||Last Updated: Dec 19th, 2007 - 13:17:15
Comment - Irish Economy 2006 and Future of the Celtic Tiger: Putting a brass knocker on a barn door!
By Michael Hennigan, Editor and Founder of Finfacts
Aug 14, 2006, 08:38
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|THE UK ECONOMIST WHO COINED TERM "CELTIC TIGER"
UK economist Kevin Gardiner, head of global equity strategy at the investment banking unit of global bank HSBC, in 1994, coined the term Celtic Tiger, comparing Ireland's unexpected economic take-off to the Asian tiger economies.
Kevin was then working with US investment bank Morgan Stanley (Kevin Gardiner, 'The Irish Economy: a Celtic tiger', MS Euroletter, 31 August 1994).
"Celtic Tiger" as a metaphor for the Irish economic boom is very widely used, both in Ireland and internationally. Economic historians will continue to find it a convenient term for the unique period in the history of Ireland, for many decades to come.
The principal article here was first published in August 2006. SUMMARY OF KEY FACTS ON THE IRISH PROPERTY BOOM, was published in November 2006
Julius Caesar reputedly said that the general who rests on his laurels, is usually wearing them in the wrong place and as the outlook for the Celtic Tiger beyond 2008, looks uncertain, there is a sense that the significant opportunities to reform and modernise the economy to better withstand future challenges, have been wasted. Tacking through the wind has been the default option and while there have been some improvements, a Texan might sum up the overall picture, as putting a brass knocker on a barn door.
|A portrait of Dr. T.K. (Ken) Whitaker (b.1916- ), eminent civil servant and economist, whose study, Economic Development was the basis for the First Programme for Economic Expansion, published in 1958, hangs in the National Gallery of Ireland. The portrait by Thomas Ryan P.P.R.H.A. was officially unveiled by Charlie McCreevy, T.D., Minister for Finance, in the National Gallery on Monday, April 22nd, 2002 |
At an economic conference held by Ireland's Central Bank on September 15th, Governor John Hurley said that "the much-discussed era of exceptionally strong growth - representing a delayed catch-up process, if you like - is clearly behind us now," he said, noting a number of specific concerns about the economy's structure. In particular, growth has become somewhat unbalanced in recent years, with an unusually high reliance on the construction sector, combined with some deterioration in the economy's export performance....Further structural change will clearly continue to be required if we are to maintain and improve our relative position. The policies to be pursued, therefore, are ones that permit, or even encourage, structural change to occur on an ongoing basis and in as smooth a manner as possible."
In a paper at the Central Bank's conference, Dr. Frank Barry of University College Dublin, highlighted some of the issues that are explored in this article, including the "structural flaws that give zoned land an artificial scarcity value and that continue to offer strong incentives for corruption. The failure to tackle these issues seems ascribable, in part at least, to the failure to introduce international best-practice measures with respect to the financing of the political process. The failure to address cost and time overruns in infrastructural provision over the boom period represents a further weakness in Irish governance."
In a review of the Irish Economy published in Washington D.C. on August 7th, 2006, the International Monetary Fund (IMF) said that economic growth is strong, unemployment is low and labour participation rising, and government debt has been reduced dramatically over the past two decades. Nevertheless, it observed that growth has become increasingly unbalanced in recent years, with heavy reliance on building investment, sharp increases in house prices, and rapid credit growth, especially in property-related sectors.
Davy Stockbrokers says in a July 2006 report that it is highly likely that that the pace of growth of the Irish economy will slow in the later years of this decade. After 2007, consumer spending growth will be impacted by the withdrawal of the SSIA stimulus and the long-anticipated peak in the housing market may finally have occurred. Davy says that it is difficult to see what sectors could replace this loss of momentum.
On a broader canvas, a well-known practitioner of the dismal science, Stephen Roach, Chief Economist of US investment bank Morgan Stanley, wrote in the Financial Times issue of August 14, 2006: There is nothing like the seduction of a boom. The recent vigour of global economic growth is a siren song. By International Monetary Fund metrics, world gross domestic product growth probably averaged 4.8 per cent over 2003-06, the strongest four years since the early 1970s. As tempting as it is to extrapolate this into the future, that may be a serious mistake. There is a much better chance that global growth has peaked and the boom is about to fizzle.
The world’s main growth engine, the US, is slowing. That is the verdict from the labour market, with job growth in the past four months running 35 per cent below average since early 2004. It is the verdict from the housing market, where an emerging downturn in residential construction activity is knocking at least 1 percentage point off the GDP growth trend of the past three years. And, notwithstanding July’s temporary bounce-back in retail sales, it is a message from the consumer, whose inflation-adjusted spending growth fell to 2.5 per cent in the spring period – one percentage point below the heady trend of the past decade.
Celtic Tiger Economy - Built to last or on a foundation of quicksand?
In a money economy, the proximity of success and failure is closer than many people wish to believe.
In Ireland in the past decade, the big change at a human level is the virtual disappearance of the fear of unemployment. The searing impact of running out of money has to be experienced to understand it, in particular where there are family dependents.
I don't wish to be a Cassandra forecasting the next storm as I'm an optimist who could have opted for the safer option of pensionable employment. However, without the constraints that limit the comments of bank economists, I can be direct in highlighting failures and ask if the challenges facing our petro-like economy with almost 20% of the private sector workforce dependent on the construction sector, could be better met?
This article should not also be viewed through the prism of partisanship. Any Government that has been in power during an unprecedented period of prosperity should have its record seriously analysed. It's up to the electorate to judge whether our leaders are political Lilliputians and dare we imagine an Ireland where there are no ignorant voters!
In a June 2006 article following the death of former Taoiseach (Prime Minister) and Fianna Fáil leader Charles Haughey, The Irish Times' Frank McDonald recalled a 2004 interview in which Haughey said in relation to the current Fianna Fáil/PD coalition headed by his protégé Bertie Ahern, that it was the "worst Government in the history of the State - the worst", because they "can't seem to get anything right" and had "no real vision of the future of Ireland."
The publication of this article has coincided with more evidence that our largest exporter and second-biggest private sector employer Dell Computer, is facing challenging times. Dell is planning to extend its service operation in the East German city of Halle and is expected to soon announce plans to build a manufacturing plant in the Polish city of Lodz where average monthly industrial wages are €677 compared with more than €3,000 ($3,850) at the EMEA (Europe, Middle East, Africa) region plant at Limerick, Ireland.
Dell employs about 3,500 directly in Limerick and a further 1,000 on a contract basis. An estimated 16,000 jobs in the Mid-West are indirectly linked to the success of Dell in Ireland.
Put simply, no philosopher's stone has been discovered that will transmute a boom built on American direct investment and domestic construction, into a permanent prosperity. Neither has there been political courage to take necessary decisions on reforming the economy.
Ireland's economic success has been powered by foreign owned firms - principally American - who were responsible for 87.6% of exports in 2004. Dell Computer is the largest exporter and the three largest private sector employers are Intel, Dell and Hewlett-Packard (HP).
US chip giant Intel is Ireland's largest industrial employer with a payroll of 5,500. In the first half of the twentieth century, Irish-American Protestant Henry Ford, whose father was a native of West Cork, was the greatest industrial hero in Ireland and in 1930, the Ford plant in Cork City, had a payroll of 7,000.
|Irish-American industrialist Henry Ford (1863-1947) - Ireland's greatest industrial hero. In 1919, the year that the tractors began rolling off the assembly lines, at the Henry Ford & Son plant in Cork City, the war of independence against British rule began. Protestants in Henry's father's native West Cork, were sometimes targeted because of suspicions about their Irishness. The son of a West Cork Protestant has a special place in the history of Cork. |
The corporate tax rate is among Europe's lowest and tax on incomes have been reduced significantly over the past decade. Social security payroll costs are low compared with countries such as France and Germany. However Ireland is not a low tax economy and the overall tax burden is comparable with the UK's (see below).
