Letters from the tax man - the mounting cost of Ireland's property tax and running the country

A man puts up a poster outside Leinster House in Dublin, to promote anti-property tax protest
in Dublin city center

On most mornings over the past month in homes all over Ireland, there has been the barely audible sound of a letter or two plopping into the letterbox or down on the doormat.

Pestered as we all are by junk mail and bills of all kinds, particularly soaring energy bills, most of us don't exactly rush to pick up our post these days. 

But for the past month it's been different.  Because over the past four weeks the Revenue here have been sending out their property tax letters to every home in the country.

As we all know, there are only two things in life that cannot be escaped -- death and taxes.   So it has been with a heavy heart and a sense of foreboding that we have all had our ears strained each morning for the faint sound of the mail arriving.  

Then there is the quick flick through the junk mail, with eyes peeled for the letter with the telltale Revenue type in the corner.

The mail blizzard from the Revenue started on March 11 and by the end of the month, over one million letters had been sent out.   By now, I would guess that most of the 1.6 million homes in the country have had their letters.

Last week it was my turn, and I did what everyone else has done, ripping open the envelope and scanning the letter quickly with fluttering heart and dry mouth to see what the amount I owe is.

Now I know that people in America and most other developed countries are well used to property tax.  But it's all new to us here, or certainly to anyone under the age of around 60.  

Back in 1977 the local property tax that we had here was abolished by the Fianna Fail government as an election gimmick, resulting in a famous landslide victory for them.   And ever since then, the opposition to the reintroduction of any kind of property tax has been fierce.

To replace the revenue lost to county and town councils, which have to provide local services, the central government gave local authorities a grant every year.  And that had to be paid for out of central revenue, from income taxes and sales taxes and so on.

So of course right from the very beginning the idea that property tax could be "vanished" into thin air was nonsense. Someone still had to pay for road maintenance and street lighting and sewage treatment and all the rest of the services that keep our local areas safe and civilized.   We still paid, except that now it was in extra tax to central government.

We stuck with that system for the last 36 years for two reasons.  Firstly, for most of the time, central government was able to pay the bill without jacking up taxes to levels that people could not pay.   Secondly, politicians of all parties were too cowardly to propose the reintroduction of local property tax.

But it was never a good idea.  It removed the link between local tax and local services and people got the idea that central revenue was a bottomless pit.  And that always leads to inefficiencies and waste.

Over the years, local councils found new ways of raising revenue.   Even though all our taxes had gone up, many of them began to charge for or privatize services that used to be free.  For example, it now costs me €8.50 ($11) to get my normal size garbage bin emptied.

During the property boom, local councils also raked in millions by charging developers inflated charges for connecting new houses to local services like roads, street lighting, water and sewage.
But most of their funding -- hundreds of millions of euro -- still came from central funds. When the crash came a few years back, this was a big problem. 

Central government revenue collapsed, as did the revenue from the development charges that local councils had been applying.   The result was that central government could no longer afford to pay the massive grant to local councils, and local councils were unable to raise enough money to pay for services.

Two years ago when Ireland entered the bailout, the troika (the IMF-EU-ECB) officials took one look at the situation and said it was ridiculous, that we should have a local property tax like all other European countries.  They made it a condition of giving Ireland the bailout money, writing it into the bailout program so that it specifically commits us to the introduction of a local property tax.

Viewed objectively, it all makes sense.   Local councils must have the money to run essential local services.  The national budget deficit has to be reduced, and removing the huge amount the government now transfers to local councils every year will make that easier.

But from the taxpayer’s point of view, it's not that simple.   If we're all going to be paying local property tax now, can we have a reduction in the income tax we have to pay to central government through the Revenue?  Can pigs fly?

No, the reality is that we're going to end up paying on the double, and that's why so many people here are so angry.  

They feel, with a great deal of justification, that income taxes and sales taxes here are now so high that we are already paying enough.

There is also the fact that although there was no annual property tax here, it is incorrect to suggest that no tax was raised from property. 

Every time a property was sold it attracted a huge amount of tax.  As prices soared during the boom, so did the amount that the government was getting in property taxes.

On good size family houses the stamp duty (or sales tax) was six percent or even nine percent if the house sold for over €1 million.

So a lot of people who bought homes during the boom years paid a huge amount in sales tax (upwards of €25,000 was normal on a family size home).  These people are not being given any credit for this and will now be hit with this annual property tax just like everyone else.

For buyers of new homes during the boom (many of which are now deep in negative equity) there is also the fact that adding together all the charges and taxes (including income tax from construction workers and sales taxes on materials) meant that around half of the cost of every new house was going to the Revenue in one form or another.   Naturally these people also feel that imposing an annual property tax on them now is double taxation.

For people who bought property during the boom and are now in negative equity and who may be among the tens of thousands who are way behind in their mortgage payments, the idea of having to pay this new property tax seems not just impossible but grossly unfair.

But in spite of all the problems, the government (and our troika masters) is determined to drive forward with this new source of funding.  

And because it's being administered not by local councils but by the Revenue, which has the power to look into personal banks accounts, etc. and ultimately apply draconian penalties or even jail people who don't pay, there will be no escape.

Even for people who are not in mortgage distress, it's hard to take.  We already have a marginal rate of income tax of 52 percent, or 55 percent if you are self-employed like me.

On top of that we pay tax on almost everything, with heavy sales taxes, motor taxes, garbage payments and water charges starting at the end of next year. 

About half the population pay very expensive private health insurance, so they are paying for their health care as well even though over 10 percent of their income tax pays for the public health service.  

And although education is supposed to be free, all schools every year ask parents for contributions to help them make ends meet.

The property tax comes into effect on July 1, which means that this year people will only have to pay half what it will be in future years.  Softening the blow in this way is part of the government's strategy.

The tax is payable on the current market value of all residential properties.  It will levied at the rate of 0.18 percent for properties up to a market value of €1 million, and 0.25 percent on properties over €1 million (the higher rate applying only to the portion over the million mark).

