This year’s Budget is something of a Rorschach test: asking people what they think of it will tell you more about them than it does about the Budget itself. The government itself tried to portray the Budget as a pre-Brexit exercise in caution. As Conall MacCoille pointed out, though, any budget where government expenditure grows year-on-year by 6% can hardly be described as cautious.
When it comes to housing, it struck me that a lot of the anger – where there was anger – related to mortgage interest relief for residential landlords being extended to 100%. The optics of this, of course, are not good. But in essence, this is part of a much-needed professionalisation of Ireland’s rental sector.
If you run any other business venture in Ireland, any costs you incur – including costs of capital borrowed – are not counted when the government calculates your income. If your business happened to be renting out residential property, however, that was not the case.
There is no good reason to handicap the rental sector – and by extension, Ireland’s renters – by discouraging professional business through discriminatory measures.
What makes it a bit messier, of course, is that these investors overlap, at least to some extent, with owner-occupier buyers. Thus, any move that affects one group affects the other. But, as it happens, owner-occupiers are already incredibly favoured by the tax system – and remain so despite the latest changes.
If you are an owner-occupier, you do not pay any income tax, for example, on the property you rent out to yourself. This may sound outlandish but there are numerous countries where such imputed income is taxed.
To see why, consider a situation where Mr Murphy and Ms Kelly live in next door to each other. In one version of the world, they own the homes they live in and do not pay any income tax. In another version, they live in the home that the other person owns.
Society should be completely indifferent to these almost identical situations but instead, in this second version, both Mr Murphy and Ms Kelly would be liable for income tax – and indeed for capital gains tax when they finally sell. (Owner occupiers are exempt from CGT too.)
The ideal system for housing would be where all mortgage debt is eligible for tax relief – just as it would be for any other business – but where all income from property, including imputed income enjoyed by owner occupiers, is eligible for income tax.
Viewed from that perspective, the relatively small change to mortgage interest relief is not at all the key Budget measure on housing.
Indeed, I would argue that to judge the Budget on housing, we need to start by looking at health. Gerard Brady, economist at IBEC, outlined during the week the extraordinary increase in public funding of healthcare in recent years.
In 2015, it was planned that the Government would spend €12.7bn on healthcare. The actual figure turned out to be €13.3bn and the 2016 plans were based on growing that higher number. The same pattern has played out each year since and the 2019 healthcare budget is an eye-watering €17bn.
That’s a €4.3bn increase – an increase of one third – at a time of zero inflation. Roughly half that increase has been entirely unbudgeted and the response of policymakers was to reward those overruns, not punish them, with even more public monies in subsequent years.
Language is not our friend here: using the word billion hides the magnitude of this. €4,300 million is probably a better way. That’s almost €1,000 extra for every man, woman and child in the country for a health system that few would describe as one third better now than in 2015.
Perhaps we’re just catching up with our peers? Far from it. Since 1999, despite having one of Europe’s youngest populations, we spend more per capita on healthcare than the OECD average. We spend almost €3,600 per person on healthcare. The average for high-income countries is just €2,000 per person.
What has this got to do with housing? Healthcare and housing are recognised as the two areas most in need of a “fix”. And yet the level of spending in one completely dwarfs the other.
For example, the increase for the Department of Housing in 2019 is €421m. This will be spread principally across a ‘capital’ budget – money to be spent directly on building homes – and the Housing Assistant Payment (HAP). The budget for HAP will increase by €121m. Written as €0.1bn, you can see how this kind of budget would hardly be noticed in healthcare.
Of course, as Ireland’s bloated healthcare budget shows, it is not just about how much you spend –how you spend it is just as important. And here, sadly, Ireland remains some distance from best practice in relation to social housing.
Taxpayer money should never be spent on new houses up-front – rather it should be used to borrow to build what is a long-lived asset. And taxpayer assistance to social tenants should not be tied to market rents, but rather to the cost of building new homes.
Unfortunately, those two features – spent up-front and based on market rents – underpin most of the budget for social housing.
Could you imagine a world where the €2bn over-run in healthcare over the last three years had instead been spent on a cost-rental scheme? Cost-rental works off the basis of linking assistance for social tenants to the cost of providing them with homes (not market rents).
The standard cost-rent system takes a set fraction of disposable income – such as 30% – so that the more you earn, the smaller the subsidy. And when a household’s income rises high enough to cover the rent, they receive no subsidy. This makes cost-rent systems incredibly efficient with taxpayer money.
If the taxpayer had to subsidise the bottom third of the income distribution – roughly 650,000 households – a two-billion euro budget would stretch to an average subsidy of more than €3,000 per household each year. And that budget would be tied to new construction, not to market rents.
Even with high construction costs in Ireland, that subsidy would be enough to cover the cost of adding a whole host of badly needed housing across Ireland – including options for downsizers as well as independent and assisted living complexes.
Many arm-chair pundits talk about what we could do with the Apple money currently tied up in an escrow account. We have actually had a corporate tax windfall of nearly the same amount – €11bn. But instead of spending it on getting the social housing system we need, we have largely spent it on propping up the dysfunctional healthcare system we have.