Pub talk has all too often passed for economics in political circles this summer. The ECB put up interest rates to tackle inflation which is our main economic challenge. Some politicians, however, demand mortgage-interest relief, which contradicts the purpose of that policy. Fine Gael eventually fell in behind Sinn Féin and the Minister for Finance, Fianna Fáil’s Michael McGrath, has now fallen in behind the lot.
Mortgage interest relief is a subsidy for those who have a mortgage and the wherewithal to borrow. The tax relief would be paid for by all, even those who can’t get a mortgage. Paying a mortgage is already cheaper than renting.
In tandem, people demand higher interest rates on savings. Again, these would mainly benefit housed, older people with money and will inevitably be paid for by bank customers paying interest on loans, including those paying mortgages for whom an interest rate subsidy is perversely demanded as compensation.
The unlearnt lesson of recent economic history is that little beats leaving well enough alone. The alternative is that we go into a cycle of demanding higher rates for savers – rates that inevitably, if not immediately, push up mortgage interest rates, to be subsidised by taxpayers in the form of interest relief. That drives up the cost of mortgages, and the price of houses. Like existing mortgage interest relief for buy-to-let landlords, it is inflationary. Bizarrely, that is now cited as a benchmark for mortgages generally. We live at a time where, in a Dutch auction of expectations, it is assumed that the State will pay your bills.
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The losers are living at home with their parents, in a country where knee-jerk reactions invariably favour those on the housing ladder, or who are housed and have money. It is far from the politics of the underdog.
Some 68 per cent of people aged between 25-29 in Ireland still live at home, double the proportion of a decade ago. The number of those aged 65 and over will rise from 25 per cent in 2020 to 46 per cent in 2050 as a share of the working population. And yet we refused modest but blindingly necessary changes to the age of eligibility for an old-age pension to 67. Mary Lou McDonald’s outlandish claim that the demographics would take care of themselves became mainstream, as first one and then another political party fell in behind her.
The losers are living at home with their parents, in a country where knee-jerk reactions invariably favour those on the housing ladder, or who are housed and have money. It is far from the politics of the underdog.
The reality of Irish banking is a lack of competition, with little certainty that our slimmed-down model is sustainable. The departures of Rabobank, KBC and Ulster were partly just desserts for a market characterised by outlandish lending, and the regulatory failure of the Central Bank.
There is also a basic fact: banks are fat with savings. They don’t have to compete on rates for deposits. But politically prodded they will, to an extent. They will then slowly socialise the cost in a market less attractive to competition – which is the ultimate power of incumbency.
The banking levy that will be extended is already a cost on the savings which will be rewarded with higher interest rates, if those same voices get their way. The levy was introduced in 2013 in circumstances where it was in effect impossible to collect taxes on banks until they ran down their losses. It was an instrument intended to appease public anger and remains so. A bank’s liability is charged as a percentage of the Deposit Interest Retention Tax (DIRT) paid on its deposits. DIRT is 33 per cent and paid by the saver. The levy is a cost to the bank. In different ways, they drag down the returns enjoyed by savers.
New banking competition at home is nowhere on the horizon, and the prospect of political interference is a barrier to it
Politics abhors complication, however. It is good opposition politics to stick it up to the banks, which are unpopular.
The problem for the Government, which controls substantial deposits through State Savings Ireland and An Post is that it has little to say to those small savers, as it simultaneously depresses the return to savers in banks. Banks may be “laggards”, as Simon Harris said, in passing on increases in interest rates to savers – but so is the Government in which he is a minister.
A note of reality, and I suspect irritation, was added to Harris’s comments by his colleague, Public Expenditure Minister Paschal Donohoe, who reminded savers to shop around in European banks for better rates. New banking competition at home is nowhere on the horizon, and the prospect of political interference is a barrier to it.
There is a clear connection between interest rates and inflation. Rates are a rough tool, but effective over time. House prices across the State are now growing by a modest 2.2 per cent annually and in Dublin dropping by 0.9 per cent. That’s the effect of sustained higher interest rates on house prices specifically, as well as on inflation more generally.
Every tax relief for someone, however, is a tax hike for everyone. Just as there are no free taxes, everyone’s return on capital is paid for by someone else.