Briefing notes given by senior Government officials to the reappointed Minister for Finance, Michael Noonan, provide a window into the thinking of this key department and the issues they believe are facing the economy. They highlight clearly the key questions facing the Minister.
1 Will economic growth hold up?
All the economic indicators have been rosy in recent months, with unemployment falling and strong tax returns. The Minister is warned, however, that “internationally, there are very real concerns regarding prospects for the global economy”.
It adds: “Risks to the central forecast are firmly tilted to the downside, especially for the second half of this year and into next year.” This means that, in the department’s view, growth rates are more likely to be below forecast than above.
The notes refer to the familiar tale of global economies concerns: fears about China and emerging markets, slow growth in Europe. The threat of Brexit adds to uncertainty. In short, since the Budget was presented last October, the risks have increased significantly. Continued growth is necessary to underpin just about everything the Government plans, and to clear the way for Noonan to have some leeway in the next budget.
It is also vital to help the Government stay within EU rules on the pace at which our public finances must be improved. Already, the document warns, Ireland is at risk of breaching one rule, which constrains the rate at which spending can increase this year. And that was written before the latest announcement that more cash was to go into health and justice.
2 How can the Government deliver on promises of tax reform?
Fine Gael’s general election campaign promised cuts in the USC and a lower tax burden. But the programme for government pulled back on these promises and has committed to using two-thirds of spare resources for higher spending. It said the Minister will present a medium-term tax strategy document to the Oireachtas “by July”. Central to this will be securing a stable tax base for the future. (Last year, 70 per cent of the over-performance in overall tax was driven by corporate tax.)
The briefing document says the Revenue Commissioners’ “initial view last October” was that this was sustainable and based on trading profits, but it also says this is under “constant review”. The 2016 forecast looks reasonably conservative. But does this talk of a review suggest some concern about the outlook for this key tax?
Beyond this, the department argues that, while headline figures comparing the level of tax to GDP show that Ireland is a low-tax economy, it is brought closer to the average when adjustment is made for the impact of multinational activity on our GDP figures.
However, the Government has promised to cut taxes for low and middle income earners. So some nudging down in the USC rate can be expected, with measures via the PAYE tax credit to limit the benefit for higher earners. But with little to play with, will the taxpayer feel the difference?
Noonan must also find money to meet commitments to cut tax for the self-employed and to reduce inheritance tax. As for promised spending measures, that is an issue for Noonan’s colleague, Minister for Public Spending Pascal Donohue.
3 What will the EU Commission decide on Apple, and how should the Government react?
Almost three years after the European Commission began looking into Apple’s tax affairs in Ireland, officials at the Department of Finance have told Noonan they expect Brussels to make a final decision on the case soon.
Initial findings by the commission in 2014 said that Apple’s Irish tax arrangements were improperly designed to give the iPhone and iPad maker a financial advantage in exchange for jobs in the country. In a worst-case scenario, JP Morgan analysts estimate Apple could end up having to pay a $19 billion (€16.7 billion) in back taxes, though the expectation is that any negative ruling would end up with a much smaller bill.
Either way, Noonan would be left with things to ponder, including: whether to stick with his line that any ruling against Ireland would be appealed to the EU Court of Justice; and what to do with “large recovery amounts pending the outcome of an appeal”.
In the past, Apple has said it doesn’t use “tax gimmicks”, while the Government has repeatedly said that no State-aid rules were breached in this case.
4 What are the state’s options for its share in PTSB?
Permanent TSB shareholders have had a pretty torrid time since the bank and the Government sold €500 million worth of shares a year ago, as PTSB returned to the main stock market for the first time since the height of the crisis.
The shares, currently trading at less than half of the issued €4.50 price, have come under increasing pressure since the new Government was formed. Analysts see PTSB as particularly exposed to the political pressures that all lenders are under to cut mortgage rates, and the risk of higher regulatory fees.
As officials currently review how an annual €150 million banking levy will be calculated as it extends to 2021, the notes to Noonan warn that any increase for PTSB, which currently pays €27 million every year, may threaten the bank’s EU State-aid restructuring plan. Or worse: “render the bank unviable”.
Indeed, they suggest the bank’s long- term viability may be best served by a merger with another bank.
The department has been down this road before. In the early days of the crisis, officials had weighed merging the bank with some other bailed-out lenders to form a “third force”.
Two years ago, Royal Bank of Scotland executives discussed combining Ulster Bank with PTSB with Merrion Street mandarins. While RBS subsequently decided to retain Ulster Bank, Bloomberg reported last year that it could revisit its stance within two to three years.
