Finance Bill 2009: Economically-illiterate and jobs-destroying

Finance Bill 2009 published yesterday confirms a simple fact Lenihan and Cowen are hell-bent on pillaging this economy and destroying private growth and wealth.

I will focus on far less-discussed Explanatory Memorandum:

• confirms that "the income levy rates in force in the first four months of the year will apply to redundancy payments made up to 30 April 2009" - so DofF has venally gone after people who lost their jobs and was forced to step back. No worries, they'll get you in some other ways. But this means that the DofF projections for €754mln in 2009 due to be raised out of income levies is now looking more like my predicted (here) €714mln.

How? Well, we had some 384,400-268,600=115,800 people joining the Live Register since November 2008, this is probably ca 80% of those laid off in the period and so the numbers of those getting redundancies since January 1 (there is a lag in redundancy payments for quite a few workers due to cash flow problems in many businesses) are close to the above number. Statutory redundancy is 2 weeks pa, so say on average we have around 4 weeks of pay pa of service, for median salary of the laid off of, say €35,000 pa. Average tenure in the job is 5 years. Redundancy total paid since January is around €1.55bn mark. At 1% foregone levy, flat, that is €15.5mln. Annualized - €46.5mln. Ouch! Yet, it does not stop there - those 115,800 workers aren't going to get a job any time soon, so their income taxes (and levies) are now NIL. Foregone levies? Ouch, €41.5mln odd for the rest of 2009 income... And that is before we get to factor in the Laffer Curve effect of levies on the rest of us...

Yes, Brian, you should have sent Lenihan to Economics 101...

• "Section 5 amends section 97 of the Taxes Consolidation Act 1997 in relation to the extent to which interest on borrowed money used to purchase, improve or repair a rented premises can be deducted in computing the amount of taxable rental income. Where the borrowed money is used to purchase, improve or repair a residential premises, 75% of the interest on the borrowings can now be deducted instead of the normal 100%".

Now, I am not the biggest fan of buy-to-let investors, but... this is absolutely arbitrary. If I invest in a business - to increase that business' earning capacity, I can write it off against my earnings. Well, rental properties are business too. This measure is arbitrary in so far as it applies to a relative penalty to specific businesses. It is also idiotic, for it discourages improvements in properties, or in other words reduces efficiency of the existent housing stock in the country.

Yes, Brian, you should have sent Lenihan and DofF to Economics 101... preferably not taught by Alan Ahearne...

• "Section 6 amends section 644A of the Taxes Consolidation Act 1997 (which deals with the income tax treatment of income arising from dealing in residential development land) by providing for the abolition of the 20% incentive rate of income tax on such income, with effect from the 2009 tax year. From 2009 onwards such income will be taxed under normal income tax rules. The section also inserts a new section 644AA into the Taxes Consolidation Act 1997 [on] certain trading losses arising from a trade of dealing in residential development land where if profits had been earned the profits would have qualified for the 20% incentive rate of income tax. Under normal income tax rules, a loss sustained in a trade may be set ... against the person’s other income. In the case of losses sustained in a trade of dealing in residential development land, ...such losses (sustained in a trade in which if profits had been made would have been taxed at 20%) could be set against the person’s other income taxable at the higher 41% rate. The new section provides that such losses must first be converted into a tax credit, valued at 20% of the loss, and then allows the tax credit to be set sideways in the year the loss is sustained
  against tax payable on the person’s other income."
  

Brian-the-Genghis-Khan of Irish finances is now doing the following: you can earn income and pay a tax of 41%, plus levies, but if in the process you incur a loss, you can only write it off at 20% tax rate. This is patently business retarding. Application of this Zimbabwean-like measure to residential development land is not the point. The point is that the tax charge is more than twice the loss write-off charge. Of course, Zanu-FF will never pass this onto the entire economy - because our MNCs and large domestic vested interests will never allow this to occur, but... drop-by-drop he will start extending this in the next Budget to other parts of business.

But again, an added here is a bonus insight into Brian's economic illiteracy. The banks and corporates are overloaded with bad loans at this time. Much of it is collateralized on or lent on development land. If we were to force the banks to take serious writedowns and to see developers do so as well, why are we introducing a 50% penalty for them to do this? Brian is creating zombie land banks in return for a couple of hundred of euros he might claw back from a handful of forced sales of land. This is (a) going to haunt us for a long period of time, and (b) bodes poorly for the prospect of NAMA not generating the same...

