The background to the decision last February to scrap tax measures that kept investors out of the residential property market has revealed much about the Government's approach to policy making on this issue. The penal 9 per cent stamp duty rate charged on new investment property - and the associated 2 per cent per annum anti-speculation tax - were abandoned in response to sustained lobbying by investor related interests. Documents released under the Freedom of Information Act - as reported in this newspaper on Monday - show that the U-turn was made against the advice of Department of Finance officials who felt the measures were having the intended effect. A 9 per cent rate for investments in second-hand residential property was retained.
The tax-based disincentives in question were born out of the third report by economist Mr Peter Bacon to the Government, delivered early last year. The response of the Government to the report addressed only part of the problem. Rather than concentrate on the root cause of higher prices - a shortage of new housing - the Government opted for a quick fix, based around reducing demand by taking investors out of the market. A drawback was, however, that a certain level of investor interest was needed to ensure that developers kept building apartments and starter homes. The new measures also decimated the holiday home market.
Despite their crude nature, the measures were effective. Investors disappeared from the residential property market almost overnight. Not surprisingly the ink was hardly dry on last summer's second Finance Bill when the individuals who stood to loose out started lobbying. They included holiday home developers, rural auctioneers and other business interests.
The clientalist nature of the political system quickly brought about the farcical situation where the Taoiseach was lobbying his Minister for Finance - on behalf of the chairman of Drumcliffe, Co Sligo, Fianna Fail cumann - to reverse the measures. Mr Ahern was one of seven cabinet minister who found themselves lobbying for the overturn of their own collective decision of a few months earlier. They were joined by the Government chief whip, five ministers of state and a group of Fianna Fail backbenchers. Mr Jackie Healy-Rae, the unofficial leader of the four independents on whom the Government relies for its majority, also pressed the case.
The situation could be dismissed as comical, had the Government not proceeded to then abandon the new measures. The volte-face was carried out despite opposition from the Department of Finance. Department officials pointed out - somewhat tongue in cheek, presumably - that the sheer weight of lobbying from investor related interests indicated the measures must be working. They also cited a considerable body of evidence to show that the tax was slowing the rate of increase in house prices and giving first time buyers an edge over investors. The officials also warned that abandoning the measures so soon after their introduction would indicate that the Government had no faith its ability to make policy in this area. They were right.