Charity status for vulture funds – someone shout stop!

Can you trust charities any more? In an inefficient and poorly regulated sector with huge overlap in terms of service provision, not only do we contend with a string of scandals, we now learn charitable status is being used by vulture funds to shield incomes earned in Ireland from the Irish tax system.

That is, to put it mildly, not a good thing. Facilitated by legal firms, somehow special purpose investment vehicles are being given charitable status, which allows them to pay almost no tax. Irish tax legislation, via Section 110 of the Taxes Consolidation Act 1997, provides for special treatment for qualifying SPVs (special purpose vehicles). Essentially this allows a tax deduction for interest payments.

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Paying the price for free education

Today, I’m writing as an academic and as the Acting Chair of the Higher Education Authority, because I think it’s really important to respond to the recent publication of the Cassells Report on the funding of higher education.

You might not know much about the HEA. It has three main jobs. It disburses about €1 billion in funding to the higher education institutions of this State, it regulates the higher education sector, and it provides policy advice to the Minister for Education and Skills.

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The Dickensian repercussions of Britain’s decision to leave the EU

There’s something Dickensian about the contrasting approaches of the Irish and British governments to the Brexit crisis. Remember Dickens’s opening line from A Tale of Two Cities, a collage of stories from London and Paris in the 1770s?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

I can’t stop thinking about this line since I started reading the book to my sons recently. Dickens’s book is really about how ordinary things change after an extraordinary event. In his case it’s the French Revolution, which overthrew a monarchy to establish a republic. In our case it’s the potential dissolution of the European Union and the weakening of one of Ireland’s largest trading partners. Somehow in its universality Dickens’s line speaks to the kind of large structural change we’re seeing post-Brexit.

It was the best of times

The financial markets have been battered since June 24. The Ftse 100 index of very large multinational firms, which benefit from the incredibly weak sterling level, is up €30 billion. British exporters have seen huge increases in demand for their newly-cheap products. Some currency speculators made out like bandits, and anyone holding gold is feeling very smug indeed. Little Englanders and euro-sceptics are triumphant. This is their moment.

It was the worst of times

The Ftse 250 index has lost €38 billion in value. The Eurostoxx banks index, which tracks the 30 largest banks in the eurozone, has lost over €110 billion.

Over half of the £25 billion Investment Association property sector has now suspended trading, with five of the largest British property funds suspending any redemptions. Companies importing products have been hammered and are issuing negative profit guidance, especially airlines such as EasyJet and Ryanair.

Employers cut almost 800,000 job ads following the result in order to compensate, somehow for austerity. Local authorities and city councils across Britain have to prepare to lose large percentages of their budgets, bringing in austerity measures for those who need government services the most.

In England, the EU funds more than £5 billion. In Wales they’ll lose almost £2 billion, and in the North, they’ll lose almost £400 million. Scotland will lose over £700 million. Here, Minister for Finance Michael Noonan revised down his estimates of Irish GDP growth from 4.3 per cent to 3.4 per cent, and while insisting the figures for Budget 2017 were sound, he admitted the future of the Irish economy was now more uncertain.

Ireland’s fortunes depend on the ultimate form the Brexit takes. Whether it’s a Norway-style or a World Trade Organisation-style deal matters hugely to us.

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The shock of Brexit has not yet faded. It may take years to fully absorb the consequences of what has happened.

One thing is certain: Ireland’s fiscal future is more uncertain because of Brexit. Let’s look at some of the upsides and downsides.

At the National Economic Dialogue last week, ministers Paschal Donohoe and Michael Noonan stuck rigidly to the script that the Summer Statement, released only 48 hours before the Brexit vote, took much of the effects of Brexit into account in the short term. Both agreed the real changes to Ireland’s fortunes would come after 2018, when the actual Brexit occurred.