That sounds simple enough but there are all kinds of practical difficulties.  It's a self-assessment tax, so how do you value your house after the property crash when the housing market is at a standstill? 

Unless you live in a development where there are lots of similar houses, some of which have sold recently, how are you supposed to know what your house is worth?

To help with the calculation, the letters from the Revenue include guidelines on how to value your property, but they are so general they are practically useless.  You are also advised to consult property sale websites and local property agents in your area (who will charge you for a valuation!)  

If you live out in a rural area or on a road where the houses are a mixture, it really is guesswork.

Who knows what a house is worth these days until you put it on the market and find a buyer?
There is no property ownership register in Ireland which also makes the task difficult, although there are electoral registers and of course the electricity and gas companies and phone companies have registers.  Revenue has the power to access these databases, so avoiding the tax is going to be very difficult.

So far, most people here seem to be accepting the reality that they will have to pay, even if they are angry and depressed about it and can't afford the few hundred euro it will cost them.  (A typical family home valued at €375,000 will owe property tax of €337 this year and €675 next year for a full year.)

That's a lot of money for many families to find, especially where someone may have lost a job or pay has been cut.   A small number of defiant people have been declaring that they can't and won't pay. 
But the Revenue will be able to extract the money from welfare payments or pay packets, if necessary so it may be taken before people can stop it vanishing.

If you are caught undervaluing your property (say when the true value is revealed when you sell it at some point in the future) the Revenue will hit you for the back tax and also with very heavy penalties which could double your bill.   They say they will only do this if they believe you have deliberately undervalued the property.

One thing is sure -- it's going to be painful for everyone.

End to Ireland’s disastrous bank guarantee - an achievement at the expense of the Irish State

Irish graffiti former Finance Minister Brian Lenihan and former Taoiseach Brian Cowen

At midnight last Thursday the disastrous blanket guarantee given to the Irish banks in September 2008 by the last government reached the end of its extended term and finally came to an end. 

The present government believes that the banks are strong enough now to function without the guarantee and will be able to access the funding they need without state back-up.

That remains to be seen.  In the meantime, the ending of the guarantee last week was hailed as evidence of the success of the present government's policies. 

In fairness, it is an achievement of sorts.  But it has come at the expense of the Irish state pumping billions and billions into our banks over the last four years to pay their debts and to recapitalize them, which means that with one exception they are now all owned by us taxpayers (and we own a chunk of the single exception).

Whether our state owned banks could now fail to pay their debts without the country appearing to default is doubtful.  So the announcement of the ending of the state guarantee for Irish banks last week may be more for the optics than anything else.   But it is certainly a welcome footnote to a disastrous period in the Irish economy.

The infamous state guarantee decision in September 2008 ended up bankrupting the country within two years.   In 2010, with the state unable to cope with the mountain of bank debt, the guarantee had forced us into the IMF bailout and into the program that robbed us of our economic sovereignty.

That state guarantee was the worst decision ever taken by an Irish government.   Of course it was presented at the time as being a temporary measure necessary to avoid a run on our banks.

At the time the markets were worried about our faltering property boom.  Billions in deposits were being pulled out of Irish banks that September and their share prices were plummeting.

The crisis intensified over a couple of weeks.  There was a real danger that our banks would collapse altogether.

So after an all night crisis meeting with the bankers on September 30, 2008, the government gave the infamous blanket guarantee which meant that all the deposits in the Irish banks and all their debts were underwritten by the Irish state.  This was necessary, we were told, to stabilize the banks.  We didn't want the ATMs to run out of cash, did we?

We were assured that the banks had a temporary liquidity problem, but that basically they were solvent.  The Irish property boom would end in a soft landing, not a crash, and everything would be okay.

In the beginning we were told that we were on the hook for a few billion.  Trying to gauge in 2008 how big the potential risk was going to be meant guessing how far the market was going to fall.  

Either the bankers did not know or deliberately underplayed the scale of the problem.  The politicians, Brian Cowen and Brian Lenihan, and the top civil servants who were involved, failed to grasp what they might be getting themselves -- and the rest of us -- into.

In the end, as we now know, the total guarantee given by the state to the banks meant we had jumped into a black hole and no one knew how deep it was.  We soon learned that the amount involved -- the liabilities of the Irish banks in debts and deposits -- was close to half a trillion euro.  

A significant portion of that had been given out in toxic property loans and we ended up pumping around €64 billion into the Irish banks to make up for the losses and enable the banks to pay back their liabilities without all of them going bust.

Financing that, plus paying for our budget deficits, bankrupted the country and forced us to take the €85 billion IMF bailout in 2010.   And the repayments on that debt are now a millstone around our necks and will be for decades to come.

Coincidentally, last week's resolution of the crisis in Cyprus prompted further revelations about the disastrous bank guarantee in Ireland in 2008. 

Speaking last week in the wake of the decision to burn depositors in banks in Cyprus, the German finance minister was asked what implications this had for Ireland, where we had been forced by the EU to pay back all the bondholders and depositors in full to avoid undermining confidence in European banks.

Minister Wolfgang Schauble said that this was different and that Ireland itself had the "sole responsibility" for giving the bank guarantee in 2008.  This was very interesting because despite strenuous efforts by the media here, no one knows what happened at the all night meeting on September 30, 2008 between the bankers, the politicians and their advisers. 

Even though this is the most important financial decision ever taken in Ireland, we have been kept completely in the dark.  Here at last was a chink of light.

Schauble stated categorically that the disastrous blanket bank guarantee was an Irish decision alone.  It was not forced on us by Germany or the European Central Bank or the IMF, as has often been suggested.  According to him, we dug our own grave.

This is a vitally important issue for Ireland because it was this decision, effectively turning the mountain of debt owed by the banks into sovereign debt owed by the Irish taxpayer, that caused us to go under.

Despite what Schauble says, we don't know how much pressure was put on Ireland at the time to give the guarantee, even if the final decision was left to us.  We do know, however, that it was an absolute condition of us getting the EU-IMF €85 billion bailout in 2010 that all depositors, bondholders and other lenders to our banks had to be paid back in full.

