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 for the labour backbenchers, the minimum in terms of a signal to the markets that the Government will remain cautiously incremental in its exercise of 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 conservatively within these parameters. And that is a pity because even within these parameters they had considerable scope. 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 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 safe.
What they did will please financial markets — uncertainty is the enemy of government bond yields, the seemingly sole metric of merit for the Government. While these have fallen, 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 cautious nature of the budget will depress yields.
A further complication for the banks is around the housing tax. The plan, to somehow tax property, is at its 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. This will see people 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. It’s up to you to show that it’s worth less than X. You can employ a valuer, but the cost of this is liable to be more than the incremental cost of the tax. So people will give in and pay the revenue basis, that is the plan. We have a basis in VRT where the revenue value of cars on import is 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.
* Brian Lucey is professor of finance at Trinity College Dublin
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