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Archive for March 12th, 2011

As it’s the weekend and to mark St Patrick’s Day during the week ahead, here is fairy tale in the old tradition which might have some relevance to the present day.

Once upon a time in a kingdom far, far away, an awful misfortune had befallen the country – the economy had tanked, there was rampant unemployment and people were emigrating in droves to escape the hardship. The king of this land was a worried man and wondered what he could do to restore his kingdom’s good fortune. Finally the thought came to him that he might organise a grand competition for ideas to solve the economic crisis.

And so his messengers went forth and proclaimed a great competition. And on the appointed day, the castle was packed with the great and good of the land as well as onlookers hoping to hear the idea that might deliver salvation. But alas as the king sat on this throne, and as a parade of the wisest men and women in the land came forth and set out their ideas, none was greeted with enthusiasm or any confidence of success. “Windbags exuding hot air” said the king privately to himself and he grew weary.

And as the day drew to a close, as the last competitor was pitching yet another uninspiring idea, a mysterious stranger entered the great hall. With a beard long and white, bent over with age with a large walking stick he slowly made his way towards the king. And beside him strode the most beautiful young maiden that anyone could remember seeing – graceful and noble, she floated alongside the old man. The pair came to a halt before the king’s throne, in the middle of the crowd which was now straining to study this strange pair, some noticed that the young maiden carried a small box, the size of a jewellery box, in one hand. Crafted from a plain wood, the box had a shiny strip of metal which seemed to keep the box sealed.

The king leant forward in his throne to better hear what this old man had to say. The old man, with the maiden a couple of paces behind, made a grand effort and bowed deeply before the king. Clearing his throat the stranger started “Your majesty most high, I humbly come before you today with my modest proposal to banish the ills that have beset your land”

The king expected yet another fantastical scheme but before a weary exhaustion had a chance to return the old man continued “This will solve all” as he took the box from what now seemed to be his assistant, and held it aloft, the metal strip catching the last rays of the setting sun streaming through the castle windows.

“And what is that?” asked the king

“It is” said the stranger “salvation from all your woes.”

“What does it do?” asked the king

“It will bring back wealth to your kingdom my lord, give employment and put a stop to the emigration of your young”

“But what does it do precisely?” repeated the king, slightly peeved that the old man was ignoring his question

“That you must not ask” replied the stranger

“What nonsense” said the king “I command you to answer”

“I cannot, my lord but I promise you upon the most precious of lives that this box will do as I say and restore the fortunes of the kingdom”

“You promise on your precious life” replied the king derisively “why, you’re just an old man, of what value is your life to anyone?”

“Not my life, my lord” and taking the hand of his assistant “but the most precious of lives – that of my only daughter” At which, the young maiden curtsied before the king.

And seeing the sincerity of the old man’s promise, the king commanded him continue to explain how the box would restore the kingdom’s fortunes. The old man explained that each household was to be provided with such a box and would pay five groats for it and thereafter each month, the household was to pay one groat to one of the king’s men who would check the box wasn’t opened. The boxes were to be sealed with the king’s own wax seal before being delivered to houses and it was that seal that was not to be broken under pain of death.

The old man went on to explain that he should be provided with private apartments and workshop in the castle grounds, that thousands would be employed in cutting down trees, milling the timber and constructing the plain boxes. The boxes were to be delivered to the old man at his workshop each evening where he would finish the construction of the box by sealing it with a metal strip screwed into the box and applying the king’s wax seal to the lid to prevent the box being tampered with or opened. And each morning the completed boxes would be collected and distributed throughout the kingdom.

The old man concluded “Follow my instructions and I assure you, on my daughter’s life, that the kingdom’s prosperity will be restored”

“But what does the box contain?” asked the king “in what way will it restore prosperity?”

“My lord, that is my secret but I promise, on the life of my only daughter, that if you follow my plan, your fortunes will be restored. And all I will ask is one half  of your new wealth”

The king was unhappy at not understanding the plan but as his eyes moved from  his immense bodyguard with sharpened scimitar to the tender neck of the young maiden and finally into the eyes of the old man, he concluded “Very well, old man, I will follow your plan as no father would place the life of their only daughter in mortal danger but this I promise you, if in six months your plan has not restored my kingdom’s fortunes, your daughter shall feel the blade of my bodyguard’s scimitar upon her neck”

The king concluded “Go now with my men and they will provide you will all you need” The old man bowed deeply and as he withdrew from the great hall with more than a little pep in his step despite his great age, the king called after him “Old man, what is your name?”, With a glint in his eye the old man replied “I am Nagoh”

And so Nagoh and his daughter were provided with apartments and a workshop in the castle where they lived apart from their host. And cadres of men were newly employed to chop down trees and to mill the wood so that the boxes might be constructed by an army of carpenters. And each evening the boxes were delivered to the private quarters of Nogah who laboured with his daughter through the night, and the next morning the boxes were ready with a metal strip holding them closed and the king’s seal applied to prevent the box being opened.

