Jill Kerby

HIGHER STUDENT FEES COULD LEAD TO YET MORE FINANCIAL DISASTER …FOR STUDENTS

Last week’s revelation that there has been a surge in CSO applications for science and technology places in our universities is great news. The country needs more young people training for such sectors.  Consequently, and I speak from personal experience here as the mother of an 18 year old with his heart set on a science place at TCD, more young Leaving Cert heads are now engrossed in their schoolbooks this weekend as they scramble to achieve the higher points they’ll need from their June exams.

The less good news for these aspiring scholars is that there’s also been an increase in the number of students from Northern Ireland and the British mainland applying for college places here.  

They’re not doing so to fill our skills gap but because from next September their annual college fees go up to £4,000 and £9,000 respectively.  Unless they have rich parents, Irish registration fees of c€2,500 look a lot more affordable over four yeas than the prospect of years of slogging to pay off UK bank loans of £36,000  or more.

This isn’t just a simple tale of the consequences of changing government policy regarding the funding of third level education.  Fees are higher because all western governments are running huge deficits and they can’t get away with blatant universal freebies (like free university).

But unless they plan to reserve access to third level education only to the very wealthy – which is political suicide - they will have to find another way and state backed, student bank loans will be given a go until that money burns out.

The British have the Student Loans Company, which originally offered mortgage style finance to qualifying students and since 1999, future income-based loans – or graduate tax - for repayment purposes. The amounts the SLC award no longer cover the huge new fees and there are questions about how far the UK government can go to keep funding and guaranteeing these loans.

The Americans have similar schemes, but the money originates in private banks and is backed by the US government so that full cost of fees can always be covered and not just amounts set by the student loan company as happens in the UK.

The UK system is losing money, but the American one is an an unmitigated financial disaster. Could it also happen here?

Young buyer beware, especially in light of this anecdote.

A couple of weeks ago, the Federal Reserve Chairman, Ben Bernanke, made an extraordinary revelation to the House Finance Committee during his monthly report about the state of the US economy.

He said that his son, who is a medical student, now owes over $400,000 in (state-backed) student loan debt.

Tuition at an Ivy League medical school (where presumably Mr Bernanke’s son attends) costs at least $50,000 a year. Multiply that by seven or eight years (the young Bernanke also has living expenses) and that figure is credible. 

Or Incredible.

American doctors earn huge money but to be carrying $400,000 in debt before getting your first job or seeing your first patient seems a little excessive even by the US personal debt standards.

Bernanke junior’s story is an extreme example of what happens when government policy to support higher education with a state backed loan scheme goes out of control.

Government supported loan schemes really took off in the US in the 1970s, partly as a response to meet the education promises made to returning Vietnam War GI’s and to encourage higher third level education generally.

The size of the loans grew greater and greater in response to the inevitable raising of fees by the education sector which was acting in exactly the same way as all commercial recipients of cheap, easy-to-get finance react:  they raised their prices. 

(When an infinite amount of money meets a finite supply of goods, the goods ALWAYS get more expensive.)

The US student loan industry is now a racket. 

There is over $1 trillion in loans outstanding now and 27% of those loans are now in 30 days arrears.  Default is commonplace; so much so that bankruptcy laws were changed to exclude student loans. Unlike non-recourse mortgages, that debt now follows the ex-student indefinitely.

It isn’t just Ivy League and State universities that are the expected beneficiaries of taxpayer largesse. Every post secondary institution qualifies and there is now a new industry of for profit educational institutions in the US that was set up specifically to milk the government student loan schemes, aimed a sub-prime scholars.

No one with a beating pulse is turned away from so called third level education; if the student drops out or doesn’t get their qualification or degree, (and can’t repay their loan because they have no job), so what? The government picks up the tab, the fee part of which just keeps getting more expensive every year.

The US Economic Policy Institute recently produced a study that showed that the wages of young men aged 23-29 have fallen by 11%, adjusted for inflation over the past decade and by 7.6% for young women. 

The easy availability of higher education has not improved the employment or earnings prospects of all graduates in the United States and while the Ivy Leaguers with professional qualifications will undoubtedly early substantial incomes over their lifetimes, if their fees are not waived, even they will be burdened by inflated state-backed loans.

No one wants third level education restricted to only those who can pay the true and full cost. This is why colleges constantly seek (or should) donations, bequests and benefactors, and hire fund raisers and fund managers:  to offset the costs for gifted but poor scholars.

The politicians meanwhile have a political agenda, specifically to please middle class voters and to keep youth unemployment and dissent as low as possible.

For 15 years the cost of ‘free’ third level education was paid for through government borrowings and especially during the boom years, from abundant property taxes. (Where did you think that money was going when you paid €40k stamp duty on your new house?)

Now all this money is gone and university fees have to be reintroduced.

I don’t think we’re at risk – yet – of introducing calamitous state loan schemes on the American or even British models. That’s because we’re already bust.

But emigration isn’t going to keep the youth unemployment pressure cooker under control forever and it doesn’t buy very many votes from their parents either.

Give us enough time and financial assistance from the Troika or ECB and student loans will be part of the debt landscape here too with the same outcome: higher college fees and charges, even more ‘graduates’ than we already have with useless arts and social science degrees, a growing default rate as they can’t find adequate employment to repay their debt and, in the end, another great big bill for the Irish taxpayer.

THOSE AIB WORKERS LOST THEIR JOBS FOUR YEARS AGO

Losing your job is always a difficult personal setback.

The 2,500 AIB workers who will lose theirs are no different from all the other hundreds of thousands of private sector employees who have been made unemployed in the last four years except, of course, that they’ve known for nearly all that time that their jobs were hanging by a thread.