It was the EU view that any default by Irish banks could cause "contagion" across European banks and a possible bank run in some countries.  So us failing to pay back some big investors/depositors or imposing a haircut on bondholders was out of the question.

So Ireland bit the bullet and started paying back all the bondholders and investors, a process that is now almost complete and was achieved with bailout money that has to be paid back.   

Since then we have seen the EU policy  on this question shift in Greece and now in Cyprus.  It seems that now bondholders or depositors can and will be burned if an EU bank gets into trouble.

What this means, of course, is that the EU is now admitting that the full bank debt repayment policy it imposed on Ireland, either in September 2008 or in the couple of years after that, was wrong. 

Forcing Ireland to transform all the private bank debt into sovereign taxpayer debt was wrong.

Despite this effective admission, however, the EU is not changing its policy towards Ireland on the debt question.   We got a half promise last year that private bank debt and sovereign debt would be separated in EU countries that got into trouble.  

We argued that this should be applied retrospectively to us.   But so far, despite the Cyprus deal, nothing has been done.

If it did happen, the new EU financial rescue funds could take over our bank debt and leave the Irish taxpayer to deal with our budget deficit debt.  If Spain and Italy get into deeper trouble, you can be sure that some variation of this will happen.  Either that or more depositors/bondholders will be getting a haircut.

Ireland's problem is that it was the first country to get into trouble, and since then the rules of the game have changed. And in spite of all the sympathetic guff from our "colleagues" in Europe, no one cares too much that we have been left holding a very bad hand.

As you know, we recently got a deal from Europe on about half of our bank debt mountain (the Anglo-Irish half) which extended our repayment time for that part of the bailout money by a couple of decades.   But, crucially, it did not include any debt write down. 

We are also campaigning in Europe for a similar deal on the rest of the bank debt mountain, to push our bailout repayments on that out into the future.  But again there is no suggestion of a write down.

Morally, all of this stinks.  Ireland was forced into the dire position it is now in by the EU, but Europe does not want to share the cost of what has happened to us.  They refuse to help even though it was saving European banks and the euro that got us into the mess.  

Europe thinks it's okay now to change policy and offer different solutions to other countries, and that Ireland's taxpayers should carry on as before bearing a huge repayment burden.

The end of the state guarantee last week does not change any of this.  Nor does it mean Irish banks are out of the woods.  

There's a mountain of bad domestic mortgage debt coming down the tracks here which could make the Irish banks insolvent again.   Unless of course the Irish government puts more borrowed billions into them and the Irish taxpayer is again left to pay the bill.  Watch this space.

Cyprus? Been there, done that - EU leaders brass necks insist European’s money is safe

Protests against the bailout of bond holders, such as this 
one in Dublin on March 16, happen regularly in Ireland.

The raid by the Cypriot government on bank accounts in Cyprus has sent shudders of fear through ordinary people across Europe.  And that includes Ireland.  

Time and again EU leaders have told us that no matter what happens in the ongoing financial difficulties in Europe, bank deposits are safe.  Now it seems they're not as safe as we thought!   

Of course the EU leaders are insisting that this is a one off, that it won't happen again, that Cyprus is a special case.  And Irish government ministers have been reassuring us that it could never happen here.  Never.  Bank deposits here are completely safe, they say.  

One has to admire their sense of humor ... and their brass neck.  Because, as  we all know, there's more than one way of skinning a cat ... or someone with a bank account, which is pretty much everyone these days.

It was hilarious listening to a couple of our government ministers here in the past few days being all holier than thou.  There but for the Grace of God and the more responsible way we handled our bailout we could have gone as well, they implied.  

We could have been like Cyprus except for our careful handling of the banking crisis here.  And that would have been unthinkable!  A government going straight into bank accounts and taking money! How shocking!  

They have short memories.  Okay, so the government here did not raid bank accounts directly.  Instead, they found other ways of taking the money from us to make up for the huge losses our banks had racked up, losses that were so enormous Ireland was faced with a banking collapse.  Just like Cyprus.  

And just like the people of Cyprus will pay, it is the general population in Ireland who are paying the cost of the "solution."  If anything, it's worse in Ireland.

Under the revised bailout in Cyprus, depositors with up to €100,000 in the bank are protected.  This is the same cut-off point that applied to the government guarantee in Ireland, and it's the same level that applies in general to the EU-wide deposit guarantee.

But saving the Irish banks (in other words, paying their debts) came at a high price for everyone in Ireland, including those with much less than €100,000 in the bank.  The government did not put its hand straight into our bank accounts to take the money. Instead they are hitting us with extra taxation, and also forcing us to pay extra for services.

The net effect is the same.  And it's simply not true to say that the Irish government did not take money directly.   

The government did not put its hand directly into our bank accounts.  But it did put its hand straight into our pension funds by applying the pension fund levy that is costing people here hundreds of euros a year each.   

Bear in mind that these are people who were doing the right thing, who had worked hard and saved to build up their own little pension fund.   

Two years ago the government just jumped right in and hit these funds with an annual levy.  It's raking in hundreds of millions every year as a result.   

Then there's the Universal Social Charge, a fancy name for what is in reality just another income tax. We already had an extra income tax called Pay Related Social Insurance (PRSI) which was already providing for the social welfare part of government spending.  But at the start of last year a second extra "social" charge (or tax) was imposed on the population to squeeze more money out of them.  

This USC charge is a colossal seven percent of everything you earn over  €16,000.  PRSI is another four percent.   

And keep in mind that these "charges" are on top of the 41 percent income tax that all middle income people here pay.    

By law, like income tax and PRSI, the new seven percent USC charge introduced in January last year is also deducted at source from your paycheck.  So the  government puts its hand straight into your pay packet and takes it.  Just like  the government in Cyprus is going to take money straight out of bank accounts.

Can someone please tell me what's the difference? Of course, ordinary people in Cyprus with less than €100,000 in the bank will end up paying for the bailout as well.  They will just pay in a different way, even if they don't realize it yet.

