Fisking Polly Toynbee on the Irish “Bail-out”

Posted on 24/11/2010

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Today The Guardian newspaper, published a Polly Toynbee column entitledIreland shouldn’t get a penny until it gives up its tax piracy“.  The article is riddled to such an extent with conjecture, half-truths and fantasy economics that I thought it deserved a full-on Fisking, so here goes:

The bailout of Ireland and its banks is so odd that it takes triple somersaults of the mind to accept that this can really be happening at this time, on these terms and with so little reform of the banks.

Neither Ireland nor it banks are being “bailed-out” as part of the proposed rescue transaction.  Ireland and its citizens are taking on a vast additional financial liability, equivalent to approximately €23,000 for every man woman and child in the country, in order that the lenders to the Irish banks do not have to face losses on their positions.  As The Guardian showed in its data-blog today, UK institutions have lent £139.2bn to Irish banks, companies, individuals and the government.  Germany is second with £128.9bn and the US third with £71.3bn.  These are the real beneficiaries of the “bail-out”, which is a misnomer anyway given that Irish citizens will have to pay it all back (with interest).

Yet again the western world teeters on the edge of calamity caused by the bank-lending extravaganza that fuelled the great property bubble. As the euro rose then fell and Moody’s credit rating agency today pronounced that “a multi-notch Irish downgrade is most likely”, Europe holds its breath. Will the market predators be halted at Ireland, or might the rating agencies knock down all the dominoes one by one, first the weak countries, then the strong? Meanwhile a Europe-wide fiscal tightening panic may yet bring about the very thing it seeks to prevent, as democracy once again falls under the wheels of finance.

The credit rating agencies and and the market “predators” do not have the ability to determine whether or not “dominoes” will be knocked-down.  The ability of governments to borrow at affordable rates of interest is a function of the creditworthiness of the states in question, which is in turn determined solely by the economic policies being pursued.  A negative reaction by the financial markets and the rating agencies is a symptom, not a cause, of weak state finances.  Finally, why should investment managers, who after all are fiduciaries legally required to protect our savings, pensions and investments, lend money to countries that are pursuing suicidal economic policies?  Should our right to invest our savings as we please – or that of others to do so on our behalf – be abolished in order that the EU can direct these funds to near-bankrupt governments?

In a mystical piece of numerology, the Irish bailout will cost Britain around the same £7bn painfully and needlessly sliced from public spending this year – the self-same £7bn that City banks are expected to pay out in bonuses in February. Any point hinting that those billions might be confiscated to pay for UK bankers’ rash lending to Irish banks? The markets would take their revenge.

Firstly, what is the difference between “confiscation” and theft?  Secondly, the greater the bonuses that are paid out by the banks, the greater the taxes that will be raised thereon by the government.  With the top rate of income tax now 50%, it could be the case that the UK government receives nearly £3.5bn.  Wouldn’t it be better if the banks made higher profits, paid higher bonuses, and the exchequer collected more tax?

What lessons are learned from the Irish crisis? Europhobe Bill Cash MP, so quiet of late, was back on the rampage yesterday, outraged at the bailout, while Eurosceptics of left and right rub their hands with “I told you so” glee; and even Tories have been praising Gordon Brown for keeping the UK out of the currency. They conveniently forget that Iceland, engaging in the same bubble economics outside the euro, is also bankrupt – despite the freedom to devalue and set its own interest rates. But nobody rescued the Icelanders.

Nobody rescued the Icelanders?  The government of Iceland received a loan of $4.6bn from the IMF and bilateral loans of $6.3bn from Germany, Netherlands and the United Kingdom in order that the Icelandic citizens would take on the responsibility of ultimately repaying the depositors from those countries.  On a per-person basis, Iceland received $34,400, more than Ireland is expected to receive.  Also, Iceland is not quite the same situation as Ireland.  In Iceland, the banks engaged massive loan-making to finance the over-priced acquisitions of overseas assets by “leading” Icelandic and foreign businessman.  These assets have since been seized by the creditors of the collapsed banks, leaving Iceland with nothing to show for the financial folly.  In Ireland – excluding finance and construction – there is a strong real economy and the country runs a significant trade surplus.  Secondly, because the country suffered a construction boom, Ireland now has a significant stock of real assets that can be brought back into productive use at low cost as the economy recovers.

