Irish Examiner 21/11/2014

Here is a piece carried by today’s Irish Examiner on the funding of public expenditure on water.  It is based on a recent post - ‘how much do we spend on water?’.  The unedited text for the piece is reproduced here.

Conservation grant a half-measure that muddies the waters

In 2012 public expenditure on water in Ireland was €1.5 billion.  This money is being spent on a system that does not work.  The ongoing protests about water charges fails to understand the key point – it is not about paying for water; it is about paying for the infrastructure to deliver clean water and treat waste water.

Over the past ten years the government has spent €18 billion on water.  Of this, only 10 per cent was to pay for the actual supply of water to households and businesses.  An emphasis on conservation can only save money on this small portion of the expenditure.  The other 90 per cent of expenditure is unaffected by the amount of water we use.

It costs about twice as much to manage and treat waste water and sewage as it does to provide clean water.  A further 30 per cent of water expenditure over the past decade was consumed by staff costs.  The remaining 40 per cent was devoted to investment in the water and waste water infrastructure.  This is the largest component of expenditure on water and the most important.

The most significant austerity measure introduced in relation to water since 2008 is not the botched introduction of domestic water charges – it has been the slashing of investment in our water infrastructure.  Since 2008 capital spending on water has been cut by over 60 per cent.

In 2008, the government provided €1 billion for investment in the public water system.  The same year the ESB also provided €1 billion for investment in the electricity system.  In 2012, the ESB’s capital expenditure was close to €800 million while public capital expenditure on water was cut to just €375 million.

As a semi-state company the ESB can leverage its revenues to borrow money to fund its investment.  As a commercial enterprise the ESB’s management can take a long-run perspective.

On the other hand, expenditure on water was part of general government expenditure and the huge cuts to public investment in water were introduced to meet short-term deficit targets and avoid adjustments elsewhere.  

Huge expenditure is needed to bring our water network up to scratch but it is not clear where the money will come from.  The government remains under pressure to reduce the deficit and the size of the public debt limits the government’s capacity to borrow even though interest rates are at historical lows. 

A public utility can raise the funds and its management can look beyond short-termism or the election cycle.  Investment in water and sewage infrastructure does not have political attractions.  It is disruptive, underground and offers little opportunity for ribbon cutting. 

Although they have been on the agenda for years, water charges were rushed in by the current government because they wanted to get them in the rear-view mirror well before the 2016 election.  The charges were over complicated politically-motivated add-ons such as allowances which required PPS numbers to be administrated correctly. 

If the politicians wanted to compensate people for the introduction of water charges it should have been done through the existing tax and transfer system.  This would have been possible in last month’s budget which had a €1 billion package of tax cuts and expenditure increases but a lack of joined-up thinking resulted in a failure to get a coherent message across.

Now we have a further complication with the €100 water conservation grant.  This is just further pointless administration.  The government want to cap water charges at €160 per household but because Irish Water must get more than half of its revenue from private sources households will actually pay €260 to Irish Water and receive €100 back from the Department of Social Protection. 

The government met major difficulties a few years following the introduction of the €100 household charge; now they are giving €100 to households to try and solve the mess made of water charges.   To avoid been deemed as a subsidy to Irish Water the €100 will be paid to all households.  So instead of collecting money off those on the public system we now have reached a point where we are subsidising those on private water schemes who paid for their own water up to now.

Ireland has a history of introducing measures with names that do not reflect their actual design.  For example, we have the respite care grant and the public sector pension levy.  This measures have their merits but their implementation has nothing to do with respite care or public sector pensions.  They are a transfer payment and a pay cut. 

There are many items on this list to which we can now add water charges and the water conservation grant.  These have nothing got to do with using or conserving water.

The principles of taxation are equity, efficiency, certainty and ease of administration.  The charges announced this week fail on three of these principles.  Both the charge and offsetting grant are at a fixed rate so are regressive.  The fixed charge means that there are no efficiency gains from conservation and the fact that households have to pay €260 to Irish Water to get €100 back from the Department of Social Protection only adds to the unnecessary bureaucracy of our system.

