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Archive for November 4th, 2011

“Ideally, the greater the level of detail that can be decided upon and announced in terms of the overall fiscal adjustment package, the better. This would help to remove uncertainty for domestic households and firms and contribute to confidence in the adjustment process overall. It could also help to limit the effects of higher precautionary savings by clarifying the impact of the overall fiscal adjustment package on households and firms, although the difficulties of identifying and agreeing the detailed adjustments cannot be underestimated.” Central Bank of Ireland Quarterly Bulletin July 2011

In response to the central bank’s calls for greater clarity on the future direction of the fiscal adjustment – narrowing and hopefully eliminating the difference between what the Government takes in with taxes and, on the other hand, spends – Minister for Finance, Michael Noonan undertook to publish plans for the next three years setting out in “as much detail as possible” where the axe will fall in terms of cuts and where additional taxes and levies will be imposed. He told the Dail in September 2011 that the plan would be published in October 2011. All fine and dandy so far, and it is commendable that the Government would set out its plans so as to give clarity to society which might then be able to plan its spending with more confidence which might then generate domestic-focussed growth in the economy.

But it seems the good intentions have become corrupted. Firstly the plan wasn’t published in October 2011, and the cynical amongst you might suggest this was because the Government wanted to avoid awkward questions on 2nd November 2011 when it repaid €730m to Anglo unsecured unguaranteed bondholders – the scenes in the Dail on Wednesday were angry enough with raised voices and walkouts, imagine how much worse they would have been if we had a fresh document setting out imminent new taxes and cuts.

And secondly, in the plan published this afternoon by the Department of Finance, it seems that there is precious little detail that might allow anyone in society plan their economic activity with any confidence. If you were expecting a list of new taxes, or areas which might see increased taxation, or new levies you will be disappointed. All we know is that there will be €1.6bn of new taxation in 2012, and an additional €1.25bn in 2013 and an additional €1.1bn in 2014 and an additional €0.7bn in 2015, in other words compared with today there will be €4.7bn of new taxes being taken out of the economy in 2015 – that’s one heck of an overall increase to an economy that today takes in about €30bn per annum in taxes.

Unfortunately today’s plan provides very little sign-posting of the sources of new taxes and levies. Here’s what the document says:

“Therefore, it is the Government’s objective not to make any further substantial changes in income tax in Budget 2012. This will require that other areas of taxation deliver the revenue increase consistent with the overall budgetary targets.

Income Tax (including the USC) now accounts for 40% of Exchequer tax receipts. Maintaining the current bands, credits and rates in the years 2013-2015 will be dependent on making progress on expenditure reductions and tax changes in other tax areas to ensure that the overall budgetary targets for the period are met.

Proposals in the area of VAT, excise duties and carbon tax are being examined to see how indirect taxes can assist the Government in meeting commitments under the EU/IMF Programme. This will be done in the context of the Programme for Government commitment that any increase in VAT will limit the standard rate of VAT to 23%. In addition, carbon taxes and excise duties on energy products are being examined with a view to protecting revenues, while encouraging behavioural change and reducing our greenhouse gas emissions”

So how clear are you about the new taxes and levies? Although income tax bands and rates might not change in 2012, what about allowances? Will you need contribute more to your pension to offset any reduction in tax allowances on pension contributions. Significantly there is nothing about social welfare so will you need plan for a reduction in childrens allowance?

I cannot see how, by any standard, there is sufficient clarity given in today’s publication to engender confidence to plan for economic activity, the confidence the central bank had in mind when it made its recommendation in July. And if you were expecting to find out where the axe would fall in cuts to the public sector, all we really get today is a roadmap which says that on Thursday next 10th November, there will be some more information on capital spending published and the following Thursday 17th November there will be a document which will set out “an ambitious agenda of public service wide reform and re-structuring measures”. Remember there was supposed to have been a Comprehensive Spending Review completed in September (yes, two months ago) which set out where the cuts would fall in the public sector.

So all in all, this document today does not do what was called for by the central bank, and represents another failure by the Department of Finance, in particular, to help the economy recover by providing clarity to the direction the Government intends taking with policy changes. It has not been a good week for the Department of Finance with the uncovering of a €3.6bn error in the national accounts, and an underwhelming performance at the Committee of Public Accounts which painted a picture of management/communication dysfunction.