The bailout plan for Cyprus includes budget cuts, privatization of services and various economic reforms.  These are all designed to cut state spending in Cyprus and make ordinary citizens pay more for things that were either cheap or free up to now (health care, schooling, public transport, etc).

So ordinary citizens in Cyprus will find that they have to dig into their savings anyway, even if the government has not taken a chunk of their money out of the bank.  The overall bailout in Cyprus is around €16 billion, with 10 of it coming from the EU/IMF on condition that the other six comes from Cyprus itself.  That's what all the argument has been about.   

And remember that, in spite of all the propaganda that it was the Germans who were behind it, it was the Cypriot politicians themselves who said that they would raise the €6 billion mainly by imposing a levy on bank deposits.   

Initially, they wanted to impose it on all bank accounts, including small depositors, to lessen the amount they would have to take from the big depositors, many of them Russians and other foreigners putting "hot" money in Cypriot banks.   

Banking had grown to an unbelievable eight times the size of GDP (national income) in Cyprus and has been a huge part of the economy.   A lot of this was funny money, money that was avoiding tax in other countries or money that was the proceeds of activities that were questionable.   Around €20 billion (one half of ALL the money deposited in Cyprus banks) is Russian, and a lot of that is hot money or funny money of various kinds.   

There is lots of anecdotal evidence from bank workers in Cyprus of Russians arriving with suitcases stuffed with dollars.  Even if this money is clean, it probably avoided Russia's exchange controls and taxes. 

But it's also true that a lot of the Russian money is in Cyprus legitimately, at least from the Cypriot point of view.  Company tax in Cyprus is half the rate in Russia, and lots of Russians have set up shell companies in Cyprus through which they funnel billions in business.   They don't actually do much in Cyprus apart from some paperwork, but it allows them to avoid huge amounts in tax.   

All of which means there is very little sympathy in Europe generally for the mess the Cypriots have got themselves into, mainly because the Cypriot banks invested too much in Greece.   And we all know what has happened to investments in Greece. 

There won't be much sympathy for those who will be losing 20 to 40 percent of  their deposits over €100,000, since a lot of them are foreigners.  There is, however, some sympathy in Ireland for the ordinary Cypriots and what they face.  We've been there and we know what lies ahead of them.

One other interesting fact emerges from the Cyprus bailout situation.  Here in Ireland we were told by the EU that the reason we had to pay back all depositors and bondholders was because failure to do so would destroy confidence in European banks.  So our billions in bank debt was transformed into sovereign debt, and the ordinary Irish taxpayer will be carrying that burden for the next 40 or 50 years.   

When people here suggested that some of the senior bondholders who had gambled  on the Irish boom should be singed a bit, if not completely burned, we were told no, we could not do that because senior bonds have the same status as deposits.  They have to be protected.  

So they gave Ireland the bailout so we could pay back all these bondholders, and now Irish taxpayers have to pay back the bailout.

But what's happened in Cyprus shows that as part of a bailout, the EU and the IMF now think that burning depositors and bondholders by as much as 30 or 40 percent is OK.  So if that's the case, why did we have to pay back every last cent to all those German and French banks who pumped money into Irish banks and bonds to get a taste of the action here during the boom?  Am I missing something?

We'd all love some of that Cypriot sunshine here at the moment since we're  freezing in the coldest March in decades.  We can't have that. 

But maybe we can learn some lessons from Cyprus instead.

Good old reliable Ireland - depressed Irish continue paying massive bank debt with no end in sight

Ireland turned green for St. Patrick’s Day on 
Sunday, but problems still persist.

Here's hoping you all had a great St. Patrick's Day.  In Dublin it was less ecstatic than usual, possibly because of the unseasonably cold weather that has afflicted us for the past two weeks.

I see from the TV pictures that it was the same over there, with what looked like sleet showers falling on the New York parade at some stages.   That did not seem to dampen enthusiasm in the Big Apple.

But then again, the Paddy's Day celebrations have always meant far more to people in the U.S. and other outposts of the Irish around the world than they do to us here at home.

That's understandable.  We're here and we're Irish simply because of that.  We don't have to prove it or demonstrate it.

But for those with Irish ancestry in other parts of the world, the national day is an opportunity to embrace and celebrate their roots, to declare with pride who they are and where they came from.

There is also the reality that these days a lot of people here would much prefer to be somewhere else, somewhere with more opportunity, more optimism and more reward for hard work, unlike here where life is all about cutbacks and new taxes.    

The fact is that, despite some flickers of light at the end of the financial crisis tunnel, life is still pretty bleak here.  Cutbacks continue.  New taxes are about to kick in.   Unemployment stays stubbornly above 14 percent. The national mood is depressed.

People's despair and anger at the failure to lift us out of the mess quickly enough is clearly visible in the latest opinion poll.  There is such disillusionment with the government that Fianna Fail, the party that led the country into the economic collapse and was thrown out of office two years ago as a result, is back from the dead.

Once again they are the most popular party in the country.  It puts Lazarus in the shade.

It's not because of any new found love for Fianna Fail, of course.  It's more an expression of anger that the new government of Fine Gael and Labor, despite all their election promises, are dealing with the financial crisis in the same way as their predecessors did -- by dumping it on the ordinary person.

They have been so successful at this that Ireland is now being held up by the EU/IMF leaders as the "responsible" example for the rest of Europe to follow.  

Unlike in Greece and Spain where there have been violent clashes and huge street protests, the Irish have been taking the harsh medicine without any upheaval and with little complaint.

We have meekly accepted our fate of higher taxes and cuts in state spending on services, even though we know that all the wealthy bondholders who gambled on the Irish property boom have been getting all their money back.

The markets have been very impressed with us.  So last week Ireland was able to raise €5 billion in new "10-year" government debt in the first deal of its kind since the EU/IMF bailout.  

We don't riot. We're sticking with the budget deficit reduction program.  We're reliable.  So the markets have decided to lend to us again.  

Being able to borrow again on such a scale means we have moved dramatically closer to exiting the EU/IMF bailout on schedule at the end of this year.