It is a little ironic that the outcome of the protests of the past few weeks has resulted in charges that are regressive and inefficient.  We should have water charges based on use but not necessarily because we need to conserve water.  Conserving water is helpful but it is not as if like we are going to run out of it.  It actually does fall out of the sky.  It is better management of the plentiful supply we have that we need.

Better management can be achieved by metering but the benefit of this will be in identifying leaks and unreasonable usage rather than in getting typical households to control their usage.  Universal metering is unlikely to being significant benefits.  The introduction of metering is to link charges with usage of water but we must have a utility that can adequately fund the 90 per cent of expenditure that is on top of the cost of the actual water.

Many of those protesting want the abolition of Irish Water.  A utility company for water is exactly what we need.  The system that resulted in the broken water network we have now must be dismantled.

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Sunday Business Post 26/10/2014

Here is the submitted text for an article in last weekend’s SBP on the European Commission State-Aid investigation to Apple’s tax arrangements in Ireland.

Commission probe unlikely to bear fruit

The European Commission’s investigation into Apple’s tax affairs started out as a narrow probe of a transfer pricing arrangement in place in Ireland back in 1991 but could expand into a much broader trawl through Apple’s global tax affairs. 

The discussions from 1991 that took place between Apple’s tax advisers and the Revenue Commissioners were reported in a damning fashion by the Commission but were short of what is required for an adverse state aid finding to be made.  It seems the Commission investigation are motivated to make an adverse finding against Ireland and have thrown a wide net over Apple’s management of its intangible assets.  However, like their examination of the 1991 agreement the Commission are unlikely to come up with much to interest them.

The key to Apple’s profitability are its brand and innovations.  Lots of companies can make smartphones and other consumer devices but none command the customer loyalty Apple has engendered or the reputation it is fostered.  The Apple brand is a massively valuable asset and much of Apple’s profit is rightfully attributed to it.

Apple has divided the economic rights to into two divisions.  On one side you have the Americas, with Apple declaring its profits to the Internal Revenue Service in the US and paying tax accordingly.  On the other side there are the global rights to Apple’s intangibles and that is where the story gets interesting.

As was revealed by a US Senate investigation in May 2013 these hugely valuable intangible assets are held in Irish-incorporated subsidiaries of Apple.  However, apart from some Irish Corporation Tax paid on the profits of the activities of their branches in Ireland these subsidiaries paid no other corporate income tax anywhere in the world.

This was achieved by being “stateless” for tax purposes which was the result of not being tax resident anywhere.  Apple engineered this by falling between gaps in the interaction of Irish and US tax law.  Of course, a company that is “stateless” for tax purposes has to be somewhere in reality.

The question the European Commission wants answered is where are these companies.  If they are in the US it is not an issue for Ireland but if these companies are carrying out their operations in Ireland how come they are not paying Corporation Tax to Ireland on the massive profits earned.

There was lots finger-pointing at Ireland following the US Senate hearing but the reality is that these “stateless” Apple subsidiaries carry out their activities in the US and therefore their profits are not subject to Irish tax.

In his opening statement to the Senate hearing when talking about these companies, the committee chairmen Sen. Carl Levin said that “these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States.”  In a sense the European Commission have asked the Irish government to prove this.

A problem faced by the government is that they need Apple’s help to do so.  It was easy for the government to provide the information on the 1991 agreement because the Revenue Commissioners had it all but how do they get information about Apple’s activities in the US unless the company provides it?

From an outsider’s perspective we can try to find evidence of these companies in Irish economic statistics, most notably the balance of payments which records international transactions.  The scale of Apple’s financial flows means they should be fairly easy to identify in Irish statistics.

In 2011, the key Apple subsidiary in question made payments of $1.4 billion to the parent company as part of the agreement to use Apple’s intangible assets outside the Americas.  In that year this company had sales revenue of $48 billion and a profit of $22 billion.  If these massive financial transaction were happening in Ireland they should be easy to identify in Ireland’s economic statistics. 