While the tax regime is positive for attracting foreign direct investment, indirect taxes, which are also dubbed stealth taxes, as a proportion of total taxes, are the highest among the industrialised countries. Electricity costs for consumers, are 46% above the average paid in the UK and the cost of a new car is 28% above the EU average. The Government collects an average of over 30% of the cost of every housing unit built in the State, in taxes and levies. As the standard of the public health service is currently low, the majority of the workforce have to take out private health insurance. The premiums of the State health insurer VHI Healthcare, are expected to have risen more than 50% in the period 2001-2006, by the end of this year. Annual premiums for a typical household are at least €2,000 and the cost of visiting a doctor has risen by about 60% since 2002.
|Time Magazine cover of July 12, 1963, following the State visit of US President John F. Kennedy to Ireland - - Sean Lemass, Irish Taoiseach (Prime Minister) 1959-1966 who together with T.K. Whitaker and former Minister for Finance Gerard Sweetman (1954-1957), are the architects of the modern Irish economy|
A survey that was published this week by Europe's top bank UBS, shows that Dublin is the 8th most expensive of 71 global cities. A meal for two in a mid price-range restaurant, would cost at least €60, compared with about €40 off the Potsdamerplatz in central Berlin, which gets a 26th place ranking in the survey.
While tax policy can be viewed as positive from a macroeconomic viewpoint, as the spoils of the Celtic Tiger have been disproportionately spread, some who have gained from having a job, are nevertheless struggling.
Due to the extension of property related tax incentives during the boom, many wealthy earners were able to reduce their income tax to zero and in 2001, one beneficiary of a tax exemption scheme that was originally introduced for poor artists in the 1960's, earned €10 million. More than 11 song writers or other writers earned more than €1 million tax free in 2002. In the December 2005 Budget, a ceiling of €250,000 was put on the benefit and last week, it was reported that Irish rock star and his colleagues in U2 have moved their business operations to the Netherlands to avoid paying tax on the income arising from creative work, that they would have paid for the first time.
The sainted multimillionaire Bono, who has become the world's leading designer humanitarian, showed that he had feet of clay after all, in his elevated shoes. In the same week, through his US equity group, he had teamed up with another multimillionaire Malcolm Forbes, publisher of Forbes Magazine and failed Republican Party Presidential Candidate who had gained little traction with his advocacy of a flat tax. It's ironically a system that chimes with Bono's support for no tax for people like himself.
Beyond designer humanitarians, separating out the costs of 38,000 additional workers on the public payroll since 2001, public service salaries have increased by 38%. The comparable rise in the average industrial wage was 19%. Salaries of members of the Oireachtas (Irish Parliament) have risen by 100% since 1997 and the base salary (excluding unvouchered expenses) of a member of Dáil Éireann is €96,650, more than three times that average industrial wage for a male worker. In addition, 900,000 workers in the private sector, have no occupational pension. A member of Dáil Éireann is entitled to a pension for life of half annual salary, after 20 years service.
The planned IPO (Initial Public Offering) of Irish State airline Aer Lingus, starkly illustrates the gulf between the Irish public sector and the private professional services sector on one side and the private traded goods sector, on the other.
Following the announcement of plans for the stock market floatation, Ireland's largest trade union played its hand well in opposing the privatisation. While trade unions have limited influence in the Irish private sector in contrast with their grip in the public sector, SIPTU has used the Aer Lingus issue to make it clear to the Government and workers in general, that trade unions are still a potent power in the country.
At the urging of the Government, Aer Lingus has conceded all major demands and the workforce will not have their current 14.9 per cent stake in the airline diluted. See: SIPTU celebrates Aer Lingus agreement to privatisation inducements. Average earnings are the highest in the State-owned electricity supplier ESB.
The impact of the construction sector is evident in every other sector of the economy. Property related taxes and levies may amount to €9 billion this year - almost 19% of total Government spending in 2006. We are building a record number of new housing units and approximately 1 in 8 people (12.6%) are employed in Ireland, in work in construction. This compares with an EU average of less than 8%.
New house building units increased by 23.6% in the seven months to July 2006 and the Central Bank announced that 80% of the 27.3% growth in Private Sector Credit in the year to June 2006, was property related.
Up to 20% of Ireland's private sector workforce is dependent either directly or indirectly on the property sector, for employment.
Of the 258,000 net increase in total persons at work between 2000 and 2005, over 76,000 (or 30%) were in the construction sector. The new housing units are small and are among the lowest standard in the Developed World. We are 4% urbanised but we're short of land!
The Irish Central Bank says that the proportion of household borrowing in June 2006 that is secured on housing in the the euro-area countries was highest in the Netherlands at 89.5 per cent, followed by Ireland at 80.2 per cent. The Bank says that while both these countries have high personal debt to income ratios, they also have the highest proportion of household debt secured on housing. Both countries are well above the euro-area ratio of 70.3 per cent.
Property has made some Irish people very wealthy and Bank of Ireland Private Banking says that the Irish invested €30 billion (equity and borrowings) in local and overseas commercial property in the period 2001-2005.
Ireland has overtaken the United States as the single largest cross-border investor into UK commercial property, accounting for almost 22% of total overseas purchases in 2005.
In an extensive research report published last month, Bank of Ireland Private Banking shows that, in a survey of the top 8 leading OECD nations, Ireland is ranked the second wealthiest, behind Japan and ahead of the UK, US, Italy, France, Germany and Canada, showing an average wealth per head of nearly €150,000.
In contrast, private rent support has cost the Government €1.6 billion since 2000. At the end of 2000, there were 42,700 recipients. This had increased to 60,100 at the end of 2003 and then settled at the higher level. Last week, the Department of Social and Family Affairs said that a record 79,000 people had requested assistance with the costs of sending their children back to school.
National house prices have increased by 270% over the past ten years – compared to a total rise of just 30% in the consumer price index. The Sunday Business Post wrote in November 2000 that former Taoiseach (Prime Minister) Albert Reynolds' "home at 18 Ailesbury Road is now worth over £4.5 million. It is believed that he originally paid around £650,000 (€825,000) for the house," in the mid-1990s. Last month, The Sunday Independent reported that "estate agent Pat Gunne has emerged as the mystery buyer of number 17 Ailesbury Road, Dublin 4, paying a stunning €13m for the luxury house. The house, previously the property of Delphine Kelly, widow of former Fine Gael minister John Kelly, was sold quietly before the auction."
There is no tax payable by the vendor on the proceeds of a principal residence, whatever the value while Pat Gunne will pay €1.17 million in stamp duty.
Farmers who rely on payments from the EU's Common Agricultural Policy and who have been able to sell land for development whether for house or road building, have raked in money from a crazy system that creates both a bonanza and fuels corruption.
In a report in The Financial Times issue of August 12th, 2006, on Irish buyers driving up farm prices in the UK, Matt Dempsey editor of The Farmer's Journal is quoted: "When you can now sell a piece of rezoned farm land on the edge of a town in Ireland for €500,000 an acre, several farmers have found themselves very rich."
One of Ireland's richest men is the top beneficiary of the direct payments from Brussels that are a form of public welfare and Ireland has to yet to be a net funder of the European Union Budget, after 33 years membership.
Meanwhile, as killings are made from the property bonanza, the industrial sector is contracting and this year less than €200 million in venture capital will be invested in Irish firms. The total monies invested since 2001 by the Enterprise Ireland Partnership Funds amounted to €183m in 99 companies.
In contrast, the Dublin-based Cosgrave Property Group family, has invested almost £500 million in UK property, in this year so far.