Elsewhere, Belgian banking group KBC is set to decide within the next year on the future of its Irish unit. A sale may result if the bank can’t prove it can grow as an “organically profitable bank”, or build a captive insurance business in Ireland.
5 What about the State’s other bank shares?
AIB’s long-awaited return to the main stock markets is all but delayed to the first quarter of next year. Department officials are telling Noonan that the earliest initial public offering opportunity at this stage is the first quarter of 2017.
The next step is to appoint a syndicate of investment banks to manage a sale for the State, according to the notes. Goldman Sachs, Deutsche Bank and Credit Suisse are among a 12-member advisory panel, drawn up in 2014, that the Department can choose from for help with an AIB share sale.
The briefing notes repeat that the State still aims to recover the €21 billion it injected into AIB during the financial crisis. But they also note the bank’s value has fallen “well below” the €11.7 billion estimated late last year, to €9 billion-€10 billion.
Getting the timing right on share sales will be critical to clawing back AIB’s aid. Department officials estimate it could take as long as 15 years, depending on market conditions.
Meanwhile, the value of Bank of Ireland, in which taxpayers hold a residual 14 per cent stake, has fallen by about a quarter so far this year. Analysts at Investec this week suggested the State will seek to sell down this holding next year.
While much of the briefing notes on a strategy for selling Bank of Ireland shares were redacted, Noonan’s officials appear to err on the side of an “orderly trading plan” to drip-feed the shares into the market. This is similar to how the UK has cut its Lloyds Banking Group interest since 2014.
The alternative, they say, is a large block sale of the stake, which is currently worth about €1.13 billion.
6 What can the Government do about the troubled insurance sector?
Central Statistics Office data out on Thursday show that motor insurance premiums are rising at an annual rate of 35 per cent. So it’s little wonder that the woes of the industry are as high up on Noonan’s in-tray as they were when the previous government was winding down.
Irish insurers are seeking to return to profit, having been loss-making in recent times amid a surge in court-ordered injury awards and as years of mispricing risk finally caught up with the industry. According to Insurance Ireland, whiplash awards account for up to 80 per cent of Irish motor claims and average €15,000 per case, compared with €5,000 in the UK and €3,000 in France and Spain.
The notes say that both Noonan and the Department of Transport, led by Shane Ross, should have received initial recommendations at the end of April following a review of rising motor insurance compensation.
The work will feed into a wider review of policy in the insurance sector, which the department is currently undertaking in consultation with the Central Bank and other areas of Government.
The pressure increased this week as Fianna Fáil tabled a motion demanding urgent action to rein in soaring insurance costs. The party’s finance spokesman, Michael McGrath, has put forward a 12-point plan on the issue, including the publication for a “realistic” Book of Quantum, a compensation guide for awards.
The guide hasn’t been updated since the Personal Injuries Assessment Board was set up more than a decade ago.
7 What is the best way to wind up the National Asset Management Agency?
Nama has said for some time that it intends, by 2018, to redeem all of the €30.2 billion of senior Government- backed bonds used to pay banks for risky commercial property loans during the financial crisis.
The notes, however, state officially for the first time that Nama also intends to repay about €1.6 billion in subordinated debt, in March 2020. This is when it first has the right, but not the obligation, to redeem them.
They say that repayment of all of the debt gives “a level of flexibility on how Nama’s surplus is realised and transferred to the State”.
Nama raised its lifetime profit target on Wednesday to €2.3 billion from €2 billion and Noonan told reporters that some of the money could find its way into a Government “rainy day fund”, to cushion itself against future economic and financial market shocks.
Neither the residential construction projects that Nama is currently funding nor its involvement in developing a large swathe of Dublin’s docklands will be completed and sold by the end of 2020, according to the notes.
But by then, however, the agency “will hold a portfolio of valuable and residential exposures at various stages of completion”. The realisation of these needs to be subject to “ongoing consideration”.
Again, some of the notes around this have been redacted.
8 What about the unpopular Central Bank mortgage rules?
Officials highlighted that the Minister and the department “can exercise some degree of soft power in relation to the Central Bank”.
However, the deputy governor at the Dame Street institution, Sharon Donnery, signalled on Thursday that the regulator was not up for easing mortgage lending caps. These were introduced last year against pushback from a number of parties, including the department.
While the limits are currently up for review, “the evidence threshold to justify adjustments to these rules is significant,” Donnery said.
Meanwhile, Noonan’s staff used the briefing notes to take a swipe at the Central Bank’s rising costs base as it seeks to make the financial industry pay for 100 per cent of the expense of regulating it, from 50 per cent currently.
“The department would see validity to some of the concerns raised [from financial institutions] in relation to the ever increasing cost base of the bank,” the notes said.
