxes. Overall, the recommended measures – ones that we have spent decades trying to avoid, he said – will spur economic activity, he believes. But right now, the economy is still flapping around unsure of itself, lumbered with a horrible Government deficit. It seems likely that an annual property tax will come knocking on our doors before the income levies are banished from our payslips.
If I stop being selfish and paranoid for a moment, however, I can see that there is much in this report that is both logical and fair. What do you think?
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