The Irish Independent reports that families face the prospect of having to shell out an extra €1,000 after a swathe of crippling charges and stealth taxes was announced in yesterday’s Finance Bill.
The combination of mortgage hikes and higher income taxes imposed in the past three Budgets, along with the extra charges announced yesterday, are likely to cost an average family up to €1,000 a year. The bill contained a range of stealth charges proposed just two months after a savage Budget cut public sector pay and reduced social welfare payments. Private sector workers had thought they had largely escaped in the last Budget, but the swingeing measures contained in the Finance Bill will leave all consumers reeling. The bill also proposes an extension of the new carbon tax that will see a tankful of domestic heating oil rise by €43, domestic gas prices rise by an average of €41 a year, and tolls on the M50 and the Dublin Port Tunnel are to rise by one-fifth.
Householders will also lose tax relief on bin collection charges worth €80 a year. This is to go from the end of next year.
Bin collections by local authorities will rise by 13.5pc from July as county councils will have to pay VAT for the first time. Private bin collectors already pay VAT.
Going for a swim in a local authority swimming pool will also be dearer from the summer, as will car parking provided by local authorities and the as will car parking provided by local authorities and the use of a county council gym.
But there is a slight extension in the deadline for removing mortgage interest relief, which means anyone who buys a house in the next two years will still get the tax relief.
The imposition of carbon tax on domestic heating oil from May means it will cost an extra €43 to fill a 1,000-litre oil tank.
Domestic gas charges are set to rise by 6pc from May 1, sending the average household bill up by €41 over a year. The move will partly remove the benefit of recent gas price cuts, as the average annual bill is set to rise from €680 to €721.
The maximum toll for using the Dublin Port Tunnel will shoot up from €10 to €12.10, while the toll on the controversial M50 is set to rise from €3 to €3.63 if the full 21pc VAT charge is imposed by the Government.
The Finance Bill, which will give legal effect to the measures in last December's Budget, will also see the carbon tax eventually extended to coal and peat.
Department of Finance officials were not able to give a firm date for when that part of the tax would be imposed yesterday.
However, they confirmed the cost of most services provided by the country's local authorities was set to soar.
Consumers will have VAT of between 13.5pc and 21pc imposed on services such as bin collections, car parking, swimming pools, the hiring of sports facilities and commercial water provision.
Failure
Local authorities will be forced to add 13.5pc to the charge for bin collections from July.
The European Court of Justice recently found against Ireland over the failure of public bodies to charge VAT for services they provide.
This is because private companies competing against local authorities by providing bin collections and other services are forced to charge VAT.
Imposing VAT on Fingal County Council's bin charges, for example, would see the annual charge rise from €110 to €124.85, while a per-bin charge would rise from €8 to €9 if the full VAT charge is passed on to householders.
However, Department of Finance officials insisted many local authorities may not pass on the full VAT charge to consumers as they will be able to claim back some of the VAT payments.
There was some relief for those paying into a pension when Finance Minister Brian Lenihan reversed a previous move to impose a 1pc levy on pension payments.
The minister does not want to discourage people from investing in pensions.
And mortgage interest relief will last for six months longer than the timeframe announced in December's Budget.
Anyone buying a house for the next two years will now get the relief until the end of 2017.
Fine Gael finance spokesman Richard Bruton said the new taxes would fall hardest on households in Dublin, where VAT will be applied on the East and West Link toll roads and on bin charges by local authorities for the first time.
He said this would cost families up to €350 a year.
Labour's Joan Burton said the measures in the bill would mean extra hardship for most families and households.
The Irish Independent also reports that the Revenue has been given a number of new powers under the Finance Bill ranging from the policing of the black economy to the monitoring of tax compliance at the new National Asset Management Agency (NAMA).
As the Government attempts to beef up its tax take against the backdrop of the economic downturn, the Revenue will play a bigger role in generating incomes.
"This is enhancing the powers of the Revenue Commissioners to ensure everyone pays the correct amount of tax," a spokesperson from the Department of Finance said.
In a bid to clamp down on the black economy, the tax body will be given more information from transport operators in advance of arrival or departure from the country to target the smuggling of goods liable for customs or excise duty.
For example, the maximum fine for smuggling cigarettes into the country has been hiked to €126,960 from the current level of €12,695 under the new bill.
