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Dan White: Forget a giveaway Budget - spend cash to cut house prices


The Central Bank in Dublin

The Central Bank in Dublin

The Central Bank in Dublin

With an election looming and tax revenues soaring, the Government is busy dreaming up new ways of spending the windfall.

Pity the Fiscal Advisory Council (FAC) then - the body of 'wise men' established in the aftermath of the crash to advise the Government and prevent another budgetary blowout.

The recovery from the last bust has hardly begun, but already our politicians are squabbling over how to divvy up the extra tax revenue pouring into the Exchequer.

Meanwhile, the FAC's advice to take it easy is being ignored. It wants the Government to spend no more than an extra €700m next year on tax cuts and higher public spending.

Not on your life. With an election due by next April at the latest - the smart money is now on next October - Finance Minister Michael Noonan is planning to splurge up to €1.5bn in an effort to find favour with the voters.

The Government has already announced plans for a public sector pay deal which will cost the Exchequer an extra €560m in 2016 and 2017. And there is almost certainly more to come.

Speaking yesterday, Taoiseach Enda Kenny dangled the prospect of major cuts in USC in next October's budget. Stand by for a tsunami of further proposals for extra public spending between now and polling day.

With an election to win and the Troika having gone home, the advice of the FAC takes a poor second place to the political imperative. The guiding principle seems to be: win the election first and worry about the mess resulting from the commitments made to win that election afterwards.

Asking politicians to abstain from spending more money at a time when extra tax revenue is pouring into the Exchequer strikes me as being hopelessly optimistic. If the politicians have it then their instinctive response is to spend it: no matter what the FAC might think about it. Which is exactly what is happening now.

Call me a cynic, but I can't help feeling that the best we can hope for is that, if the money is going to be spent, we should at least try to spend it on something worthwhile.

How about trying to do something about soaring house prices, particularly those in Dublin? In a report published this week the OECD, that Paris-based club of rich countries, wrote that Irish property prices were "reminiscent of the bubble period of a decade ago".

After briefly pausing for breath late last year following the Central Bank's publication of tough new mortgage lending rules for the banks, house prices are rising rapidly once again. Dublin house and apartment prices rose by 1.1pc in March and by a further 1pc in April.

So if mortgages are much harder to come by and buyers need to save much larger deposits, why are house prices in the capital still rising at warp speed?

With Dublin's economy growing rapidly and thousands of new jobs being created, the capital needs to build 10,000 new houses and apartments every year to match supply and demand. Last year only a little over 2,000 new housing units were completed. Surprise, surprise - prices and rents are rising at Celtic Tiger era levels.

So why, with prices soaring, aren't more new houses being built in Dublin? A large part of the explanation is that, with the State taking over 40pc of the price of a new house in VAT, local authority development levies and other charges, even developers with good sites and the right planning permission are finding it impossible to make money at current prices.

How about using some of the extra tax revenue being generated by the economic recovery to increase the supply of new houses and bring prices under control? This could be done by reducing the proportion of the price of a new house going to the State - in the UK the taxman takes less than 10pc of the price of a new house.

Not alone would this help cut house prices, the increase in the number of new houses being built would further boost economic activity and tax revenues.

It mightn't be a "self-financing tax cut", but it would certainly come close. More jobs, more houses, more taxes and lower prices. It's all so sensible - which is exactly the reason it will probably never happen.