The Sunday Times - Money Comment 08/11/09

Posted by Jill Kerby on November 08 2009 @ 14:10


A report has arrived in my inbox encouraging me (as a member of the media) “to take a holistic view of prosperity and understand how it is created. Holistic prosperity extends beyond just material wealth, and includes factors such as social capital, health, opportunity, security, effective governance, human rights and liberties, and overall quality of life.”

Quite right too.  The best countries in the world, say the Legatum Institute, a London-based think tank, are those with high scores in areas like health, safety, freedom, and social capital, but they also include categories that look at the country’s democratic institutions, education, entrepreneurship and innovation, good governance and personal freedom.

Their assessment of us under some of these categories is pretty startling. Not only did we come out 11th in the overall rank of 104 countries, but we somehow managed to convince the evaluators that we are the number two country in the world under the Health category, 5th under Economic Fundamentals and Safety and Security,12th for the three categories of Entrepreneurship and Innovation, Social Capital and Governance, the latter’s variables of which include issues like business regulation and corruption and  government effectiveness and corruption.  We also managed to come in at number 18 and 25 under Personal Freedom and Education. 

This is a fascinating report but I’m not sure I entirely recognize the country they call Ireland, especially when they rank the French at number 14 under the Health category.   Not to put too fine a point on this, but perhaps the data they were using was…out of date?  

You can download the 2009 Legatum Prosperity index here http://www.li.com/ and make up your own mind: 


It looks like it’s going to be a lean Christmas for the clients of Irish charities, even as some people perform small, anonymous gestures of generosity.

One day last week, just as the Society of St Vincent de Paul was imploring the Minister for Finance in its pre-Budget submission not to cut social welfare payments - “already this year, calls for assistance have risen by almost one-third in some areas, and the situation is getting worse” - the third world aid agency, World Vision Ireland received an envelope stuffed with €2,760 used notes and a raffle ticket.  

World Vision wants the donor to make themselves known so that they can thank him or her personally. “It’s incredible. It’s restored my faith in people, that’s for sure,” said the worker who opened the envelope.  

I rather doubt that’s what he or his colleagues in St Vincent de Paul will be saying about Minister Lenihan delivers his Budget speech on December 9th, except maybe the “incredible” bit.  

The Minister is in no position to be generous with anyone this year and even the charity sectors long standing request for enhanced tax relief on donations is probably now just a distant aspiration. 


Do you believe that the price of your house and all the houses in your neighbourhood have stopped falling? Me neither, but the Irish House Builders Association (IHBA) say not only that house prices may have hit rock bottom but that there’s going to be a shortage of property in the Dublin area in the next few years if the decline in new house builds continues. 

The IHBA is just one of a long list of property sector trade bodies that has no choice but to ‘talk up their book’ and put on a positive face in an effort to convince potential buyers, who are sitting on the sidelines, to take the plunge a become a home owner. 

They say that Irish house prices have already probably dropped by 40% and there is very little give left in the system.  What they don’t mention is that massively exuberant asset bubbles, like the 10 year long Irish property one, can give up nearly all its volume before the reflating process eventually starts all over again.  Laughably, their chairman Dominic Doheny last week sited “commentators” in AIB as a source for his belief that the peak to trough fall in Irish house prices will stop near or at 40%. 

House are now selling below cost price, claims the IHBA and “Current prices are not sustainable in the medium and long run. Companies will not resume building new houses or apartments until market prices reflect all cost inputs and a reasonable return for the investment.”

What does that mean?  That if prices do remain this low (or go even lower) the properties will never be sold?  That his members will bulldoze them into the ground? 

Clearly, no one in the IHBA realizes that during an economic depression, the price of all assets fall in proportion to the money supply – the availability of credit – just like the earlier price bubble was created by the inflated money supply and loose lending conditions. 

A deflated property price might not represent good value for the builder who is sitting on a loss, but the reality is that every house will find a willing buyer…if the price is low enough. 

With the market still moribund, there’s some way to go yet. 

