Honey, we forgot to shrink the inflated building industry
The Budget could be a slow burner, with modest tax increases masking a decline in services as we pick up the tab for the construction collapse
'WE should not do anything that disrupts unnecessarily an industry (construction) that is such an important driver of jobs. For this reason, for projects that are already in the pipeline, I am extending the date for which 100 per cent relief for expenditure will apply by five months from end July 2006 to December 31, 2006.
"Thereafter, where 15 per cent of the relevant expenditure on the project has been incurred by that date, the relief will apply to only 75 per cent of the expenditure incurred in 2007 and to 50 per cent for expenditure incurred up to end-July 2008."
Fateful words, uttered by Brian Cowen in his Budget speech in December 2005. At the time, as he pointed out, the building industry employed a quarter of a million people and made up one-fifth of the economy. One might not want to "disrupt" it, but it was imperative to begin shrinking it.
Shrinkage, however, must be postponed. And when it came, the shrinkage was as disruptive as any finance minister's worst nightmare.
But they were not the first such fateful words. Just the year before, Charlie McCreevy had intoned; "I am aware that there is a range of construction projects either in the pipeline or under way which will be seriously affected by this termination date of end-2004.
"As the deadline approaches, pressure on construction resources will mount to deliver these projects. Accordingly, I propose to extend the termination date for all of these area-based schemes until July 31, 2006."
So, the ludicrous tax reliefs -- or, certainly, ludicrous by that stage -- were extended for a full four years from the original expiry date. In that period, 320,000 housing units were built. In the first two years of the tax relief extensions, house prices went up by more than 20 per cent.
It was, by any definition of the term, a "surge." House completions peaked 18 months after the first extension, and then peaked again at the end of 2007. There was a final smaller peak last July, as the deadline expired, before the construction collapse began.
The surge in prices, from a 7 per cent annual rate to 15 per cent in 2006 just as the ECB was doubling interest rates, was even more extraordinary. So practically all the over-building and unjustifiable price rises occurred in those fateful years. Given human nature, especially in periods of market mania, it is a reasonable conclusion that the series of deadlines provoked ever more irrational behaviour.
On Tuesday, we will have the first instalment of the vast bill we are about to pay for this mania, as the Budget savages public spending and raises taxes to the tune of at least €3bn.
It is worth pointing out, if not exactly cheering, that almost all of this pain is being inflicted by the housing market woes. The worst of the commercial property bust has yet to show up in the public finances, as has the general economic slowdown now sweeping across the world.
Even less cheering is the fairly reasonable conclusion that, had Mr McCreevy left well alone, there might have been a soft landing for the housing sector. Prices were rising at an annualised rate of only three per cent a year, which might well have cooled the builders' ardour. No reputable analysis found any great over-valuation of Irish houses before 2004.
It would have been more difficult to curb the commercial property boom. But, if ministers did not wish to disrupt the building industry "unneccessarily," there is no reason to suppose they would have tried. If, as a result, we were relying on the banks to do the disrupting, it is no wonder it did not happen.
It is also worth remembering that we taxpayers, along with the banks and developers, made enormous sums of money from the three-year bubble. Despite tax cuts and current spending increases of over 30 per cent, the surplus on day-to-day spending came to €23bn.
We are passive investors of course, and may not be too happy about how our windfall was spent. We are also locked in and could not sell the Celtic Bubble short and get out. Now we must count our losses; €3bn due to be taken out of the system next year, and a permanent €120m a year to service the €25bn extra borrowing over the current two years.
One suspects that this Budget will be a slow burner. The tax increases may seem quite modest after all the apocalyptic talk. But much of the capital programme will be postponed indefinitely. Worse, unless there are urgent sweeping changes to the way public services are delivered, what looks like being a huge cut in public spending will mean a gradual -- or maybe not so gradual -- decline in the quality of those services.
So look behind Wednesday's headlines for any sign of plans to maintain and improve public services without any increases in real resources.
Look even more for any sign of plans to prevent politicians presiding over another unsustainable boom in future. We have had three in the past 35 years. Even if we get through this bust with our membership of the euro intact (by no means a certainty) we probably could not survive another such episode.
- Brendan Keenan
