Economic planning that fails to factor in climate costs is pointless

Given there are just 12,700 properties currently listed for sale on MyHome, the tightness in the housing market looks set to remain for some time — reflected in KBC’s survey last week, finding 70pc of consumers expect price inflation of least 4pc per annum for the next three years.

Eyes will now turn to the Government’s ‘Housing for All’ strategy, set to be unveiled in the coming months. Also, the terms of the new equity loan scheme have yet to be formally published and signed off by the Central Bank. In the meantime, some unusual suggestions have been put forward to address the housing issue.

First off, some have suggested the recommendations of the 1973 Kenny Report should be reconsidered — imposing high capital gains taxes or levies as land is zoned for residential development. Colm McCarthy argued convincingly in this newspaper last week that such an intervention will be guaranteed to fail. Crucially, it would not address the nub of the issue, the lack of serviced, residentially zoned land with planning permission for residential development.

Indeed, James Benson of the Irish Home Builders Association (IHBA) has expressed concern some councils are now planning to cut the amount of residentially zoned land —  to comply with the National Planning Framework’s (NPF) aspiration for higher-density urban development.

For example, the IHBA has drawn attention to the draft Meath county development plan for 2021-2027.

According to the IHBA, the new plan envisages in the region of 663 hectares of residential zoned land, a 55pc reduction from the 1,497 in the previous plan and expects to de-zone 321 hectares in the process — the equivalent of circa 11,000 homes.

Earlier this summer, the Office of the Planning Regulator criticised Dún Laoghaire-Rathdown council’s development plan saying the proposal to zone for 22,800 housing units was significantly in excess of housing supply targets and would lead to “surplus lands zoned” for residential use. I’m not sure if the regulator considered the possibility any surplus zoned lands could push down their prices?

Higher-density urban development may be a desirable outcome, but it is an expensive one. It is accepted apartments have far higher build costs than traditional housing. Developers of apartments have overcome viability issues in recent years by selling to institutional investors in the private rented sector — itself clearly a political sensitive issue. Given elevated build costs, there is not currently a viable market to sell apartments to ordinary homebuyers.

It is this viability problem the Government now seems to have in mind. Last week, the Sunday Independent reported the centrepiece of ‘Housing for All’ will be a €500m grant scheme for homebuilders.

The new scheme is intended to reduce build costs for brownfield development in urban areas, providing up to 20pc of the cost, effectively a rebate on VAT and development levies. The Housing Agency will apparently police the scheme, so the grant is passed on as a lower price to homebuyers.

The critique of such subsidies is that they may ultimately prove inflationary, ending up in higher land prices, wages and other costs and failing to solve intractable viability issues that require structural reform. For example, over-zealous building standards, inefficiencies and the lack of standardisation and scale within the construction sector.

However, the proposals also show housing policy is not only focused on the shortage of accommodation. There is now also an ambitious target to reverse decades of low-rise, low-density development in Dublin and urban areas. Whether the electorate is ready for apartment living over traditional housing is another matter.

Ireland’s GDP data portray an increasingly misleading picture

Our new Davy forecast is for 10pc Irish GDP growth this year, following a 6pc rise in 2020. At face value, Ireland’s GDP data suggest the economy has been left unscathed by the Covid-19 pandemic. Of course, the explanation is well known — the outsized contribution from technology, med-tech and pharmaceutical firms.

However, Ireland’s GDP statistics are becoming increasingly unwieldy. They suggest in 2020 the 257,000 workers in multinational firms accounted for 11pc of total employment and €186bn of value added, or just over half of Irish GDP.

In 2003, the 153,000 multinational sector workers represented 8pc of employment, far closer to their 23pc share of GDP.

The mismatch has grown as intellectual property assets have been transferred into Ireland to comply with the OECD’s Base Erosion and Profit Shifting (BEPS) tax reforms, €137bn in 2019 and €101bn in 2020.

The other key aberration was the 25pc GDP growth rate recorded in 2015, around the time Apple’s stateless holding companies for its Irish subsidiaries were shut down. The volatility in the Irish data is impacting aggregate European measures. For example, despite Ireland’s small size, the 39pc monthly rise in industrial production in November 2020 likely made a reasonable contribution to the 2.6pc rise in the euro area.

The economist John Kenneth Galbraith once uncharitably said “There are two kinds of forecasters; those who don’t know, and those who know they don’t know.” I would count myself among the later.

Gauging the prospects for Irish GDP growth now requires an appreciation of the global revenues and profits of the largest global technology and pharmaceutical firms, and the proportion of these profits allocated to their Irish offices.

In recent years, GDP growth has consistently beaten expectations as intellectual property assets have been transferred into Ireland, but there is a risk profits could be reallocated as corporate tax reforms are implemented.

In fairness to the Central Statistics Office, they have introduced new measures to better capture developments in the domestic economy — free of the distortions created by multinationals. Our Davy forecast is for ‘indigenous sector output’ which contracted by 8.7pc in 2020 due to the Covid-19 disruption, to see a partial 5.2pc rebound in 2021 followed by a further 6.3pc GDP growth in 2022.

Accounting for Climate Change

Whatever the immediate prospects for Ireland’s recovery, they pale into insignificance set against the Inter-governmental Panel on Climate Change (IPCC) report and the dire warnings that immediate action is required to curb CO2 emissions.

Perhaps one reason action on climate change has been limited is the constant real-time analysis of economic data points and statistically insignificant moves in asset prices offered by Bloomberg, CNBC, Reuters, social media and the panoply of business media. Some appear to see the state of human development as best described by the current level of the S&P500. Amid the cacophony, the risks from climate change can get short shrift.

Again, the GDP data and national accounts can give a jaundiced view. They make no judgment on the quality of economic output and its contribution to society. CSO data show agriculture, forestry and fishing accounted for 21 million tonnes of CO2 equivalent emissions in 2018, industry 20 tonnes, services 24 tonnes and households 13 tonnes.

However, there is no attempt in our GDP data to deduct the costs of these emissions from the value added of each sector. A paper from the Dutch Central Bank in July estimated that environmental damage costs were equivalent to 7pc of GDP in 2015.

The authors found some sectors; agriculture, manufacturing and transport, did not generate sufficient profit to cover their pollution costs.

The point here is not that activity should cease, but these sectors are very costly in terms of climate change, a key point in designing taxes to reduce CO2 emissions. Perhaps the CSO may eventually end-up producing similar estimates for Ireland.

I should stress the economics profession has been found wanting, perhaps too focused on avoiding another financial and sovereign debt crisis. In July, Jean Pisani-Ferry of the Washington, Peterson Institute warned it is “high time policymakers realise climate policy is also macroeconomic policy and design transition strategies now”. Time is ticking.

Conall Mac Coille is Davy’s chief economist