• Finally, where a claim for terminal loss relief (i.e. on the permanent cessation of a trade) has not been made to and received by Revenue before 7 April 2009, the new section restricts the relief so that any part of the terminal loss that relates to a loss sustained, before 1 January 2009, in a trade of dealing in residential development
  land is ‘‘ring-fenced’’ and can only be set against income arising in that trade, or in that part of a trade, in prior years.
  

So no booking of losses after January 1, 2009 on development land. This is a penalty on those going bust in 2009 - a venal act, given that some developers tried their best to stay afloat before then and are now facing back taxes on business losses. Again, not being enamoured with land speculation myself, I just don't think this is a good way of reducing such activity in the future, but rather a way to kick in the sensitive area those who are already down. Well done, Brian.

In contrast, Section 8 allows for a close-off period for nursing homes incentives scheme phase-out. Why not for development land, Brian? After all, what's more toxic and needs to be written off faster and in a more orderly fashion?

In further contrast, here is a fair treatment:

• Section 11 abolishes the effective 20% rate applied to trading profits from dealing in residential development land with effect from 1 January 2009. An accounting period that straddles that date is treated for this purpose as two accounting periods. Profits or gains on dealing in residential development land will now be charged at the general rate of corporation tax that applies to dealing in land, which is 25%.

The only question to be asked here is why on earth did we have this exemption in the first place?

• Section 7 amends section 372AW of the Taxes Consolidation Act 1997 which relates to the Mid-Shannon Corridor Tourism Infrastructure Investment Scheme. One of the conditions of this tax incentive scheme is that the Mid-Shannon Tourism Infrastructure Board must grant approval in principle for investment projects in advance of expenditure being incurred. At present an application for such
  approval in principle must be made within one year of the commencement of the Scheme, i.e. by 31 May 2009. This amendment extends the period during which such applications can be made from one year to two years so that the latest date for the submission of applications is now 31 May 2010. Under the Scheme, the current period within which expenditure must be incurred for capital allowances purposes is the three-year period commencing on 1 June 2008 and ending on 31 May 2011. To cater for any projects that may avail of the new date for the submission of applications for approval in principle, this period is also being extended and will now end on 31 May 2013.
  

So all is fine in the land of wasted resources - Mid-Shannon development incentives scheme is being extended... Typical FF regional subsidies waste before the local elections.


Down to the part where Brian extorts the money out of the ordinary folks:

• Section 9 increases Deposit Interest Retention Tax by two percentage points with effect from 8 April 2009. Section 10 increases the rates of tax applying to life assurance policies and investment funds by two percentage points with effect from 8 April 2009. Section 14 gives effect to the proposal announced in the Budget statement to increase the rate of capital gains tax from 22% to 25% in respect of disposals made from midnight on 7 April 2009. Section 15 confirms the Budget increase in the rate of Mineral Oil Tax on auto-diesel which, when VAT is included, amounts to 5 cent on a litre. Section 16 confirms the Budget increases in the rates of Tobacco Products Tax which, when VAT is included, amount to 25 cent on a packet of 20 cigarettes with pro-rata increases on other tobacco products.
  

• Section 22 provides for an increase in the current non-life insurance levy by 1 per cent to 3 per cent and for a new 1 per cent levy on life assurance policies. The increase in the non-life levy applies to premiums received on or after 1 June 2009 in respect of offers of insurance or notices of renewal of insurance issued by an insurer on or after 8 April 2009. The new levy on life assurance policies applies to premiums received on or after 1 August 2009 in respect of life assurance policies whenever entered into by an insurer.
  

As expected, the issue of legality of these measures didn't phase DofF. I certainly hope insurers are going to take this state to the ECJ and trash these measures as an arbitrary infringement by the state onto the conditions of the private contracts.

• Section 23 gives effect to the proposal announced in the Budget statement to reduce the current tax-free thresholds from \542,544 (Group A — broadly speaking, from parent to child), \54,254 (Group B — broadly speaking, between siblings, from children to parents, from grandparents to grandchildren, and from uncles and aunts to nephews and nieces) and \27,127 (Group C — all cases not covered by Group A and Group B) to \434,000, \43,400 and \21,700 respectively. The section also increases from 22% to 25% the rate of tax in respect of gifts or inheritances taken after midnight on 7 April 2009.

