April 28, 2010
This is a copy of a letter sent to Brian Cowen in November 2008. Some of the content has been superceded by events, but some still has relevance today. The budget refers to November 2008. This letter has also been posted on the Property Pin Website.
Congratulations on your appointment as Taoiseach earlier this year. You have taken on a role that is going to demand insight and vision as we move from the Celtic Tiger via the Bertie Bubble to the Irish Bust. You cannot stop what is happening to the economy now. What is needed is rapid and radical action to ameliorate its worst effects.
Some new thinking is now needed. This is what I suggest you do for starters — note the financial recommendations are approximations, as I do not have access to the financial information available to you.
A significant item on your agenda has been the Lisbon Treaty. Drop it — it is a ‘dead treaty’ an ‘ex treaty’. You should respect the ‘voter’ result. Ireland is an equal partner in the European Union, so do not be intimidated by your colleagues in Europe — declare the matter finished. This is essential because attention focused on the Lisbon Treaty is attention taken from the economy and the economy needs all your attention. Anyway, there is no guarantee that the result will be any different if you insist on a second vote.
I must confess that having read the Lisbon Treaty, I do not wish to be part of a European superstate. Opt outs are inadequate — have you read clause 48? I wish to be part of a free trade area only. I do not like the tone of some of the official European comment post the rejection of the Lisbon Treaty. I feel that there is a serious democratic deficit at the heart of Europe. I also feel like a small Irish child being reprimanded by our seniors and betters in Europe, when I see us as equal partners in a European club. It is my view, that as one of the few countries to hold a referendum, that Europe should learn from our democratic example, and that you should not disrespect it.
The budget has not exactly been a success. Ideologically, Fianna Fail used to be the party of the little fellow. Now, I feel it is the party of the big and the powerful — the party of its paymasters. This matters because how you function as a party informs how you develop policy. Faced with a financial crisis, you could have taken a top – down or a bottom up approach to the drop in government income. A top – down approach would have meant cutting payments to the most wealthy, those with whom I suggest you identify. While you have had to row back on your initial plans, to me you have taken a bottom-up approach to budget cuts – targeting the most vulnerable in our society – those supposedly less well able to court government support. In addition, you are borrowing heavily for consumption — a truly reckless behaviour. Borrowing for consumption means that Ireland Inc. is living beyond its means. What will you do if the tax shortfall continues to widen in the next years? Who is going to pay back the money you are borrowing? What if you cannot rely on inflation to reduce the burden of the debt?
Recently, the Small Firms Association suggested that the minimum wage should be reduced. I suggest that individuals on the minimum wage are least able to afford wage reductions. The problem as I see it is not the minimum wage, but the very high wages further up the food chain. Although you have just completed a wage agreement, you may not have the money for it. I believe that you need to start talking about wage pauses at all levels and wage reductions at the top and above a certain level of salary.
Wages, Tax and Costs
1 Introduce a 50% + cut on income above â‚¬ 100,000.00 for income and pensions of all government and government funded (e.g. the HSE) bodies — the country cannot afford the disproportionate remuneration of the public sector. This means that an individual earning â‚¬ 500,000.00 would now earn â‚¬ 100,000.00 plus 50% of â‚¬ 400,000.00 = â‚¬ 200,000.00 = a total of â‚¬ 300,000.00.
2 Eliminate perks and make expenses receipt based only.
3 Everybody should pay tax on income — so start with members of the Oireachtas. Then proceed to seek tax from any industry not currently paying tax e.g. the horse industry.
4 To make business tax fair — simplify the tax system. Based on average costs as supplied by the Revenue set a cost deduction on sales / turnover for every industry — so depending on calculations:
ï‚· 80%+ for primary producers, e.g. farmers and miners
ï‚· 60%+ for manufacturers
ï‚· 30% + for service industries
Tax would be paid at a very low level on sales / turnover over the cost allowed percentage. This would encourage businesses to be efficient and profitable and not to engage in buying unnecessary end of year tax avoidance equipment or dangerous leverage to avoid paying tax. It would support a move away from excessive deficit funding of businesses, which is now causing problems. It would spread the tax net, so that all companies pay some tax and end tax avoidance schemes. A tax free period would be allowed for new start-ups.
5 Change the public sector budget system, so that money over at the end of the year does not have to be spent needlessly to avoid having a surplus deducted from the next year’s budget allowance.
Ireland has become a dangerously expensive place to do business. This needs to be urgently reversed if all the gains of the Celtic Tiger are not to be completely lost. It is all very well to talk of going up the economic food chain, but that is a very short-term solution as there are too many competing countries out there for this to work except in the very short term. We have to reduce our costs and continue to produce and make. If we do not do this, we will have to borrow to buy goods and end up with a chronic Balance of Payments deficit like the United Kingdom and the United States. So, rents, rates, public service and utility costs need to come down now before it is too late. It would be better to facilitate this while there is an economy to save rather than when you are forced to do so with a devastated economy.
