Thursday 19 September 2019

Donohoe should assume the worst when preparing for Budget

Finance Minister Paschal Donohoe. Photo: Gareth Chaney/Collins Dublin
Finance Minister Paschal Donohoe. Photo: Gareth Chaney/Collins Dublin
Richard Curran

Richard Curran

Finance Minister Paschal Donohoe has some tricky decisions to make ahead of next month's Budget. Budget calls are always tricky. This time is different as Brexit looms large. So too does a possible general election here.

There has been a strong feeling that if the direction and nature of Brexit became a little clearer, there would be a need to clear the political air in Ireland too.

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So should Donohoe presume the worst and do very little by way of spending increases or tax cuts, or should he try to do something small for everybody with an eye to a more stable economic picture and a possible election?

This should of course be a no-brainer. Regardless of the madness taking place in Westminster (and soon to visit every British town and city with a general election), common sense suggests he should not engage in any kind of meaningful tax cuts. Equally, Government spending has to be kept under control, especially with so much wider international uncertainty.

The August exchequer figures put some of these issues in perspective. Ireland has been the fastest growing economy in the eurozone for several years. Benign oil prices, cheap interest rates and a cheap euro fuelled a very solid recovery.

But instead of bagging any of this money for a real rainy day, Government spending has been allowed to go up quite dramatically. The State took in €2.6bn more in tax in the first eight months of 2019 than it did the previous year. Yet, we still managed to run up an exchequer deficit of €625m. It isn't a huge deficit by any means, but it shouldn't really be there at all.

The cost of running the country through total expenditure in the year to August was €36.4bn. Three years ago, expenditure during the same eight months was €32.1bn, or €4.3bn less.

That is equal to €82m more per week in expenditure than in 2016.

Yes, the exchequer tax receipts are ahead of profile. Yes, spending has been kept under a level of control relative to profile. But we have yet to see whether there will be another health spending overrun and whether a crash out Brexit will cause serious economic damage.

The growth in tax receipts has been fuelled to a worrying degree by the Corporation Tax take. So far this year Corporation Tax receipts amounted to €4.9bn. This was €314m ahead of profile. That is all well and good depending on what is done with the money. Where would the exchequer finances be if Corporation Tax receipts had not taken off into the stratosphere as they did a few years ago?

The scope for Budget tax cuts and spending increases is very tight. Take away the increased spending already accounted for and there is just €700m left for additional spending increases and tax cuts.

Donohoe could put the squeeze on by tax-raising measures on excise on booze or cutting tax relief on pension contributions to help fund a more generous income tax cuts package.

But he can only tinker around the edges. Widening the tax bands by €1,000 would cost €216m. Bringing the self-employed tax credit in line with PAYE workers would cost another €35m.

The economy does not need a consumer stimulus. We have full employment and solid consumer spending. Why throw on more fuel?

The minister has to have something to announce when he takes to his feet next month on Budget day. Having a long list of tiny tinkering measures might not do much for anybody but it has become the norm on Budget day since the recovery began.

Public expenditure is where the Government has to be most careful. The Government is asking businesses to assume the worst on Brexit. It should do the same.

Greencore won't want to be meat in Coltrane sandwich

Greencore chief executive Patrick Coveney must be wondering about what New York hedge fund Coltrane Asset Management is up to. The fund has built up a 3pc stake in the sandwich maker and it has a track record of being an "activist" shareholder.

But what might it get "activist" about? Surely the best time for an activist shareholder at Greencore was when its US business was seriously underperforming and the company needed to reverse out of North America.

Coveney did exactly that and managed to land a very good $1.1bn price for the sale of the US business. Around half the proceeds were used to keep the shareholders sweet by returning it to them. Another chunk helped to cut debt.

Coltrane has been activist by shorting a number of stocks in the UK and the US. It has also been pretty hard-nosed about others. The company tipped outsourcer Interserve into a pre-pack administration earlier this year when it blocked a debt-for-equity swap deal with its lenders.

It is also reported to have made £4m (€4.4m) betting against the shares in another UK contractor, Carillion, before its collapse last year.

A few things suggest Greencore management might be right in saying "nothing to see here". Coltrane doesn't always short stocks or block equity swaps. It also takes up positions in stocks where it sees value. It has around 8pc of Cairn Homes. Its Greencore punt has come through CFDs and began more than a year ago.

Perhaps as a UK-only play, Greencore might be ripe for a takeover, especially if the share price comes down on the back of a post-Brexit recession. But Coveney has rightly pointed out that it offers its products in all price points and, well, 'people have to eat'. And while the market is tough, the company's balance sheet allows for further acquisitions.

Greencore shares gained close to 8pc during the week and were trading around 225p. They were as low as 162p last December.

One thing Coltrane might have something to say about is senior management's remuneration. Coveney has attracted a lot of negative attention in the past for a hefty remuneration package which totalled more than £3m just a few years ago.

In 2018 he earned a total package of £1.25m. But Greencore is a much smaller business now. It reported revenues of £734.9m for the first half of 2019. This was without the £500m of revenues the former US business would have chucked in the previous year. The level of management remuneration at Greencore after the sale of the US business won't be public until next year.

There is a number that might interest Coltrane.

Counting Duffy's cut

When it comes to remuneration, bankers really know how to get paid well. Unless of course you are chief executive of AIB where the Government pay cap still won't let you earn more than €500,000 per year.

Former AIB chief executive David Duffy was in the eye of the storm as shares in CYBG tumbled by 23pc during the week. The fall was triggered by higher than expected costs associated with the PPI scandal there.

Duffy really landed on his feet when he left AIB to join the bank as it de-merged from NAB back in 2015. He received £318,000 in salary in the first four months of the job as well as 768,000 conditional shares to "recognise the executive directors' contribution to the success of the de-merger".

He hasn't looked back since, with total remuneration in 2016 of £2m, 2017 of £2m and a further £1.8m in 2018.

In fact he has earned around €7.8m since he joined. His total earnings in the same period if he had stayed at AIB would have been €2m.

AIB chief executive Colin Hunt has pointed out that the effective ban on bank bonuses is a bigger restriction than the pay cap. He may be right but it doesn't look like changing any time soon.

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