The interest rate on these new 10-year bonds is 4.15 percent, which is less than Spain or Italy are currently paying on their bonds.  The €5 billion we raised last week is half the €10 billion or so our deficit will be this year.

So we're back on track and should be able to continue borrowing enough to fund deficits until we eliminate them, without having to be in an EU/IMF program.  

Clearly this is good news.   And the government has been letting everyone know it, saying it is evidence of the success of government policy not to renege on bank debts or burn bondholders.

But everyone needs to remember that this "success" has been achieved at an enormous price for the Irish people, and that the "success" has locked us into heavy annual debt repayments for decades to come.

The scale of the readjustment in the state finances here and the effect of that on ordinary people tends to be forgotten.

But if a similar "readjustment" was implemented in the U.S. there would be another revolution; given the reaction to the present debate on cutting spending in the U.S. that much seems certain.

The new Irish Times correspondent in Washington Simon Carswell (previously one of the best financial reporters here) pointed out some of the figures in a recent column which compared the situation there and here.

He said that between 2008 and 2012 the Irish government had squeezed €27.5 billion of a fiscal adjustment out of the state, a correction equal to 17 percent of the state’s economic output or GDP.

Carswell said that if the same adjustment had been applied in the U.S. over the past five years, based on U.S. GDP of roughly $15 trillion, the current U.S. deficit of $900 billion a year would have become a surplus of more than $1.6 trillion!

Instead, as Carswell pointed out, the Democrats and the Republicans have been unable to agree on any adjustment, resulting in the sequester kicking in.  And in spite of all the alarm over that, it only adds up to $85 billion in cuts, or less than one-tenth of the current annual deficit.

I'm not saying the Democrats are wrong or the Republicans are right.  The answer, as here, has to come from both growth and spending cuts.

And getting that balance right is not easy.  You don't want to smother growth when you're cutting spending. 

But two things are clear.  First, the scale of the problem facing the U.S. dwarfs the problem we have here in Ireland.   Second, the pain felt by ordinary folk when this kind of "adjustment" happens is very real.  

In Ireland, of course, we have a solution.  The EU/IMF/ECB troika forced us to  pay back all the lenders who pumped the billions in here that fueled the boom.  

They made us turn billions in private bank debt into sovereign debt so that it could be dumped on the ordinary Irish taxpayer.  In return they gave us the bailout.

Now that we have access to the markets again and our deficits are coming back to a sustainable level, the time is fast approaching when we won't need any more bailout money and we can refuse to go on paying.  

In spite of what has just happened in Cyprus, Europe is already starting to accept that turning bank debt into sovereign debt to be paid by all citizens is neither fair nor sensible.

Ireland can lead the way on that one.

Here come the bad house debts - Irish family with mortgage debts left in nightmare situations

Christine Lagarde and Taoiseach (Prime Minister) 
Enda Kenny in Dublin last week.

In the last few weeks we have been listening to lots of positive noises being made about Ireland.  For the first six months of this year Ireland holds the EU presidency, so there are important people visiting here all the time for important EU meetings and they tend to say nice things about us when they're here.

Recently it was European Commission President Jose Manuel Barroso who hailed our economic recovery, saying the country is "turning the corner" and well on the road to recovery.

"Confidence is returning to Ireland and to Europe," he said at a meting of business leaders in Dublin.
As if we were not glowing enough already from that, he added that Ireland was a "shining" example of how a country can recover after it has been bailed out.

Last week it was the turn of the IMF's managing director Christine Lagarde.   In Dublin for meetings, s Lagarde poured on the charm.   She heaped praise on the government for the way we have faced up to the painful restructuring necessary to deal with the economic crisis.

"What has been done (in Ireland) is huge by any standards," she said.    The way in which we have implemented the bailout program (of spending cuts and tax hikes) has been "extraordinary."

She was so effusive in her praise that she managed to make our Minister for Finance Michael Noonan blush, according to the papers. Although that may have had more to do with something she said about how understanding of women he is (it was International Women's Day).

In return he took her for a glass of Guinness in a pub near the government offices when the day's work was over.  And she wore her lovely green scarf for all the press pictures when she was here to prove she knew what country she was in.

All of which is supposed to make us all feel much better.   It's always nice to hear people saying nice things about you.

On top of that, of course, there are three significant developments which have added to an emerging feeling here of hope, even confidence, about the  future.

There was some slight growth in the Irish economy at the end of last year.   The markets have been so impressed by the difficult steps we have taken towards fiscal sustainability that they have indicated a willingness to start buying our bonds again on a big scale and thus enable us to exit the EU/IMF program on schedule.  

And we have secured a long-term restructuring deal on about half of our bank debt (the Anglo promissory notes part) with an expectation that a deal on the other half may yet be achievable with the EU and the IMF.

So is everything in the garden as rosy as Lagarde suggests in public?   Not at all. Lagarde is a lawyer, not an economist.  

That's worrying enough, but there is another reason why we need not be too impressed by her sweet talk (and I'll come back to that at the end of this column).

There was, however, one aspect of her visit here which made few headlines because it happened behind closed doors.  Seemingly she laid it on the line to the Irish ministers and officials that something has to be done quickly to prepare for the tsunami of bad mortgage debt that is gathering in the Irish banking system.

You don't have to be an economist to see how serious it is.  Even a lawyer can see that it's bad.  

So far it's a crisis that has been largely ignored in the faint hope that the market might improve enough to sort the problem out.  For that reason, the scale of the developing mortgage crisis has not been as widely understood as it should be.

But the fact is that the crisis in domestic mortgages here is worse than anything that the speculators and developers managed to do to us.

The property crisis did not just hit developers and construction companies here.   There are tens of thousands of people here who bought houses and apartments during the boom that they can no longer pay the mortgage on.  

In many cases the properties are in negative equity, meaning they are worth far less than what they cost.  In the worst cases, the mortgage debt owing on them can be twice as much as the property is now worth.  And because of the downturn the owners may have reduced earnings or may have lost their jobs altogether.