The 2008 global financial crisis and the massive fall in Irish bank share prices the previous year signalled the perilous state of the Irish banks. Within months it was established that the Irish banks were bust and would have folded if the Irish state hadn’t unilaterally guaranteed all their debts and deposits.

Four years later and nationalisation, no profitable new business has been done in AIB.

The 13,000 workers have mostly spent their time servicing the on-going ordinary needs of customers like personal banking (which is not very profitable) or in coping with their arrears and debt problems - which is a huge loss-maker. 

There have been no severe or widespread cuts to their numbers, pay, perks or pensions.

No one knows exactly who will make up the 2,500 redundancies at AIB, but every single one of the 13,000 employees have had a three or four year stay of execution that no one else in the private sector has enjoyed. Non-Irish banking firms that experienced a 20%, 30%, 50% drop in business have long since slashed their labour costs and numbers, usually the single highest cost component of any service business.

AIB workers instead have shared the protected status of civil and public servants who have also been immune from the reality of the collapse of their business – the running of the Irish state.

Tens of thousands of state workers have also kept their jobs despite having less to do, or certainly less money with which to do it as the tax base of the state collapsed and a €25 billion a year shortfall appeared (now ‘just’ €18 billion).

Like the public and civil service, AIB (which only has more losses coming down the road) is now offering an incentive of three and a half weeks of pay per year of service to incentivise those 2,500 to take voluntary redundancy.  The state, of course, incentivised the early retirement of 9,000 of its staff to leave its employ but attracted mostly the wrong people by not identifying the 9,000 people whose jobs were actually redundant, and had little or not work, due to the Great Recession.

On a personal level I’m sorry that anyone employed by AIB with bills to pay and children to raise and hopes and dreams they wanted to fulfil, is losing their job.  I wish every one of the 2,500, which might include a beloved nephew, good luck in finding new work.

Yes, we’re all ‘victims’ of the dastardly bank bosses. But workers in the Irish owned banks have seen the writing grow larger on their walls since 2008 and they’ve enjoyed four years worth of wage/pension subsidies from the taxpayer to prepare them for the inevitable.

IS IT HIGH NOON FOR MORTGAGE LENDERS AND DEBTORS? 

Let us all wish Matthew Elderfield, the Deputy Governor of the Central Bank well in his efforts to get the banks to properly identify and own up to the great wall of bad mortgage debts that is about to crash down upon them.

The slow pace at which the insolvency and bankruptcy legislation is being finalised suggests it will probably be at least a year before the first debtors are processed through the new system.

The legislation is under construction right now, but after passing through the Houses of the Oireachtas, it will take considerable time before the proposed Insolvency Agency is set up and the recruitment, training and accreditation of the Insolvency Trustees.  

And time is running out.

At least that seems to be the view of the Deputy Governor last week in a speech to the Harvard Business School Alumni Club of Ireland. He doesn’t seem in the least bit happy about how long it’s taking the banks to identify the loans that are septic and need to be lanced and those that are downright untreatable, even with available forbearance measures such as interest only payments, extended terms, lower rates and mortgage holidays.

“The very limited or transitory relief provided by standard forbearance techniques could just be putting that person deeper in debt,” said Mr Elderfield. “The homeowner may be building up a bigger and bigger shortfall, for example through interest capitalization, which will eventually be owed when ownership of the home if ultimately lost. In other words, kicking the can down the road in the most difficult cases where families are borderline insolvent is unfair by adding to debt if there is in fact no realistic prospect that the standard forbearance is ultimately going to work.”

Sheriff Elderfield, who has cleared the worst of the desperadoes out of the town’s banks and stuffed their empty vaults with new capital borrowed from the ECB Sheriff’s Fund, knows that everyone from the schoolmarm, vicar, and town drunk borrowed too much when the place was booming. They know and he knows that the banks are never going to see billions of this money ever again.

It now looks as if the terrible mortgage arrears problem will start to be cleared long before our 21stcentury bankruptcy laws will be up and running and write downs and writeoffs will be happen - whether the banks’ like it or not.

 ‘High Noon’ has arrived and maybe genuine, widespread debt relief too, but it will interesting to see who’ll be left standing when the gunsmoke clears.

Ends

UNIVERSAL OAP BENEFITS NEXT FOR THE TROIKA CHOP?

Will old age pensioners take to the streets again if the Troika forces the government to withdraw or reduce their free travel passes, over-70s medical cards, electricity allowances and contributory old age pensions?

Maybe.

Judging by the crowds at the Over50s Show this weekend in Cork, (where I was giving “Build an Ark” seminars), most of the retirees I saw seemed more preoccupied by their planning their next holiday and spa weekends than in paying much interest in taking on the government.

They may be worried about the increasing cost of living, but don’t seem very convinced that they will be the next target for special austerity measures.

“They wouldn’t dare, not after the medical card demo” one woman told me after I suggested that means testing of all sort of pensioner benefits could be on the cards.

No one is suggesting that people who diligently paid their PRSI contributions, raised their families when personal income tax rates were at nosebleed levels and were prudent borrowers are not deserving of a decent state pension, currently c€12,000 a year and the other benefits.

But it just isn’t true that every pensioners is only getting back from the system what they paid in.

The value of the minimum required 260 PRSI contributions over 10 years that are required, up to this year, for a 65 year old to qualify for a contributory state pension (assuming they earn an average wage over that period of say, €30k) would never equate the value of the state pension should that person live another 10, 20 or 30 years.

Having paid in just €12,000 into the social insurance fund, and their employer another c10% or €30,000, is still a fraction of the €240,000 they would be paid over 20 years if they lived to be 85, assuming today’s payment remained the same.

Explaining this reality and reminding everyone that old age pensions continue to operate on a pay-as-you-go system (our taxes fund our pensions, not investment assets) doesn’t really cut much ice with retirees, but the sad truth is that the country is broke and the state pension system is unsustainable.