The king decreed that every house in the land was to possess a box for which it would pay five groats, that the box was not to be opened on pain of death and that each month one of the king’s men was to inspect the seal of the box and collect one groat from the household. Of course the households were not very happy with the prospect of handing over five groats for a box whose contents were a mystery, but their king assured them that the box would restore their fortunes, that their sons and daughters would return from overseas and that the kingdom would again be prosperous. So they submitted to the scheme, took possession of their box which they guarded with their lives, parted with five groats and each month paid a further groat when the king’s men came to check the seal was not broken.

Thus the scheme was put into effect. To be sure, at the beginning there was much doubt that the boxes could restore the kingdom’s fortunes. Of course not even the workers knew the contents of the box, there was no noise when the completed box was shaken to give clues and because the workers did not know how much the metal strip weighed they could not guess the additional weight of any contents which might have been affixed to the interior of the box by Nagoh and his only daughter.

But as the days went on, the king could see that the five groats that each household paid was used to pay the army of workers who in turn spent their earnings in the kingdom which circulated the income and wealth. Indeed the king took a tax from the earnings so his wealth too increased and before long many remarked at how opulent the castle looked and how all the nobles wore marvellous clothes and ate the best food and drank the finest wines. But the wealth was by no means confined to the king and his nobles, even the most humble peasant saw his lot improved by the extra spending in the kingdom.

And so the day came to pass when the last box was delivered to the last home in the land, the king came to Nagoh’s workshop. “Nagoh, truly you have delivered what you promised to deliver. The fortunes of my kingdom have been restored, parents have been reunited with their sons and daughters returning from across the sea. And it is all because of you and your wondrous boxes. Your work now is complete” and the king handed over a coffer of gold representing one half of his wealth. And in his turn Nagoh thanked the king and said that now his work was done, he would return to his home. His home he told the king was “beyond the clouds” which meant a great distance away in a foreign land. And the next morning when the king awoke, he found that Nagoh had left with his daughter during the night.

And so life continued in the kingdom. Of course as soon as the initial five groats had been spent by the king there was less income from the monthly groat handed over by each household. And as time went by, households saw less and less evidence of the new prosperity in the kingdom. The king too was becoming worried again as he struggled to understand why the box had brought good fortune that was rapidly ebbing away. With less wealth circulating in the economy, people again felt the hand of misfortune upon their shoulders and again sons and daughters left their homes to seek better lives overseas.

The king was dejected. If he could only find Nagoh and his daughter he would have his revenge, because by now he felt he had been made a fool, cheated out of his wealth by the old man who had promised to save the fortunes of the kingdom, on the life of his only daughter. In a fit of rage one night he stormed into the old apartments of Nagoh and his daughter who had long-since departed. He searched for any clues which might help him find the pair but the apartments were bare and it seemed they had left nothing behind. At last in an old armoire, the king found something and a discovery which froze him. There was a walking stick which he recognised immediately as Nagoh’s and a wig of white hair and a long flowing beard and something else. An unsealed box. Although the metal strip was placed atop the box it had not been screwed into place. Gingerly the king picked up the box and slowly lifted the lid.

The box was completely empty. “What black magic is this” cried the king as he drew back in fear from the box, still clutching the metal strip in his frozen hands. And he retreated in fear to the corner of the room not wanting to take his eye off the empty box, his hand felt an irregularity on the metal strip and slowly he raised it to examine it more closely and saw that there was engraving there that he had not seen before, and squinting in the candlelight of the chamber he made out the words which made it all make sense  – “water meter”

The above is inspired by new Minister for the Environment Phil (Nagoh) Hogan’s plans to install a water meter in every home in the land for which we will need pay far more than five groats. Ireland is one of the wettest countries in the world (precipitation multiplied by land area divided by population) and whilst accepting that there are some variable costs in the treatment and delivery of water these costs are completely dwarfed by the proposed scheme which will see the manufacture and fitting of a box in every home in the land which is practically next to useless. It may well generate some income for installers and the government but it will come directly out of the pockets of households. Sadly the proposed scheme is more than a fairy tale and implementation studies are likely to start in the coming weeks.

UPDATE: 6th June, 2011. Nahoh, sorry Minister for the Environment, Community and Local Government Phil Hogan sets out his position with respect to water meters in the Irish Times. Much of what is written seems like tosh which can’t disguise the fact that water charges are primarily about raising revenue. However there are some facts and statistics worth recording here : there are 34 separate local authorities with over 950 public supplies producing some 1,600 million litres of water daily through a network of 15,000 miles (25,000km) of pipes. In Denmark, a reduction of 12.6 per cent in household consumption was achieved following the introduction of water meters. Wow, so if Ireland followed Denmark, then 1,400 million litres of water would flow daily as opposed to 1,600 million?