We know that Google does have its international sales running through Ireland and the effect of these on Irish economic statistics can be identified.  In 2013, Google’s non-US revenue was €17 billion which is much lower than Apple’s.  It is also the case that Apple’s revenues are growing rapidly.  The subsidiary the Commission are focussing on had revenues of $48 billion in 2011 which in 2012 had grown to $64 billion and this rapid growth has continued.  Figures in the Irish data do not show these increases.

A useful check to make would be to see if these flows appear in US balance of payments data.  Apple may be one of the biggest companies in the world but the US remains the biggest economy in the world and identifying the impact of a single company in US statistics is impossible. 

We can check flows by country and there is nothing in the US data to suggest that Apple is routing its revenues through Ireland.  A possibility is that the investigations into these “stateless” companies has revealed huge gaps in the international tax law but also a massive black hole in balance of payments data.

The profit from Apple’s sales around the world flow directly to the US just as Sen. Carl Levin said last year.  Unlike Google there is no stop-off in Ireland to indicate that the application of Irish Corporation Tax to these profits is warranted.  The profits are in the US and it is US rules that allows them to go untaxed until they are transferred from the subsidiary to the parent.

It is not clear how the Commission investigation will proceed from here.  Apple may not have been pleased but, as a US company, they were obliged to provide information to the US Senate on their US activities. There is no such obligation for them to tell the European Commission about their activities in the US and the Irish government cannot provide information that they do not have. 

The Commission are shaking the Apple tree but nothing is going to fall out of it.  Rather than being objective it seems they will be disappointed by that.

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Sunday Business Post 16/03/14

Here is the submitted text for an article in this week’s SBP on SME debt, the state of the banks and this year’s stress tests for eurozone banks.  It continues below the fold.

Should we fear an SME loan meltdown?

In 2007 Prof. Morgan Kelly identified the likely 50 per cent fall in Irish house prices. He set out the implications this would have for construction employment but suggested that the larger banks were “well-capitalized” with unemployment and “macroeconomic dislocation” being the main problems that would emerge. The analysis was incredibly accurate on house prices and the consequences for employment and it wasn’t long before the impact on the banking sector also became clear.

The underlying factor to the most recent warning is not property price falls but the banks calling in loans provided to small and medium enterprises (SMEs) and in the event of their inability to repay the banks would foreclose on the businesses. Again the threat is to employment but it is not limited to 300,000 construction jobs; it is to SME employment across the entire economy.

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Irish Independent 12/11/13

Here is a piece published in the Irish Independent that looks at some of the details behind the collapse of Newbridge Credit Union.

More credit union failures are inevitable - and we'll pay price

Two additional points that space constraints meant they didn’t make it past the sub-editor are:

The €54 million that is being provided to PTSB from the Credit Union Resolution Fund is roughly split as half to cover the existing capital shortfall on the balance sheet and half to cover the additional losses that the special manager has projected.

and

There have been protests from credit unions members but absent this rescue through PTSB the credit union would have crashed in a matter of weeks. Somewhat paradoxically they are protesting against being bailed out.

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Irish Examiner – 06/09/2013 and 13/09/2013

The Irish Examiner have carried two pieces from me over the past week.  They are available at the following links.

• Facing up to the arrears problem, 6th September
• Getting banks back on track, 13th September

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Evening Echo 27/05/2013

The importance of Apple to Cork city and surrounds meant the furore of last week was bound to attract the attention of the local media.  Here is a piece (continued below the fold) on Apple and the broader corporation tax debate that was carried in Monday’s Evening Echo.

Firms using US tax rules to their benefit

The intense focus this week on the tax strategies of US companies like Apple has led to speculation that there will be changes in international tax practices.

This is particularly important from a Cork perspective as not only is Apple based here but so too are many US companies in the pharmaceutical sector. These are large companies offering thousands of well-paid jobs that are hugely important for the Cork region.

There is no doubt there are some risks to having this dependence on US investment but the presence of two construction cranes in Hollyhill is an indication that Apple are not expecting any changes in the medium term.

There have been accusations that Ireland is using unfair tax competition and dodgy tax practices to attract foreign direct investment. However, most of the large companies that the IDA has attracted to Ireland are from the US. This would suggest that there is something in particular that makes Ireland attractive to US companies.