Retailers yesterday said they lost nearly €700m in revenues from tobacco being sold illegally on the black market.
Under section 145 of the Finance Act, Revenue will also be given access to information on tax compliance by NAMA, the body designed to purge the banks of developer loans.
As NAMA prepares to transfer billions of euro in toxic loans to its books, if it becomes aware of any offshore companies or entities in transactions under its scrutiny the body will pass this information on to the Revenue for policing. This will ensure that property deals are correctly handled for tax purposes.
Other powers include the overseeing of the tax treatment of company directors.
The Revenue will ensure that the amount of PAYE tax credit available to individuals is less than the amount they pay under Section 997A of the Taxes Consolidation Act, 1997.
Summons
The body has also been given the authority to serve summons normally reserved for the gardai in relation to tax, excise or stamp duty payments.
In addition, it will oversee the new taxes to be added to the list of those which must be paid before the Revenue can issue a Tax Clearance Certificate including customers and excise duties.
The Revenue will also be given more information from the Taxi Regulator to ensure that tax compliance is adhered to in that sector.
Meanwhile, Section 152 of the bill also sets up a legal framework for judges to pay their voluntary contribution towards the pension levy to the Revenue.
By the end of last month, 30 judges had yet to pay or make arrangements to make voluntary payments.
The Irish Times reports that European Central Bank (ECB) chief Jean-Claude Trichet has urged the Government to remain on “permanent” alert in the face of it economic challenge.
While praising the Government’s efforts to restore order to the public finances, he adopted a cautious response to the suggestion by Minister for Finance Brian Lenihan that the worst was over for Ireland.
He was speaking at ECB headquarters as policy-makers left its main euro zone interest rate unchanged at 1 per cent, saying the central bank expected price stability to be maintained over the medium term.
Although economists believe the central bank may start increasing interest rates from their exceptionally low level near the end of this year, the ECB’s current assessment suggests there is little prospect of any imminent rise.
Mr Trichet expressed confidence in the capacity of the Greek authorities to correct their wayward public finances, adding that the deficit of the euro zone compared favourably with large economies such as the US and Japan.
Without naming any specific countries, however, he said many members of the single currency face “large, sharply rising fiscal imbalances, leading to less favourable medium and long-term interest rates and lower levels of private investment”.
He said there was no scope for complacency when asked if Irish people were right to be sceptical about Mr Lenihan’s assertion that the period of greatest difficulty had passed or whether the Minister was correct.
“We all have to remain alert permanently....But let me also add that the decisions which have been taken by the Irish Government to put the house in order have been very impressive. I take it that they were right, and I take it that this is something which, of course, probably was what the Minister for Finance was alluding to.”
Having warned last month that Greece had no right to expect special treatment from the European authorities, Mr Trichet welcomed the government’s new austerity measures three days ago.
“The ECB governing council approves of the medium-term goal that has been fixed by the government to get back to less than 3 per cent of public finance deficit as a proportion of GDP in 2012.”
Mr Trichet expects the euro area to grow at a moderate pace in 2010. However, he warned that the recovery process was likely to be uneven.
He said that banks which make profits in the current situation should use their surpluses to rebuild their capital base and make credit available. “We do not accept that we have supply constraint in the present period,” he said of the credit market.
“Our message for the banks is very clear. It’s good that you make money. We prefer that you are making money instead of losing money – because when you were losing money it was a drama. But, don’t forget, you have a duty.”
He said this flowed from the efforts of the public authorities to avert a depression and the commitment of taxpayers to banks.
The Irish Times also reports that new laws designed to close a loophole used by multinationals to cut their tax bills could leave Irish companies facing increased compliance costs, one expert warned yesterday.
This year’s Finance Bill introduces provisions that will regulate transfer pricing, a practice used by multinationals to exploit the benefits of countries with low corporate taxes. The new laws will take effect from the beginning of next year.
Transfer pricing is where a branch of a company in a high-tax jurisdiction sells goods at a low or discounted price to a branch in a low-tax location, which then sells them on at a profit, thus cutting its tax bill.
The Republic’s tax code deals with it in only a limited way and the new rules will bring it into line with trading partners such as the EU and US.
The high number of multi-nationals operating in the Republic, allied to its 12.5 per cent corporate tax rate, means trading partners are concerned that companies are using operations here to siphon away revenues from their tax authorities.