We are contributing the second largest bailout to Ireland because we are so exposed to its banks: being in or out of the euro has little to do with it. And how smug will we feel next year, when the euro area is predicated to grow at twice our rate? Whether we are better in or out remains moot. Let’s hope the crisis never comes when we try to scurry in for cover – and it may be too late.

“Whether we are better in or out [of the Euro] remains moot.”  Really? REALLY!?  If we have learnt anything from this crisis, then surely it is that having the flexibility to determine our own interest rate (and with it the FX rate) is essential.  The Irish banking and construction orgy – which, let’s not forget, was a major factor in the crisis – was caused because the ECB’s policy of ultra-low interest rates to stimulate France and Germany in the last decade meant that Ireland was left with negative real interest rates.  In this scenario it is perfectly rationale to borrow as much as possible, as you are – in real terms – being paid to do so.  With it’s own currency, Ireland might have avoided this mess.  Secondly, we are bailing out Ireland in the first instance because we are a member of the IMF – under our terms of membership we have no choice in the matter – and because the Labour government signed-up the UK to the European Financial Stability Mechanism.  Providing funds from these two sources is not a matter of choice.  Only the potential bilateral loan is a matter of choice for our government, and even then, aren’t our cultural, political and trade links with Ireland strong enough to justify this?

What lesson has George Osborne learned since he penned a paean of praise in the Times in 2006, “Look and Learn Across the Irish Sea“? He wrote: “Ireland stands as a shining example of the art of the possible in long-term economic policymaking … Capital will go wherever investment is most attractive. Ireland’s business tax rates are only 12.5%, while Britain’s are becoming among the highest in the world.” Low taxes are the answer, he said.

The Irish banking crisis and subsequent sovereign debt crisis is in no way connected to the low rate of tax.  George Osborne’s point about the benefits of low taxation is as correct now as it was then.  The results of empirical studies are unequivocal in finding that the lower the level of taxation in a particular country, the higher the level of economic growth that the country is likely to experience.

He must still think so, as he hands over the £7bn without suggesting Ireland’s corporation tax rates are grossly unfair competition. Only the direst necessity would have a Conservative Eurosceptic chancellor shell out to the eurozone; but making the best of it, he claims he is being “good neighbours” with our cousins across the Irish sea. What he does not say – perhaps embarrassed by all that previous praise – is that the Irish have been exceptionally bad neighbours to everyone else.  Only last week another important British company – Northern Foods, now merged with Greencore – shifted its headquarters to Dublin. Just its brass plate and its profits went, not its factories making biscuits and frozen foods. Ireland’s corporation tax is 12.5%, the UK’s is 28%, dropping to 24% in 2013, and the US rate is 35%. Ireland has played the beggar my neighbour, race-to-the-bottom tax game for many years. Quite why the EU tolerated this is a mystery when a fortune was poured from Brussels to Dublin to pay for a spectacular modernising infrastructure over the years. A few other large companies recently decamped to Dublin from London, advertising giant WPP for one: these are mainly virtual moves for tax purposes only, since virtually no staff go over – and certainly not the board.

Grossly unfair competition?  What is unfair about about a sovereign state, a free people, a democratically elected government, choosing their own tax rate?  The problem is not that that Ireland has a grossly unfair tax rate, but that the rest of Europe has suicidally high tax rates.  We can’t expect businesses to invest, or for people to educate themselves, to work hard or to engage in entrepreneurial activities if the government extracts the benefits of this via taxation.

