Commitment to tackle budgetary problems should help State in talks with EU partners
THE EUROPEAN Council meeting seems to have failed to resolve the euro zone’s problems, mainly because of German and Finnish electoral problems.
However, for some time past it has been clear that until the true scale of the Irish banking problem is clearly established, the terms of the Irish bailout cannot be seriously discussed with our European partners.
We and they need to know how much the banking system will need of the €25 billion contingency fund made available to us for that purpose – on top of the initial €10 billion that we have agreed to inject into the banking system.
If it turns out next week, following the completion of stress tests on the Irish banks, that all of this €35 billion will be needed for the banks, then we could have to finance the next three years of budget deficits exclusively with IMF and European money, on which we would have to pay 5.8 per cent interest.
But to the extent that less than the full €35 billion turns out to be needed for the banks, we could treat anything left over as a kind of overdraft, the existence of which, without drawing it down, would justify us in substituting our own quite substantial funds for some European or IMF loans, saving us 5.8 per cent interest payments on whatever amount of our own funds we used for this purpose. From the budget documentation, we know that if the banks needed only the earmarked €10 billion, so that none of the extra €25 billion would be required for that purpose – which, in light of what Minister for Finance Michael Noonan has recently said on the issue, now seems improbable – this could have reduced our interest payments to 3.5 per cent this year and to 4.4 per cent next year.
With some or even perhaps all of this extra €25 billion now likely to be required to refinance the banks, we are not now going to benefit on that scale from this €25 billion contingency fund, and we shall have to wait another five days to find out whether any of it will in fact be available to help reduce our interest burden.
Until we learn next week what if any proportion of this €25 billion cushion may be available to us as an overdraft, enabling us to substitute some of our own money for external loans at 5.8 per cent, we will not be in a position to discuss bailout adjustments with our European partners.
In this connection, it is also important to explain that while we may have to inject more money – whether our own or borrowed – into several of our potentially viable banks, this is not money lost to us, as many people seem to have been led to believe. These financial injections are investments into banks that as taxpayers we now own or, in Bank of Ireland’s case, in which we have a major shareholding.
If these banks in time become profitable, as should be the case, shareholdings in them would become valuable – and by selling our shares in them later in this decade or in the next, our future tax burden as taxpayers should be substantially alleviated.
Meanwhile, ex parte statements by self-proclaimed experts to the effect that we will have no choice but to default – which have been hugely unhelpful to our international reputation – should be ignored.
Such doom-laced rhetoric has not helped our national self-confidence or our relationships with our European partners. Our chance of receiving more aid from Germany is not enhanced by talk in Ireland about default. German taxpayers may be understandably reluctant to invest money which from the sound of all this talk they may fear ever to get back. In the situation in which Europe now finds itself, we should not be too surprised that worried leaders of several EU states have sought to recover diminishing political support at home by means of populist rhetoric about the Irish corporate tax rate.
However, as the effective tax rate in France, at 8.3 per cent, seems to be almost one-third lower than the Irish effective tax rate of 11.9 per cent, deriving from our 12.5 per cent corporate tax rate, French rhetoric on this subject has no substance.
Germany, with a higher effective rate than ours, has more to complain about, but Angela Merkel has not done herself justice by her simplistic suggestion that by increasing our corporate tax rate we could increase revenue from this source.
This argument ignores the likely decline in that source of revenue as multinationals affected by an increase in the tax rate moved business activity out of Ireland, mainly to locations outside Europe – and also future losses through diversion elsewhere of future potential foreign investments.
All that does not mean that we should ignore legitimate concerns about the application of our lower tax rate to earnings of companies located here which may have been earned from activities outside Ireland.
Recent Irish legislation has endeavoured to ensure that only companies with real business activity here can avail of our 12.5 per cent corporate tax rate.
We also have introduced transfer pricing legislation to meet OECD practice and to ensure that the correct amount of profits are taxed here. But that does not mean that we should not be willing to discuss any remaining transfer pricing issues with our partners.
In contrast to President Sarkozy, with his crude and unjustified demand that we raise our corporate tax rate, Chancellor Merkel’s most recent statements have simply sought some unspecified quid pro quo for an alleviation of our bailout terms. May there then be some room for negotiation in this area?
What should stand to us in the impending negotiation on our bailout is the energy and national commitment with which we have tackled our budgetary problem, together with the strength of our real economy.
In marked contrast to the situation in some southern European states, Irish output and exports of a wide range of goods and of services have recently been growing, and our external balance of payments has consequently been moving out of deficit and into surplus. This reality has been obscured by press reports about revisions of our GDP and GNP figures.