However, Turlough Galvin, head of Dublin legal firm Matheson Ormsby Prentice’s tax group, said the new laws could force big domestic companies to shoulder extra compliance costs.
Mr Galvin explained that, under EU law, any member state that introduces transfer pricing laws has to apply them internationally and domestically.
As result of this, he argued that Irish companies with branches in more than one location in the Republic could have to implement transfer pricing policies for transactions between individual branches and subsidiaries, even though they can’t benefit from the practice.
Along with finished goods, transfer pricing can apply to components, patents, services or anything that contributes to a finished product that is then sold on.
The Department of Finance said the new system, based on the market price of the goods in question, would bring the Republic into line with trading partners.
Department officials also stressed that the measure was not designed to raise any revenue.
Tax advisers predicted the provisions would have a limited impact on multinationals, which are key sources of employment and investment in the Republic.
Dan McSwiney, transfer pricing director with accountancy and consultancy firm Ernst Young, said multinationals from countries that already have a regime in place would see little change.
“Many multinationals already have documentation in place to support intercompany pricing arrangements,” he said.
“However, companies must now review all existing arrangements . . . and decide on the need for remedial action if any.”
The American Chamber of Commerce in Ireland, which represents 600 US multinationals that employ 100,000 people in the Republic, welcomed the measure.
The Irish Examiner reports that the governor of the Central Bank was forced into an embarrassing shift in policy last night by deciding to ban all spouse travel after admitting partners of employees clocked up €67,450 in costs on 71 foreign trips.
The average cost of long-haul flights amounted to €4,515.
Patrick Honohan admitted the bank paid for travel of accompanying spouses to business meetings, 62 of which were on European flights, and nine in long-haul in business class.
"I was not aware that the organisation had been covering the cost of so many spouse trips," he said.
"While some of this expenditure could perhaps have been justifiable in the past, the practice does not seem appropriate in present circumstances.
"Accordingly, I have decided that spouse travel will no longer be paid for."
The bank revealed some 2,700 bank trips had been paid for in 2007 and 2008.
Of these, 52 related to the spouses of 35 staff going to 49 meetings where "spouses’ programmes" were held. Some spouses went on more than one trip.
In 2009, 18 spouses of 17 staff travelled to 13 international meetings. The Central Bank and Financial Services Authority of Ireland paid for the travel, it added.
Of the trips, 62 were in Europe, averaging a cost of €435, while the average long-haul cost was €4,515.
Mr Honohan’s office said most of the trips were European Central Bank related.
The policy of accepting foreign invitations reflected Department of Finance 2009 guidelines, it added.
Where a formal spousal programme was provided, spousal expenses were allowed on an exceptional basis, usually once a year, if approved by the director general or chief executive.
Central Bank chiefs are to be hauled before the Public Accounts Committee as part of a probe into how and why the agency funded the spouse trips. The spending watchdog intends to investigate how the trips were funded, how much was spent, who went on the flights and where they flew.
Its chairman Bernard Allen said: "We welcome Governor Honohan’s statement that in future, spouses’ travel will no longer be paid for. We hope that other State bodies will consider following this example and do away with this practice, other than when absolutely necessary. We’ll want to know details referred to in the report. Who was on them and what was the purpose of the visits?"
Mr Allen is to write to Mr Honohan and senior officials will be asked to attend hearings in April. "The legal advice we have is that we have jurisdiction over this as it’s a value for money issue."
The Financial Times reports that Jean-Claude Trichet, European Central Bank president, moved on Thursday to boost confidence in eurozone public finances while keeping up pressure on southern members to bring spiralling deficits under control.
The overall eurozone fiscal deficit compared “very flatteringly” with those in other countries, Mr Trichet said. Financial market had not appreciated “the kind of solidity that the eurozone has”.
Mr Trichet cited International Monetary Fund forecasts showing the US deficit would hit 10 per cent of gross domestic product this year, compared with about 6 per cent in the eurozone. Other industrialised countries would be even higher, he said.
However, amid rising investor nervousness about the risks faced by Spain, Portugal and Greece – where deficits have spiralled way above the eurozone average – Mr Trichet said it was of “paramount importance” that individual countries had clear fiscal “exit strategies”.