All the anger in the world won’t magic up the billions needed to keep this pyramid scheme from collapsing, but calls for a wealth tax are unlikely to go down very well with the prosperous ‘Over50s’ crowd either.

‘FATCA’  IS NOT JUST FOR FAT CATS

What an odd business page poll The Irish Times ran last week.

It asked readers if they believed the US Foreign Accounts Tax Compliance Act will have a detrimental effect on Irish financial institutions. The majority of respondents said it would, but judging from the accompanying comments, nobody seemed to really understand what FATCA is – most seemed to think it has something to do with our low corporation tax that so attracts American companies here.

In fact FATCA requires any foreign bank or deposit taker, insurance company, brokerage house, even estate agency identify and report to the US Internal Revenue any clients who are US citizens and who have holdings with their institution of $50,000 or more or €37,830.

FATCA, which is being rolled out over the next couple of years is part of a crackdown on personal tax evasion by US citizens who have foreign bank, brokerage, insurance accounts.  Banks and institutions that don’t comply will be liable to an annual 30% withholding tax on all their earnings from US assets (such as bank deposit and share dividends).

Irish institutions may still only be coming to grips with the implications of FATCA, but what is a real eye opener is the number of Americans living in Ireland, many of them for decades, who are even unaware of their obligation (if they have earnings in excess of the equivalent of c$90k) to file and pay US income tax every year and then claim credits here on their Irish tax liability.

If they haven’t been filing, and have savings in excess of $50k in a deposit account, shares or investment funds, these American residents may want to speak to a good tax advisor with an understanding of both the US and Irish tax code.

Borrowers batten down the hatches for a long voyage

I don’t know anyone who is borrowing money these days…if they can help it.

It isn’t that they don’t want to add a new bathroom or replace their car, purchases that usually require an injection of credit. It isn’t even that their bank would reject their application out-of-hand.

It is simply because they are waiting.

Waiting for that sign that things really are getting better, and not just here in Ireland. Signs like unemployment rolls finally reversing, the bottoming out of home prices, forced immigration no longer being a talking point amongst their family and friends and perhaps most of all, no more threats of cutbacks at the office or plant.

Nevertheless, some commentators are pointing to the Central Bank’s latest monthly summary of private sector credit and deposits for December 2011 as a sign that consumer fears are diminishing.

Lending to households was only down €90 million in December instead of €360 million the previous month, they note, but the fall is still a negative 3.8% year on year compared to -4.1% year on year to November 2011.

These minor celebrations of fraction of a percentage movements is a lot of wishful thinking.

Even the fact that household deposits rose significantly in December by €540million to a total of €91.3 billion, after a €865 million withdrawal the previous month, reflects a complex pattern of debt repayment and intensive savings that has been at play for nearly four years.

This was a ‘good’ December for savings for two reasons:  people who were desperately worried about the huge tensions that had built up about Greece and the euro by November saw some frantic deal making by the technocrats and the easing of crisis. The impulse to pay off even more debt or to even shift savings out of the euro or out of Ireland (the latter representing a very small percentage of household savings) would have also eased.

The heightened savings, debt paying, and protective measures for any wealth we still have are just instinctive but sensible reactions to the crushing debt and huge uncertainty that continues.

They may not know it, but it is just part of the financial Ark building that began four years ago all over the country, as personal budgets were dusted down or created, debts tackled and unaffordable spending habits abandoned.

Difficult as it already is to make ends meet, especially in the face of the austerity measures demanded by our IMF/EU paymasters, the real test is going to be creating enough places on your Ark for all the people you’d like to accommodate until we spot blue skies and dry land again.

Civil disobedience

Civil partnerships have only been legal for a year, but the loopholes are already being exploited in the legislation. Last week, Tim Bracken, the co-author of The Probate Handbook, a very in depth and welcome guide to inheritance issues, recounted the case of two heterosexual women, life-long friends, one a widow with terminal cancer, the other a divorcee, who undertook a civil partnership.

The motivation for the civil partnership was that the widow wanted to leave her estate, including her home and extended pension rights to her friend, who she loved dearly and was in straightened financial circumstances. Had she simply named her as the chief beneficiary in her will, the capital acquisition tax bill would have eaten up a huge proportion of the inheritance.   

This way, the widow’s entire capital estate transferred tax-free to her friend, even though they had never lived under the same roof or co-habited in any way. 

I don’t have any problem with the idea of tax-free inheritance: better someone of your own choosing gets to spend or squander your accumulated wealth than the government, which would have already taxed it many, many times. 

I just don’t think this was the idea the government had in mind when they finally agreed that committed same-sex couples were entitled to the same tax and financial considerations as heterosexual, married ones.

Whether this tax-avoidance loophole can or will be closed will probably depend on how annoyed the Revenue becomes if it catches on.

Not such a daft idea 

The furore over the €50 septic tank charge had just about died down when the Daft.ie economist Ronan Lyons delivered his paper late last week to a Dublin economic workshop on his proposed version of a property tax, a site based valuation tax based on 4500 districts, just five different house types and 10 valuation bands.

The Lyon’s formula, which he claimed could raise a whopping €3 billion from year one, at least reflects the view that people who live in cities where they enjoy a myriad of amenities and local authority services, should pay the most and rural dwellers, who have to supply their own sewerage and have no street lighting, pay less.

However, because it is also the site,  not the property that will be valued, the owner of a large garden on which a miserable bungalow sits in the middle of pastoral Meath or rich dairy country in Cork or Limerick is going to pay more than a bungalow owner in a central Dublin neighbourhood.

