Sector undermined by political mismanagement

Supports were allowed to continue far too long during the Ahern years, writes COLM KEENA

BACK IN the boom years, people such as Joan Burton and Fr Seán Healy spoke out incessantly about the injustice of the tax breaks then in operation, and about high-net-worth people paying less tax than people on low to middle incomes.

Not even they, however, said the hotel relief scheme was directing large amounts of bank borrowings into insolvent businesses that would in time threaten the viability of an entire industry.

Economist Peter Bacon’s report shines a focused light on the mismanagement of the State by Bertie Ahern’s second government, and in particular by the current Taoiseach and then minister for finance, Brian Cowen.

Capital allowances for hotels were first introduced in the 1960s and supported the development of businesses such as the Doyle and Ryan hotel groups.

New measures were introduced in the Finance Acts of 1994 and 1997. The 2003 budget brought these measures to an end, but the associated act allowed for transitional arrangements and these were extended again in 2004.

The transitional period for extended capital allowances was again extended in the 2006 Finance Act, providing for 100 per cent of expenditure in that year, three quarters in 2007, and half in 2008. In other words, the scheme, which should have been closed in the very early part of this decade, continued right up to the collapse of the property boom and, as is now clear, the near collapse of the hotel sector.

In December 2004 Cowen, as minister for finance, announced that a review of the various tax schemes was to take place, including the hotels relief scheme.

A draft report of the tax review group in October 2005, available on the Department of Finance website, notes that the Department of Arts, Sports and Tourism “suggested that the tax relief schemes for hotels had run their course and that the hotel trade agreed”.

In December it was disclosed that the review had found the tax schemes to be costly and inefficient. However, there was much lobbying that schemes which were in the pipeline had to be provided for, and so the extended provisional arrangements for hotel investors were put in place.

It was over this period, from the beginning of the second Ahern government right up to last year, that the most disastrous investment occurred in the hotel sector, as Bacon’s report makes clear.

The total amount of investment available for relief in the period 2004 to 2008 may have been up to €3.72 billion. The cost to the exchequer may have been €1 billion. The investors borrowed money that then qualified them for tax relief on other earnings.

Bacon’s analysis shows that the number of hotel rooms in the State rose rapidly in the period after 2003 – around the time the banks started borrowing money abroad which they directed into the property sector. On average, the hotels were insolvent upon construction.

Bacon’s analysis of Central Bank data on hotel-related debt concludes that there was a negative net asset value of just over €17,000 per existing hotel room in 2008 and a debt-to-room value of 117 per cent. He says total excess of debt over hotel asset value now stands at more than €1 billion, with most of the debt relating to post-2004 development. Given the dire state of the sector, as outlined in Bacon’s report, this figure will no doubt continue to grow.

The investors sought to avoid their due taxes, and now that it has gotten them into difficulties, the State is being asked to create a get-out clause. The ordinary taxpayer, meanwhile, has to again cough up, to shore up the weakened banks. Good, long-term businesses have being undermined by reckless, wrong-headed investment practices.

The report is a picture of political mismanagement on a grand scale.