The scale of this is staggering.   In the middle of last year, about 10 percent of ALL domestic mortgages in Ireland were in trouble, either behind in payments, making reduced payments or not paying anything.  By the end of 2012 and the start of this year, that had climbed to over 12 percent.

To put an actual number on this, it means that 186,000 mortgages here are now in some form of arrears or have had to have repayments lowered with the permission of the bank.  

About half of these, close to 95,000 according to the Central Bank, are at least three months or more behind in payments.   Half of those are at least nine months behind.  And  close to 25,000 are two years or more behind on payments.

If those 25,000 worst cases are beyond saving, that's an awful lot of houses to repossess and a lot of families to be putting out on the road.

Apart from the human anguish involved, what would that do to the "recovering" property market when the banks put all these repossessed houses up for sale again?   It would collapse the property values to a new low, and banks would either collapse or require another rescue. It's economic Armageddon, and it has to be avoided somehow.  

In total the domestic mortgages in arrears add up to somewhere between €15 billion and €20 billion. If we assume that at least half of that value is already eroded by the property collapse to date and a fire sale could make it even worse, the banks are looking at needing maybe €10 billion or €15 billion to plug the hole.  

All you bright students in the class will now be going Hey! Hang on a minute! Wasn't about €10 billion of the 2010 bailout money specifically allocated to us to deal with the potential mortgage debt problem, and haven't we pumped all that and a whole lot more into the banks?

And of course you're right.   The problem is that the banks have hung on to that money to improve their capital reserves and they don't really want to use any of it to enable debt forgiveness for ordinary householders who find themselves facing an impossible situation on their mortgages.  

All kinds of schemes are being suggested by the government to avoid both putting people on the road and collapsing the banks.  They vary from the banks retaining ownership and people being switched from buying their homes into renting them, to joint ownership with banks, to various restructuring packages, most of which push out the repayment term into the distance.

For the past year, apart from urging the banks to begin to deal with the problem on an individual basis, the government has not actually forced them to do anything, even though we own the biggest bank and most of the second biggest.

Now in the past week the government -- prodded by Lagarde and the IMF -- has told the banks, rather than asked them, to get on with it.  It's still unclear exactly what will emerge and how it will work in practice, but we will be watching it from here.

It's a disastrous situation for many young families who stretched to start buying a home over the last five or six years and now find themselves in a nightmare of debt from which there is no escape.

They can't just throw the keys back at the bank, like you can in the U.S.  Here you still owe the mortgage debt, even if you hand over possession.  And for the individual buyer there is no Nama (the new national bad bank where the loans that speculators and developers can't pay were shifted).  

The main banks are still pursuing individuals for full repayment even in cases where the property has halved in value and the buyer's income has collapsed.  All of this, of course, is doubly unfortunate because it is coming at the very time when our new property tax is about to kick in.  

The demand letters from the Revenue will be dropping in letterboxes here all over the country in the next week or two.  We will be returning to this in detail here, but for the moment, an observation -- how are people who cannot now pay their mortgage going to find hundreds of euro to pay the new property tax?  Answers on a postcard to Enda Kenny, please, not to me.

One final word about Lagarde, whose Gallic poise and slightly melting froideur charmed everybody here last week.  She's a lawyer, not an economist, as we pointed out.  But that's not the only reason to treat her pronouncements on our economy with some restraint, especially if they have anything to do with tax.

You do remember, don't you, that this is the woman who told the Greeks (with a good deal of froideur) that they would be doing a lot better if they paid their taxes.  And then it emerged that because her position of IMF head has some kind of semi-diplomatic status, she does not pay tax on her roughly $500,000 a year paycheck.

It's the little people etc ...

State workers are whiners - private sector workers in Ireland stomach the brunt of pay and pension cuts

Liam Doran speaks to the media
 at Croke Park last Thursday.

Viewing the sequester controversy in the U.S. from this side of the Atlantic last week was a reminder of how much we have in common with you guys over there.

The financial crisis in Europe, in the wake of the global downturn, has been caused largely by governments (like in Ireland) that can't balance their spending with their revenue and that run massive, unsustainable budget deficits.   And it's the same in the U.S.

You don't have to be Bill O'Reilly to see that America is in deep financial trouble, and that Uncle Sam's national debt simply cannot go on increasing at its present rate.   It's got to the stage now where another trillion dollars hardly causes a raised eyebrow!  

Just like here, the answer will be found in a balanced program of increased taxes and cutbacks in spending. President Obama wants more of the former and less of the latter, the Republicans vice versa.

There is certainly plenty of room for higher taxation at the upper end in the U.S., and that is something better off Americans are going to have to live with (unless they want to leave the debt problem to their children and grandchildren).   Equally, there is a need for a major reduction in government spending in the U.S., and so far there is little evidence that Obama is willing to do that on the scale that is required.

But America is running out of road. Just like in Ireland, and in other European countries like Greece, Portugal, Spain, Italy and even France and Great Britain, a major re-balancing of the state finances is needed urgently in the U.S.

In some European countries, like Ireland and Greece, the day of reckoning has already arrived. Corrective action was forced on us by the IMF and the EU in return for enough bailout money to enable the country to function until we can get our finances back in balance.  It was either that or turn into Argentina.

But the day of reckoning is also approaching in the U.S., probably faster than many people over there realize.

In Ireland, we've been though several years of so-called "austerity budgets" which cut spending and raised taxes and charges.  And it's going to continue for at least another two years as we try to reduce the budget deficit down to a sustainable level of around three percent of GDP.

Getting the books to balance again has been made far harder for us by the mountain of private bank debt which was added to our national debt, something that was completely unjust and which was imposed on the Irish people to save European banks and the euro.  At least in the U.S. you don't have that problem.  

But there are many similarities in the situations on the two sides of the Atlantic.  There are two big components in state spending, one being welfare programs or "entitlements" as O'Reilly calls them over there (that's when he's not ranting about it as "stuff for the folks").