Property tax is going to be the toughest nut this increasingly inept and unpopular government is going to have to crack next year and no pricing mechanism is going to be acceptable or satisfactory.

My guess is that any residential property owner, bar the most humble, who ends up paying less than .5% of the site or market value a year a year when the barricades have been pulled down and the dust settles, will be very lucky indeed. 

Insolvency law designed to help creditors, not borrowers

The draft Personal Insolvency Bill, published last week, has raised more questions than it has answered, especially about the extent of the power of the banks to veto debt write-downs that are at the core of the non-judicial personal insolvency options.

Some parts of the new bill seem very lenient, like the way Debt Relief Certificates will allow the swift writing off of up to €20,000 of unsecured debt held by people with no assets and no income. Will there be a surge of arrears now from others, perhaps with impaired credit records, who will only see the upside of letting the arrears build up on their high cost credit card bills or car loans?

There’s also the question of how much the new Insolvency Agency is going to cost. Their job will be to that will administer the new scheme, recruit, train and supervise the army of accountants, lawyers and financial advisors who will become personal insolvency trustees. No funding provision was made in Budget 2012, and no one seems to know how many billions in personal debt – especially unsecured debt, could end up being re-scheduled or written off.

The Minister for Justice has at least admitted that he’s only guessing when he suggested that in year one (probably starting this time next year) only three or four thousand debtors will apply for Debt Settlement Certificates.  The same number, he said will be made bankrupt, and just 10,000 are likely to opt for the two non-judicial insolvency measures, the Debt Settlement and Personal Insolvency Arrangements.

These numbers seem very low. Perhaps the Minister isn’t fully aware of the known size of the problem, as determined by the Central Bank.

As of last September, 62,900 homeowners were in arrears of more than 90 days. Fifty percent of another 70,000 whose mortgages were restructured and have only been paying interest off, are in arrears of up to, or more than 90 days. These numbers will be higher when the fourth quarter statistics for 2011 are published.

Meanwhile, the non-judicial insolvency options are being touted by the government as a way for debtors with serious arrears and negative equity to keep living in their family homes and avoiding the stigma of personal bankruptcy. 

But where is the evidence that this is what the majority of insolvent homeowners really want?

Their desire to keep their homes, no matter what, may have been there at one time, but rising taxation, reduced services and the relentless rise of negative equity and arrears as property prices keep falling will eat away at anyone’s resolve, especially if they now regret buying at such an inflated price and perhaps in an unsuitable location?

Under these circumstances wouldn’t it be worth finding out how many how many insolvent homeowners will be willing or able to endure five or six years of personal financial trusteeship

Even the new bankruptcy option for those who have no chance of salvaging their home or other valuable assets, seems too harsh compared to the process in Northern Ireland and the UK mainland where personal bankruptcy can be discharged in a year to 18 months rather than the proposed three years here.

A couple I know who have opted for UK bankruptcy told me last Wednesday that even if they could go bankrupt “back home” tomorrow, or take up the Personal Insolvency Arrangement option that might let them keep their family home, they wouldn’t.

“We’ve been through three years of hell already, pleading, then fighting with the banks; hiding from bill collectors and the sheriff’s men; juggling bills and avoiding answering the doorbell and phone. We simply couldn’t bear another three, let alone five or six years of it. We only have another year to go [before discharge]. We’ll have to start from scratch again, but we can start living.”

Surely if the government really wanted to “assist those in unexpected difficulties as a result of the current fiscal, economic and employment conditions” they’d create a process that is as simple and compassionate as possible for the private debtor, and as fair as possible for the creditors.  Templates just like these have been in place for years in Britain.

Instead, what we seem to be getting is legislation designed mainly to protect the still loss-making but apparently well capitalised Irish banks, from the effects of tens of thousands of their customers, all seeking debt forgiveness and write-downs at once.

The order of the day, on so many fronts, seems to be to allow the great Irish debt crisis drag on interminably.

Oz is bubbling up

Will red-hot property markets in Australia and Canada end up burning some of our recent émigrés?

The Irish have favoured Australia as an emigration destination for many decades and Canada in more recent years, but just because their banking systems and employment numbers have held up, doesn’t mean they’re immune to the property bubbles that brought down our own economy and has devastated European banks.

Both are now experiencing small but steady nation-wide declines since the financial crisis began in 2007.

Since 1988, and the resurrection of a generous first time buyers grant scheme, property ownership in Australia has soared, reports MoneyWeek magazine. 

Between then and 2000, interest rates halved from a whopping 14% to 7%, which was a very good thing, but the amount of interest also doubled in proportion to their average Australian’s disposable income.

Then in 2001, after the dot-com bust scare and 9/11, the Aussie government doubled the grant and just as happened here, interest rates fell as central banks intervened bring down the cost of borrowing.

The expanding bubble has wobbled several times since 2008, but survived. 

According to MoneyWeek, “Australian home loan debt has soared to more than 85% of GDP. The debt now equates to 130% of household income: five times the 1988 level.” 

In 2011, prices dropped 3.7% and while many Australians are reported to be in denial about how vulnerable they are to a slowdown in China, their single biggest customer for their mineral wealth, the strong Aussie dollar and higher interest rates, a leading US analyst, Jordan Wirst is predicting residential property prices will fall by 60% or more over the next five years.

Hopefully our émigrés can recognize a bubble market when they see one, even in a Lucky Country. 

Billion euro mess-up in the credit unions

Where is that €1 billion of taxpayer’s money when you need it, credit union officials all over the country must be asking this week after the Central Bank sent a ’special manager’ in to run the Newbridge Credit Union and is expected to do the same to at least 20 others.

The Minister for Finance has set aside €250 million to pump into struggling CUs this year and next, but the total bill is expected to be about €1 billion, he said last October, as bad CU debts balloon to at least amount.