The Israeli IVC Research Center reports that:
- Capital raised by Israeli VCs surged to $1.2 billion in 2005
- Capital available for investment now at $2.3 billion
- $1 billion projected to be raised by VCs in 2006
The Minister for Enterprise, Trade and Employment, Micheál Martin TD says that Ireland can be a global knowledge economy in 7 years and €3.8 billion is to be spent on a Research & Development programme in the period 2006-2013.
Ireland's needs a deeper science base and much of the money will inevitably be wasted. The question is will it all disappear down a sinkhole?
The MIT Media Lab's operation in Dublin folded in 2005 after burning through €35 million in public money. The Institute of Neuroscience at Trinity College got €28 million in public funding and apparently, the room that was built for Ireland's first whole body 3 Tesla magnet, was too small for it.
Given the lamentable record in managing large public-funded projects, the new R&D plan has rich pickings for academics wishing to convert their dreams to reality. The existing record of commercialising patents in the higher education area is poor and research done by PhD students often has no relevance to what they work at later. Public funds are already being spent on funding PhD students at Irish universities to attend overseas universities and participate in research. The issue of who owns the intellectual property is a relevant point.
Bitch-fights among academics fighting for turf, lucre and a reluctance to cede ground to world-renowned scientists who could increase the chances of success of the programme, will also be inevitable. The international conference industry will also do well. Meanwhile, the senior civil servants who presided over the wasted spending of huge amounts on IT and infrastructure projects, will monitor progress.
The Minister has said that "excellence is what this is all about and we have already embarked on this journey towards excellence and I want to take this opportunity now to exhort you, the stakeholders, to drive this challenge."
The 7 year time period seems ridiculous and the missing ingredient is the need for excellence in seeking value for money, while at the same time recognising that there is a big aspirational aspect to any R&D plan where there is so much ground to be made up.
Political Paralysis, Limited Accountability and the Buck Stopping Nowhere
| An Taoiseach Bertie Ahern, TD meets Nicholas Evans (2) from Blackrock, Dublin -- Ahern is viewed as indecisive and a hands-off manager |
With the Exchequer awash with cash from the property boom and windfalls from past tax dodging, the most palatable option for politicians in power, is to sail with the wind.
Ryanair, Ireland's most successful company of the past decade, has benefited from EU airline deregulation and there would have been no serious competition for the State airline Aer Lingus if deregulation had depended on the decisions of an Irish Government.
Taxi deregulation was introduced following a High Court decision but wealthy vested interests remain untouched. The Government provided taxi drivers with average compensation of €11,500 provided that they had "suffered extreme personal financial hardship and loss of income." It is in marked contrast to payments to beet farmers for up to seven years even though they have ceased growing beet on some of the best land in Ireland.
The Progressive Democrats (PDs) has been the junior party in the Irish Government since 1997 and a decade ago, there was optimism that it would be more serious about reform but although small, it has morphed into a version of Ireland's two main parties Fianna Fáil and Fine Gael where there is little appetite for challenging vested interests.
Twenty years after the introduction of the Internal Market in the European Union, the Irish pharmacists' trade body wishes to maintain the legal prohibition on foreign qualified pharmacists practising in Ireland. Pharmacists dispense drugs on the basis of prescriptions written by doctors; sell non-prescription drugs and cosmetics. Even where, a pharmacist is in a rare position of providing advice to a member of the public, they issue prescriptions every day that have been written by foreign-trained doctors.
The Chairman of the PDs Senator John Minihane is a pharmacist and Minister of State Tim O'Malley is also a pharmacist.
Prices in Ireland are high
Price difference between Ireland and EU15, per cent
|Source: OECD Economic Survey of Ireland 2006: Boosting growth through greater competition|
While the implementation of an EU Directive has liberalised some aspects of the pharmacy trade, the OECD said the following in its May 2006 Economic Survey of Ireland:
There are several barriers to competition in the pharmacy industry. The worst is the restriction on foreign-trained pharmacists. Even Irish citizens who train abroad are not permitted to open or run a new pharmacy – the best they can do is buy one that has been operating for three years.
This does nothing to promote healthcare; it is purely an anti-competitive restriction that protects incumbents. The government’s proposal to remove this restriction should be implemented swiftly. However, liberalising the industry is more complicated than just lifting entry restrictions because the (regulated and negotiated) retail margin on pharmaceuticals is too high. The margin has to be lowered – or completely deregulated – before the gates are opened to new entrants.
When PD Justice Minister Michael McDowell tried to liberalise the drink licensing laws which stymie competition in particular in Dublin, he folded in the face of the publican lobby in the senior Government party Fianna Fáil.
|Michael McDowell, PD Leader and Minister for Justice once made the bold claim in relation to his party that it's credited with major responsibility for Ireland's economic boom by pioneering tax reform, deregulation and competition to end mass unemployment and emigration. In nine years, the reality is that the record in tax reform deregulation and competition is lamentable and while personal income tax levels have fallen, the overall tax burden is still as high as the UK's.|
McDowell claiming credit on his website: "Michael In What Turned Out To Be A Defining Moment Of The Election."
William Prasifka, the chairman of Ireland's Competition Authority, said last June that “in too many areas, Ireland has not willingly embraced competition. European Directives forced the introduction of minimum levels of competition in the telecommunications and energy sectors. In other areas, such as taxis and pharmacies, legal advice or court actions precipitated change.”
The OECD also said in its May Survey, that rolling back Irish anti-competitive regulation in services, should be a priority as it would spur productivity growth and restrain inflation. It also said that the deteriorating competitiveness of Irish products implies that net exports will contribute very little to growth in 2006 and 2007.
In the tenth year of the present Government, serious attention at last is being given to reform of the health service but there is no evidence that the powerful and wealthy medical consultants' lobby will be challenged.
The striking aspect of Irish public governance is that the buck stops nowhere.
The Taoiseach Bertie Ahern has a hands-off approach to governing, apart from his active involvement in the Northern Ireland peace process. He does not hold incompetent ministers to account and between elections, he gets away with refusing to give in-depth television interviews. It is also notable that Ahern seldom gives detailed speeches on Government policy.
Ministers blame civil servants for cock-ups and last week it was reported that the cream of the crop had received bonuses for achieving objectives.
Three senior civil servants received over €20,000, with one securing a €25,000 pay-out. Most of the senior civil servants - 13 top Gardai and 12 Army officers - received bonuses of at least 10% of their salaries.
These are based on self-assessment forms and a review by each Department's Secretary-General of how specific goals have been achieved.
The Committee for Performance Awards (CPA), which monitors the awarding of the bonuses, warned Department heads not to be so generous with taxpayers' money after giving over €2.1m in special bonuses to 185 senior civil servants.
The CPA also expressed its concern that in nearly one-third of government departments these annual objectives, or targets, have not been issued by April, when one-quarter of the performance period had elapsed.
The bonuses were paid in respect of 2005 and in October 2005, new controls were introduced by Minister for Finance Brian Cowen on large IT projects and contracts for infrastructure, following a public outcry.
It is likely that the individual in the Department of Health who was responsible for paying consulting firm Accenture €3 million in respect of producing a website that was never launched, also met his targets.
It says a lot about Irish public governance, the competence of individual ministers and the senior bureaucrats, that everyone in a position to make what would have been commonsense and basic business decisions, did not do so until several hundred millions of euros disappeared down an Information Technology sinkhole and billions were underestimated on roadbuilding projects.
Each year, the Comptroller and Auditor-General details waste and negligence in the spending of public money. Inaction can be important even down to parish-pump levels when a dangerously cracked pavement on the Main Street in Blackrock, South Dublin, goes unrepaired for more than 2 years.