This is clear hand out to the trade unionists - you work all your life, you save and invest, you pass it over to your children and you get milked by the state on assets which were acquired from after-tax income. This is a signal that Brian Lenihan wants to send to us, wealth-creators, and to the rest of the world.

I certainly hope that during his ''road show' selling Ireland Inc, at least one prospective foreign investor stands up and asks him: "Minister, if you can raid your own peoples' wealth in an arbitrary and unilateral fashion such as this, what guarantees can you give us, foreigners, that you will not turn Ireland into a Zimbabwe, where property rights are adhered to only as long as it is convenient for your Government?"

And watch him avoid your gaze...

Economics 08/05/2009: ECB - a bark, but no bite..., Obama's Frying Pen for Ireland

ECB's latest rate cut has a bark, but little real bit...

As we all know by now - the ECB has cut the rate by 25bps to a 'historic' low of 1%. The word 'historic' is suppose to impress us, yet it does not - the US rates are at zero, UK at 0.5%, Japan at 0.1%, Canada at 0.25% and these countries have seen significant devaluations vis-a-vis the Euro and quantitative easing...

Some say - this is the seventh reduction in seven months. "Geez Louise!", as Woody Allen would say. It would have been better if they were to cut the rate once - seven months ago - to 1.25% and not pretend to be 'conservative'. More medicine quickly is what gets the sick back on their feet. Drip-feeding vitamins to a dying patient is not going to do much good. And hence, I am not impressed by today's cut.

More significant was the statement that the ECB delivered alongside the decision. This is worth to be discussed on several fronts:

1) It suggests (and Trichet hinted at the same) that the forthcoming growth data for Q1 2009 is going to be poor. Does ECB know something we don't? My forecast (see April 24 post) was for 1.1% decline - monthly. So quarterly decline of ca 3.3% or more than double on Q4 2008 (-1.6%). Can it be worse? Yes, it can - Germany is forecast to fall 5.6% in 2009, with most of the falling to be done in Q1-Q2 2009. My gut feeling is that no matter what the fall off in Q1 can be (and we will know today), we are now in a 3.5-4% decline territory for Q2 as well. Hold on to your seats, because if this is the case, ECB's posturing that we are at the end of the cuts cycle is a fantasy. Expect a cut to 0.75% in June-July. Why? Because if H1 contraction were to be in a 4-5% territory, we are going to post a similarly deep contraction for the whole year. And that would warrant serious intervention.

So on the net, I must revise my forecast - yet to be quantitatively confirmed (which I will do tomorrow once the Q1 figures are in) - downward, and my feeling is that the full year 2009 figure is now shaping to look like a 4-4.5% fall in the eurozone.

2)Trichet had to mention the 'tentative signs of stabilization' in the economy. Presuming he was not talking about the US, the phrase reflects lack of agreement within the council as to what is taking place in the real economy. This is good news for us, analysts, since we now are no longer alone in not knowing what is going on, but it is bad for the markets. Uncertainty is something that usually spurs the Fed to act, and ECB to stall. Hence, I suspect we will see a month-long pause before another 25bps cut is enacted. Remember, the patient - the euro area economy - is still in ICU...

3)Whether you call it quantitative easing or not, but the plan to purchase €60bn in covered bonds (CBs) is a joke. Brian Cowen alone would burn through that amount in a year (with NAMA - in a blink of an eye). And there are Austria, Italy, Greece, Portugal, Spain still waiting in line for a handout. CBs are debts backed by cash flows from underlying loans (e.g mortgages). It is the sort-of securitization product, with all the stuff - however toxic, as long as it is paying some sort of interest - bunched in. It does appear that Ireland and Spain are the two leading contenders for the first slot at the new 'ECB pawn brokers' window, as our banks have been shifting all sorts of pesky stuff across their books into the ECB already.

The only question to ask here - what will be the associated terms and conditions? We will know these only about a month from now when ECB actually sketches these. But I suspect Brian Lenihan will be phoning Trichet's people to find out the details starting from tomorrow. After all, survival of the Irish financials and the Exchequer is now hanging by the thread, and Mr Trichet has a pair of sharp scissors at his disposal. Significantly, of course, the ECB's newest plan is to come ahead of NAMA legislation, so here is a question: Is this new CBs-purchasing plan a tailor-made device for Ireland to be tested as a guinea pig in European financial rescue experimentation?