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Like that old chestnut of whether or not men and women can truly just be friends, or if ultimately sexual instincts will get in the way, it seems that France and Germany have finally abandoned any pretence of just wanting a platonic relationship as they make a beeline for our treasured corporate tax rate and base.

The reporting this morning is that the EU summit in Brussels yesterday, which broke up in the early hours this morning, has concluded with newly-elected Taoiseach, Enda Kenny flying back to Dublin empty-handed. His hopes for a reduction of 1% in the 5.7-6.1% interest rate charged on bailout funds from the EU were met with a quid pro quo demand for a change to either Ireland’s corporate tax rate of 12.5% or agreement to a common definition of tax base which would exclude income generated outside Ireland. Enda said “no” but Angela Merkel and Nicolas Sarkozy persisted. But for Enda, “no means no”. That said, he was apparently left in no doubt that if this position persisted then there would be no reduction of 1% in the EU element of the bailout which could save the country €400m a year at most (1% of €40bn – remember the IMF element of the bailout of €22.5bn is unaffected and ~€5bn is in unilateral lending and of course Ireland is contributing €17.5bn of her own funds to the bailout). The matter will be next addressed at the EU summit on 24/25th March and it is understood that the impasse will need be confronted then.

Looking at our corporate tax arrangements from the German and French perspectives, it is hard not to sympathise as they see companies with extensive trading operations in their own countries, Google and Facebook for example, siphon off profits to low-tax Ireland which denies their national exchequers of revenues. Ireland sees the low corporate tax rate and the present arrangements for assessing the base as key to the country’s success in attracting and retaining foreign direct investment and that Ireland’s corporate tax “brand” is so vital to the country that we will not even tinker with the arrangements in case such tinkerings are seen as the thin end of the wedge. To change our corporate tax arrangements for an annual €400m reduction in EU bailout interest (and remember as we pay off the principal, that will reduce) is seen as suicidally dumb here.

Elsewhere our friends in Greece, who were the first recipients of bailout funding in the present crisis, have come away with a deal – of sorts. The deal has come at a high price that will be deeply unpopular in Greece – the country must sell off €50bn of state-owned assets by 2015 though in return for that, the term for repaying its bailout is increased from 4.5 to 7.5 years and the interest rate on its EU lending is reduced by 1%, reportedly to just under 5% (UPDATE: 13th March, 2011. The press is now reporting the term to have increased from 3 to 7.5 years and interest rate reduced from an average of 5.2% to 4.2%). The Greek press reporting of yesterday’s talks is of note because it claims that “Greece is on her own” with Portugal and Spain uninterested in forming a united front with Greece to strive for better terms. Spain and, in particular, Portugal are behaving at present as if their own shit doesn’t smell but it seems likely that in days if not weeks Portugal will need some assistance. Spain’s problems will take longer to crystallise. The Greek press is claiming “an alliance with the new Irish Prime Minister Enda Kenny [was not, according to Greek sources] said to be forthcoming”. It is bizarre in the extreme as to why Enda Kenny’s Tanaiste (deputy prime minister) from his coalition partner, the Irish Labour party, Eamon Gilmore doesn’t use his membership of the European Socialists (which includes the prime ministers of Portugal, Greece and Spain) to develop a strong united voice. It should be noted that a key development from yesterday’s talks was the effective enlargement of the EU bailout fund which reminds us that Ireland and Greece may not be the last recipients of aid.

What now for Enda? He’s tried “please” in Helsinki last week and “pretty please” in Brussels yesterday. Heck, he even took a €14,000 reduction in salary on the eve of the talks in Brussels to demonstrate his resolve for solving our economic crisis. If our corporate tax arrangements are to remain intact, then we will need yet further austerity or debt restructuring or a change to the bailout terms (interest rate, term for repayment, sweeteners). We can expect our creditors to squeeze us until the pips squeak and looking in at the country at present, there is little evidence of squeaking so why would our creditors accept debt restructuring just yet? Sure, there is high unemployment, high personal debt, emigration, negative equity, higher taxes but on the other hand we have some of the best paid public servants (Enda still earns €28,000 more than David Cameron), relatively generous social security and little outward signs of public unrest. Our creditors would have to be idiots in the present circumstances to concede debt restructuring so early. And so back to Enda, the ball is in your court, what are you going to do?

UPDATE: 13th March, 2011. The BBC is reporting, citing “Treasury sources”, that plans are afoot to reduce the main corporation tax rate in Northern Ireland from its present rate of 28% (27% from 1st April 2011). There is no word on what the new rate will be. The new rate will be of interest across the border where the corporation tax rate of 12.5% is perceived to be under attack. The Azores principle requires regional variations in tax rates in a single EU country to be self-sustaining, in other words Northern Ireland must balance its books without depending on a central handout from Westminster. That will be a challenge.

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