Who cares? Where is the responsibility? Where is the accountability?
Taoiseach Bertie Ahern has been termed a master of actionless action and nothing exemplifies it better than the failure to address land development reform, which creates a logjam to advances in so many areas while at the same time creating multimillionaires of farmers already on public welfare, at the expense of people struggling to get on the property ladder.
Dublin's principal shopping street, is the sixth most expensive retail street in the world for rents and prime office and industrial rents in Dublin, are among the highest in the world.
The high property costs and rents, fuel inflation and impact our international competitiveness.
We have enough land rezoned for up to five years housing output but as there has been no local government reform either, local councils have no incentive to provide services for additional population.
In 1973, a report known as the Kenny Report recommended that development land should be priced with a 25% mark-up on agricultural land prices.
Recently in The Sunday Independent, its Political Correspondent Joseph O'Malley wrote: Six years ago, Bertie Ahern asked the Committee on the Constitution to examine the issue. In 2004, it concluded that Mr Justice Kenny's recommendations could be introduced by legislation, and without amending the Constitution. Two-and-a-half years later, still no legislation, but last week the Taoiseach was hopeful "we can do it by legislation". He was awaiting a final report from the Attorney General.
Implementing the Kenny report, like draining the Shannon, has remained the unfulfilled aspiration of successive governments that have, in practice, done nothing to achieve it. And if it hasn't been done over the last three decades, then Bertie Ahern is even less likely to do it now.
Yet it allows Bertie Ahern to do what he does best, which is to engage in actionless action, by identifying with a problem, and by empathising with those affected. But he can also detach himself from any responsibility for the Government's failure to do anything about rectifying the problem. It clearly works.
It’s extraordinary that a public tribunal investigating planning corruption, has been sitting since 1997 when the present government combination came to power. Lawyers have become multimillionaires in the interval and surprise, surprise, ABSOLUTELY NOTHING has been done to change the system that fuelled the corruption!!
On Wednesday August 30th, in a scene reminiscent of a political satire show, a man stood next to Taoiseach Bertie Ahern TD, at a press briefing on housing. He had similar speech gestures and mannerisms to Bertie Ahern and left the cat out of the bag on Bertie Ahern's Government's Rip Van Winkle attitude to the property bubble.
|Noel Ahern - thought that he was on the Opposition benches when he attacked a nine-year record of his own Government|
Bertie Ahern's older brother Noel who is a Junior Minister in the Irish Government, said that property speculators trying to make a fast buck in the Irish housing market, would be better off dealing in oil and cocoa beans.
He warned that people who trade in houses and apartments or buy land to sell on to developers should be "taxed out of existence."
Ahern said up to 90,000 homes could be built this year but it didn’t seem to be curbing the cost of housing.
“There is something wrong if the prices keep going up,” he said. “Some form of taxation would help, as output alone does not seem to keep prices down.
“There are people buying land in the short term, not to build on it but to sit on it for a few years before selling on to some developer.
There's fat chance of Bertie Ahern or the PDs with their farmers' advocate Tom Parlon as their new President, upsetting the land development bonanza. For the latter, radicalism is posturing on who should run a second terminal at Dublin Airport or on the number of buses run by private operators. There are no radical proposals for change at the Soviet-style State transport company Córas Iompair Éireann (CIÉ). There's a general election on the way and why not just put another brass knocker on the barn door?
With a reformed land development system, a Government with vision could have already built a second Dublin Airport between Dublin and Portlaoise and centralised all Government Departments on the western rim of the city as an alternative to the December 2003 back-of-the-envelope shambolic decentralisation project.
-Chaos at Dublin Airport
In 2005, the two Government parties only finally decided to build a second terminal at Dublin's only airport, that has experienced a huge growth in traffic in the past decade.
They spent years arguing about whether the second terminal should be run by the existing State airports management company or a private operation. A sod has not yet been turned and Ryanair's additional routes announced on August 9th, will result in at least an extra 900,000 people passing through the already congested airport.
More than 18.4 million passengers travelled through the airport last year and the numbers next year are expected to exceed 24 million.
It will be 2010 or 2011 before the chaos at peak hours abates. As the politicians argued, a temporary long wood extension was added to Pier A at the airport.
The new second terminal will cost at least €395 million - 46% above the April 2005 cost forecast!!
Last March, a low-cost airline terminal that can handle 10 million passengers annually, opened at Kuala Lumpur's impressive modern airport. It took less than a year to build at a cost of €27 million.
In May 2005, the Dublin Airport Authority (DAA) said the following:
The timeline for the development of a second terminal is likely to extend over three and-a-half, to four years. The DAA will first consult with its airline customers to ascertain what type of facility they require to cater for their forecast volumes and mix of traffic. This will help determine the most appropriate site, scope and design of the terminal building and support infrastructure. As soon as the specification is finalised, DAA is committed to having the scope and costings of the project submitted for independent verification, before proceeding to the planning process and subsequent tender process.
The DAA also notes the Government’s decision to put in place preliminary arrangements for the provision of a third terminal at Dublin Airport at the appropriate time. The DAA will work positively with the Government and other interested parties to facilitate this development.
Preliminary arrangements for a third terminal?
Isn't that something to get excited about when the second terminal will arrive a decade late!
The DAA's craven kowtowing to its indecisive political masters, will hardly speed up delivery.
"This existing Government has broken its promise to provide us with a second terminal during the lifetime of this Government," Michael O'Leary said when he announced additional routes from Dublin Airport.
"We'll be coming back to it in the run-up to the election."
The Ryanair CEO called on Dublin Airport Authority to sell its stake in Birmingham and Düsseldorf airports, as well as the Great Southern Hotel group, to fund expansion at the three main Irish airports.
"That would pay off the debt in Cork, it would pay off the debt in Shannon and it would pay for the second terminal at Dublin, and we cannot understand why these things are not being pursued."
"If someone as bright as Dermot Desmond thinks it's the right time to sell London City Airport, surely you would think that the halfwits in the Irish Government would think maybe it's the right time to offload the stakes in Birmingham and Düsseldorf airports.
"Neither of them makes any contribution to Irish tourism or the Irish economy generally," O'Leary said.
In the Budget speech of December 2003, the then Minister for Finance Charlie McCreevy announced that a programme of decentralisation of public services "will involve the relocation of 10,300 civil and public service jobs to 53 centres in 25 counties."
It was a rabbit-out-of-a-hat announcement and the biggest planning aspect to it before the announcement was the division of the jobs to ministers' constituencies. With the local elections months away, it was perceived to be a master stroke that political opponents couldn't oppose.
This biggest "reform" plan in what will be ten years of governing in 2007, was given to PD minister Tom Parlon to implement.
|Irish Junior Minister Tom Parlon (seated) has warned that any change in the restrictive rezoning system of land for development that has a 20-50 times multiplier effect on values, would be to the "left of Stalin" even though as a big farmer, he is a significant beneficiary of European socialism|
In a clear sign in 2002 that a return to government was more important than principle, the PDs had recruited the former leader of the Irish Farmers' Association as a candidate for the Dáil, in return for a promise that he would be made a Junior Minister if elected.
Parlon was the most militant and sucessful trade/professional group leader at the time and months before had forced the Government to concede significantly improved terms for farmers forced to sell land for roadbuilding.
In 2001, the Irish State agency, the National Roads Authority (NRA), said in relation to a campaign for an increase in compensation for land acquired by Compulsory Purchase Order, that was led by Tom Parlon, then President of the Irish Farmers Association (IFA) that pronouncements by senior IFA officials, including Parlon, had claimed that:
- the State, through the actions of local authorities, has no right to appropriate farmland;
- the compulsory acquisition of farmland for the national roads building programme is unjust, inequitable and seriously damages the livelihood and viability of 8,000 farm families;
- CPO legislation is outdated and compensation paid to farmers is inadequate;
- compensation should be paid at development land prices given the intended use of land for road schemes and not at market value for agriculture land
Parlon as a Minister of State has said that any tampering with the existing system of determining land prices for development, would be a form of Stalinism.