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Money Times - 04/11/09

Posted by Jill Kerby on November 04 2009 @ 23:10

Emotions – and tempers – are running high these days on the public airways and everyone is debating a single question:  should the €20 billion public sector wage bill be cut or not in the upcoming Budget?  


We’re also trying to figure out whether the public sector protest rallies on November 6th and 11th and the November 24th all-out strike will harness support for the public sector, or will pull the country apart.  And what effect will the marches have on our ability to pay our bills, encourage jobs and exports, attract new capital, or even, as some of the more militant supporters hope, cause the government to raise the taxes or confiscate a portion of the capital wealth of “the rich” who earn more than €100,000?


Listening to RTE’s Liveline last Thursday was a disturbing experience.  Aside from pitting public and private sector workers against each other it also allowed for too many unsubstantiated claims about which group of workers’ earnings and contribution to our society is more worthy than others; about how much wealth is controlled by how many people; about the amount of tax that is paid by various income earners and about who benefited most from the now discredited “Celtic Tiger” boom.


Finding up-to-date income and tax information is nearly impossible here, as it is not made available on a current basis by the Revenue Commissioners, the Central Bank or other state agencies. Private surveys and studies that are quoted are also usually hopelessly out of date and no more so than now when it is accepted that asset values like property, stock portfolios and pension funds have all crashed, incomes are falling and 280,000 people have lost their jobs. 


Bear with me friends.  The following tax statistics in particular make for dull reading, but might be helpful for anyone who gets caught up in a tax debate. They are based on the Revenue Commissioner’s most up to date 2008 Statistical Report (see http://www.revenue.ie/en/about/publications/statistical/2008/income-distribution-statistics.pdf) but are based on 2006 data.  

The Tax Take: 

In 2006, there were 2,261,236 income earners who between them earned over €77.8 billion euro for a national total average income of c€34,424 per annum.  The total amount of income tax collected from this €77.8bn income was €11.9 billion.


The bottom five categories of income earners with earnings up to €20,000 amounted to 926,100 people, or 40.9% of the total 2,261,236 earners. 


This 40.9% of the total earning population generated taxable income of c€7.9bn or 11.6% of the total €77.8bn income earned. This 40.9% of earners paid €22.19 million income tax, or just 0.95% of all income tax collected in 2006.


All earners earning up to €50,000, or 1,839,903 people (or 81.3% of the earning population), paid 19.6% of all the income tax collected in 2006.  The vast bulk of this income tax was paid for by just 469,342 people of the 1,839,903 who earned between €30,000 and €50,000.


At the other end of the tax spectrum, there were 86,214 people or 3.8% of the 2,261,236 total earners, who fell into four categories of incomes over  €100,000:   €100k to €150k; €150k to €200k; €200k to €275k and over €275k. 


This 3.8% of the total earning population generated taxable income of €16.76 billion or 21.5% of the total €77.809bn income. They paid €4.98bn income tax or 41.6% of all income tax collected. 


Amongst the highest earners of all in 2006, those 8,905 people with incomes over €275,000 - who represented just over one third of one percent of the earning population, (ie 0.39%) - paid 16.06% of all the income tax collected that year or €1.92 bn. 


It was claimed – and reiterated several times on last Thursday’s Liveline – that 1% of the population control 35% of all the wealth in this country. It was not stated what that wealth consists of, but we can assume the caller meant all savings, property, businesses, stocks and shares, pension funds, livestock, durable and luxury goods, etc. 


The only reference to 1% of the population controlling any disproportionate percentage of the nation’s wealth that I could find however, is based on a controversial 2007 Bank of Ireland ‘Wealth of the Nation’ report (based on 2006 figures) in which it claimed that 1% of the population owned 20% of the nation’s wealth, or a €100bn share of their estimated total wealth value of €500bn. 

It is probably fair to estimate that Irish asset values are down at least 30%, but perhaps has much as 50% since 2007.