But, in the view of Richard Murphy of Tax Research UK, the corporation tax rate is only a fraction of the true story, a flag to signal to global companies that they will get a phenomenal deal with an Irish relocation. Ireland’s real shame is not that, like the UK, it mistook its property boom for a never-ending cash machine. What is unforgivable is its shameless status as Europe’s greatest tax haven, helping to cheat tax from the world’s treasuries for decades.

It’s called the Double Irish arrangement, and it’s often combined with the “Dutch sandwich”. Take the classic case of Google, as reported by Bloomberg. Google cut its taxes by a phenomenal $3.1bn over the last three years using the “Double Irish” trick to put most of its foreign profits through Dublin and the Netherlands to Bermuda. That reduced its non-US tax bill to just 2.4%. Ireland allows Google, Facebook, Microsoft Corp and many others to shunt profits around subsidiaries so that they escape even Ireland’s own low tax rate.  Ireland allows them, quite legally, to pass the profits on to other tax havens that levy no corporation tax at all, paying only tiny sums in passing: Google put 92% of its billions of worldwide non-US profits through Dublin, and it paid Ireland just £18m.

If corporations or individuals are using complicated avoidance (or evasion) techniques to dodge taxes in Ireland, then that is not a problem with the tax rate, but the manner in which the tax system is administered and payments enforced.  Secondly, the importance of locations such as Bermuda and the Cayman Islands is not to be understated.  Ireland should not be blamed or punished for the successful taxation regimes of these states.

This is a pure tax haven, with the laxest tax regime in the EU, with no controlled foreign companies rules (to limit deferral of tax). Google does bring some work to Ireland – about 2,000 mostly clerical jobs to process paperwork. The losers are not just every country in Europe, but everywhere except the US. Remember that the next time you read Google’s sanctimonious logo “Don’t be evil”. And maybe remember Bono, for whom even 12.5% was too much as U2 shifted its financial base to an even lower tax country, Holland; he would be wise not to promote good causes until U2 relocate to his native land. So why is Ireland not required to put its tax affairs in order and stop cheating all those neighbours now coming to its rescue? IMF doctrine demands countries squeeze the breath out of their people with punitive cuts – and they like low or, even better, no taxes.

Again, why are we questioning the rights of organisations such as Google, or individuals such as the members of U2, to legally organise their financial affairs as they so wish?  Why would any right-thinking person voluntarily pay taxes above and beyond the amount legally required.  I certainly don’t.  Do you, Polly?  Ireland might have attracted a large number of “brass-plate”-only companies with its low-tax regime, but it has also attracted a large amount of genuine investment, including in the electronics, data-processing, medical supplies and pharmaceuticals industries.  Indeed, US foreign direct investment in Ireland is $166bn, more than Brazil, Russia, India and China combined.  In comparison, US FDI in the UK is £421bn, only 2.5x greater, despite a population about 14x greater. It is no coincidence that Ireland has low tax rates and also one of the highest levels of GDP per capita in the EU (and therefore the world).

The IMF’s purgative is an ideological brew; it learns no lessons. When its patients get worse and near death, as Ireland has done after its first terrible dose of cuts, the fund calls for more leeches, mercury and arsenic. That is, of course, the same pre-Keynesian medicine Cameron and Osborne prescribe for us. There is a week before a final settlement: will the rest of Europe really hand over their money without demanding Ireland abandons tax piracy and joins the civilised world?

Keynesian economic policy clearly has a number of advantages, allowing a government to stimulate an economy when private sector demand is below the level of potential output.  However, in order for Keynesian policy to be implemented, the government must have additional borrowing capacity.  The events of recent days clearly show that Ireland has no further capacity to borrow freely in the financial markets.  The sensible solution now is not to borrow more in order to pursue Keynesian policy nor to bail-out the insolvent banking system, but to recognise the inevitable and declare default.  It will not be the ruin of the country, but rather the salvation.

Posted in: Economy, My Thoughts