Since all the previous estimates of bad debts in the industry have been incorrect, it’s hard to imagine that the final bailout bill for the credit unions will match this prediction. Bad debts, especially those linked to property loans are a moveable feast in this falling market, as anyone in Nama can attest. 

Many credit unions are in trouble not just because members have lost their jobs; too many of the unions permitted members to borrow towards the purchase of property that is now worth a fraction of the original cost. They also allowed, for too long, old loans to keep rolling over rather than seek the repayment of the capital and the part-time and amateur financiers on the boards of some unions made poor investment decisions with their surpluses. To their horror this money then disappeared as the leveraged property deals in which they were invested collapsed in the post-2008 crash.

Poor lending practices and inappropriate investments – the same events that brought down our once-prudent high street banks – has caused this credit union crisis.  Yet I couldn’t help but laugh last week when I heard anonymous credit union ex-officials on the radio, insisting that their troubles began and ended when the Central Bank came poking their nose into their business, weighing them down with layers of new lending rules and regulation.

The Central Bank has a lot to answer for, including facilitating the political decision to bailout our bankrupt banks, but tightening up the prudential and compliance rules under which all financial institutions must trade, isn’t one of them.

Meanwhile, it’s worth remembering that credit union deposits up to €100,000 come under the state government deposit guarantee scheme, but as with the banks, you don’t want to leave your money with a credit union that is insolvent, even if the taxpayer gets stiffed picking up the tab to cover your deposit.

Read the annual report. Attend the AGM. Find out for yourself if it is a safe place to leave your money.  Demand that your CU officials proactively correct the failings of the organisation, and if they don’t, withdraw your funds and vote with your feet.

Pensioner power

Tax compliant pensioners are justifiably annoyed about being included in the Revenue Commissioner’s recent and badly organised 115,000 strong mail shot to retirees whom they claimed owed more tax than their newly expanded records – care of the Department of Social Protection – suggested they were paying.

The fallout from this hastily organised data trawl between last November and 1 January has been well reported, but the angry and very public reaction by pensioners who knew they were fully compliant and were incorrectly targeted was heartening. 

Tens of thousands who got the letters complained to their public representatives, to local Revenue and Citizen’s Information offices, to Age Action, the Senior’s Parliament and to the media. This pressure eventually forced an apology for the cock-up from the senior Commissioner Josephine Fehilly when she appeared before an Oireachtas committee.

Would such an outcome have happened in the UK, where a 2010 report of the British parliament’s Public Accounts Committee suggested that pensioners are not very well treated by their tax authorities either?

That report has some sober warnings for us. The committee found that despite being considered the most tax compliant cohort in the UK (as they are here) 1.5 UK pensioners had overpaid £250 million in tax because of the discrepancies between HMRC’s records and the records of employers and pension providers. 

HMRC’s systems, it found, were incapable of easily dealing with the multiple sources of pensioners’ incomes. Sound familiar? 

The furore over the Revenue’s latest tax trawling exercise may have died down, but the mountain of data they received from the DSP will take a lot longer than two months to revisit properly this time.

The parliamentary committee made several recommendations in their report to improve the tax service to pensioners, including how to make it less daunting for an estimated 2.4 million people to collect £200 million of deposit interest refunds, but the National Audit Office subsequently predicted that with 20 million tax codes still unmatched in the UK, the system changes would take many years.

Pensioner tax discrepancies may or may not be as great here, but the UK experience sounds like an endorsement for hiring an independent tax advisor to deal with Revenue if there is any suggestion that you owe them money… or better still, if they owe you any.

Shining example

Counterfeiting is declining, report Central Bank, fell by 19.3% in 2011 compared to 2010.  Is this because the ECB is now so enthusiastically counterfeiting the currency itself – adding as it did €500 billion to the money supply in order to provide eurozone banks with a lending facility last De ember of last resort?

 The only other reason I can think that there would be such a huge drop in dodgy €20 and €50 notes (always the biggest sellers) being printed by the ODC’s –the ordinary decent criminals of the black financial economy, is that they’re also beginning to write off the euro as a credible, or even medium form of money.

 I mean, who would want to get stuck with a pile of dodgy euro if the balloon went up and we all reverted back to our old familiar punts, drachma, lira and peso? 

 Happily for gold and silver buyers, modern day counterfeiters, whether in the lofty halls of the ECB or in some damp garage, still haven’t worked out how to duplicate precious metals, which explains why both their value and sales keep rising.

Mailshot not a red-letter day in the history of the Revenue

Revenue’s handling of Lettergate was properly excoriated by the Oireachtas committee members in front of whom the head of the Commissioners, Josephine Feehily appeared last week.

The purpose of this vast mail shot was spot on:  to make sure every pensioner in receipt of a state pension was paying their correct share of tax.

How anyone in the Revenue thought it was a good idea to take 560,000 files sent to them in November by the Department of Social Insurance and whittle those down to just 115,000 letters with some probability of underpayment by 1 January – a mere six week period that also included the Christmas/New Year break - is mind-boggling.

Any public relations junior could have told them that it might be better to start with  a smaller number of letters – say, the 2,500 to pensioners earning €50,000 or more whom the Revenue suspect owe them money and then only after they’d double and treble checked the figures to ensure that all the date being sent out correct and up-to-date. 

Instead, letters that were riddled with errors and out-of-date data were sent out, by their own admission, to the most tax compliant group of taxpayers in the country, who quickly made their disquiet known to the Revenue, their own tax advisors where applicable, their TDs and especially to Joe Duffy’s Liveline Show.  

It will take a little time for the Revenue to regain their reputation after this own goal, a reputation for toughness but that has been pretty exemplary in recent years and pretty much restored after the huge deposit account/amnesty scandals of 20 years ago.