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Irish Times 29/03/13

The previous post on EU corporation tax revenues reminded me of an article for The Irish Times that was published in the Friday business section about a month ago.  I don’t think it was available online and was based on this post.  Here is a scan of the piece and the text is reproduced below.

Increasing headline rate of corporation tax will do little to unravel ‘Double Irish’

Ireland's headline rate of corporation tax is 12.5% despite some pressure to increase it.  Such pressure seems to have been successful in getting Cyprus to increase its corporate tax rate as part of its EU/IMF programme and now only Bulgaria has a lower corporate tax rate in the EU than Ireland.

However, it is not necessarily the headline rate but the calculation of the tax base that is the most important feature of the Irish corporate tax regime.
Recent data published by the Revenue Commissioners show that, in 2010, companies in Ireland reported an aggregate gross profit of just over €70 billion. On these profits, companies paid €4.2 billion which gives an average effective tax rate of 6%.

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Irish Examiner 02/01/13

The unedited text of a recent article from The Irish Examiner is continued below the fold.

UPDATE: The published text is here.

Counting up the myriad costs of five years of running a budget deficit

The last year in which Ireland did not run a budget deficit was 2007. In that year, general government expenditure was €68 billion which was matched by revenue of €68 billion, giving a balanced budget overall.

The outlook for 2008 was described as “uncertain” but the budget announced by Brian Cowen on the 5^th of December 2007 allowed for an eight percent increase of spending in 2008, with increases across all areas, as well as reductions in income tax through changes to tax bands and credits. All of this was supposed to result in a budget deficit of less than 1% of GDP because the assumed growth rate facilitated such largesse.

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Irish Examiner 22/12/12

The unedited text of an article that appeared in The Irish Examiner recently is continued below the fold.

We need to face up to the repossession crisis

According to the latest mortgage arrears statistics there are 33,000 households in arrears of between 90 and 360 days and a further 35,000 households in arrears of more than 360 days. Both figures continue to rise. There is an expectation that they will level off in the middle of next year but we will have to wait for evidence of that to emerge.

Beneath this there are 39,000 households in early arrears of less than 90 days and a further 34,000 households who have had their mortgage restructured but are not in arrears. Across all levels there are around 150,000 households showing some sign of mortgage distress from very mild to very severe levels.

Research by the Central Bank shows that 44% of borrowers who fall into 90 day arrears return to performing mortgages over time. It is likely that 100,000 households need some form of intervention.

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Evening Echo 28/11/12

The text of a recent article for The Evening Echo is below the fold.

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Cork Independent 02/08/2012

The text of a short article from today’s Cork Independent is below the fold.  It offers some brief comments on the unemployment figures published recently as part of the results from Census 2011.  The newsprint version of the article can be seen on page 30 here alongside a rather colourful picture of some Naked Bike Riders!

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Evening Echo 16/07/2012

Here is the text of an article written last week that was published in tonight’s Evening Echo.

Our banks now just worth €12bn

In the course of the past four years Ireland has poured €64 billion into the recapitalisation of just six banks: AIB, BOI, EBS, PTSB, Anglo and INBS.  Just over €1 billion was received in return for the sale of around one-sixth of Bank of Ireland so this leaves the total recapitalisation bill at around €63 billion.

Of the €63 billion that has gone into the banks, €35 billion has been provided to Anglo and Irish Nationwide.  These dead banks have been merged into the Irish Bank Resolution Corporation (IBRC).  The bulk of this money was provided via €31 billion of Promissory Notes issued in 2010, while €4 billion of cash was provided to Anglo in early 2009 when we were still in the notional realm of “the cheapest bailout in the world”.

Discussions to change the repayment of this money have been ongoing for months.  The aim for Ireland is to try to delay the repayment at low interest rates for a very long time, say 25 years, to allow growth and inflation the opportunity to reduce the real cost of these banking failures.

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Cork Independent 17/05/12

A short article I wrote on the Treaty on Stability, Coordination and Governance for The Cork Independent can be read here.

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Evening Echo 15/03/12

Here is the text I submitted for an article that was published in tonight’s Evening Echo.