It surely is a bizarre system of "free enterprise" that the PDs claim to support, where public funds paid primarily by German and Dutch taxpayers, provide Parlon and his farmer colleagues with most of their income and when they sell land, the average Irish taxpayer is also screwed.
Extract from Parlon's speech at the Parnell Summer School, Aug 2003:
The provision of quality affordable housing to all citizens is the ultimate goal that the State wants to achieve, and I fully support that. But I believe that weakening private property rights as a means to achieve this goal would be a great mistake.
Such an approach is gift-wrapped in an ideology somewhere left of Stalin, which has no place in a modern dynamic open economy like Ireland.
Any measure giving the State the power to control the value of private assets would have major negative ramifications for thousands of property owners and would be a jump back to the dark days of the 19th century.
What if your home, your business or your farm is zoned for development? Should you be allow reap the benefits of this? In a democracy of course you should.
The practical implementation of such a measure would be hugely inequitable and would end up taking the value of the land off the property owner and passing it on to the eventual owners of houses on the site.
It took centuries for Irish politicians to establish property rights and any move to change that would be a slight on the memory of people like Charles Stewart Parnell.
My party, the Progressive Democrats have worked hard since our foundation 18 years ago to put competition and enterprise at the heart of the Irish economy and a move like this would be regressive for Ireland.
So rezoned land at €500,000 an acre is a result of competition in a country that is 4% urbanised!! Where did you learn your economics Mr. Parlon?
In May 2004, Parlon's then party leader Mary Harney said in an address to her party members at the launch of the Progressive Democrats' Local Elections' Manifesto: "In this manifesto, we are... committed to ending private windfall profits arising from rezoning decisions."
As with Bertie Ahern on the 1973 Kenny Report, more actionless action as Harney being "committed" does not mean anything has happened in the meantime and with socialist farmer Parlon in her camp, nobody should hold their breaths!!
Economist Jerome Casey, who is editor of the Building Industry Bulletin in a report in 2003, said that site costs account for 42.5% of a house nationwide. Casey said that typically in the mid 1990s, Durkan Brothers sold apartments off O'Connell Street for £35,000 to £40,000 (€44,440 to €50,790) for which the site cost was £5,000. Currently, both the Irish Council for Social Housing and private house builders are reporting city house site costs at up to 50% of the house price. Outside the cities, site costs can represent up to 40% of the house price. For the country as a whole, site costs may now constitute 42.5% of the house price, an increase of almost 30 percentage points on the pre-boom position. In Dublin that increases to 50%. Overall the Irish figures are grossly out of line with the rest of the developed world.
In the US land accounts for 20% of the total cost of a house. In Denmark the figure is similar while in Portugal the land factor drops to 15%.
It is similar for the rest of Europe. Casey estimated that the 30% differential between land prices for houses in Ireland accounted for about €6.6 billion of the total new and second hand housing market, estimated to be worth €22 billion in 2002.
By applying the 30% margin on the cost of land, Casey said the amount of surplus profit for the key landowners was estimated at €300 million. In his report Casey said the major issue was that just 25 individuals or companies controlled more than half of the housing development land in the Fingal area. That includes Balbriggan, Lusk, Donabate and other well- known areas targeted for development on Dublin’s expanding north side.
Casey's conclusion means that up to eight years in the life of a normal 25 year mortgage now goes to pay for the excess in the price of the site.
Yes to Property Rights but No to Rights of Workers
So the man who would have got away with shutting down central Dublin with farmers' tractors on what is termed a tractorcade, to get a Government to cave-in, had no problem telling civil servants living in Dublin, many with teenage children and partners working outside the service, they should head off on their bikes to the boondocks.
In the meantime, Parlon's mode in media interviews is to downplay clear opposition to the scheme while avoiding addressing the issue of what is planned for civil servants who do not wish to move.
With the general election on the horizon, the Government has said little on its flagship "reform" programme.
In a decade, any Government has bragging rights to some achievements. However, in key areas, reform has been glacial and the soft option has carried the day. In a decade, about 100,000 jobs will be lost in the construction sector and competition for foreign direct investment will be strong. We are currently like an oil economy with property dominating every sector. The politicians currently in power will be on very generous pensions when they leave office. They do not have any money worries ahead of them but can the same be said for so many others?
I'm not forecasting a property bust but I will not be surprised in future years if people will look back on these halycon days of the Celtic Tiger and wonder why in a unique period since independence, when a Government was not distracted by economic turmoil, it flunked the test of political leadership so comprehensively and left the economy unprepared on a foundation of quicksand?
Finally, before moving on to more in-depth coverage of specific issues raised below, we end this section with a conclusion of the article of Stephen Roach of Morgan Stanley in the FT that's referred to above, which also has implications for our open economy: "Excess liquidity bought time for a precarious world. As central banks move to normalise monetary policy, that time has run out. Without the unsustainable support of asset bubbles, it is back to basics – with aggregate demand supported by more modest labour income generation rather than the excesses of wealth creation. So much for the artificial boom of an unbalanced world. It could be about to fizzle out."
The Rise of the Celtic Tiger
The genesis of the Celtic Tiger dates back to the bleak 1950's when Ireland appeared to be in terminal decline with an average of 50,000 emigrating each year.
|The man who really changed things was Ken Whitaker... I don't think there is any other official who has a remotely comparable impact upon Irish history in the second half of the 20th century- - Professor Ronan Fanning, Department of History, University College Dublin|
In 1950, the Industrial Development Authority was established as an independent State agency and in the interval, IDA Ireland has shown what State employees can achieve when freed of the cobwebs of civil service bureaucracy. In 1955, the Minister for Finance Gerard Sweetman appointed the 39-year old Thomas Kenneth Whitaker as Secretary of the Department of Finance. The choice was not only inspired but in the then backward theocratic society, it was brave.
The 1956 budget that was introduced by Sweetman proposed a tax exemption on profits from exports. It had Whitaker's imprint and in the following year, that was marked by the creation of the European Economic Community, he began work on the seminal paper Economic Development. He was focused on preparing the Irish economy that had been so linked with the UK's, for eventual membership of the new six-country member European body.
Whitaker's paper was the blueprint for the move from protectionism to free trade and the modernisation of the economy through the incentivising of multinational companies via tax breaks and grants, to establish manufacturing operations in Ireland.
|Source: Heritage Foundation |
Sean Lemass, the Tánaiste (Deputy Prime Minister) and Minister for Industry and Commerce from mid-1957, was a strong supporter of Whitaker's blueprint despite opposition from business and trade union interests and it became the basis of the First Programme for Economic Development. In 1959, Lemass became Taoiseach (Prime Minister). In the same year, the Shannon Industrial Free Zone opened at Shannon Airport in south-west Ireland and American companies began opening assembly facilities in the zone. In 1961, Ireland applied for membership of the European Economic Community without success. Two years later, the State visit of President John F. Kennedy, the great-grandson of Irish emigrants, set the seal on the new modernising Irish economy as prosperity began to reverse the tide of emigration.
In January 1973, Ireland joined the then European Economic Community. In October of that year, unemployment fell to 63,000 and another Middle East War ushered in an oil embargo and a quadrupling of oil prices. Inflation shot up to double digit levels and governments lost control of public spending, emigration resumed and negated the positive impact of the membership of the EEC.
Between 1977 and 1981, the combination of tax cuts with huge spending increases (in the single year 1979, the public service pay bill was increased by 34%), resulted in a trebling of the National Debt.