On a bit more positive note, the ECB stretched liquidity provision terms to 12 months. It also added the European Investment Bank to the eligible counterparties list, in effect creating an additional supply of credit - ca €40bn. Now, combined the ECB €60bn, plus the EIB's €40bn are just about covering the borrowing requirements for Biffonomics and Lenihanama.

Obamanomics might, just might, spell a real disaster for Ireland Inc...
It was 100-days in the Hot Seat for Barak Obama last week and, true to his promises to change America, the President has gone for his big pledge: to crack down on the use of offshore tax havens. This time around Ireland will have to do better than sending Mary Coughlan to Washington in order to keep the US taxman at bay.

A key initiative, announced Monday, would partially close a provision that allowed US companies to defer paying taxes on the profits they make on their overseas investments. Another proposed change is to close completely the loophole that allowed companies to treat foreign subsidiaries as non-resident in the US for tax purposes.

A report by the Congressional General Accounting Office found that 83 out of the US top 100 companies have set up subsidiaries in tax havens. Some $20bn in allegedly ‘lost’ annual revenue for Uncle Sam is at stake, as in 2004 – the latest year for which data is available – US MNCs paid just $16bn in Federal tax on foreign earnings of $700bn. That’s an effective rate of tax of ca 2.3%.

Now, an interesting twist in the proposals is to allow deferring tax payments only on R&D investments, so expect Ireland suddenly jump to the top of the league of nations in per capita R&D spending, should the White House plan go through Congress.

It is worth remembering that our much-loved Bill Clinton prepared an even more ambitious plan for shutting down tax havens that would have seen US investment here dry-out like a salty pond in the middle of Sahara. Much-disliked George Bush shelved it, saving our US MNCs-led economy. Now, another Democrat - ah they are such 'friends of Ireland' those Democrats - is going to fry us up crispy...

How're those 4% growth forecasts from DofF looking now?

Adoption issue ...fizzles in gutless Seanad

In a follow up to my post on the issues of adoption between Ireland and Russia and Vietnam (here) - and a large number of responses I received to it - yesterday there was a debate on the issue at the Seanad, the transcript of which is available here.

Given that Seanad site provides collapsed entries for each statement on the issue and since the debate took place in the context of the debate on the order of business (so the adoption issue is mixed within other statements), here are the parts of the debate that relate to the topic. My quick analysis of what happened follows this copy of the Seanad record.

Emphasis is mine, throughout.

Senator John Hanafin: I raise the issue of adoptions from Russia and Vietnam. In particular, I am cognisant that the difficulty that has arisen could be ameliorated through serious bilateral negotiations, notwithstanding the fact that all organisations, including the Health Service Executive, have limitations. Whereas normal criteria are applied prior to adoption, I understand post-placement requests have become extremely vigorous. If a little understanding were shown, it could help the HSE and put the matter in context..

[Senator Hanafin subsequently votes against a proposal to bring in Minister Barry Andrews for questions on the issue that he so passionately supports in this statement]

Senator Ivana Bacik: It is important to debate the treatment of children today. It is extraordinary that this Government has time to legislate for an outdated and dangerous offence of blasphemous libel--- and yet no time, apparently, to ensure the impasse between the HSE and the Ombudsman for Children is resolved and ensure the bilateral agreements for adoptions in Vietnam and Russia are resolved.

[Senator Bacik subsequently votes in favour of a proposal to bring in Minister Barry Andrews for questions on the issue]

Senator Mary M. White: Like my colleagues, I call on the Leader to invite the Minister for Health and Children, Deputy Mary Harney, to come in and explain the difficulties faced by the Ombudsman for Children, Ms Emily Logan, which led to her suspending her investigation into the HSE’s handling of the child protection audit of Catholic Church dioceses. The HSE should be absolutely transparent as a public body and should be forced to co-operate fully with the Ombudsman’s investigation...

When the Minister of State at the Department of Health and Children, Deputy Barry Andrews, was here to discuss the Adoption Bill he was exemplary in his understanding and comprehension of the legislation. I remember my colleagues on the other side of the House praised him for his dedication and understanding. It is critical we get to grips with the situation regarding adoptions in Russia and Vietnam. When I spoke on the Bill I said we must have compassion for the parents who are waiting to adopt children and for the children who are aching to be brought into a loving family...