If this 1% elite includes the top 1% of taxpayers illustrated by the Revenue’s 2008 Statistical Report for the year 2006, then this group consisted in 2006 of 24,212 people who earned €9.03 billion in taxable earnings in 2006.  This is an 11.6% share of the total earned income, on which they paid €2.9bn income tax.  This accounts for 24.2% of the total €11.97bn tax collected. 


Some trade union leaders and their members are now arguing that higher earners – with the ‘rich’ benchmark ranging from €100k to €250k of earnings - should 1) pay a higher, still undisclosed, rate of tax on earnings in excess of these benchmarks; 2) pay an annual, still undisclosed, wealth levy on their capital based wealth, with the non-resident super-rich also being obliged to pay income and capital tax and levies on their off-shore holdings or be forced to renounce their citizenship. 


It would be very useful – and less emotive – if definite proposals from the unions could be costed by the Revenue Commissioners.   


Then at least we can properly debate whether a proportion of the accumulated wealth at the top strata of society can be collected every year with the permission of its owners in order to maintain the current cost of running our state, or whether it will have to be confiscated by passing new tax laws that arbitrarily target only certain citizens.


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You & Your Money - Nov 2009

Posted by Jill Kerby on November 01 2009 @ 15:06


The one thing you can be absolutely certain about a Great Recession

…is that it will come to an end some day.  What goes down always comes up again, and that goes even for an economy that has had the stuffing beaten out of it. 

The timing of this transformation, however, is another matter.  

One year after the pivotal collapse of Lehman Brothers investment bank, the politicians and central bankers who got us into this mess in the first place have declared an end of the Great Recession in the United States, France and Germany. 

They use so-called ‘technical’ data to mark the end of a downturn, usually by monitoring the increase in Gross Domestic Product (GDP) over a full quarter.  GDP is up in the US – allegedly - but only by about 1% in the second quarter of 2009; it’s due more to government stimulus packages and spending such as the two multi-billion car scrappage schemes, tax credits for new home buyers and the stimulus lending to states and municipalities so they can spend on projects that neither they, nor the private sector fancied investing in during the boom times. 


Here, the economic movement is non existent, and it’s not being helped by taxes and levies being jacked up or by the transfer of €77 billion worth of private debts (at a cost of €54 billion) onto the public balance sheet.   


Nevertheless, desperate for any good news, there are an awful lot of people here pinning their hopes on our big trading partners being the first to “recover” what everyone seems to believe was lost after the Lehman collapse: that is, the prospect of endless economic growth backed by an endless supply of cheap credit and debt. 


Personally, I think too many false hopes are being raised by economists and stockbrokers (who never saw the downside coming) who now believe that once the credit spivot is turned back on, the spending party will resume and the global recession (whatever about our own home grown depression) will be well and truly over. 


Sadly, in the same way that a single swallow doesn’t herald the summer, a single stock market rally does not ‘a sustainable recovery make’.  


Anyone who thinks the Americans are going to get themselves, let alone the rest of us out of this Great Recession through a ‘jobless recovery’, is delusional: no new jobs means no new corporate earnings, or corporate profits.  No profits; no tax returns. No tax returns…well we know what that means.


I could fill this entire magazine with reasons why this recession isn’t over yet, but let us suffice with seven good reasons, all originating in the United States, the world’s biggest economy (for now), biggest debtor nation, and the owner of the biggest money printing press that is missing its ‘Off’ switch: 


1) The US Census Bureau has reported that real median income in the US fell by 3.6% in 2008 to $50,303, that a million people lost their employment based health insurance and that a record 39.8 million or 13.2% of the population now live in poverty. Meanwhile, 216,000 people lost their jobs in August and seven million have been made unemployed since the recession began at the end of 2007, raising the official unemployment level to 9.75%. However, the true rate of unemployment is 16% when those people no longer entitled to unemployment benefit or who can only find reduced hours are taken into account, said Atlanta Federal Reserve Bank chief Dennis Lockhart.