The continued success in building up the base of foreign companies, the opening of a financial services centre in Dublin in the late 1980's, eventual political courage and cross-party support to control public finances, large structural funds transfers from Europe and a favourable demographic factor with a young educated population, coincided with the take-off of the American economy from the mid-1990's and the Celtic Tiger was born.
Dr. Garret FitzGerald has written in the Irish Times that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors - both of which were essentially temporary in character.
The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1 per cent of Europe's population, attracted up to 25 per cent of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4 per cent annual increase in output per worker at national level, ie productivity.
The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from "home duties" to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here.
Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation.
FitzGerald writes that the huge increase in the proportion of our population engaged in work, and the consequential drop in our dependency ratio - more rapid than had ever previously been seen anywhere in Europe in peacetime - accounted for more than half of the improvement in our living standards. But that extraordinary combination of productivity growth and reduced dependency, which distinguished the 1990s in Ireland from any other decade, was a temporary phenomenon.
“In future, our standard of living is likely to rise much more slowly than we became accustomed to during the 1990s. However, I don't think that with most people this particular penny has yet dropped,” FitzGerald writes. “Since the end of 2003, output per worker in Ireland has been almost static. It seems to have risen by only 1 per cent in 2004 and not at all in 2005. Even if the CSO was in due course to revise upwards its current estimates of economic growth in those two years - which is quite possible - any such revision is unlikely to be on a scale that would show any appreciable rise in productivity…. in the absence of improvements in output per worker, the current spending spree, financed by borrowing, could not continue indefinitely. And, on top of the uncertainty created by our huge growth in dwelling construction, this new factor introduces a further element of uncertainty into our economic prospects in the latter part of the current decade.”
A Low Tax Economy ? plus the Mother of all Stealth Taxes
The report Prices and Earnings that was published by Europe's biggest bank UBS on August 9th, says that Ireland is the 8th most expensive of a sample of 71 cities worldwide.
With the highest net wages, Zurich and Geneva, followed by Dublin, Los Angeles and Luxembourg, lead the pack in purchasing power.
However, in Dublin, rents are low but house prices are very high. So net earnings after housing costs can vary widely depending on whether the worker is a renter or mortgage payer. In contrast with other European cities, where public health care standards are high, many Dublin workers have to buy private medical insurance from their net earnings after tax. There are other examples of hidden taxes such as the data from the EU last month that electricity prices for consumers from the State-owned monopoly, are 46% higher than in the UK.
The Irish Government gets an average of €100,000 in various taxes and levies i.e. tax, from the cost of every housing unit built in the State. It amounts to more than 30% of the average cost and is the Mother of all Stealth Taxes. In November 2004, the Minister for Finance Brian Cowen, said in the Dáil that the percentage was 28%. The Construction Industry Federation says that its more than 30%.
Figures published by the OECD in October 2005 show that Ireland's tax as a percentage of GDP (Gross Domestic Product) ratio was 30.2% in 2004 compared with 29.1% in 1975. The European Commission said in May 2006 that Ireland's tax ratio burden fell 2.9% from 1995 to 30.2% in 2004.
GDP in Ireland is substantially larger than GNP (Gross National Product) due to the disproportionate impact of multinationals in Ireland.
The ratio of tax to GNP in Ireland in 2003 was 36.21%, according to the National Competitiveness Council (NCC). In other countries, the difference between the GDP and GNP ratio, is small.
The OECD says that Sweden once again had the highest tax-to-GDP ratio among OECD countries, at 50.7% in 2004 against 50.6% in 2003. Denmark came next at 49.6% (48.3%), followed by Belgium at 45.6% (45.4%). At the other end of the scale, Mexico had the lowest tax-to-GDP ratio, at 18.5%, against 19.0% in 2003. Korea had the second lowest, at 24.6% (25.3%), and the United States had the third, at 25.4% (25.6%).
The OECD says that many countries with high tax-to-GDP ratios provide family benefits as cash payments rather than as tax reductions, increasing the apparent tax burden as measured by the tax-to-GDP ratio.
The NCC says that the fall in the Irish tax burden by 10% in the period 1995-2003, can be largely attributed to the significant rise in the value of Ireland's GDP.
The NCC also says that the breakdown of total tax revenue between direct, indirect and social security tax shows that Ireland has one of the highest shares of indirect tax as a percentage of total tax revenue. Low direct taxes and high indirect taxes favour export oriented manufacturing and services sectors over tourism.
As the Celtic Tiger boom accelerated from the mid-1990s, the Irish Government significantly extended property-related tax incentives in respect of rundown areas in most urban areas, car parks, nursing homes and holiday homes.
Very wealthy people have been able to use such incentives to reduce their tax liabilities to low levels or even zero.
Breakdown of Tax Revenue, 2003
||Social Security Tax|
Income tax or direct taxes rates have fallen since the dawn of the Celtic Tiger.
In the 2002 Programme for Government, Fianna Fáil and the PDs agreed that 80 per cent of all income earners pay only standard rate tax. The commitment has not been met.
In 2002, almost three quarters of earners paid only standard rate tax. Today, just two thirds do. Four years ago, just over a quarter paid tax at the higher (42 per cent) rate. By 2006, nearly a third now do. The failure to index bands and allowances for inflation in recent budgets, except in December 2005, is the principal reason.
In percentage terms, more people are paying tax at the higher rates in 2006, than in 2002. And this has happened despite years of strong growth.
Pay - Irish Public Service 2001-2006: Salaries up 59%; Payroll up 18% - 38,000 additional workers and Pensions up 81.3%: Average industrial wage rise in the period was 19%
Irish public service salaries have risen by 59% in the past five years and the payroll has expanded by 38,000 extra staff.
Increases in public sector over the period due to general rounds total €2,479m (or 24.3%), “special” pay increases (primarily Benchmarking) total €1,328m (or 13%), and other factors (such as extra numbers) total €2,193m (or 21.6%).
The increase in the average industrial wage for a male worker in the period 2001-2005, was 19%.
The Exchequer’s annual wages and pensions bill increased sharply from €10.2 billion in 2001 to €16.2bn last year, with what has been termed "benchmarking" accounting for up to €1.32bn of the rise.
The number of public servants grew by 38,760, or 18%, since 2001 to 257,013 last January.
The education sector saw the biggest increase with pay costs rising by 65%. Health sector pay surged by 63% in the period, civil service salaries rose 48% and in the security sector they rose by 34.8%.
The average weekly earnings for non-health service public sector workers stood at €848 last September, according to the CSO.
This was above the €754 for the banking and insurance sector and €579 for industrial workers.
Fine Gael finance spokesman Richard Bruton insisted taxpayers were not getting value for money.
“Salaries have increased greatly, but there has been no quid pro quo for the taxpayer because ministers did not build the necessary reforms into the benchmarking structure,” he said.
Labour’s spokeswoman on finance Joan Burton called for benchmarking to be much more transparent.
“I really don’t think we are seeing the money showing up on the frontline of health and education in particular. The bloated bureaucracy is swallowing so much up,” she said.
Public sector pay rose by 8% in 2005 and pensions now account for 10% of the total pay bill, up from 8.6% in 2001. The pensions bill has increased from €876m in 2001 to €1,588m in 2006 representing an 81.3% increase over the period. The increase in the health sector has been 104%. Pensioners also received the special benchmarking increase of an average of 9%.
In August 2006, it was reported that senior civil servants had been paid average bonuses of €11,000 in respect of 2005.
Some of the largest performance-related bonuses were paid to senior Department of Health officials.
Three public servants received over €20,000, with one getting €25,000. Most of the senior civil servants - 13 top gardai and 12 defence forces chiefs - received bonuses of at least 10% of their salaries.