Last week, I wrote that Brexit, if it occurred at all, would take far, far longer than the two years mandated by Article 50 of the Lisbon Treaty. Think closer to ten years. The sheer complexity of a disengagement from the European Union would require an army of negotiators, lawyers, trade experts, a phalanx of other assorted parasites. Every person running for Tory Party leader has been very relaxed about invoking Article 50, with the front runner Theresa May saying it would not be invoked before January 2017.
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Fiscal space. What fiscal space?

For once, Ireland’s civil servants got it exactly right. No, I haven’t been hitting the Blue Nun early. Honest.

The recently drafted National Risk Assessment placed the threat of the UK leaving the European Union as a real and negative threat to the Irish economy, and a taskforce from the Department of the Taoiseach has been working for more than a year on contingency plans for Ireland in the event of a Brexit vote.

The decision to leave has historic consequences, and we need to think in terms of decades, not days.

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Brexit’s benefits are an illusion. The cost is not

At present, we are days away from Britain’s decision to stay within the EU or to leave it. The polls are forecasting a very close result, with Leave and Remain camps very close to one another in terms of overall support. As I write this, surveys from three major surveyors, ORB, ICM and YouGov, show the Leave campaign opening up a margin over Remain.

The Brexit debate is already affecting Ireland’s borrowing costs. The gap between Irish and German ten-year bond yields widened to almost 100 basis points this week, while this week, yields recorded their biggest daily jump since January — up 12 basis points at 0.95 per cent.

The markets are pricing in just how hard they think we’ll get whacked if the British vote to leave the European Union. The best case scenario would see Irish GDP fall by 1 per cent, with the worst case scenario seeing a 3 per cent drop.

That’s a huge drop in growth and living standards for Ireland, just when the economy looks like it is righting itself, with taxation revenues coming into line with expenditure, and a normalisation of spending patterns across the main areas of the economy, most households, firms, the government and the rest of the world. Only the banks remain impaired now, after their restructuring.

In Britain, the key variable separating each camp seems to be education. Those with more education are overwhelmingly for remaining, while those less educated are overwhelmingly for leaving the EU.
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New bodies are there to prevent TDs from pledging too much

We have bankrupted the state three times since 1950. Each time the broad pattern was the same: an international shock depressed economic activity here and the state’s ability to fund itself through general taxes was compromised. National debt levels rose to plug the funding gap, and spending on redistributive programmes to help the weaker parts of society fell. The state’s ability to fund itself was not as strong as the people, or their government, thought.

Each time we’ve found that politicians can gain popularity by lowering taxes and increasing spending in the short run, only to find that promising everyone the Mater Private in their front garden and Croke Park in their back garden isn’t sustainable.

As I’ve written many times now in this column, we are back full circle to 2002, when unrealistic public expectations and a political system paralysed by the need to be popular is talking about spending more, and taxing less.

But there’s a difference this time. We have spending rules built into our Constitution, and a quango to monitor whether those rules are being observed.

We also have a much more analytically-driven civil service, which has tried to learn the lessons of the crisis by building much more analysis and data into its decisions.

Last week, the aforementioned quango, the Irish Fiscal Council, released its report showing that Ireland was technically in breach of its fiscal rules, and that tax-and-spend measures announced in the Programme for a Partnership Government aren’t costed. The language is firm but very clear.

Here’s a sample: “[The Programme for a Partnership Government] document does not reconcile the overall cost of the various policy proposals with an estimate of the resources that will be available in future years to fund new tax and spending measures.”

Can’t be much clearer than that.

The council is clear that exiting the ‘corrective’ arm of the fiscal rules Ireland has signed up to is a good thing, but tells us that the ‘preventative’ arm’s rules are quite a bit stricter, and so budget giveaways will be harder and harder to do.

Remember the context Ireland is within now. We have the fastest growing economy in Europe. Even stripping out some of the activities of multinationals and just looking at domestic demand for goods and services, we can see that Ireland is booming ahead. Unemployment is falling and employment is rising – everywhere across the country – and workers want wage increases and employers want tax cuts. Everyone wants their share of the recovery. It’s all back to normal.