2) In August of 2009, one in every 357 homes in the US was at some stage of foreclosure. This figure was slightly lower than in July, but still 18% higher than in July 2008. Meanwhile, according to The New York Times, there are currently 2.8 million interest-only mortgages in the US worth $908 billion, of which $71 billion will expire over the next year and will reset at higher monthly repayments. Within another year, another $100 billion will reset higher, “and by the halfway point in 2011, another $400 billion will follow suit.”   Deutsche Bank predicts that 48% of all US mortgages will be in negative equity by 2011. 




3) By September more than 35 million –  one in nine Americans and nearly seven million more than last year - were receiving food stamps. In August, the US Senate passed a new $124 billion agriculture spending bill that will increase the numbers who can receive Federal food stamps aid. Another 12% has been added to the federal school lunch programme and 9% more to the food aid scheme for poor children and pregnant women.


4) Like here, consumer spending in the United States experienced a slight, seasonal, upward blip in August but it fell by $21.6 billion in July, the biggest fall since 1943 and 430% greater than the expected $4 billion retrenchment predicted by government economists.  Consumer spending accounts for 70% of US gross domestic product and is now 33% down from the summer of 2008.  The US consumer, who is now reducing debt by a cumulative 10% per annum, still has an estimated $26 trillion worth of outstanding personal debt to repay.  


5) Meanwhile, savings are on the rise, from a negative rate in 2007 to over 5% today.  But every 5% of income saved means $500 billion less being spent in the American economy (or on exports). Analysts say the savings rate could rise to nearly 10%. 


6) This year, the US budget deficit will reach $1.8 trillion or 13% of US GDP, according to the US Treasury. The previous largest peacetime deficit, in 1920, was 6%. The Obama administration expects the cumulative deficit to reach a whopping $9 trillion within 10 years. At time of writing the total current US national debt was $11.7 trillion, up from $9 trillion when George Bush left office and from c$5.6 trillion when Bill Clinton departed  (after balancing the federal budget.)  Is it any wonder the US government is desperately trying to inflate away their debts by devaluing the dollar?


7) In July, Neil Barofsky, the special inspector-general for the Troubled Asset Relief Program (TARP), said that the US Treasury's bailout program of the financial services sector could end up costing $23.7 trillion, reported the Bloomberg news agency. The programme, a sort of gargantuan Nama, was fraught with "conflicts of interest", “collusion vulnerabilities", and “deliberate obfuscation” of what banks are doing with the money they received from the government, reported the Wall Street Journal.  It is predictions like this that fuel warnings about price hyper-inflation. 


And finally, if the Americans are up to their oxters in debt, jobs are still collapsing, and consumers have stopped spending, should we all be turning to the Far East for an oriental knight-in-shining armour to come to our rescue? 


It’s a nice thought, but while the Chinese claim their GDP is up over 8% this year, their trade figures have fallen by 22%.  Their biggest western customer – America – can’t afford to buy the same volume of stuff from them and the Obama administration is starting to slap tariffs on Chinese goods like cheap car tyres that they say the Chinese are dumping in US markets at below cost price. The Chinese are threatening retaliation against the US chicken and auto parts export market. 


No, this Great Recession has some way to run yet.  Probably until the ordinary Chinese worker, who is a big saver, can be convinced to start spending his hard earned cash, and then when it runs out, to borrow and spend just like we did - before we broke the banks… and the banks broke us all. 

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The Sunday Times - Money Questions 01/11/09

Posted by Jill Kerby on November 01 2009 @ 14:21


The Sunday Times 


November 1/09


DL writes from Dublin:

I've read that it used to be possible to buy a property as a means to a future pension. Is this still an option? If yes, please can you explain who I should contact if I want to proceed with this? Should I approach any financial adviser or are there specialists in this area? Does the property have to be based in Ireland? My partner and I are both employed. Our combined salaries are approximately €110,000. One of us has a private pension the other does not. Our primary residence is mortgage free. We already have two investment properties with mortgages and these are paying for themselves. We are both in our late forties. Can you please clarify how much we could pay towards a property pension annually? Is it possible to purchase a property for €100,000 (approx) and obtain tax relief via pension contributions towards the purchase of this.


