This is a version of a column in the Irish Examiner 6 December 2012
So now we know. The budget, like Enda Kenny and Eamonn Gilmore, is cautious, careful, technocratic and minimalist in terms of its aims. It is a holding operation, designed to do the minimum – the minimum in terms of adhering to the needs of the troika, the minimum in terms of some red (actually dyed) meat to the labour backbenchers, the minimum in terms of a signal to the markets that the government will cautiously and incrementally remain cautiously incremental in its exercise of the very limited autonomy. The government is safe, in all senses, and remains focused on external perception, ignoring in its massive majority the internal dynamics of society and the Irish economy.
For all the sound and fury it is dull. It is a dull throbbing pain for all of us, enlightened by occasional flashes of acute discomfort. A budget that keeps low corporation tax and hits the elderly , the sick, children and the poor is hardly one that bears the hallmarks of a government with a socialist party involved.
The parameters of the budget were set in advance and the government has moved within but not beyod these parameters. And that is a pity because even within these parameters they had considerable movement potential. In fact they have almost total freedom, so long as the broad shape – in terms of hitting debt/gdp ratios and deficit targets – is maintained. It is simply not the case that the Troika required us to increase motor tax, introduce a particular form (or indeed any) property tax etc. These were agreed but the actual Memorandum of Understanding (the new name for Bunreacht na h-Eireann) states “Government may, in consultation with the staff of the European Commission, the IMF, and the ECB, substitute one or more of the above measures with others of equally good quality”. So the ball lay in their court, but instead of adopting innovative and equitable approaches they played the safe tired game we saw.
What they did do will please the financial markets – uncertainty is the enemy of government bond yields, the seemingly sole metric of merit for the government. While these have decreased that is on the back of a wall of ECB money hitting the markets, who have then engaged in a carry trade whereby they borrow cheap ECB money and invest it in high yielding government bonds, obtaining in this a further subsidy from the taxpayer. Paradoxically the safe cautious nature of the budget will depress yields and thus increment the pressure on the Irish banks by reducing this profit flow, and they will make this up by further squeezing the customer base.
A further complication for the banks is around the housing tax. The plan, to somehow tax property, is at basis a good one. However, the approach used smacks of another desperate attempt to stave off the slow erosion of value. In essence the Irish banks are still very badly exposed to domestic property. The deleveraging they have undertaken has exacerbated that. The housing tax contains an administrative sting in the tail – the freezing of value and the revenue guidance. First, the revenue will take the value as of 2013 as the basis for tax through 2016. In essence this is going to mean that any falls in house values will be of no benefit to homeowners in terms of tax. Yes, this prevents penalizing of home improvements, but the reality is that the effect will be to have people being taxed in 2016 on an inflated basis. Second, the valuation of the home will be the touchpaper for a firestorm of problems. In essence the revenue will say your house is worth X. And its up to you to show that its worth less than X. You can of course employ a valuer, but the cost of this valuation is liable to be more than the incremental cost of the tax. So people will simply give in and pay the revenue basis, that is the plan. We have a basis in VRT where the revenue value cars on import at a level which is fantastically at variance with the reality of actual market values – and always in excess. There is every incentive and every likelihood for the state to overvalue homes. The uncertainty in terms of home values is not good for certainty in the housing market and therefore not good for the banks. And that is not good for the taxpayer, as we are still shackled to the banks