OPINION:RECENT YEARS have been dominated by the need to correct the public finances and sort out the banks. Business, meanwhile, has got on with the task of cutting costs, restoring competitiveness and adjusting to new economic realities.
All of this needed to happen, but there has been a paucity of new ideas when it comes to reviving the domestic economy. The property market is frozen, those that can afford to spend are saving and the level of economic activity is far below what the economy can reasonably sustain.
There is, however, considerable potential for growth.
Years of recession and fear have resulted in significant pent-up demand. Yes, many are struggling to get by, but others have deferred purchases and investment decisions because of the climate of uncertainty. In time, normal spending and saving patterns will return. The challenge is to ensure this happens soon.
In the first instance, consumers need to be given more certainty about the future. The Government must move faster to rebut inaccuracies touted by commentators, particularly with regard to Ireland’s debt sustainability. The upcoming four-year plan for public finances is also an opportunity to set out how future budgets will affect households.
Getting the property market working again must also be a priority; we desperately need a normal, sustainable level of property transactions to resume.
The number of mortgages for first-time buyers and mover purchasers has dropped from about 80,000 a year to about 10,000 per year. If the market functioned normally, this figure should probably be about 40,000 a year, allowing for lower employment growth than that recorded in the boom.
Each property sale results in direct spending of about € 20,000 in additional items, such as professional services, furniture and home improvements. A properly functioning market would therefore generate about € 600 million a year for the domestic economy, with significant revenues flowing to the exchequer. To ensure these benefits are realised in the near future, the Government should encourage prospective buyers to purchase sooner rather than later. This could be done by exempting homes purchased before 2013 from any new property taxes for six years and those purchased during 2013 for three years, and pre-announcing an increase in the flat rate of residential stamp duty on purchases after December 2012 to 2 per cent, and to 3 per cent after December 2013.
Nama should be redesigned to ensure it disposes of properties quicker and the Government must work with the covered banks to get a clear view of mortgage demand and ensure sufficient credit is available.
Along with the property sales, home improvement work generates considerable retail and construction activity. New steps should be taken to encourage older age groups, with high savings levels, and younger age groups unable to move house due to negative equity, to invest in home improvement.
A home improvement tax credit should be introduced for a period of three years. This would increase activity and have the knock-on bonus of ensuring that work carried out is tax compliant.
There is also scope to change pension rules to allow some of the €70 billion plus savings to be spent now. Many have not provided adequately for their retirement, but some put substantial amounts into AVCs.
The Government should allow a period of three years during which up to 25 per cent of the value of AVCs could be drawn down without penalty at the standard rate of tax. This would boost State coffers and the domestic economy.
Steps also need to be taken to ensure the enormous welfare budget is spent in a way that is most advantageous to the wider economy. Child benefit costs the exchequer €2.2 billion annually and is paid to almost 600,000 families. The system is poorly designed and badly targeted.
When it comes to framing the next budget, reviving the domestic economy must be the priority. Austerity alone will not solve our problems; we need new ideas and a new strategy for growth. Our fortunes will not change overnight, but sensible, inexpensive steps can speed up the recovery. Simply waiting for the domestic recovery to happen is not an option.
Danny McCoy is director general of the Irish Business and Employers Confederation