The bonuses are based on self-assessment forms and a review by each Department's Secretary General of how specific goals have been achieved.
The Committee for Performance Awards (CPA), which has a responsibility for monitoring the awarding of the bonuses, warned Departments not to be so generous with taxpayers' money after giving over €2.1m in special bonuses to 185 senior civil servants.
The CPA also expressed concern that in nearly one-third of Government Departments, the annual objectives, or targets, have not been issued by April, when one-quarter of the performance period had elapsed.
Their report shows that seven assistant secretaries in the Department of Health received an average of €13,730 each. In no case were any of the public servants rated for a zero award, although none received the maximum 20%.
A €532,000 bonus pot was shared among 46 senior staff at the Department of Foreign Affairs, most of whom are ambassadors
|Common Agricultural Policy receipts per head. Source: Future Financing of the European Union report, UK House of Lords European Union Committee|
On Tuesday October 10, 2006, Taoiseach Bertie Ahern, said that problems in health and other public services cannot be solved unless working practices change.
Ahern said change and modernisation in the public service could be achieved only if staff extended their working day.
He said it would not be possible to face challenges in the future if public sector workers wanted to work only six hours a day and take a half-day on a Friday.
So in the tenth year in power, it's as if he had never heard of benchmarking or more likely, that he knows that he has been a fraud that has not resulted in any worthwhile changes.
Taoiseach says problems in health and other public services cannot be solved unless working practices change such as working six hours a day and a half-day on a Friday
Pensions- 900,000 Irish Workers without an occupational pension
In August, a report prepared by the Pension Board stated that at present over 900,000 people, almost half the country's workforce, have not made provision for any private pensions and, as of now, are moving towards a retirement in which their main source of income will be the State pension.
In May 2006, Danny McCoy, Director of Economic Policy at IBEC, the principal Irish employers' group, said that we spend 3% of our GNP annually providing pensions for our pensioner population of approximately 300,000.
We spend a further 1.3% of GNP in funding what are excellent pensions for 70,000 public service pensioners. The average public service pension is about twice the Social Welfare pension and the overall bill keeps growing as a consequence of Benchmarking and wage related indexation.
A private sector worker can provide for the equivalent of a public service pension for a maximum of two-thirds of final salary for retirement. However, 28% of salary would have to be put aside every year for 40 years to do so.
This figure is based on an assumption that a person's salary increases by 5% per annum; annual investment growth is 7% and annuity rates (which buy a pension on retirement) are 4%.
Public pensions now account for 10% of the total public service pay bill, up from 8.6% in 2001. The pensions bill has increased from €876m in 2001 to €1,588m in 2006 representing an 81.3% increase over the period. The increase in the health sector has been 104%. Pensioners also received the special benchmarking increase of an average of 9%.
As a consequence of our favourable demographics Irish public spending on pensions is among the lowest in Europe.
At a recent Pensions Board meeting, William Beausang, the representative of the Minister for Finance Brian Cowen, objected to mandatory pensions on cost grounds. Both he and his Minister have gold-plated pensions and a National Pension Reserve Fund that will pay for these pensions, is currently valued at €16 billion.
The Sham Benchmarking System - The Scam of the Decade
An average special pay increase of 9% has been awarded to politicians, public servants and pensioners. Aspirational targets have been introduced in public services but there is no evidence of any improvement whatsoever in accountability.
In the public service, the opportunity to link responsibility with accountability was flunked with a sham benchmarking system. The recent national partnership deal has provided for some public service reforms including a removal of the ban on outsourcing "core work" but these are essentially baby steps.
Irish public service workers come from the same gene pool as those who work for the world class companies that power our economy. However, senior managers can sign-off on multi-million euro projects without having to take any responsibility for it.
In December 2000, a Public Service Benchmarking Body, established under the Programme for Prosperity and Fairness (PPF), was asked to undertake a fundamental examination of the pay of public service employees vis-a-vis the private sector. Former Davy Stockbrokers' economist Jim O'Leary was a member of the body for a period but he resigned before it reported.
In 2004, O'Leary who had joined the Department of Economics at Maynooth University, published with two of his colleagues, the results of six months' rigorous and painstaking research into public-private sector pay differentials in Ireland - Public-Private Wage Differentials in Ireland, G.Boyle, R.McElligott and J.O'Leary, ESRI Quarterly Economic Commentary, Summer 2004.
O'Leary and his colleagues wanted to discover whether similar people in similar employment circumstances were better or worse off working in the public than in the private sector. In order to do this, they had to control for attributes like age, experience, gender and education, and also for job characteristics like occupation, type of contract and size of establishment.
As the CSO data does not permit this kind of analysis, the dataset that they had to use is one based on a large-scale survey conducted by the Economic and Social Research Institute (ESRI) and used for much of its research into poverty and inequality.
The core finding was that on average, public servants earned 13 per cent more than their private sector counterparts on a like-for-like basis in 2001. The researchers also discovered that the size of this margin (the public sector premium) in 2001 was not significantly different from what it had been in 1994, suggesting that pay increases in the public sector had kept pace with the private sector throughout the Celtic Tiger period.
Another discovery was that the margin by which public service workers outearned their private sector counterparts tended to be significantly larger at the bottom of the income distribution than at the top.
A particularly striking finding was that the estimate of the public sector premium for Ireland was more than twice as large as the available estimates for other countries.
The Public Sector Benchmarking Body recommended pay increases which averaged 9 per cent across the grades examined and cost €1.2 billion a year. Government Departments introduced aspirational targets for staff that would make a laughing stock of a manager in the private sector who emulated the farcical exercise.
O'Leary says that the Public Sector Benchmarking Body never published its research results and at no stage in its 278-page report did it explicitly state or opine that public sector pay had fallen behind that in the private sector.
Ministers, other politicians and all living former employees of the Irish public service received special payments.
Last November, Davy Stockbrokers said that Irish public sector pay is on average around 120 percent of private sector earnings, having risen from 113 percent in the past five years
The biggest fraud of all was that the Benchmarking Body did not take any account of the unique public pension scheme, never mind the issue of job security.
Taoiseach Bertie Ahern wanted to buy off the public service unions, whatever the price and as a man whose job before entering politics was an administrator in a Dublin hospital, he had not the exposure of life in an unprotected private sector company.
Overpaid Legislators: 30% Special Pay Awards including Sham Benchmarking and Pay up 119% since 1997 - Average Weekly Industrial Earnings up 60%
Ireland has 166 members (TDs) in the lower parliament chamber Dáil Éireann who represent some 4.2 million people. With one TD for every 25,000 persons, the people are over-represented in parliament, and their representatives are, by international comparison, overpaid as national legislators.
However, following the latest census of population, Ireland may even get more.
Joseph O'Malley, Political Correspondent of the Sunday Independent recently wrote that IreIand has far more TDs than Britain has MPs: four times as many in proportional terms. The TD in Leinster House is now better paid than his or her counterpart at Westminster. The TD also enjoys superior pension benefits, and for a much lower pension contribution: 6 per cent of a TD's salary, while the MP pays 10 per cent.
O'Malley says that for the TD, the transformation from being underpaid to being overpaid represents a remarkable turnaround in a short time. The TDs, however, are not complaining. Within a decade, few sectors of society have done better in pay terms than the political class at Leinster House.
In 1997, the Westminster member was paid a quarter more than the TD, who then earned €44,067. Nine years later the TD/MP pay gap has not just been closed, it has been reversed. Today, the Dáil deputy earns €96,650 and the MP earns 11 per cent less, at €87,132.