Greece won important supportfrom Mr Trichet, who said fresh measures announced this week to boost revenues and cut taxes were “steps in the right direction”.
Admitting it had become the latest “prey” of financial markets, Portugal on Thursday promised to match Greece’s ambitious debt-reduction measures. But markets were unnerved by the prospect of swelling trade union protests against austerity measures in Spain, Portugal and Greece.
The ECB left its main interest rate unchanged at the record low of 1 per cent for a ninth consecutive month. With the bank expecting inflation and economic growth to remain “moderate”, financial markets have not pencilled in any interest rate rise until at least late this year.
However, Mr Trichet hinted strongly that next month’s meeting would see further steps implementing the ECB’s “exit strategy”, under which it is gradually unwinding emergency measures to support financial markets.
In Lisbon, Fernando Teixeira dos Santos, Portugal’s finance minister, said “strong and credible” measures to be presented to the European Commission this month would be “no less ambitious” than the Greek plan to consolidate public finances. The Lisbon government has pledged to cut the budget deficit from last year’s 9.3 per cent of GDP to less than 3 per cent in 2013.
The minister said Portugal had taken over from Greece as the main victim of the “animal spirits” of financial markets. But the concern was unjustified. Portugal’s deficit and public debt, forecast to reach a 20-year high of 85.4 per cent of GDP this year, were lower than in Greece and close to the EU average.
Meanwhile, Spanish labour unions on Thursday threatened massive demonstrations against austerity measures unveiled last week that envision €50bn ($70bn, £45bn) in public spending cuts and savings to 2013. They are also wary
The FT also reports that Portugal moved towards a political crisis on Thursday night as its finance minister appealed to opposition parties not to defeat the minority Socialist government over a regional finance bill that he said would undermine the country’s international credibility.
In a televised address, Fernando Teixeira dos Santos said opposition proposals to allow the Portuguese islands of Madeira and the Azores to increase their debt would have “grave consequences for Portugal’s public accounts” and send “the worst possible message” to financial markets.
His warning came as Portuguese bonds and shares came under fire for the second day running as concerns over sovereign debt spread from Greece to other high-deficit countries in the eurozone.
The Lisbon stock market fell almost 5 per cent on Thursday, the biggest daily fall since November 2008, and bond yields rose to new highs amid doubts over the ability of Portugal to consolidate its public accounts.
The cost of insuring Portuguese debt against default also rose to a record high.
Mr Teixeira dos Santos said approval of the bill would involve an increase of €50m (£45m, $70m) in funding for the islands this year, rising to an increase of €83m in 2013. This would make it impossible for the government to meet its commitment to the European Commission to cut the budget deficit from 9.3 per cent of GDP in 2009 to less than 3 per cent in 2013.
The centre-right Socialists were re-elected to a second four-year term in September, but lost their overall majority in parliament. The contested bill is supported by opposition parties on the left and right who together have enough votes to defeat the government.
Opposition parties accused the government of “irresponsibility” and deliberately creating a crisis to ensure the bill was defeated.
Earlier on Thursday, Mr Teixeira dos Santos said “strong and credible” measures to be presented the European Commission this month would be “no less ambitious” than the Greek plan to consolidate public finances endorsed by Brussels on Tuesday.
He said Portugal had taken over from Greece as the main victim of the “animal spirits” of financial markets that were often “irrational”. The concern in the case of Portugal, he said, was not justified.
The New York Times reports that just as America’s recession begins to ebb, trouble is brewing in Europe that may prolong a downturn on the Continent and ricochet through the global economy as it struggles toward a recovery.
A rout in stock markets that began in Europe spread to Wall Street on Thursday and around the globe to Asia on Friday, amid fears that Europe may be the world’s next financial flashpoint. Pressure has been mounting across the Atlantic as Greece, Portugal and a handful of struggling countries that use the euro scramble to pay off mountains of debt accumulated from years of profligate spending.
The Dow Jones industrial average slid 2.61 percent, or 268.37 points, to 10,002.18 Thursday, after briefly falling below 10,000 for the first time since November, as American investors grew more uncertain about Europe’s economy.
Stock markets across Europe slumped as much as 6 percent, and worries that the troubles might push even big European nations like Spain into a financial crisis drove the euro to $1.37, a seven-month low against the dollar.
