Property tax a useful option in tackling deficit, says Honohan
Published 28/10/2010 | 05:00
PROPERTY is a useful base on which to raise tax "and one we could use now", Central Bank Governor Patrick Honohan said last night.
Dr Honohan refused to be drawn on how much a property tax might contribute to the Exchequer. Speaking to the Institute of Certified Public Accountants in Ireland, he said the fiscal adjustment must try as far as possible to restore lost cost competitiveness and enhance growth potential, "while aiming at a fair distribution of the burden".
He noted that tax receipts had fallen even faster, despite big increases in the tax base and rates, especially in income tax, as the Government tried to make up for shortfalls in areas like stamp duty.
"That is one of the main reasons why Ireland's exposed fiscal position, with which the Government has been struggling for the past two-and-a-half years -- and which will be the subject of intensified corrective action to be set out in detail in the promised four-year fiscal programme -- is so exceptional," he said.
The governor questioned whether accountants had done enough to flag the problems looming in the Irish banks.
"Arguably, in a rapidly deteriorating environment, accountants should at least have been more concerned with post-balance sheet events, and more fundamentally, could have done better in seeing the need for expected loss forecasts and the amplitude of potential property price movements in assessing the 'going concern' assumption."
He said the reality was that traditional bank accounting practices were not really geared to deal with assets that were so uncertain and long-lived, an economy that tanked so deeply and economic prospects that were so uncertain.
Dr Honohan warned against using the National Pension Reserve Fund to cover the Budget deficit. "You have to be very careful, and recognise that moving money between accounts will be seen through by market analysts."
Calling it a "rainy day fund", Dr Honohan said: "It's raining now, it's being used for some rainy day needs, like the €7bn invested in the banks -- and probably some more for AIB."
Dr Honohan said the final estimate on the value of bank loans by the National Asset Management Agency (NAMA) could deviate somewhat from the current estimate "following the rigorous procedure mandated in law and required by the EU Commission."
"For the smaller loans hitherto intended for NAMA but now staying with the banks, a provision equal to the average all-tranche NAMA haircut for that bank has been applied. This needs to be verified more thoroughly," he said.
"These could go either way, but in any case are relatively small elements. The current figures are as precise as can reasonably be expected at this stage," he said.
He told one questioner that Irish government bonds, yielding over 6pc, were a great buy for pension funds. He would not be drawn on the controversy over whether Irish pension funds should be allowed to calculate their liabilities on Irish yields, rather than the lower "benchmark" German yield.
He said the Irish deficit required a fiscal adjustment in the long term "and a higher tax rate way out beyond 2015".
The fiscal crisis was caused partly by the fact that the eurozone Stability and Growth Pact rules "were not adequate as an indicator of sustainability into the future of the public finances".
"A country could run a surplus for years and yet the structure of its tax receipts and spending could leave it vulnerable to a sudden crippling turnaround in the deficit and a rapid accumulation of debt.
"The SGP points to what may be necessary, but are certainly not sufficient, conditions for sustainable public finance policies," Dr Honohan said.