Compared to their equivalents in some of the other PIIGS countries, especially Greece, our tax collectors are mostly seen as doing a difficult job efficiently, honestly and cost effectively, which is no less than any of us should expect from such key officials of the state.

However, the part of this story that has been lost in the headlines about angry pensioners is that this is the start of a change that should have happened decades ago:  the joined-up reporting and sharing of information between government departments and agencies.

Not only will the Revenue be updating our tax returns with the pension division of the Department of Social Protection in the future, but with the division that pays out unemployment benefits, the €550 million paid out every year for rent and mortgage supplements and the most controversial tax-free, universal payment of them all - child benefit.

The introduction of the PAYE system displaced – up to now – the need for most workers to file an annual tax return, but with about half the population in receipt of some state benefit, and the self-assessment system increasingly less reliable as the economy implodes, the re-introduction of universal tax returns is surely not faraway.

The Revenue’s resources will certainly have to be bulked up to accommodate that surge in tax reporting, but it would be fantastic news for tax advisors and accountants and for a company with which I first became familiar as a college student with part-time jobs many decades ago:  the ubiquitous H&R Block.

Set up in 1955, it has 22 million customers in the US, Canada, Australia and the UK and while it has expanded its services, its core business is still helping people, for a modest fee, fill out their annual tax return, mostly on-line.

Insolvent abuse

The bankruptcy proceedings against the former billionaire Sean Quinn doesn’t interest me as much as how closer our legislators are to producing the new bankruptcy legislation that will apply to the ordinary people of Ireland, who can’t pay their bills.

The tens of thousands of shop owners, service provider and mortgaged home owners who are now insolvent due to the economic collapse of this state – helped in many cases by their own over enthusiastic borrowing and the encouragement of their lender – deserve far more attention and sympathy than the likes of Sean Quinn and his fellow mega-bankruptcy tourists, most of them property developers, who owe billions to their creditors.

The numbers of mortgage holders who are theoretically insolvent and who could be forced into bankruptcy by their creditor, their mortgage lender, probably includes just about every homeowner in serious arrears.  Since that number is now accepted to be at least in the region of €100,000, realistic bankruptcy legislation should be the top priority for this new Dail term.

How any system will cope with the flood of applicants who genuinely cannot sustain their mortgages, is another problem that no one seems to want to acknowledge.

Class struggle

The 400 householders in Terenure West in Dublin who are seeking the redrawing of their constituency boundary may want to consider what impact, if any, it might have on their property values.

Once upon a time, a favourably amended postcode was believed to be a sure-fire way to increase the selling price of your house; now, with a property tax on its way that might take into account the site value, market value, square footage, or perhaps a combination of all three factors, artificially ‘upgrading’ your neighbourhood may not be in your financial interests.

The Terenure 400 believe their political interests are more in sync with those who live just across the road within the Dublin South East constituency that includes Ranelagh and Rathmines, Donnybrook and Ballsbridge and are represented by the smoked salmon socialist Ruari Quinn and Fine Gael’s Lucinda Creighton.

Meanwhile, Dublin South Central, in which this corner of leafy Terenure is included, along with Drimnagh, Crumlin, Ballyfermot and Inchicore is predominantly working class and includes Sinn Fein deputy Aonghus O’Snodaigh and People Before Profit’s Joan Collins.

Until it is decided how the upcoming property tax will be assessed – either as a site tax, a market value tax, one based on square footage or a combination of all three – these householders might want to hold their fire to see if constituency lines play any part in the way the new tax is assessed.

In our property-apartheid culture, my guess is that a pleasant three bed Edwardian terrace in Terenure/Dublin South East will always command a higher property price – and tax - than the same terraced house in Terenure/Dublin South Central.

Warning: don't allow this levy to damage your health

Do you still have private health insurance?  Or are you being forced to join the tens of thousands of VHI, Quinn Healthcare and Aviva Health members who are reverting to the care of the public health service?

The latest 40% health levy increase by the Department of Health to €289 and €95 for adult and child members, certainly isn’t going to slow down that exodus and could play a growing part in the end of the two tier health system in this country.

The purpose of the levy is to subsidise the loss-making VHI, which is fully owned by the Department of Health, so that the state won’t have to provide the €200 billion it is estimated, but doesn’t have, that the VHI needs before it can comply with EU solvency regulations.

I rather doubt any subsidy will restore the VHI to fiscal health.

A private health insurance system like ours, with community rated premiums, (whereby everyone pays the same price for a plan regardless of age) needs a constant stream of younger, healthier members joining in order to meet the benefit promises to older members who make the bulk of claims.

High unemployment, the return of immigration as well as rising premium costs has reversed that stream of new members and the pyramid scheme is beginning to collapse. The higher the government hikes the subsidy for the VHI, the greater it undermines the ability of the private insurers to compete or others to enter the market, and the more precarious the pyramid becomes. 

Since it is still early in the New Year I’m going to make a guess – I don’t believe in predictions.  As the economy continues to contract, private health insurance is going to become the preserve of the wealthy, just like it is in other countries.

Community rating, as it was originally designed, will continue to be undermined by the cherry-picking that all the insurers are now undertaking to minimise their exposure to older, expensive claimants.  It will become irrelevant.

Meanwhile, the Department of Health’s creature, the VHI, complete with its civil service remuneration and pension terms, will be protected and preserved so long as it is in the power of the Department to do so.  In fact, if it was in their power to return the VHI’s monopoly, it would, and the VHI could then be ‘the insurer’ at the heart of Dr O’Reilly’s great plan to introduce Dutch-style universal health insurance here.

Thankfully, this won’t happen…because I’m also going to guess that we will have a very different state, let alone government long before 2016. Universal health insurance will have to wait.