I think it would be a very good idea indeed for you to consult with a 

specialist pension consultant about your idea of buying yet another property. 

I passed your letter onto independent, fee-based financial advisor, Vincent Digby of Impartial.ie who said, “Before jumping directly to the ‘which property should I buy ’ conversation, I recommend your reader review his overall pension strategy and planning especially since he is already materially exposed to the property market for pension and non pension assets. Concentration of investment in one asset class is particularly risky and not something I would recommend.”  Digby says that if you buy another property for pension purposes, you need to be aware of how current and future risks like rental voids, falling rents and oversupply and the fact that there is no guarantee about capital appreciation could affect the value of your pension and retirement. “If he is determined to increase property exposure in his pension, he should consider not just a single property, funded either through a self-administered pension, if it applies in his case, or in a self-directed life assurance based pension into which you can include a residential or commercial property, but also a property fund based investment that can reduce the negative impact of rental voids via a larger diverse portfolio.”   This is a complicated issue:  your advisor can explain all the details, including the size of the contributions you each can make and the tax relief you each claim. 


BC writes from Co. Dublin:

I am writing about my daughter who has lived in London for two years. On July 10th she had her handbag robbed while sitting in a restaurant with her boyfriend. Along with her brand new expensive handbag, her phone, MP3 player and makeup was her Barclays Bank ATM. She telephoned the bank within 40 minutes to cancel the card but by then the thieves had used it several times and had taken 350 pounds.  She has a job that only pays minimum wage and can ill afford to lose this money. She has written to the bank but they have refused to refund the money as her Pin number was used. She had withdrawn some cash earlier from an ATM which was known to be subject to tampering and she assured me she did not have the pin number written down anywhere in her bag. I am positive my daughter was not to blame. Is there anything you can do to help?

Just like here in Ireland, when there is a dispute over card fraud, your daughter should write to her bank with an explanation about the theft (and ideally include a copy of a police report) and request a refund.  If this is unsuccessful she can make a formal complaint to the Financial Service Authority Ombudsman and ask them to investigate her complaint.  She can download a complaints application form at www.complaint.info@financial-ombudsman.org.uk which must them be posted back, or she can speak to someone directly on their consumer help-line: 0300 123 9123. 


RMcC writes from Dublin:

Is now a good time to start paying extra off my tracker mortgage. At 1.75% I pay €700 with 18 years left to run.  Is now a good time to sell the house, which is in Dublin and either invest in something else like equities, seeing as house renting is pretty cheap or move to the south east? How can I find out about price drops in various areas?


I always think it’s a good time to pay off mortgage debt – if only for the peace of mind – but now is an especially good time because the value of your property is falling while the debt is not.  You’re very lucky to have such a cheap tracker rate, but interest rates are more likely to go up than fall going forward.  As for selling up and renting, that entirely depends on how much you are willing to accept and how much rent you can afford.  The latest Daft.ie house price report for the third quarter of this year might help you make your decision: it show by how much both residential property prices and rents have fallen so far this year.  Most commentators seem to agree that there is some way to go on both counts, so if you are determined to sell up, you might want to do so, sooner than later. 

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The Sunday Times - Money Comment 01/11/09

Posted by Jill Kerby on November 01 2009 @ 14:18


Since there is no stomach on the part of the banks or government to allow mass foreclosures on the growing number of people with negative equity - a six month to one year moratorium on legal proceedings is already in place depending on the institution – it’s inevitable that the “something has to be done” brigade will get their way…but at what cost?