Voting ‘no’ to Treaty will not stop this austerity

After a few weeks of uncertainty we now know that there will be a referendum on the EU’s Fiscal Stability Treaty.  We still don’t know what the proposed change to the Constitution actually is but we do know what the referendum isn’t.  It is not a vote on the rules in the ‘Fiscal Compact’ element of the Treaty. 

Ireland has already signed up to these rules, and some more besides, as part of the revised Stability and Growth Pact agreed last year.  The ‘balanced-budget rule’ in the Fiscal Compact has actually being part of the fiscal rulebook since 2005.

The main addition is that the Treaty requires the rules in it, including an automatic correction mechanism of excessive deficits, to be introduced in national law “through binding, permanent and preferably constitutional provisions”. 

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Evening Echo Article 29/08/11

I wrote an article last week that was carried by Monday’s Evening Echo.  The goal was to highlight some positive elements of the current economic situation.  I must have been in a very good mood as I took this ball and ran with it.  Some revised numbers have been released since this was written but, in the main, it holds up.

Reasons to be cheerful parts one, two and three

The Irish economy has taken a battering over the past four years.  The unemployment rate has risen to 14%, the banking system collapsed with the crash in the property market and a €20 billion hole opened in the public finances. 

These are all problems that will not be resolved easily.  However after four years where the news was unrelentingly negative, we have had occasion recently where some positive economic developments leaked into news cycle.  Here are nine that are worth recounting.

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Irish Examiner Article 14/07/2011

I had an article in today’s Irish Examiner examining the implications of the recent movements in Irish bond yields and the downgrade to junk status of the same bonds by Moody’s. 

The article was not carried by the online version of the paper but a rather scratchy scan of the newsprint version can be seen here.  Alternatively, the text submitted is provided here.

Funding Crucial To Get Us Through Key 2014 Date

The downgrade of Irish government bonds to junk status by Moody’s has generated a lot of reaction, but has not actually changed the reality that Ireland faces. In this reality Ireland’s general government debt (GGD) at the end of 2010 was €148 billion, although this can be offset by €16 billion of cash reserves we also held. 

Between now and 2014 the annual budget deficits will increase the debt by another €50 billion.  By the end of July, our borrowings will have increased by a further €8 billion as part of the ongoing recapitalisation of the banks. 

The 2014 general government debt will be close to €210 billion or around €190 billion if you want to consider the net figure by subtracting our cash reserves. This will be around 110% of GDP which puts us in the danger-zone of debt levels but it is not a terminal level of government debt.

One question that must be addressed is whether we can actually get to 2014 when it is forecast that our public debt will have stabilised and maybe even begun to decline.  Bond markets are of the clear view that we cannot survive to 2014, and this view has been subsequently embraced by Moody’s in Tuesday’s downgrade.

The EU/IMF deal provides €50 billion for the running of the State.  If the only use of this money was to fund the annual deficits then it would seem likely that we could make it to the end of 2014, and the €16 billion of cash reserves would certainly guarantee that.

However, we also need funding to pay off the maturing of existing debt.  Usually this is simply rolled over by borrowing from someone else in bond markets.  We are shut out from these markets so the money to pay off our existing debt must also come out of the EU/IMF package.

Over the next four years we have around €44 billion of debt repayments to make.  To get to the end of 2014 we actually need €94 billion of ongoing funding.  Between our own cash reserves and the EU/IMF money there is €66 billion available.  This will be fully exhausted sometime in the middle of 2013.  In just over two years the Irish State will be broke. Bond market investors know this.

Among the €90 billion of government bonds there are issues that will mature in November 2011 and April 2012.  These are trading at relatively low yields, with the November 2011 bonds yielding 5.5% indicating that buyers believe these will be paid off.  They will be.  After this, the yields on Irish bonds soar. 

The highest yielding Irish bonds are €12 billion of bonds due to mature on the 15th January 2014.  These now have a yield of over 17%. A 100 euro unit of these bonds would provide about €10 of interest payments over the next two and a half years and a €100 maturity payment in January 2014.

This bond, which has to potential to generate €110, can now be bought for about €75. Markets do not believe that these bonds will be repaid in full.  With the State forecast to run out of money in the middle of 2013 this is a perfectly reasonable assumption to make.