Asian markets echoed the losses on Friday. The Nikkei in Japan and the Hang Seng in Hong Kong were both down more than 2.5 percent in early trading.
“The question now is, how big is this fire going to be?” said Uri D. Landesman, head of global growth at ING. “What is panic, and what is legitimate? We don’t know at this point.”
Like the United States, Europe has been slow to exit recession. France and Germany — the biggest of the 16 countries that use the euro as their currency — have tried to put their financial houses back in order quickly. But countries on the fringe, including Greece, Portugal, Spain and Ireland, are having trouble paying for years of debt-driven expansion.
Now the bill is coming due. In the worst case, they could default on their debts, prolonging the economic downturn.
While the tension simmering in Europe has gone largely unnoticed by most Americans, the mounting pressure on these countries to discipline their finances has raised questions about whether the currency union that has peacefully bound Europe’s economies for more than a decade risks unwinding.
Adding to the anxiety among investors Thursday was a bleaker-than-expected report on the United States labor market. Investors are watching unemployment closely as they try to gauge the strength of the recovery and determine whether it will be severely constrained by tepid consumer spending.
On Thursday, the eve of the release of the Labor Department’s monthly employment snapshot, the government said the number of people filing first-time claims for unemployment increased to 480,000 last week, above Wall Street’s estimates of 455,000. Analysts expect Friday’s employment report to show that the jobless rate remained at 10 percent in January, and that 15,000 jobs were created.
The Standard & Poor’s 500-stock index plunged 34.17 points, or 3.11 percent on Thursday, to 1,063.11, and the Nasdaq composite index fell 65.48 points, or 2.99 percent, to 2,125.43.
How Europe decides to deal with its problems will shape its future political landscape — and the future of the euro itself.
Fearful investors have started asking whether France, Germany and other rich countries should be forced to bail out their poorer cousins, or simply allow them to default — an outcome that would have major repercussions for Europe and financial markets worldwide.
The crisis in these areas “is reaching new proportions, and the contagion effect is getting more serious,” two Royal Bank of Scotland officials, Jacques Cailloux and Harvinder Sian, wrote in a note to investors.
The current troubles began in Greece, which qualified for membership in the euro club in 2001. But the government never curbed shortfalls in its budget when times were good, and drastically expanded employment by adding to government rolls, even as an inefficient tax collection system reduced tax receipts.
While investors initially brushed off these problems, their worries resurfaced in October when the government conceded it had again buffed up its statistics to suggest a bright fiscal picture. Now, Greece has acknowledged its budget deficit stands at nearly 13 percent of gross domestic product, while debt levels are among the highest in the European Union — well beyond what the rules of euro membership allow.
Greek officials are now trying to manage the country’s deficit by partially freezing the pay of civil servants and increasing the fuel tax.
The European Union endorsed those measures on Wednesday, but the proposals have met resistance from other quarters. Greek customs and tax officials began a 48-hour walkout on Thursday, choking the flow of imports, and there were threats of more strikes.
Meanwhile, the dispute has put Greece’s credit rating under renewed threat, and stoked worries that Greek government bonds might no longer be accepted as collateral by the European Central Bank.
The president of the bank, Jean-Claude Trichet, sought to temper the doubts about Greece on Thursday. He cautioned, however, that large deficits could be a problem for other euro-zone countries, unsettling investors. “When you share a common currency,” Mr. Trichet warned, “the counterpart is that you have to behave properly.”
Nonetheless, Europe’s politicians, and global investors, have become deeply unsettled about other European countries with huge debt and deficits, including Spain, Portugal and Ireland. Investors have been demanding bigger premiums to hold the debt of these countries, and this week drove the cost of insuring their debt to new highs.
These worries deepened Thursday as Spain, saddled with 19 percent unemployment and huge debt from an American-style housing bust, played down fears of a budget deficit that has ballooned to 11.4 percent of its gross domestic product.
Portugal, whose deficits have also spooked investors, suddenly had trouble raising as much short-term credit as it wanted.
There have been whispers that Europe’s better-off countries — France, Germany and the Netherlands among them — might come to the rescue with a bailout. If they do not, economists worry about the ripple effects of a default.
“There is a realization that the economy is still on very fragile footing globally,” said David Riedel, founder of Riedel Research, which provides market analysis. “There are definitely another couple of shoes to drop here with the European crisis.”
