The Sunday Times - Money Comment 12/04/09

Posted by Jill Kerby on April 12 2009 @ 22:00

It’s easy for the Minister for Finance to say that the tax increases introduced on Wednesday will only bring people back to the tax levels that they were living with two or five or eight years ago, depending on their level of income.


The problem is that these same people went and committed much of the tax reductions they were awarded – and encouraged to spend, remember – on mortgages and car loans and crèche fees that still have to be paid every month. 


Some mortgage holders on variable or tracker rates have been extended a lifeline by the ECB in the form of seven interest rate dropsand these will help to   buffer the impact of the doubled income and health levies levies, though God help the homeowner who locked in their huge mortgage at a 5% fixed rate last year and now can’t get out of it. 


But even that extra €400-€450 interest savings for the typical €250,000 mortgage holder couple won’t offset the budget increases if their incomes exceed €75,000, the tipping point for the 4% levy (and higher PRSI liability) or if they are public servants and are already stunned by the c€4,000 net pension levies introduced last February. 


Include two young children into this scenario, with €1,000 in early childhood payments gone for 2009 and €2,000 next year and the proverbial garda/nurse couple with combined income of about €80,000 will have to scramble around to find about €9,000 over a full year to meet all their tax, pension bills and current child-care bills. (I’ll believe that single year state crèche announcement when it’s up and running.) 


Even these figures don’t take into account the upcoming property tax, the further loss of the child benefit payments (of €3,940 for two children) and the possible loss of all mortgage interest relief. 


More money had to be found to meet the deficit, but it’s come from the wrong source and these are staggering sums in a single year. 


Since housing is the biggest expenditure homeowners have, and interest rates will not remain this low forever as the US and other governments scramble to inflate the money supply with trillions of dollars worth of bail-outs and loans, Irish homeowners might want to lock in their interest rate gains by securing fixed rate of 3% or less. 


If you’ve already seen a drop in income, or a partner has lost their job and you can’t repay your mortgage – but genuinely believe you have a good chance of finding a new one - prepare a budget and refinancing proposal for your lender and tell them you will pay what you can.  If this isn’t a realistic prospect, you should realistically consider a voluntary default arrangement with your bank that involves a rental, buyback option so that you don’t become homeless. 


The second family car may have to go and the overseas holiday.  Middle-income parents that were already struggling to pay private school fees may want to reconsider this hefty expenditure (especially if they have more than one child enrolled) and start planning on how to pay college fees from next year. 


The airwaves have been full of shocked tax-payers in the vulnerable 25 to 50 age group this last week who admitted they were already living paycheque to paycheque. They must now do what the government did not do on Tuesday: cut their expenditure to the bone and face their creditors head on.


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Two recent surveys, from the Financial Regulator and Postbank, were lost in the run-up to the emergency budget but need to be revisited in light of the amount of extra money that is now going to be sucked out of the consumer economy. 


The Regulator’s survey on our financial capability revealed that fewer than half of us (46%) are able to keep track of our finances and nearly six out of ten have made no provision for a drop in income. 


Meanwhile, the latest savings index from Postbank, showed that 60% of savers don’t know what interest rate they are earning on their deposit funds and are probably just as much in the dark about the fact that the Dirt tax of any interest earnings went up from 20% to 23% last October and will now be subject to 25% tax.  That said, a bigger number of people surveyed by Postbank say they are increasingly worried about the safety of their money in those bank accounts, despite the 100% guarantee on all Irish banks and An Post savings, including Postbankaccounts.   


Is this money safe?  Well yes, so long as the government’s original €400 billion guarantee for Irish bank deposits and liabilities up to the end of next year stands up and from this week, the five year guarantee of the specific €80-€90 billion toxic property and construction debt that’s been crushing the Irish banks. 


Personally, I’ve made sure that my savings are mainly outside the Irish banks and in those that are not carrying the same legacy of catastrophic sub-prime or property-related debt as the Irish ones or some of the international banks operating here.  I’m also attracted to the fact that these other non-Irish institutions (and Postbank, where my son is about the open his first solo bank and savings account) never had boards stuffed with overpaid and clearly incompetent directors and executives.  


(For the record, I write a column for the web-magazine of one of these banks, RaboDirect and have another column in the regional press that is now sponsored by Postbank, but I’d also like to say that the interest I’m earning is less than that offered by Anglo Irish, AIB or Bank of Ireland, the three most indebted banks.)  


If this budget doesn’t focus people’s minds on the need to pay attention to their personal finance and their return on their money, I don’t know what will.  


Get your heads out of the sand.  Face up to your debt and your falling standard of living.  There is more bad news to come in six months time.

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