[Senator White subsequently votes against a proposal to bring in Minister Barry Andrews for questions on the issue that she so passionately supports in her statement]

Senator Fidelma Healy Eames: I am pleased there is support on both sides of the House for an urgent clarification by the Minister of State with responsibility for children, Deputy Barry Andrews, on the adoption crisis currently being experienced by families in this State. As an adoptive parent, I know what it is like to go through the process of adopting a child. As we speak, the applications of 24 Irish couples are delayed in Hanoi because the Minister of State has dropped the ball.

In the first week of March, we debated the provisions of the Adoption Bill 2009 in this House. Senator Fitzgerald and I told the Minister of State it was critical that the bilateral agreement should be in place by 1 May. His failure to act is hurting families, including the 250 couples who are ready to submit their applications to the Vietnamese authorities. The Minister of State has also dropped the ball in regard to Russia. Irish couples successfully adopted 484 babies from Vietnam and Russia last year, accounting for 84% of inter-country adoptions. I implore Members on the other side of the House to come together us on this issue. I ask that the Minister of State, Deputy Barry Andrews, be invited to the Chamber this afternoon to update us on the situation. I cannot answer all the e-mails I am receiving from people asking questions about it.

[Senator Eames subsequently votes in favour of calling in Minister Barry Andrews for questions on the issue]

Senator Ciaran Cannon: I refer to the matter of adoption. I have much respect, as does Senator Norris, for the Minister of State at the Department of Health and Children, Deputy Barry Andrews. He has brought fresh thinking and enthusiasm to that Ministry. However, the energy and effort invested in the attempt to get the agreement with Vietnam re-established took place far too late. It began in earnest in March and the Minister of State should have made it a priority. He should have gone to Vietnam to establish what the issues were and how they could be resolved.

[Senator Cannon subsequently votes for a proposal to bring in Minister Barry Andrews for questions on the issue]

Senator Nicky McFadden: I also support Senator Fitzgerald’s comments on the bilateral agreement. I agree with Senator Norris about the Minister of State, Deputy Andrews. He is a good, caring Minister of State but why in God’s name did he only start negotiations in earnest on 25 March? Why did he not go to Vietnam, as Senator Cannon said? We need to put ourselves in the position of the families who, after five years of negotiation, are going to get their packs, information and deposits back from Vietnam and such places. That will be heartbreaking and soul destroying for people, not to mention the effect it will have on the extended families. Given that 1,000 families are waiting in this situation, it is incumbent on us to sort it out as soon as possible.

[Senator McFadden subsequently votes for a proposal to bring in Minister Barry Andrews for questions on the issue]

An Cathaoirleach: Senator Fitzgerald has proposed an amendment to the Order of Business, “That a debate with the Minister for Health and Children on international adoptions, the suspension of the inquiry by the Ombudsman for Children and plans for child care places be taken today”. Is the amendment being pressed?

Tá: Bacik, Ivana. Bradford, Paul.Burke, Paddy.Buttimer, Jerry.Cannon, Ciaran.Coffey, Paudie. Coghlan, Paul. Cummins, Maurice. Fitzgerald, Frances. Hannigan, Dominic. Healy Eames, Fidelma. McFadden, Nicky. Mullen, Rónán. Norris, David. O’Toole, Joe. Prendergast, Phil. Quinn, Feargal. Regan, Eugene. Ross, Shane. Ryan, Brendan. Twomey, Liam.

Níl: Boyle, Dan. Brady, Martin. Butler, Larry. Callely, Ivor. Carty, John. Cassidy, Donie. Corrigan, Maria. Daly, Mark. Feeney, Geraldine. Glynn, Camillus. Hanafin, John. Keaveney, Cecilia. Leyden, Terry. MacSharry, Marc. McDonald, Lisa. Ó Domhnaill, Brian. Ó Murchú, Labhrás. O’Brien, Francis. O’Donovan, Denis. O’Malley, Fiona. O’Sullivan, Ned. Ormonde, Ann. Phelan, Kieran. Walsh, Jim. White, Mary M. Wilson, Diarmuid.

So motion was defeated... Why? Anyone?

I have no idea and I cannot define a single reason as to why would anyone oppose this, but what is clear to me is that there is some sort of a party-line closing of the ranks on the No side. Gutless and crass! And espacially so for those who spoke of their concern for children and adopting parents and then turned their backs on them in the vote!