O'Malley writes: Few can seriously dispute that the TD has less onerous national responsibilities than his British counterpart. The Dail sits less often than the Commons, and parliamentary life is much less demanding in Leinster House than at Westminster. Never mind that Britain's population is 15 times larger. And its economy is 11 times the size of the Irish economy. The TD represents fewer people in a much smaller country. Nevertheless, Dail deputies are now paid more than MPs to do a less challenging job.
The key to the current high salary status of TDs has been the conjunction of some remarkable series of developments on the pay front.
First, in 1999 the Buckley pay review awarded TDs a special pay increase of some 18 per cent. Buckley also recommended that Dáil deputies' pay should be linked to that of a principal officer in the civil service. Second, in 2002 the benchmarking review recommended a 12 per cent pay rise for principal officers. And because TDs were linked to principal officers, they also benefited from that award. Since 1997, the 30 per cent from the special pay awards, when added to the normal partnership pay rises, has meant that the pay of Dail deputies has more than doubled. It is up 119 per cent, or twice as rapidly as the average industrial wage.
Stephen Collins in The Irish Times reported last July that politicians received their fourth pay rise in a year at the beginning of June, bringing the basic salary of a TD to €96,560 before special allowances and expenses are taken into account.
For the Taoiseach and his Ministers, it was the sixth pay rise over the past 12 months. Mr Ahern's salary is now €258,730 a year, including his TD's salary, while the Tánaiste earns €222,256 and other members of the Cabinet get €204,020.
Each Government minister has got 2 benchmarking awards, even though everyone knows that the system has been an absolute scam.
A comparable country to Ireland, such as New Zealand, which is similar in population size (4.1m) and economic scale and performance to Ireland, manages with 120 MPs, one chamber, and no upper house. Indeed in 1999, in a non-binding referendum, the New Zealand people voted to reduce the number of MPs to 99: some 84 per cent voted in favour. Even more remarkable: the Kiwi MP is paid just €56,730, under two thirds the Irish rate.
Joseph O'Malley in The Sunday Independent, says that a contribution of only 6 per cent of salary entitles TDs to a full pension after just 20 years, based on half their final salary, and with a lump sum payment of one and a half times that salary. But what the TD pays for his pension bears no relation to the real economic cost of providing his retirement benefits. The taxpayer pays that extra, unquantified, cost.
In a damning indictment of the current wide gap between many of the governed and their legislators, O'Malley writes: Many private sector companies are closing their defined benefit (final salary) schemes to new entrants, while others raise contributions to close the funding deficit, which the law passed by the Oireachtas requires. Remarkably, however, little echo of this great debate on pensions can be heard in the national parliament.
To cap it all, part-time local councillors are seeking public occupational pensions even though most private sector workers beyond the foreign-owned sector and large Irish-owned companies, such as banks and public companies, have none!!
The Sunday Independent has reported that thirteen Government ministers have benefited from tax breaks, averaging almost €5,000 each on second homes in the capital, just weeks after the Taoiseach's brother Noel Ahern, said property speculators should be "taxed out of existence".
The break designed exclusively for members of the Government, allows ministers to claim relief on second homes and for overnight accommodation in Dublin. Latest figures reveal that 13 ministers availed of the perk, claiming €63,477 between them.
The "dual abode allowance" allows rural TDs to claim up to 100 per cent mortgage relief, and they can claim back the stamp duty on their city homes.
Ministers who qualify can write off much of their mortgage repayments on second homes against tax, and are allowed to cash in on the Dublin property boom tax free.
The latest figures on the ministerial tax breaks come just weeks after Noel Ahern, the junior housing minister, called for a tax to put property speculators out of business.
The Revenue Commissioners refused to name the ministers and junior ministers who availed of the scheme in 2004, citing "confidentiality".
More than half of the 23 senior and junior ministers who represent constituencies outside of Dublin have applied for the breaks.
And finally on one of many legislative perks...an audit by the Comptroller and Auditor General's office has found that a pint costs as little as €3.70 in the Dáil visitors' bar, more than 50 cent cheaper than elsewhere in Dublin.
The audit has also reportedly raised concerns about the slow rate at which TDs pay off their bar tabs and the falling profit margins at the four bars and restaurants in Leinster House.
Do more pay and perks increase the likelihood of a better standard of public representatives?
Many of the 166 current members of Dáil Éireann are uninspiring individuals who principally play the traditional role of political messenger boy/girl. In the House. with the exception of Joe Higgins and Pat Rabbitte, parliamentary performers are a rare specie and mumbling with the aid of a script is surely one good cure for insomnia.
A TD or aspiring one, should be expected to put forward challenging ideas, defying conventional wisdom where appropriate and addressing issues of public policy beyond a forthcoming election.
The limited talent on the backbenches can also be seen when up to 30 senior and junior ministers are selected.
How many of the current crop would be selected in an open competition to run a significant business?
This is an important issue because when ministers are expected to sign-off on big public sector projects for example, it's pretty blatant that even some of the more obvious questions are not asked.
The typical existing or aspiring TD who cannot articulate a challenging idea, finds refuge in an expression of support for party policy but ask what will likely follow the ending of the current CAP system for farmers in 2013 or when the foreign manufacturing sector or construction industry will contract, there is nothing to be said.
Then there are the one-issue independent candidates who are vacuous beyond their pet local hospital or whatever got them elected.
At the Central Bank's economic conference, referred to at the outset, Dr. Frank Barry of UCD, highlighted the detrimental effects of the localist and clientalist nature of the Irish political system. The shelving of the Buchanan Report of the 1960s on regional policy, for example – in response to localist pressures – is now widely recognised to have had highly adverse consequences for the country as a whole.
Barry said that the imminent end to EU supervision of national investment policy will strengthen the scope for localist pressures. A move from the present national electoral system towards the kind of list system frequently encountered elsewhere in the developed world would help insulate against such pressures and would also serve to raise the quality of Irish political representation.
The list system, which allocates parliamentary representation proportionately to parties but lets parties choose the members of parliament, was recommended by a commission on electoral reform in 1996.
The Constitution Review Group (1996) was chaired by Dr T.K. Whitaker.
Bertie Ahern isn't going to do anything about it; the new PD President Tom Parlon will not support any land development reform and one can only wonder what the new PD leader Michael McDowell means by radicalism?
Lazy journalism is surely a godsend to many of them!
Seven Years to a World Class Knowledge Economy?
Brian Maccaba founder of FX technology company Cognotec, recently told Finfacts that the company will have revenues of $100 million before contemplating an IPO.
Maccaba welcomed the Government's July announcement that the State will invest up to €3.8 billion in R&D in the period to 2013.
"We've been unable to produce scalable tech companies because of the lack of depth in scientific research. A comparable country like Israel, has over 70 companies on Nadsaq," he said.
Top Irish-owned Tech Companies
It will likely take Ireland up to 20 years rather than 7 to achieve the level of Israel in relation to the development of home-grown knowledge intensive firms.
On Tuesday, July 25th, Hewlett-Packard announced its agreement to acquire Israeli software company Mercury Interactive, which has annual revenues of $800 million and was founded in 1989.
Foreign firms were responsible for 87.6% of Irish exports in 2004 and it is expected that the current level of Foreign Direct Investment in the Irish economy will fall over the next two decades.
Chipmaker Intel and top PC maker Dell, are Ireland's biggest manufacturing employers.
Lord Leverhume, who as William Hesketh Lever (1851 - 1925) , manufactured Sunlight Soap, famously said: "I know half my advertising is wasted, tell me which half!" The same could be said of public R&D spending.
There is a danger that academics could be the ones who reap the material gains while using PhD students on public funding as mules working on research that has little likelihood of being commercialised. Enterprise Ireland already provides funds for PhD research where part of it is used for research at overseas universities, which would have control of intellectual property rights.
© Copyright 2007 by Finfacts.com
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