BUSINESS OPINION/By John McManus: When you look beyond the crass auction-politics that inspire it, the Fine Gael leader's proposal to compensate Eircom shareholders is not completely without merit.
If you accept that the decision to encourage small investors to participate in the Eircom flotation was a well-intentioned Government policy which backfired, then you can construct an argument that there is nothing wrong - in principle - with the Government trying to undo the damage.
Whatever else the Government was trying to do when it floated Telecom Éireann in 1999, it is safe to say that it did not set out to rip off some 480,000 of its own citizens.
It also unlikely that it was intent on giving the population a short, sharp lesson in efficient market theory. What it was trying to do was make some money for the Exchequer and create a vote-winning nest egg for just about every household in the State. It was a good idea. It didn't work. So why not try to fix it? After all, we elect governments to make our lives better and not to facilitate the smooth functioning of the global capital markets, regardless of the human cost.
The Government is happy to distort the market when it suits. For example, it gives tax relief on mortgage interest and stamp duty concessions to first time buyers, even though economists might say this is a bad idea. The reason it interferes is that most people agree that it is a good idea for the State to help citizens to buy their homes. However, even if you buy into the concept of a tax break for Eircom shareholders on the back of this argument, a whole host of other problems present themselves. None of these problems is insurmountable. The argument that it would set a precedent for other State company flotations and stock-market transactions involving the State is not a strong one. It would not unduly tax the mind of a good corporate lawyer to find a way to ring-fence the scheme legally.The only precedent that would be set would be a political one, and these are easily broken with.
The proposition that the State should not intervene in the workings of the stock market is equally facile. Governments intervene in the stock market all the time, but usually it is at the behest of companies, not shareholders. When the market decided that the game was up for AIB and Insurance Corporation of Ireland in the early 1980s, the Government stepped into to avert the collapse of AIB that the market would have brought about. The Government got involved for political reasons, arguing that it was in the State's best interests.
Another point in favour of compensating Eircom shareholders is that the money the Government made from selling the company has not yet been spent on anything producing a tangible gain for citizens. The money has been siphoned off into the National Pension Reserve Fund and the process of investing it has only just begun. Most of it is still sitting in the fund's bank account.
THE National Pension Reserve Fund is intended to help foot the bill for civil and public servant pensions in the future. At present, the Government pays civil and public service pensions out of current taxation. In the current economic climate - where the ratio of workers to pensioners is high - this is a valid approach. But in around 20 years the situation will start to reverse, and paying pensions will become a very significant drain on the Exchequer.
If you are a public servant who lost money on Eircom you can draw comfort from knowing the money the State made out of you will underpin your pension - if you live another 25 years or so. There also will be an indirect benefit for other taxpayers in 25 years' time, because the Government will presumably not have to tax them to the same degree to be in a position to pay civil and public servants' pensions. In a way, you can see the money that the Government made out of Eircom shareholders as a form of advance taxation. By paying this tax today you may reduce your tax bill in 2025 - should you live that long. In a bizarre way, it lends a tortured logic to the Fine Gael proposal to give some of this money back now in a tax break.
If Fine Gael persists with its plan, it could do worse than try to link the cost of the tax breaks to a corresponding reduction in the Government contribution to the National Pension Reserve Fund.
The real problem with what Fine Gael proposes is that it is a fairly naked vote-grabbing exercise which is inappropriate in the current economic climate. Whoever is in Government after the summer election faces a very difficult task. If they keep a tight rein on expenditure and decide to proceed with the various rinky-dinks employed by Minister for Finance Mr McCreevy to balance his budget, they might just finish the year with a surplus.
The budgetary situation for 2003 and 2004 looks much tighter, with the Department of Finance forecasting increasing budget deficits. As the political parties frame their election manifestos, they should be setting out their strategies for managing the economy through this difficult time.
It would be reassuring to see them tease out issues such as the merits of a return to limited borrowing by the Exchequer in order to fund infrastructure projects, rather than proceed to promise the sun, moon and stars without saying how they will pay for it. So far, only the Labour Party has indicated that they will be approaching the election in this manner, but it is early days.
Fianna Fáil and Fine Gael have shown all the signs of returning to the tactics of auction politics. It is a safe bet that by the time the election comes around in May, the two parties will have promised expenditure measures that, if implemented, will collapse the shaky edifice that is Mr McCreevy's predicted Exchequer surplus this year of €170 million (£134 million). The €90 million or so that Fine Gael's Eircom proposal will cost will be one item on the Fine Gael list; but given the other demands on the State purse it is not one that can justify being near the top.
jmcmanus@irish-times.ie