Amid the tumult, the European Central Bank and the Bank of England left their benchmark interest rates unchanged at record lows of 1 percent and 0.5 percent, respectively.
But in an illustration of the ragged nature of Europe’s recovery, the British central bank took steps to freeze measures to stimulate the economy. The bank, reacting to rising inflation and evidence that Britain has emerged from recession, announced that it would not extend its large purchases of government bonds.
The NYT also reports that executives at Goldman Sachs and JPMorgan Chase expressed misgivings on Thursday about the Obama administration’s new proposals to restrict the size and risk-taking of the country’s largest financial institutions.
Their comments, before the Senate Banking Committee, appeared to further complicate the challenge facing the panel’s chairman, Christopher J. Dodd, Democrat of Connecticut. For months, Mr. Dodd has been leading closed-door negotiations over a bill to overhaul the nation’s financial regulations, and on Thursday he expressed dismay at how long the process was taking.
“The fact is, I am frustrated, and so are the American people,” Mr. Dodd said at the start of the hearing, adding that few of the rules of Wall Street had changed, nearly two years after the collapse of Bear Stearns at the inception of the financial crisis.
Mr. Dodd said the White House was “on the right track” with its new ideas but warned of difficulty ahead.
“The refusal of large financial firms to work constructively with Congress on this effort borders on insulting to the American people, who have lost so much in this crisis,” he said.
He added that the financial services industry had sent “an army of lobbyists whose only mission is to kill the common-sense financial reforms the public demands.”
Only two days earlier, Mr. Dodd had sounded a different note when Paul A. Volcker, the former Federal Reserve chairman, testified on the two proposals he has championed. One would ban deposit-taking banks from proprietary trading — making market bets using their own money — and from owning hedge funds or private equity funds. The other would limit industry consolidation by capping the market share of a wide range of bank liabilities, not just deposits.
Barry L. Zubrow, chief risk officer and executive vice president of JPMorgan Chase, called the first proposal a “divergence from the hard work being done” by lawmakers and regulators to address the causes of the financial crisis.
“The activities the administration proposes to restrict did not cause the financial crisis,” he said. Bear Stearns, Lehman Brothers and Merrill Lynch failed because of “excessive exposure to real estate risk,” while companies like Wachovia, Washington Mutual, Countrywide Financial and IndyMac were crippled by defaults on subprime mortgages, he said.
He said that regulators already had authority to restrict the use of insured deposits to finance the kind of trading the White House wants to ban. Such a ban, he said, would make borrowing more expensive, “with no commensurate benefit in reduced systemic risk.”
Mr. Zubrow added that “artificially capping liabilities” of banks would hinder their ability to make loans or invest in government bonds. “Capping the scale and scope of healthy financial firms cedes competitive ground to foreign firms and to less regulated, nonbank financial firms — which will make it more difficult for regulators to monitor systemic risk,” he said. “It would likely come at the expense of economic growth at home.”
E. Gerald Corrigan, a managing director at Goldman Sachs, was more measured in his criticisms. But he urged the senators to distinguish between proprietary trading and hedging and risk-management activities driven by the interests of clients — which he called “natural activities of banks and bank holding companies.”
He also said the financial risks associated with ownership of hedge funds and private equity funds “can be effectively managed by means short of outright prohibition,” including tough oversight.
John S. Reed, a former chairman of Citigroup, often mentioned as an example of an institution considered too big to fail, offered a different perspective. Mr. Reed, who has been supportive of Mr. Volcker’s ideas, told the senators, “The industry should be compartmentalized so as to limit the propagation of failures and also to preserve cultural boundaries.”
He also expressed support for a separate consumer financial protection agency that would regulate services like credit cards, mortgages and debt collection — a proposal that was part of a reform bill that the House passed in December, but has faced strong opposition in the Senate.
Two scholars who appeared before the committee also clashed in their views. Hal S. Scott, professor of international finance systems at Harvard Law School, said the Volcker proposals were too broad and that the banking reforms required international coordination.
But Simon Johnson, a former chief economist of the International Monetary Fund who now teaches at the M.I.T. Sloan School of Management, said “the Volcker rules do not go far enough,” urging a cap on bank assets as a percentage of gross domestic product.