Elsewhere the document today shows a reduction in the estimate for GDP growth in 2012 to 1.6% (compared with 2.5% in the April 2011 forecast) and halves GNP growth in 2012 to 1%, mostly on the back of greater economic uncertainty in our key markets, the document doesn’t accept the recent recommendation from the newly-formed Fiscal Advisory Council to deliver a €4bn adjustment next year and to generally accelerate the fiscal adjustment, preferring instead to make a €3.8bn adjustment next year on the basis that this may jeopardize growth; Interestingly the DoF is still projecting a debt:GDP peaking at 118% in 2013, despite uncovering the €3.6bn double-counting error in the last week.

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Property power-house and NAMA valuation panel member, CBRE has issued its twice-monthly report on the commercial property market in Ireland, with a footnote on London and Belfast. The 6-page report is available here (and the previous report in September 2011 is available here) so it’s not an epic read, but here are a few observations from the report which you might find surprising

(1) Letting activity in the Dublin office market is relatively buoyant. Tenants are taking advantage of lower prices to move to better value accommodation.

(2) Rumours of imminent shortages of Grade A office accommodation in central Dublin might be premature as CBRE report “while we have been eluding (sic) to an emerging scarcity of Grade A buildings of a certain size in Dublin 2/4 for some time now, it is now evident that this will be alleviated to some extent by modern buildings being vacated and coming back on the market to let”

(3) Rents (headline) are still declining in three of the four Dublin office markets but are supposedly remaining at €323 psm (that’s €30 psf in old money) in the centre. There isn’t very much in the report on inducements given to tenants which might reduce the headline rate but two recent central Dublin transactions reported in the Irish Times – US company “Engine Yard” renting space at The Warehouse on Barrow Street and UK company AA Hamilton College renting space on St Stephen’s Green – suggest actual central Dublin rates are €20 psf.

(4) Retail rents seem be flat since the last report, even though the evidence from the long-anticipated Dundrum Town Centre reviews seem to have pointed to a downward trend in retail rents.

(5) There have been only four investment transactions of note signed in Irelandin the first nine months of 2011 – in other words the market is dead – and uncertainty about the Upward Only Rent Review issue is being blamed. There has not been any further official word from Minister Shatter as to when the new Bill will come before the Dail, the last statement on the matter referred to “late October/November”. If I were a betting person I’d say we’ll be lucky to see it in this Dail session which breaks up in mid-December 2011.

(6) Prime yields across all sectors of investment property range from 6.5% to 9.5%. Given the general economic uncertainty, crisis in the EuroZone, absence of credit and the Upward Only Rent Review issue, it might surprise you to see yields still relatively low.

(7) As regards Irish development land CBRE says there is “reasonably strong demand prevailing for lot sizes of less than €2 million in good locations” so there’s life in the old Irish development dog yet

(8) The strong performance of the Irish hotel sector in 2011 is certainly under-reported in the general media, but CBRE reports that on most metrics things are stabilized or picking up for the hotel sector. CBRE is presently marketing the Morrison Hotel in central Dublin on behalf of, ultimately, NAMA.

(9) The London investment market is still buoyant and West End yields are put at 4% and the City at 5% (down from 5.25% in the previous CBRE report). A number of sub-4% transactions are noted in London’s West End – are you hearing that NAMA CEO, Brendan McDonagh, 3% is possible in London and if you remember that a yield is simplistically rent divided by value, both the numerator and denominator can change. It would be very interesting to establish the yield on the Boots store transaction on Oxford Street reported last week where Paddy McKillen was the seller.

(10) Yields in Belfast are going south compared with just two months ago but at 6-8.5% are still stronger than in Dublin. Belfast rents appear to be just over half those in Dublin, so there is probably less downside on Northern rents, but the economic outlook for the North is not great. If the North successfully convinces Westminster and Brussels to allow it reduce its corporate tax rate from 26% to 10% (yes 10% is Peter Robinson’s target, not 12.5% as pertains in the Republic) then we may see far greater convergence of prices between Dublin and Belfast.

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