Meanwhile, review your healthcare needs, ideally before your insurance renewal date. Check out www.healthinsurancesavings.ie for policy options.  Consider dropping down to a cheaper plan before you abandon cover altogether. Families may want to at least see if they can afford a HSF health cash plan, to help cover public service outpatient and hospital charges.

Risky business

Dr Peter Bacon, the architect of the National Asset Management Agency (Nama) believes the best way to stabilise the property market is for the government to step in and take on any future price loss incurred by new buyers.

This is what he told RTE radio last week: "If people fear the market is going to fall further then that fear has to be removed and the only way it can be removed is by government assuming that risk."

According to Bacon, "If somebody were to buy a house now at €175,000 and by the end of this year there was a risk that the price was going to fall further, then the only way you will encourage punters back into the market is by the Government assuming that difference."

If the government is stupid enough to take this advice, which could happen given how Nama has already been given the green light to waive 20% of any loss on the purchase of their properties, this could prove a real winner for speculators who know how to pick well positioned properties with decent yields and potential long term growth.

Prices have already more than halved in some areas, and while it would be a gamble, between the hapless taxpayers being forced to pick up a proportion of future losses – and Bacon says the government should make good ANY loss – and a fixed rate mortgage that would be repaid faster once ECB money printing devalues the euro, the speculator could do very well from this latest suggestion for the government to interfere in the necessary correction of the property market.

Will such a deal really inspire enough ordinary people to jump into the still falling market?

Of course not.  Only the prospect of safe long-term employment and a country that isn’t in bankruptcy limbo, will resurrect this market. 

Only the inhabitants of Planet Bacon, where a whole different reality exists, think otherwise.

A waiting game

 I’m all in favour of people paying their bills on time, but as of last Wednesday lunchtime, over 2,100 people had already paid their €100 household charge or had set up direct debits in order to do so by instalment. (The latter deadline is 1 March.)

I will be paying the charge by the end of March deadline – I intend to keep my power dry for the real battle, over the site or market value that the authorities eventually put on my house – but they will get their €100 on 31 March, not before.

With another €1.25 billion of taxpayer’s money (that we don’t have to spare) to be paid by the Government to the former Anglo Irish Bank’s bondholders this month, I prefer to hold onto my money for as long as I can, rather than watch the state squander it sooner, and allegedly in my best interest.

Another rise in health insurance levy is just a sick joke

Late in the afternoon of New Year’s Eve, when many of us are just starting to prepare for a night out with friends and family, the Health Insurance Authority usually announces another hike in the subsidy that every private health insurance member must pays to the VHI, the loss-making state-owned insurance provider.  Last year the private health insurance levy was increased by €20 per adult to €205 and €11 per child member to €66. It started out at €160 and €53 in 2008.

This year’s increase will be on top of the insurer’s usual double digit premium increases for 2012, some already announced but with more to come as the progresses. 

Will the multi-million levy save the VHI in 2012 and turn it into a vibrant, efficient, value for money, cost effective insurance company, also finally complying with all the usual reserve requirements demanded by the EU of the other insurers?

Of course not.

The VHI will remain the sick child of its disfunctional parent – the Department of Health, and it will continue to be one of the significant threats to the entire health sector, both public and private and especially to the notion of community rating of premium payments. 

As I have written many times before, the VHI should have been broken up, privatised and sold off when the decision was taken in 1996 to end its 40 year monopoly.  Now, as we enter the fourth year of the Great Irish Depression, and membership numbers are haemorrhaging, what corporate investor would ever buy the VHI – even broken up and privatised?

To make matters worse, Dr James Reilly, the Health Minister proposes all sorts of mad treatments for both his sick child and the private insurance sector including that the loss-making VHI, still by far the largest insurer buy Quinn Health, which is up for sale.

Do we even still have a competition authority anymore to question such a proposal? Remind me to ask Ajai Chopra the next time he’s in town.

Dr O’Reilly is also proposing that, in spite of the extra charge that the private ensures will have to pay – again – for private beds in public hospitals, the insurers will have to pay for any public beds or trolleys that their members occupy because all the private ones are full, if they happen to find themselves involuntarily checking into a public hospital, say after being hit by a car, or having a heart attack. 

So much for everyone in the state having access to public hospital beds and other services through the taxes they pay into a state system in which 60,000 people are on waiting lists, some for as long as 30 months.

The consequence of this ‘reform’, if it happens, will be even higher premiums for private health insurance, and more people dropping their membership, say brokers who specialise in providing health insurance advice.  Over 50,000 have already done to the end of September and the brokers expect that figure to rise to at least 70,000 cancellations by the end of this year.

The economic collapse means that Ireland’s intertwined two-tiered health system is no longer sustainable. These kinds of unilateral double charges, on top of the huge medical inflation costs the insurers say they must pass on, suggests to me that in the relatively near future only the very well-off will be able to afford private medical care.

Until Minister O’Reilly’s dream of universal health care becomes a reality, and I doubt if it will happen for a very long time, the existing, shrinking public health service and hospitals will be swamped by ex-health insurance members joining those horrific queues.

Last Christmas

Does the fact that we are the second highest spenders at Christmas reflect our natural generosity and our long standing tradition of living beyond our means – at least until the credit card bills arrive – or just the fact that some people still have a great deal of savings and will be dipping into them again this year?

According to last week’s Economist magazine, we will come third only after Luxembourg and the United States for the amount we will spend on Christmas presents this year – about $690 (€531) compared to their approximately $780 (€601) and $720 (€555) respectively. 

Compared to the huge Christmas spending in the past, that €531 looks pretty modest, to be honest but the Economist believes we are “big givers,” compared to our “PIGS companions: Portugal, Greece and Spain”. Only the Spanish will spend more than $500 (€385).