In 2014, then minister for health Leo Varadkar gave a speech at the MacGill Summer School in which he said that, far from the people not trusting politicians, the politicians don’t trust the people. Varadkar wrote: “We tell them that you can have a school in every village, a university in every large town. And worse still, even if it is affordable, we do not trust people enough to tell them why it would not be a good idea. Routinely, in opposition, politicians promise the undeliverable and then, surprisingly, under-deliver.”

The fiscal council is designed to get around this problem – of having to promise too much to get elected, and then either delivering on promises you know are fiscally foolish or being flogged at the next election for failing to deliver them.

Frankfurt’s way, etc, etc.

Think how far our budgetary institutions have evolved. From Charlie McCreevy getting up on Budget Day in the early 2000s and announcing measures his own cabinet hadn’t heard of, to today’s fiscal council reports, Spring Statements, National Economic Dialogues, a Parliamentary Budget Committee, a Budget Office to cost the figures independently, and an agreed spending envelope by the public, a lot has changed in 15 years.

Despite the annoyance it generated during the election, ‘fiscal space’ is a well recognised academic idea dating to the 1990s, and the fact that the entire debate took place using broad parameters everyone serious agreed upon is a very good thing. We actually had a debate in Ireland, messy and all as it was, on whether to spend more on services, or give back more in tax cuts. The public chose the former in large numbers. They want a recovery in services.

The fiscal council estimates that, just to keep the show on the road, red-queen style, the government will need to spend another €6 billion to cope with demographic pressures, inflation pressures and more. And that’s just to stand still.

The fiscal council punctures the balloon of unrealistic expectations when it writes that despite the boom in our economy this year, we have seen “only a modest improvement in the public finances”.

It is only through rigorous and transparent analysis of where we actually are as a state that we can strengthen our finances to avoid the vicissitudes of another collapse. We are one of the most open economies on Earth. Every shock has the capacity to affect us. The state’s finances have not been able to cope three times before. Next time, if the warnings of bodies such as the fiscal council aren’t ignored, we just might avoid a fourth national crisis.

Life and death: At mercy of the market

Imagine a new drug has been invented that would save only one person, but which would take the entire health budget to administer it to them. Should you sanction the use of the drug? The pot of money is finite. All other resources will be diverted and stopped. Others will suffer, if not die, because of your decision. If you don’t give that person the new drug, they will die.

What would you choose?
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There is a recovery in employment

Judging by the discussions I hear on radio and read in the new programme for partnership government, you’d swear that out beyond the M50 lies an irradiated wasteland, some kind of cross between Mad Max and Trainspotting where life is nasty, brutish and short. The common refrain is that the recovery hasn’t made its way beyond the Pale.
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The full blow of Brexit

The subjects of the United Kingdom of Great Britain and Northern Ireland will vote yes or no on June 23 to the question: ‘Should the United Kingdom remain a member of the European Union?’ The politics of why Britain’s political classes have allowed this moment to arrive are irrelevant. What matters is what will happen in the event of a yes vote, and, being a little parochial about it, I’m concerned about the citizens of the Republic of Ireland.
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Coveney faces uphill battle to speed up rate at which things usually happen here

Imagine you crash your car at 10 miles per hour. Now imagine you crash your car at 100 miles per hour. You’re going ten times faster, but the damage to you and your car will be far more than ten times worse. This is an example of effect-asymmetry.

Credit has an effect-asymmetry, and that’s where you get the old saying that if you owe the bank one million, they own you, but if you owe one billion, you own them.
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An excoriation of Europe’s elites from a Greek prophet

Non-fiction; And the Weak Suffer ; What They Must?; By Yanis Varoufakis ; Bodley Head, €23

The Bundesbank is the villain. The game played is international one-upmanship to cope with the vast imbalances of money, goods, and people that modern trading nations generate. At the rotten heart of this game is nothing more than the exigencies of power and national self-interest.

The euro, a currency designed to pull Europe’s disparate nations together, has instead left them increasingly divided into ‘creditor’ and ‘debtor’ categories, with the weak in each nation suffering more than is necessary as a result.

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