The banks following their international colleagues have ‘played puck’ with borrowing and lending, while you looked the other way. Historically bank lending was for investment, the capital sum lent could reliably expect to be repaid from the returns on the investment. As banks have raced more and more out of control, they have lent for speculation, consumption and gambling. They have also taken too much money out of the business in the form of dividends and remuneration. There is absolutely no point in giving them money to fritter on the inflated lifestyle that they have been living in recent years.
David McWilliams has recommended a three step process to stop the collapse of the banks:
ï‚· Guarantee the deposits etc.
ï‚· Dismiss the architects of the disaster
ï‚· Recapitalise the banks
After steps 1 and 2, the suggestion is that you recapitalise the banks. If you absolutely have to do this, you first need to deal with the excessive monies being taken out of the business, particularly in the form of financial reward. Bank wages need to be reduced to reflect bank income and the need for recapitalisation. Then if you really have to use public money to recapitalise the banks, I suggest you consider the following:
ï‚· Buy residential mortgages issued from 2005 to 2008 from the banks at 30cent + on the Euro. Hold these mortgages with the original borrowers at 50cent + on the Euro, receiving the adjusted repayments. Do the same for mortgages from 2002 to 2004 at 50 cent + on the Euro. Hold these mortgages with the original borrowers at 70cent + on the Euro, receiving the adjusted repayments. You can repeat the process if necessary with other property loans, eventually selling them back or not to the originators at a profit. This will provide a means of writing down over-inflated loans, give the banks some money, help the poor borrowers who have been fooled into borrowing too much and put the extra money the borrowers will now have into the economy.
ï‚· It is my experience that banks are currently looking at all possible means to increase income. No lender should be allowed to add interest to capital outstanding and then charge interest on the interest (compounding) as it were.
The employment situation is deteriorating rapidly. There has been a large jump in the number of individuals unemployed and it is set to get worse. Many of these individuals are from the building trade. They need to find alternative employment. I suggest that in addition to government infrastructure projects, you quickly open up the building of one-off houses in the countryside. There are many persons (including me), who would build an individual house if allowed. While this would not replace the building boom, it would provide employment to a body of the currently unemployed. At the same time, you need to stop what could be seen as ‘racketeering’ by the county councils who repeatedly demand what are seen as arbitrary design changes with a new fee every time a plan has to be re-submitted.
It is now possible to install environmentally neutral septic tank systems, so objections to building in the countryside on these grounds are unnecessary. I attended the Sustainable Building Exhibition at the RDS recently. It is not just the individuals directly working in the building trade who are going to be out of work or business if you do not act. All the small businesses that depend on the building trade will go if you do not quickly respond. I cannot stress enough the urgency of this. Encourage these one-off houses to be multi-purpose e.g. suitable for living and small home businesses. You may say, ‘but we have too many houses’. Because of misguided government policies, we have too many houses of the wrong kind, in the wrong place and at the wrong price. You cannot force anyone to buy these unwanted houses as a means of supporting the building industry and the councils would get very bad value for money if they were to buy them for supported or social housing. As for Home Choice Loans — these are subprime loans to bail out the building industry by stiffing the first time buyers.
The current restrictive planning laws have not worked. The zoning and planning laws are similar to those in place in England where over many years they have led to overpriced building land, which has in turn led to property shortages, booms and busts, overpriced rents both private and commercial, mortgage slavery and high costs contributing to the decline of manufacturing. So much money goes into servicing property costs, it drives up all other costs in the economy and leaves much less money for investing and spending in that economy. High property prices are not a good thing. High property prices are a bad thing.
Now you can say that there is plenty of land zoned, but there has not been plenty of available zoned land, otherwise the price differential with agricultural land would not generally be so great. The cost and availability of land are the foundation costs of the economy and other costs follow on from them. You need to reform zoning. The current system has not been a success. Although the property bubble was driven by the banks, it had a real or perceived shortage of land and buildings as a spark. There always has to be a perceived shortage to start a bubble. You could not for example create a bubble in apples at the moment.
High Density Development and Congestion
The policy of concentrating jobs and populations in large urban centres has led to huge problems. What has been gained by concentration of services has been offset by the cost of congestion. There is no point in concentrating work in cities and towns if accommodation becomes unaffordable in those cities and towns and individuals have to travel long distances to work. One alternative to addressing the long commute and congestion would be to encourage home working. There are many jobs that do not require a trip to a centre of work and this would cut congestion and costs and the long commute. A financial incentive in the form of reduced Employer National Insurance contributions could be used to encourage take-up of the scheme. Of course widespread broadband would be an essential support system for this.
There is a second problem with unemployment and it is that benefits are only available to individuals who were previously employees, i.e. the self-employed do not get benefits unless almost destitute. This is a barrier to the unemployed becoming self-employed. It is particularly a barrier to self-employment, that if you become ill, you will not be able to apply for benefits. I suggest that at least some if not all benefits available to employees be available to the self-employed. This would provide a safety net for the unemployed to try self-employment and go off benefits. I believe that many of the unemployed might be encouraged to become self-employed if the barrier of denial of State Benefits was removed. Let’s get people working.
