The Construction Industry Federation (CIF) submitted what it describes, as a revenue neutral, 10-point plant to stimulate the industry in advance of the Budget on 7th April. These are essentially about the creaton of various tax avoidance loopholes and tax holidays, maintaining capital spending at a high level, the faster consideration of planning applications, a social insurance tax holiday, VAT reductions and even the removal of the cap on the tax deductibility of charitable donations.The removal of the cap on charitable donations is so touching - but why is it made without reference to the millions of € already donated by property developers to bona fide charities - if that is the case? Surely, this evidence would make that argument more compelling! One would hate to believe that the removal of this cap could possibly be subverted for anything but the most noble and heart-rending reasons directly connected to legitimate charities. But when an industry has to surrender €150 million to the Revenue Commissioners in unpaid tax liabilities, an observer could never be too careful when it comes to the question of creating tax avoidance loopholes.
Well, the facts are that the Irish economy has been run into the ground by a coalition of rampaging developers, delusionary politicians, ungoverned and ungovernable banks. Ireland cannot afford a hyperactive construction sector operating at a level that is unsustainable and totally unrelated to genuine need. The days of acquiring property to play Russian roulette are going to be a thing of the past.
Tax revenues are estimated to drop from €47 billion in 2007 to €34 billion in 2009. Rapidly rising unemployment is well on the way to fully depleting the social insurance fund. Stamp taxes are likely to be €2.5 billion less and VAT could be €2 billion lower in 2009 than last year.
The Irish construction industry suffered a downturn of 48.2% in production volume and a 35% decline in value since peaking in 2005/06. The downturn was especially severe in the residential sector. Dormitory communities have mushroomed within a radius of over 100 kilometres from the larger cities throughout the country and those householders who are working are spending an awful lot of time commuting in the early morning and late evening.
Many large developers are believed to be in severe financial difficulties with several openly declaring an inability to meet obligations in full or on time. Overexposure to the sector ultimately resulted in the nationalisation of Anglo Irish Bank in January 2009 and a major State bailout for 5 other banks and building societies.
The Anglo annual report for the year ended 30 September 2008 indicated that at least 15 of its customers each had indebtedness in excess of €500 million. Other Irish banks and building societies have experienced very high levels of bad debts and impaired loans relating to the construction sector. The construction bubble, which had ridden high for many years on the prospect of aggressive property inflation, has burst and is causing havoc, disruption, widespread negative equity and billions of € in impaired loans.
The 2006 Census of Population reports a total of 1,469,521 households in Ireland. The construction industry completed slightly over 610,000 residential units between 2000 and 2008 and employment growth in the industry climbed from 178,100 in 2000 to 284,600 in 2006 before contracting to 233,100 last year. The construction industry lost 48,800 jobs in 2008.
The average price of a house in Dublin was €339,042 and outside Dublin €255,999 in February 2009. This represents a monthly decline of 2.1% in Dublin and 0.8% outside Dublin – an annual decline of 13.3% and 9.7% respectively. House prices increased 4-fold in ten years and there are now many unoccupied houses, some of which have never been occupied.
Many taxpayers would be quite cynical about this so-called plan; some will be plain angry. Past initiatives, such as first-time buyer grants, never made the impact intended on the consumer because their value is subverted into the price of a transaction. The developer increase the price and the buyer never obtains the benefit of the grant. Others would be very angry with the overall performance of this industry. The construction sector does not inspire trust. Too many poor quality, badly designed, hugely overpriced houses in poorly planned neighbourhoods with hopelessly inadequate infrastructure have been the bane of many house buyers.
Television news stories of many newly built residential properties being severely flooded at several locations throughout Ireland during the heavy rains of the past two summers. Some were foolishly built on flood plains and are prone to chronic recurring flooding in the future. What perspective did the planning authorities authorised this have?
More than €500 million has been spent on the Mahon Tribunal an investigation into planning corruption and bribery involving developers and politicians covering a long period. This has been sitting for over 10 years, presided over by no less than 3 circuit court judges. One of the principal characters in this opera, Frank Dunlop, pleaded guilty to 5 sample counts of bribing members of Dublin City Council in relation to the rezoning of land for development purposes on behalf of developers. He is to be sentenced on May 18th.
The expansion of the construction sector took place against a background of grossly excessive and undisciplined lending by the banks both to developers and house buyers. This resulted, for example, in sites in the inner Dublin suburbs being traded for prices in excess of €50 million per acre and the development of these sites would have to be very intensive and unsympathetic to legacy development to be financially viable. Many of these sites are mothballed for the time being because demand for commercial property has collapsed.
The African-born chief executive of a leading Irish bank personally advocated with the planning authorities on behalf of a bank customer! Back in the days when retail customers believed that they had a bilateral relationship with their banks throughout the life of a house loan there were strict guidelines on the amount one could borrow. Loans were not to exceed 250% of the borrower’s annual income and if there was a spouse, or cohabiting partner, 100% of the second income could be factored into the calculation. But in the era of securitisation, structured derivatives and leveraged transactions it seemed anything goes, including mortgages in excess of the property value and 5, or more multiples of the annual income of the borrower.
The numbers of the Live Register in March 2009 was 372,800, an increase of 173,300 in 12 months. Thousands of others are working short time or enduring stringent pay cuts. Lower disposable income will cause asset value, including house values to be reduced dramatically. The number of redundancies reported to the Department of Enterprise, Trade and Employment in March 2009 was 53,492, an increase of 100% in 12 months. The basis of resilient demand for residential property is simply not there. No sector can be expanded on the back of an unemployed or underemployed labour force.
Doubts about the probity of the construction industry are also evident in The Revenue Commissioners surveillance. They completed over 3,800 audits of the construction sector in 2007. This yielded €129.6 million in additional tax payments. A further 40,161 assurance checks yielded €21.8 million in additional tax payments or a total of €151.4 million.
The overtures by the CIF and other lobbyists are being made at a time when annual tax revenues have dropped from €47.2 billion in 2007 to a possible €34 billion in 2009. The social insurance fund is on the brink of being fully spent as unemployment levels are escalating steeply. The solvency of the Exchequer is the number one priority of this budget but the volatility of the economy makes it extremely difficult to forecast what the future holds with any degree of stability and confidence.
The consolidation and stability of public finances in the number one national priority – not the provision of lollipops to greedy developers funded by income tax contributions of a dwindling labour force. The path to economic recovery will not be based on a continuation of this madness and it would be outrageous for State funds to be squandered on the shopping list of the CIF. The CIF’s 10-Point Plan is no more than an opportunisitc, superficial egotistical rant that contributes nothing to either inspiration or confidence.
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