There has to be major reform in that area both in the U.S. and even more so here.  If Bill knew what goes on in Ireland with "entitlements" he'd have a seizure! That's something we'll be coming back to in this column in the weeks ahead.

This week, however, we want to look at the other huge part of state spending, which is state payroll. In the U.S., much of it is decided at individual state level.  Here it's obviously decided at national level.  

One of our problems is that in the past workers on the state payroll here have tended to see the state as a bottomless money pit.  

In the private sector, market pressure dictates pay rates and efficiency levels.  In the boom years pay in many industries (construction being the best example) shot up.

Since the downturn it has come down again just as quickly.  Workers at all levels in companies under stress have accepted pay cuts, higher output demands and longer working hours so that their companies could show a profit and they could keep their jobs.

In spite of this, hundreds of companies have not survived and tens of thousands of workers in the private sector have lost their jobs.

In the state sector, the attitude is quite different.  Insulated from the reality that faces workers in the private sector, the need for adjustment has been accepted reluctantly and slowly.

This can be seen again in the agreement with state workers which the government concluded with unions last week after lengthy negotiations.   It's the second Croke Park Agreement (so-called because the talks were again held in meeting rooms in the famous sports stadium).  

The agreement includes minor adjustments in pay and working hours, but nothing that reflects the scale of the crisis in the state finances.  It's more of the same.

In 2010 in the first Croke Park Agreement covering the period 2010-2014, state workers gave a commitment to change the way they work so that both the cost and the number of people working in the public service could fall significantly, while continuing to meet the need for services (schools, hospitals, police, sanitation and so on).

In return for this no-strikes deal, the government gave commitments to the state workers that there would be no further reductions in their pay rates (they had lost around 14 percent over the previous two years) and there would be no compulsory job losses as long as state workers were flexible about redeployment.

In fact there has been only minor change across the public service over the past few years, in spite of the downturn.  The old ways of doing things prevail, and the snail's pace of reform still means there are too many workers in some areas and not enough in others.   An example would be the number of planning staff we have on the state payroll even though construction is at a virtual standstill.

Most people in the private sector believe that Croke Park I was a failure.  They point to the big gap that now exists between pay in the state and private sectors and the way that high pay, inefficiencies and poor flexibility in staff movement and job responsibilities are still common in the state services. It's all completely out of step with what has happened in the private sector.

The second Croke Park Agreement was necessary because to meet our reducing budget deficit target under the bailout program the state needed to shave a further €1 billion off the €13 billion public sector pay bill.  

Despite this small-scale adjustment (1/13th) many state workers are unhappy and it is still unclear whether Croke Park II will be accepted in all parts of the public service.  

It's not just state pay and the failure to match the reductions that have happened in the private sector that make the rest of us angry.  State workers also benefit  from job security and generous guaranteed pensions that people in the private sector now can only dream about. State workers still don't seem to appreciate how priceless these things are in today's world.

Let me give you the latest example.   Workers in Independent Newspapers, the biggest media group in Ireland formerly headed by Tony O'Reilly, have been through a program which has radically changed the way they work and what they get paid.  The staff has shrunk to a fraction of what it was in O'Reilly's heyday; everybody works longer and harder for much less.

A particularly sore point is the pension fund, into which Independent staff have been putting just under 10 percent of their pay.  It's stopped automatically from paychecks.  

Because of the market collapse, this pension fund now has a huge deficit.   Staff who have paid into it for years will be left with very little. There is some faint hope that "half pensions" can be paid, but even this is very uncertain.

A journalist or a printer who worked for the company for 40 years was supposed to get a pension of two-thirds of their final pay.  So if they were on final pay of €60,000 a year, the pension would be €40,000.   Under a half pension, it would be €20,000.  

Most are likely to end up with a fraction of that.  And since few people would have 40 years service, they would be getting much less anyway.  

Bear in mind that Independent Newspapers was one of the country's leading companies.   And this is not unusual.  Pensions schemes in many big private companies have been decimated by the downturn.

Now contrast this with the news last week that new judges will have to serve 20 years in future before they can draw a full pension (at present they only have to serve 15 years!)   And in future they will have to pay a 13 percent contribution towards their pension, instead of the current four percent.

The present arrangement was based on the idea that most lawyers work in the courts for years gaining valuable experience before they are appointed as judges, often in their fifties.  So they say it's not their fault they only get to work 15 years as a judge before they retire on a full pension!

This, of course, is completely bogus.  Most of them in their years as lawyers in the courts will have been paying into private pension funds.  So they have that to rely on.

They don't need a full pension from the state after a mere 15 or even 20 years as a judge.  The case would never stand up in court!

This kind of nonsense is rampant across the public service.  Early retirement on full pension has been allowed in several areas (like the police), for example. And there are other deals that feather bed the pension arrangements for some state workers.

But the big bugbear is that despite the fact that pensions for so many workers in the private sector have been almost wiped out, pensions for state workers, guaranteed for life, have only been reduced by a few percent under Croke Park I and another few per cent under this new deal.

The very high pensions paid to management grades in the state sector will now be subjected to higher reductions.  But only those on pensions of more than €32,500 will be affected.  

In the private sector, to get that level of pension you need to have built up a savings pension pot of around €1 million!

There's one law for state workers. The rest of us can go whistle.   And there's no point in complaining to a judge!

The 'national shame' of the Taliban Tabernacle - Ireland’s recent history of the Magdalene Laundries

Supporters of victims of the Magdalene laundries gathered in Dublin 
last week in advance of Taoiseach Enda Kenny’s speech about the issue.

Last week Taoiseach (Prime Minister) Enda Kenny delivered an emotional apology in the Dail (Parliament) to the women who had spent time in the notorious Magdalene laundries in Ireland, mainly in the 1940s, ‘50s and ‘60s.  

The name of the Magdalene laundries -- called after Mary Magdalene, the fallen woman or prostitute who was forgiven by Jesus -- gives you a good idea of what Irish society of the time thought of the women who were locked up in these grim institutions. 

But very few if any of them were prostitutes.  Very few were guilty of any crime. 