Benefit for Work
Ideally I believe that some form of state employment should replace benefits for the unemployed. You would then not have to worry about individuals claiming benefits while doing undeclared work. It is not healthy to be given money without an expectation of some labour in return. I suggest that this could be done without upsetting the Unions and threatening anyone already employed. Ireland is still a tourist country. To this end, the grooming and appearance of the country is very important. While there are some well-kept areas of the country, a lot could be done to improve the visual appearance of the Irish Republic. In the countryside, many trees are being choked by ivy, there is widespread buachalÃ¡n, there are less attractive ‘weeds’ on the road margins, there are road margins and crossroads left derelict following public works and there is litter. ‘Landscaping’ the countryside would greatly enhance its appeal to the tourists and make it more visually rewarding for all of us. While the Tidy Towns do sterling work, they need help. There are still some towns and cities, with litter, chewing gum and dirty streets. Clearing the litter and chewing gum and power washing the pavements would make them more attractive to the eye. I am thinking of an on-going Spring Clean and landscaping of the country by those currently claiming benefits.
There are now many individuals in negative equity. These individuals cannot move house because they first have to clear the debt incurred on the current property. This means that individuals cannot move until the market changes. This may be a long time indeed and it contributes to paralysis of the market. I suggest that a very simple administrative change could help this situation. If it were possible to transfer the existing mortgage debt to a new property, an individual in negative equity could move house. It would not solve the debt problem, but it would create mobility.
The pension system has developed as a number of systems over many years. I applaud the concept of the Basic State Pension. However, there is an inherent unfairness in the alternative or additional pension systems. Company pension schemes are unstable. Private pension schemes are uncompetitive with the public sector and in turbulent financial times they are unreliable in terms of pay-outs. Very few individuals can accumulate sufficient money in a lifetime to be financially independent. The public service pension scheme is unsustainable in the longer term.
I believe that the pension system needs to be overhauled. I suggest the following. Continue with the Basic State Pension. For top-up, have an SSIA style pension. Individuals could save with a financial institution or pension company on a year by year basis subject to a yearly maximum. The individual would be committed to that institution for that year, but could change institution each new financial year. The government would add a sum for every so many Euro saved. This does not have to be excessively generous, but the money would go directly to the pension account, rather than to keeping a pension company in the style to which it has become accustomed. Because there are often unexpected financial needs, an individual would be allowed to withdraw up to 10% of the personal money invested in any one year in the subsequent financial year. Depending on actuarial tables, an individual at age 60 or subsequent years would be allowed to withdraw 1/25 + of the money in the pension scheme on an annual basis. Should the individual die before the age of 85 +, any sum remaining in the fund could be passed on to his / her heirs. Should an individual live beyond the age of 85 +, the state would fund that individual at the approximate level of the annual withdrawal from the fund for the remainder of his / her life.
Such a system has the advantage of:
ï‚· Empowering the individual
ï‚· Relieving the burden on the state
ï‚· Balance between state basic support and individual responsibility
ï‚· Competition between financial institutions.
Immigration and Overseas Aid
No country can cope with too rapid an increase in population too quickly. Ireland did not have the infrastructure to cope with the open door policy that was introduced when many countries from Eastern Europe joined the European Union. I suggest that immigration in Ireland needs to be regulated based on employment need. It is also unethical to seek immigration of skilled workers from poor countries that have a skilled worker deficit.
It seems to me that overseas aid uses something of a scattergun and fragmented approach. If we really want to help poorer countries through overseas aid, I suggest that we develop an inward investment system that is targeted and efficient. In countries outside the European Union, I suggest a buddy system. Depending on size, we match up a developed country with a developing one. So, Ireland takes on one country of similar size and other developed countries do the same. This would be subject to a developing country bidding for our partnership and their agreement on developing democracy and the rule of law. This would concentrate aid on a country to country basis.
Fiscal Reserve Banking
The Fiscal Reserve model of banking is a kind of pyramid scheme, by which those in the ‘know’ or those who happen to borrow at the right point in the cycle make a lot of money at the expense of the later arrivals. It depends for its success on ever increasing levels of debt (inflation). Every time, the debt becomes excessive, it leads to boom and then bust. Once in a few generations, there is a boom so large that when it busts, it leads to a depression. It is a constant cycle of a selected group getting rich while a larger group get stiffed. It is not possible under this system for everybody to make it. The idea that everybody can make it under this system is a myth. There has to be a large body of losers for there to be winners. That is the nature of pyramid schemes.
You need to stop pretending that inflation is caused by rising prices and wage demands. Inflation for all practical purposes in Ireland and most other countries is caused by the creation of too much debt both by the government and banks. Price rises and wage demands are a consequence of inflation not its cause. Now while as a member of the Euro, you cannot solve the banking system alone, you need to start discussing alternative banking systems with your European colleagues.
I am also weary of hearing ignorant talk of ‘sophisticated financial instruments’ and ‘complex derivatives’. There is no sophisticated or complex finance, merely scams (selling on bad loans) and gambling (unbelievably sometimes with my pension money).
Finally, respect the Irish electorate and straighten your shoulders when you go to Europe on our behalf. Remember that you are in Europe as our representative. You do not go to Europe to do the bidding of the big countries there.
cc Members of the Oireachtas
17 December 2008