The Dutch are the most parsimonious present givers, coming in at under $200 (€154); even our German grinchmeister’s spend more - about $350 (€270). 

Doesn’t sound like there’s much ‘ho ho ho’ in their holidays, does it?  Given how German we’re all going to have to become in 2012, let’s enjoy our last all-Irish one for whatever it’s worth.

Golden opportunity

I don’t have a crystal ball, but I keep getting asked if I think the price of gold is in a bubble and about to collapse, or if its price will keep rising, as it has every year since 1999. (See the charts at www.goldprice.org)

I don’t think gold is in a bubble, but I do think its price will go up and down and repeat that sequence until the global debt crisis is over, governments stop debasing their currencies and start balancing their budgets, unemployment starts reversing, economic recovery is genuine and ordinary Irish people are hopeful about the future again.

Buy on the dips. 

We’ve all been mugged and Minister Noonan knows it

Well, thank goodness that’s over for another year.

The 2012 austerity Budget has been delivered - and perhaps even amended by now in the case of the controversial cutting of the young claimant’s disability allowance. Your bottom line income has been left untouched, the Finance Minister Mr Noonan with assured the nation. 

By the end of his speech last Tuesday, he certainly looked pleased with himself.

Anyone who looks at their bank balance a few days after they get paid may not agree.  A motorist who bought petrol on Wednesday morning wouldn’t even have to wait for payday: the 2% increase on VAT would have been applied to his purchase.  By 1 January, his car and carbon tax will also cut into his bottom line.

If the driver has more than two children, the family income will fall by at least €228 in 2012 as a result in the cuts in Child Benefit for third, fourth and subsequent children under age 18.  If he lives in a rural area and the children rely on the school transport scheme, he’ll have to find another €100 per child out of is income to meet that cost or perhaps drive them to and from school himself.

Since many older children from rural areas must live away from home to go to college, the rural family may also have to find the extra 3% that has been cut from the capitation grant their child may have received on top of the extra €250 contribution fee that every third level student will have to pay.

Everyone with private health insurance will also have to find more income (or savings) to cover the higher government charge for private beds in a public hospital this coming year. 

The idea behind this announcement was, incredibly, to raise more income for the state hospitals.  Perhaps someone should have reminded the civil servant in the Department of Health who came up with this budget wheeze that thousands of people dropped their private health cover last year after the same beds were surcharged in last year’s budget.

The more insured people who return to the public health system, the greater the cost to the public system, and to the taxpayers who fund it.

Nobody I have spoken too, except the Minister for Finance and his colleagues, believes this budget is income neutral.

 The €100 household charge is going to have to be paid out of earned income, savings or social welfare benefits.

Pensioners who already spend every penny of their old age pension will have to dip even deeper into their savings (if they have any) to pay this charge. With only those homeowners in receipt of Mortgage Interest Supplement or living on unfinished ghost housing estates exempt, even householders who are in negative equity will have to find €100 from their already inadequate incomes to pay this tax.

What happens in 2014 when the household charge is replaced by the property tax that the coalition has promised the troika it will introduce once a proper valuation survey of properties and sites is done? 

If thousands of householders struggle to pay a mere €100, how likely are they to find the income to pay a tax based on the market valuation of their property?  Especially if that valuation is anything like the sort of property tax people in most other western jurisdictions pay, which can often account for 0.5% to 0.75% of its market value.

The Minister may have convinced himself that he protected the incomes of the citizenry last Tuesday, but an old bruiser like Michael Noonan should know that if it looks like a mugging and feels like a mugging, then it is a mugging.

Political Capital

The increase in capital taxes in the Budget was well-flagged before Tuesday’s announcement.

The Minister has settled on 30% as the new standard capital tax with the capital gains and capital acquisition or inheritance/gift tax-free rates going up from 25% to 30% and the CAT threshold being further reduced to €250,000, less than half what it was in 2008. 

Raising these taxes isn’t going to result in any huge windfall for the government since there isn’t much profit in selling assets these days, but no one has much sympathy either for people who inherit or benefit from unearned income.

However, the new 30% deposit interest retention tax will hit certainly savers who should also expect interest rates to come down in the near future if the ECB does what so many expect them to, and follow up last month’s 0.25% reduction with another one or two in the early new year.

The only consolation for them is that the Minister didn’t impose PRSI and USC on these non PAYE earnings (or rental income) as had been expected.

An age-old problem

If we still have our own Finance Minister next year – and not a clever German one assigned to us by the European Union - chances are that his 2013 Austerity Budget may finally have to address the elephants that were ignored in this one: the huge state pension bill and the still growing cost of social welfare benefits, the latter alone being worth €21 billion, or two thirds of the entire tax take of the state.

Reducing the guaranteed 50% of final pay that public servants retire on isn’t something that any politician would choose to do, since he’s one of them.  The finance minister will also no doubt try to cut other expenditure before he takes on old age pensioners.

It’s hard to work out where else the next four billion euro that must be cut from the 2013 budget will come from if the pensions and welfare bills are not reduced. (The Croke Park pay deal must remain until 2014).

Meanwhile, one of the only good things that came out of this year’s budget is that private pension savers did not lose their top rate pension contribution tax relief.  It may only be a one year reprieve until the threat to bring it down to the standard rate begins, but it’s something. 

The savings the government set out to make by cutting back on pension incentives has already been exceeded – between the €457million taken from existing pension savings by the 0.6% levy, and the other €250 million or so achieved by the new funding limits introduced last year, and the lower level of overall pension contributions this year, the pressure to cut the tax relief was avoided.

“It’s the only good news I’ll be sending my clients,” one pension advisor told me last Wednesday. “They have another year to maximise their pension contributions, assuming they have any spare money to save.”