May 11, 2008
The new finance minister should remove all support from the bloated property sector.
The Minister for Finance of a small country which is facing difficult times is like the captain of a small boat sailing into choppy waters. Imagine for a moment that you are in a boat coming around Omey Island. In a blaze of May bank holiday sunlight, Connemara opens up before you.
Looking past the Sky Road, double-spired Clifden and beyond to the Maumturks, it is hard to image a more beautiful and peaceful place. That is, of course, until the Atlantic weather turns. If you have ever been caught in a small boat when the seas change, when summer turns to winter in a matter of minutes, when the winds pick up, the ocean swells and the power of nature envelopes you, you will realise these are forces to be reckoned with.
Forces building in the global economy – the credit crunch, the global property slowdown and globalisation in every aspect of manufacturing and services – are converging and affecting Ireland in much the same way. The restructuring of the Diageo operations in Ireland, announced on Friday, demonstrates the fact that nothing, even the most sacred of things, is permanent.
Thirty years ago, when Ireland was isolated, we could ignore international economic turbulence. Then we were spectators, but now we are players.
Today — when we can borrow where we like, buy houses where the sun shines, employ Polish plumbers and waitresses, reinvent ourselves on myspace.com, travel for half nothing, watch news as it breaks, log on, blog on, buy stuff from China, get instructions for our laptops made in Limerick from helplines in India, read what we like and see what we like – we are fused with the rest of the globe.
In the book A Perfect Storm, Sebastian Junger described a storm that hit Nova Scotia during Halloween,1991. A perfect storm occurs when several weather fronts, which individually would be bad enough, converge to wreak havoc.
The weather fronts build far out to sea, gaining momentum, heading for the coast. Their simultaneous convergence causes the forces of nature to whip up a most violent tempest. This occurs rarely; when it does, the results are devastating.
As the captain can do little about the weather, his job is to make sure his small boat is seaworthy. Unfortunately, Captain Lenihan has inherited a vessel formerly skippered by Captain Cowen, who failed to keep it shipshape, even when conditions were near perfect.
Now Ireland has to change course. The country will thrive if we wean ourselves quickly off the property monster that got us into this mess in the first place. We have to do this for both economic and psychological reasons.
While other small trading countries like Denmark, Singapore, Israel, Finland and Hong Kong are thriving despite the changed conditions, we are still weighed down by the anvil of property.
The most far-sighted move Captain Lenihan could make would be to take away all government incentives to invest in property and allow the price of this most overrated asset to fall rapidly. This has to be done in order for us to remain internationally competitive.
Think about this statistic: the average cost of a middle class house in Ireland is nine times that of the equivalent house in Texas. Texas is the home of Dell and we as an economy, are trying to compete with the likes of Texas. It is obvious that, far from making us strong, the continuing high – though falling – price of property is a problem.
If the new minister were to take away all state support for this bloated industry, we would slowly move in the right direction. This would mean that all tax breaks for apartments, for redevelopment, for first-time buyers and for private pensions invested in property would be frozen and the construction industry treated like any other sector.
Such a move would have obvious revenue implications, because the construction industry throws off huge revenue for the state coffers and activity, already slowing, would falter further. For example, about 28 per cent of the price of every new home goes to the state in tax.
We have already seen how the slump in stamp duty has affected the coffers. But long-term, no country ever got rich by its people buying and selling property to each other with money borrowed from foreigners.
Psychologically, the state should try to unravel the mindset which has emerged with the property boom. This mindset is that the easiest money to make is quick, speculative money. Go to any pub in Ireland and you’ll still hear stories of the fast buck and the respect that is given to the lad who turned to property in the good old days. To move onto a more productive economic level, we need to give people back the notion that decent hard work – rather than smart-arsed or greedy speculation – is a valuable and worthy pursuit.
Such a mindset shift would allow us to conceive a new economic strategy. This would involve building a proper, lightweight, exporting economy in Ireland. Where possible, the incentives for direct foreign investment must be kept in place and complemented with incentives for Irish people to take risks unrelated to property.
In concrete terms, investors who back start-up companies should be given generous and long-lasting favourable tax treatment. The state, as it does in many other countries, could also reduce start-up costs by subsidising office space for incubation centres.
Ireland has so much to offer risk takers – both our own and international – in terms of raw material. For example, Science Foundation Ireland is slated to invest â‚¬7 billion in scientific research over the next ten years. This will go to waste unless we also bring in the necessary commercial skills that can harness this research and build it into something that will be for sale. The idea should be to build companies of our own rather than just being a conveyor belt of talent for the multinationals.
Israel – a contentious country which is celebrating an unlikely 60th birthday this week – has done this. It has created, through the extensive use of incentivised US venture capitalists, a proper high tech industry.
We could do something similar, but so too could everyone else, so we have to be quick. It will be interesting to see what the new boss at the Department of Enterprise, Trade and Employment, TÃ¡naiste Mary Coughlan, might come up with.
As we sail into the storm, we have options but we must make the hard choices. Cowen talks about patriotism; the most patriotic thing he and his new team could do would be to think of the nation as a whole rather than pander to the vested interests that have hijacked debate and policy in the past.
The property boom and the associated feel-good factor masked this takeover, but as Warren Buffett magnificently commented, it’s only when the tide is going out that you see who’s swimming naked.