Construction Industry Federation need your income tax contributions to boost sector revival!

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.

Is Ireland a nation of credit card junkies?

The popularity of plastic money has increased enormously in Ireland. The number of personal credit cards in use has increased over the five years since February 2004 by 21½%, similar to the percentage increase in the labour force between then and May 2008.

But personal credit card indebtedness, according to Monthly Statistics for February 2009 issued by the Central Bank, has increased by a massive 70% over these 5 years and now amounts to €2,896,700,000. Credit card indebtedness over the past 12 months has increased by €119.4 million, or just 4.3% since February 2008, so the current credit squeeze has not accounted for the bulk of this overall increase of almost €1.2 billion since February 2004. We are now spending less and repaying less, but owe more.

Credit cards offer many attractions, including the relative ease with which personal unsecured debt can be accrued. Some people use them as a cash substitute while others avail of the opportunity for a revolving, if a relatively expensive credit facility. They also, of course, offer a means to readily obtain cash at ATM’s.

Advances in internet technology, together with the evolution of the European single market, has spurred the growth of internet commerce in Ireland. One of the impediments that Irish consumers faced was that retailers did not enjoy the benefit of economies of scale because the Irish market was relatively small, choice was limited and prices expensive. But that impediment is now overcome as consumers can easily shop throughout the European Union for items of interest and these can be delivered to them in Ireland at a reasonable cost. Many regular service providers also encourage the use of electronic payment systems for a whole host of products and everyday services.

Retail sales in Ireland contracted in 2008 by 20%. Tax revenue dropped by 19% in January, compared to January 2008. New monthly spending by personal credit card users dropped by 18.3% to €766.4 million and monthly payments by personal credit card holders dropped by 15.8%, or €157.9 million in February 2009, compared to February 2008. The number of personal credit cards currently in issue is 2,212,000, just 1.6% more than a year previously. Depsite such a significant drop in new monthly spending and monthly payments that corresponds to the overall drop in retail activity, the total level of credit card indebtedness has increased by €119.4 million (4.3%) in the year to February.

The average indebtedness per personal credit card in Ireland is €1,310. Credit card holders typically make a monthly payment of €380 but spend slightly less, €346, each month.

Credit card trends and spending patterns have to be seen in the context of general economic trends.

The severity of the economic downturn is reflected in the most recent Live Register statistics. These are not designed to measure unemployment because they include part-time workers, who work up to 3 days each week, seasonal and casual workers entitled to Unemployment Assistance or Benefit. But, nevertheless, the trend is awesome and worrying, not just in the context of paying credit card debt but also, of course, in securing a stable livelihood.

The number on the Live Register in March 2004 was 168,880, an increase of 821 over a 12-month period. The seasonally adjusted total number under the age of 25 years on the Live Register in March 2004 was 32,900.

The number on the Live Register in March 2009 was 371,271, an increase of 173,279 over the most recent 12-month period. The seasonally adjusted total number under the age of 25 years on the Liver Register in March 2009 was 79,700.

The credit card industry emerged from the long-established practice in the United States of hotels and merchants providing customers with paper indetification cards for the purpose of doing business with that particular firm.

The credit card, as we know it today, made its debut in New York in 1950. Diners Club became the first all purpose credit card, which, of course, allowed the cardholder to use the card at multiple businesses. The Bank of America ‘BankAmericard’ arrived in 1958. American banks were not allowed to operate outside their home state and this would have been a constraint on the development of the credit card business so Bank of America set up a separate entity known today as Visa and it became an association controlled by its member banks' and financiial institutions'. It was 1966 before Master Card was created. Today both cards account for 70% of the world credit card market. The American Express charge card also emerged in 1958 - the difference being that all money outstanding has to be paid in full at the due date each month. Larger retailers were reluctant to accept credit cards at first - but smaller retailers considered that they offered them a competitive advantage against their larger rivals.

Visa and Master Card are associations owned by member financial institutions worldwide – 16,400 in the case of Visa and 23,000 in the case of Master Card. Last year Visa processed €2.3 trillion in payments covering 55 billion transactions by 1.7 billion card users.

Master Card processed 21 billion transactions used by 981 million card holders. Apart from processing transactions and having sophisticated technology platforms to mitigate fraud, both entities offer insights into consumer behaviour and buying trends. Neither issue cards, set annual fees, determine annual percentage rates on cards or solicit merchants to accept cards. The customer’s bank deals with these matters. Boards of directors are elected by member firms based on a voting system that is correlated to the transaction volume of particular banks.

The credit card industry is considered mature because such a high proportion of the population are users, sometimes of several cards concurrently. The original credit card family now includes debit cards, charity cards, special cards for discrete subsets of customers such as high net worth individuals and the promotion of loyalty points. But one of the big issues for credit card issuers is the reduction of interchange fees and the impact of these on competition. Larger merchants can negotiate lower fees. The issue of fraud, identity theft and the obligation to secure confidential information also exercises this industry.