It is projected that 200,000 homeowners will be in negative equity by this time next year.  Up to 50,000 people are thought to be in mortgage arrears. The list of ‘solutions’ cropping up in the papers and on the radio call-in shows is growing and includes suggestions like 

reverting every mortgage holder in serious negative equity onto interest-only repayments and then freezing current, low interest rates until “the recovery”; 

the banks’ writing off all or part of the borrower’s negative equity but letting the mortgage holder remain in the property; 

lenders having to adopt shared ownership schemes in which the borrower repays their original loan as a combination of rent and capital payments, ideally based on today’s market rent; 

multi-billion euro equity-for-debt swaps with a new government agency that is funded by an annual 1% levy on the mortgage repayments of all mortgage holders. 


This latter proposal is just daft.  The pool of levy payers is too small, for one thing to make a dent in the huge negative equity bill:  it would cost €2.5 billion to swop just 10% of the typical mortgage debt held by 100,000 first time buyers, who typically borrowed €250,000 during the last years of the boom.  The proposed 1% levy, based on an average repayment of about €12,240 by 600,000 mortgage holders would raise a paltry €73 million. 


Seeing as how my rising taxes are already preserving the public sector and a government that doesn’t know the first thing about good housekeeping, I don’t fancy paying another levy to bail out adult, first time buyers who didn’t have the sense to tell a bank official to get stuffed when he dangled a no money down loan in front of them that was five or six times their annual gross income and could only ever be paid off at the end of 35 years if interest rates never went up and the price of the property never went down. 


There’s only two ways to sort out a big debt: you pay it off, however long it takes and at whatever cost, or you (and your lender) write it off.  Both are deeply painful choices and the latter can result insolvency and a period of financial depression, but also a chance to start over again.  


Beggaring your neighbour, or even the next generation by forcing them to pay off your debts doesn’t seem right or fair to me.  But then I didn’t think Nama was a very good idea either. 


Generously rewarded trade union bosses are convinced that there is a large constituency of “rich” people, still resident in this country (as opposed to in Monaco, Portugal or Switzerland), who are just waiting to be bled, like Masai cattle, for the substantial cash transfusions that are needed to preserve their public sector members’ pay, pensions and benefits, and of course their own, seeing as how so many of their incomes shadow those of senior civil or public servants. 


The offshore money of the super-rich is already beyond redemption so Jack O’Connor and Dave Begg might as well save their breath.  


Meanwhile, imposing a super wealth tax on the value of their capital assets in Ireland – or even confiscating their mansions, art, horses or cattle here – would, I expect see this stuff sold or torched first and their owners moving permanently to the ‘summer place’ in Monaco.  


Which leaves everyone else earning €100,000 or more – Jack O’Connor’s benchmark to target. Slim pickings here, I expect.  


Aside from the usual suspects – the builders, senior bankers, politicians, older medical consultants, barristers with their snouts permanently wedged in tribunal troughs, high paid RTE ‘talent’ and some other monied professionals, few enough “rich” earners in this country have sidestepped the property and stock market crash or the sharp fall in turnover from their businesses. 


Nearly everyone I know still earning from €100,000 in a private sector job is, (like friends working for that money in the public sector) up to their eyeballs in debt which has to be serviced, alongside with all their other bills, from what remains of their after-tax income.  


Since April, between the income levies, health levies, higher PRSI limits, the private health insurance levy and the rise in VAT, the so-called “rich” are paying a higher rate of tax of over 52% now, meaning they too, ironically, are working for the government…at least until sometime in July every year when what is left of their money is their own. 


The only “rich” people left, frankly, that the trade union leaders may have to target are the wealthy hoarders in our society, those people, most of them middle aged and older, who prudently paid off their mortgages and avoided other debt; who lived within their means before and during the boom years; who are luckily still employed or already retired and who perhaps even made a windfall selling their family home and traded downwards when prices were sky high. 


This segment of society– and they even include little old ladies – have now boosted the national savings rate to 12% of GNP and are sitting on bags of cash that the union leaders must see that they clearly don’t need, or they’d be drawing it down.  A great big, whopping new DIRT tax of 70% would teach them …and it’s all for the common good of course. 


You think it hasn’t been suggested?  Let’s hope the Minister for Finance wasn’t listening.  

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