Lest we forget….
In all the blame allocation about the economic/banking/property crash, it seems to be forgotten that there was, in fact, a general consensus that the construction boom could not be sustained indefinitely. The debate centred on whether we’d have a soft or a hard landing. The vast majority of economists (incl. Brian Lucey) favoured the soft landing scenario, which would have yielded very different consequences to those we are currently enduring.
If we’d had the desired soft landing
- developers and builders would have experienced an orderly reduction in activity levels
- unemployment in the sector would have increased but, at a moderated rate, and much of it would have been absorbed by an economy that continued to expand in other areas
- House price rises would have stabilised, rising at a rate akin to normal inflation and moderating the need to “get on the housing ladder” for first-time buyers
- Banks would have suffered some decline in their profits, but those would still be quite substantial. They would certainly have avoided the catastrophic level of bad debts now being incurred.
However, how would the largest financial beneficiary of the construction boom, i.e. the Govt, have fared in a soft landing?
During the boom, it was routinely estimated that about 40% of the sale price of every new house and apartment went to the Govt through a variety of taxes, duties & levies. Doubtless something similar applied to new commercial properties.
On second-hand properties, stamp duty rates of up to 9%, Capital Gains Tax etc added to the overflowing coffers of the Exchequer.
Rather than recognise the temporary nature of this engorged inflow of property-related taxes, the Government instead embarked on a programme of long-term spending commitments, which were dependant on maintaining and increasing the tax inflows. These included increased public sector employment, bench-marked salaries & pensions, generous social welfare hikes etc etc..
It was a bit like a man working on a 3-5 year project, which temporarily provided a significant boost to his earnings, deciding to take on a 30-year 100% mortgage on the strength of that temporary boost.
So the Government was heading for an inevitable, and material, shortfall in its finances, the so-called structural deficit, regardless of the worldwide economic recession. We got the dreaded hard landing in spades, predicted by the very few, which has greatly exacerbated the problems in the public finances.
It’s clear that the Government was almost certain to be in trouble regardless of what happened, and it was the player who most needed the construction boom to continue as long as possible. Might that explain the annual budget incentives for developers, investors and first-time buyers?
Many investigations logically use a “follow the money” or “cui bono?” methodology. Assuming that the proposed inquiry into the banking crisis pursues this line, the Government will inevitably be in the dock alongside the bankers and developers.
- Bank Inquiry should "follow the money" to the Govt...
- Michael O'Leary & me
- Willie O'Dea - did he gamble in court case?
- Maire Geoghegan Quinn's Dáil pensions
- Michael O'Leary woos Mary Coughlan
- FG up, Labour down - but Kenny the media focus
- The George Lee affair & RTE
- ESRI slams Gormley policy on waste management
- Bailout for FTBs in negative equity?
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