The 15th January 2014 is a key date for the Irish economy.  If we can get past this date we will afford ourselves some breathing space. After January 2014 it is more than two years until the next bond rollover date arises in April 2016, and if we have brought the deficit under control our dependence on funding could be very low. 

In the meantime, though, Ireland will run out of money in the middle of 2013.  Current bond market yields suggest that we would have to pay over 13% to raise private funding.  Borrowing at rates of even half of that is not sustainable.

The current plan is that this Ireland will return to bond markets in late-2012, but with yields where they are now that cannot happen.  This means we will be bust before we can raise any more money and the bust will come first. The Moody’s downgrade reflects this reality.

If we choose to avoid this outcome we will need additional support from the EU/IMF.  The original €85 billion bailout had €35 billion set aside for the banks.  It now appears that not all of this will be used and the IMF have indicated that the leftover money can be transferred to help fund the State. 

If an extra €30 billion or so were made available it would guarantee funding through the crucial January 2014 period.  Once markets see that we can get to the stage where the debt is sustainable it is likely we can source more of our funding privately and begin to stand as an independent state again. This will also require a substantial improvement in domestic economic indicators and political acceptance of the necessity of ‘Bailout 2’.

The Irish economy can emerge from this crisis, but it would be utter incompetence to let it fail because we did not have the required funding in place to get us through January 2014.  Whatever about the rhetoric from the Government in public we must hope that in private they are dealing with reality and ensuring that this money will be available.

It appears that there is at least one person who agrees with me!

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Irish Examiner Article 06/05/2011

I had a piece carried today by The Irish Examiner on Ireland’s recent trade performance.

Trade Is Keeping Our Economy Afloat

I’m not sure the piece fully agrees with the headline!  The piece is a slimmed down version of an original article that is included below the fold.  This also includes a number of additional details that also belie the above headline.

The main point is that while the headline trade figures appear to give support to the concept of an ‘export-led recovery’, I think that once you dig down into the figures in a little more detail the impact of these trade improvements ‘on the ground’ is negligible.  

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Evening Echo Article 22/04/2011

Here is the text of an article I wrote after this week’s publication of the Review of State Assets and Liabilities that was carried by Friday’s Evening Echo.

The Review of State Assets and Liability published this week identifies around €5 billion of assets which could be sold. The report was undertaken by a group of three, but it is the group chairman, UCD Economics Lecturer, Colm McCarthy who is associated by name with the report. The other members of the group were Alan Mathews, an Economics Professor in Trinity College and Donal McNally who is the Second Secretary in the Department of Finance.

The report gives a useful insight into the activities and outcomes of 15 commercial state bodies, including the ESB, Bord Gáis, CIE, An Post, RTE and the airport and port authorities. Some commercial bodies were excluded from the report. These were the VHI, NAMA and the now nationalised banks as these are all subject to separate processes.

The report makes some strong recommendations about how these assets should be used, but emphasises that an immediate sale of these assets should not be contemplated. The recommendations of the report are to be considered by government and it is only once their actions are announced that we will know what the outcome of this process will be. The report, though, does give us the information they will be using on which these decisions will be based.

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Evening Echo Article 04/04/2011

Here is the text of an article I wrote in the aftermath of last week’s stress test announcements that was carried by Monday’s Evening Echo.

The much anticipated bank stress tests revealed that four of the six banks covered by the guarantee will require an additional €24 billion to cover the losses built up during the property boom.  These banks (AIB, BOI, EBS and IL&P) have already received €11 billion in recapitalisation funds from the State.

The bulk of the money spent by the State in what is now ‘the costliest bank bailout in history’ went to Anglo Irish Bank and Irish Nationwide.  These zombie institutions have already consumed €35 billion of State resources.  None of this money will be returned. 

As these banks are being wound down they were excluded in the current stress test process.  The report gives the belief that no additional capital will be required by Anglo and INBS.  It would be nice to think that this is true.  The previous recapitalisation process for Anglo has made provision for an additional €5 billion of funds to be provided by the State.  We will know more about these two banks when further details of their wind-down process are revealed in May.

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