They were girls or unmarried young women who had got pregnant, girls from dysfunctional families where there may have been a suspicion of abuse, young girls from families where extreme poverty was deemed to be putting them at risk of corruption, girls who were disruptive in school, girls who had been caught stealing, usually as a result of poverty.

The vast majority of them were entirely innocent of any wrongdoing other than of being from deprived backgrounds or having got pregnant. Some were from families where the mother had died and the father could not cope.  Some had been transferred into the laundries from orphanages when they were old enough to work. 

Some were put into the laundries by their parents because they could not face the shame of having an unmarried young mother in the family.  Some were girls who were a bit slow and who, it was feared, might succumb if someone tried to "take advantage" of them.

So they were all put away, to keep Irish society tidy and in conformity with the piety and "modest behavior" that was expected in a Catholic country. 

The bleak institutions where the girls and young women were incarcerated were spread around the country, mainly in the cities.  They were run by nuns and the commercial laundries attached to them where the women worked without pay financed the entire operation.  

It really was slave labor.  The regimes in these institutions were a mixture of religion and working and living conditions that can only be called Dickensian.

Except that this was happening a hundred years after Dickens had written his great novels.  It was happening in the Ireland of the 1950s up to the 1970s and even later. 

And although most managed to get out in a year or two, many of the women were locked up for much longer. Some of them were kept so long that they became institutionalized and stayed for decades.

It was, as Kenny told the Dail last week, "a national shame."  

The descriptions by the Magdalene survivors of what they had gone through were heartbreaking and, indeed, shameful.  There was a great deal of physical punishment and cruelty, with girls and pregnant young women forced to work long  hours until they could no longer stand, and to endure the steamy heat in the laundries, the cold in the dormitories, the hunger, the fear.    

But the psychological cruelty was even greater, the cutting off of contact with families and the outside world, the intimidation, the contempt, the inference that the inmates were dirty, were sinners who had to atone.  

It was utter humiliation, a complete undermining of their human dignity and sense of self-worth.  It was done to girls who frequently did not understand why they were there, who were alone and terrified.  And any rebellion was ruthlessly crushed.     

Kenny was right in emphasizing that this was a national shame, not just a disgrace to be borne by the nuns who ran the laundries.  

Yes, the nuns who controlled the system had a lot to answer for and in many cases seemed to be guilty of a sickening lack of compassion, even of outright cruelty. 

But the culpability for what happened is much wider than that.  It's far too easy to turn the nuns into scapegoats, no matter how inhumane and un-Christian their behavior was. 

The real guilty party in what happened was Irish society as a whole, the priest-ridden, ultra Catholic and conservative, miserable little Republic we had created when we got our independence.  

This was the Ireland created by the founding fathers like de Valera, the tall, ascetic figure who dominated Irish politics for so long from the 1930s onwards.

Gaunt, pinched and driven by an almost monastic zeal, de Valera was forever dropping to his knees to kiss the rings of the bishops.  In this Ireland, church and state ruled hand in hand, and anything that conflicted with Catholic teaching, particularly in relation to sex, was crushed.  

De Valera dreamed his dream of innocent "comely maidens dancing at crossroads" in a mythic Gaelic Ireland of devout, poor, hard-working Catholics who never had sex outside marriage, and only then to create children in big Catholic families. 

This was the Ireland where the Taliban of the Tabernacle ruled, obsessed with anything sexual, no matter how slight.  
This was the Ireland where there was no contraception, where everything was censored, where bishops complained if corset ads were put in newspapers, where priests patrolled dance halls to make sure nothing was going on.  

This was the Ireland of the Children of Mary, of Sodalities, of numerous Catholic organizations which helped to create a society that matched or surpassed that in other repressive countries like Spain at that time. 

A central part of this was the obsession with sex and the fear of sexual behavior.  It was this national obsession, driven by the Catholic Church, which was the root of the creation of the laundries, the places of "refuge" for the "fallen" women. 

In this society, being seen "keeping company" with a married man or being a teenager with too many boyfriends was enough to require you to be "rescued."  You did not even have to do anything. 

Having a reputation was enough.  Or being in supposed danger of corruption was also enough to get you put away in a laundry.  So even if you had done nothing, just being perceived to be at risk was enough to have you put away. 

If you were a girl from a broken home, or a family in extreme poverty, or one with an alcoholic father or mother, you were a candidate for saving.  

Most shameful of all were the cases where parents of teenage girls put them away because they had "got into trouble."  In this Ireland, keeping up appearances was everything.  A teenage pregnancy was the ultimate shame.  

So it was not just the nuns who were to blame for this appalling system that locked up an estimated 10,000 girls and women over five or six decades.  The whole society was complicit in what was going on. 

Although as ever in Ireland there was a lot of willful ignorance involved, a lot of not wanting to know, of pretending not to know, or of never bothering to find out.  Questioning the church -- especially nuns -- was not the done thing. 

Did the upright citizens who ran the hotels, hospitals, government offices and posh boarding schools never wonder how their laundry was being done? 

Did they never wonder about who was taking the sheets and towels and table cloths and boiling and scrubbing the stains out of them? 

Even private homes in some cities used the Magdalene laundries (those were the days before domestic washing  machines).  No doubt many of these solid citizens felt that they were doing good by giving work to the nuns who were doing such a great job with the "unfortunate" women.  That was much more important than getting their mountains of laundry done at such a bargain rate, right?  

Also complicit in this were the state officials who failed completely to monitor what was going on in these institutions, just as they did in the  industrial school system, that gulag of abuse and cruelty which destroyed so many young lives here and was finally exposed a few years ago for the horror it was.  

The survivors of the Magdalene laundries are now older women.  They welcomed the apology from Kenny last week, and they are seeking compensation. 

They want to be paid for all the unpaid work they did in the slave labor laundries over the years.  The older ones want pensions and health care. 

If this country has any decency it will give them a fair deal.  Many of them escaped without too much damage, especially the majority who got out after a year or two.

But nothing will undo the damage done to so many of them who were caught in the system for much longer.