The Sunday Times July 16, 2006
Irish outlook: Michael Casey: Ireland’s wealth just isn’t working
timesonline.co.uk/article/0, … 29,00.html
GEORGE BERNARD SHAW wrote that Ireland was a poor country full of rich people. A recent report from Bank of Ireland that suggests we have between 30,000 and 100,000 millionaires gives credence to his view. But some caveats are in order.
First, this is a study of personal wealth not the nationâ€™s. The latter would have to include valuations of natural resources, the fish in the sea, our infrastructure and so on. But such national balance sheets are not available. Given Irelandâ€™s poor infrastructure, we would not rank as highly by this yardstick.
In looking at the wealth of a country it is important to have accounts for all four main sectors: household, government, business and external. Often when one sector is in surplus, another is in deficit, and it is important to examine all sectors for consistency and form a comprehensive picture of financial flows from year to year.
These financial accounts are being prepared by the Central Bank, but are not yet available. When finalised they will represent a significant improvement in our economic database.
Second, it should be noted that, in terms of income, Ireland would probably rank about eighth or ninth in the world. The Bank of Ireland research, which placed the country in second place, compared Irish incomes with those in the top eight countries in the OECD (Organisation for Economic Co-operation and Development) as ranked by gross domestic product. Many countries, including Norway, Luxembourg, Kuwait, Switzerland and Denmark, have higher incomes but do not figure in the Bank of Ireland wealth comparison.
Finally, although the measure of personal wealth does deduct personal debt, the net wealth figure includes the value of second homes. On this basis we have 30,000 millionaires. If the main residences are added in, this figure jumps to 100,000 millionaires.
***The second, third and fourth homes clearly account for a substantial part of the wealth of the 30,000 millionaires. If those homes are excluded, Ireland is no longer second among those OECD nations in the Bank of Ireland comparison. The figure of â‚¬150,000 wealth per head slumps to â‚¬18,000, leaving us in last place. ***
Despite this sobering thought, the calculation that threw up the key figure of â‚¬150,000 per head of population (including second homes) does not seem unreasonable. Since gross national product (GNP) per head is about â‚¬35,000, this means that, on average, an Irish person has a net wealth of about four to five times his or her annual income.
But when you take out the second home(s), the net financial wealth falls to â‚¬18,000 or about half the annual income. This may be a little low, given that the savings rate has been relatively high in Ireland for many years.
Averages can be misleading and in discussing wealth can even be dangerous. Many people have no savings and indeed may be highly indebted to financial institutions.
At the other end of the spectrum thousands of millionaires collect rents from tenants, as well as making considerable capital gains from the value of their properties.
Discussions about inequality and poverty in this country are usually based on income data, because information on wealth has been patchy and unreliable. The Bank of Ireland study could change that situation.
An unintended consequence of this report is that it may be used by certain parties to argue for the introduction of a wealth tax, especially if other sources of revenue weaken.
The last wealth tax, introduced in the 1970s, was flawed in large part because the ratio of administrative costs to tax yield was very high. But now, with so many millionaires in the country, it might be argued that the administrative costs could be spread over a much wider base.
There are problems with all wealth taxes, but there is one advantage that is rarely alluded to. The utility of money declines as a person acquires more and more of it. A multimillionaire does not get much more utility from a seventh bathroom in his mansion nor a fifth Mercedes.
In other words, the seriously rich wouldnâ€™t miss the money taken by a wealth tax, whereas the poor person who receives a small grant from the state would benefit greatly.
It is interesting to note that Japan comes first in the Bank of Ireland league table with a wealth figure more than 40% higher than ours.
Could this be why the Japanese economy failed to grow for more than 10 years? There the rich tend to be older and they donâ€™t spend very much. At the same time poorer people are worried about inadequate pension provision and donâ€™t spend either. Could this be a problem for Ireland in the future? The most obvious factor to emerge from this survey is that estimates of Irish wealth are heavily influenced by bricks and mortar and the rapid increases in property prices. If just 10% of the population decided to liquidate some of their property in Ireland, prices would fall. In all such wealth estimates there is a kind of fallacy of composition at work. One person can realise his or her wealth, but a significant proportion cannot because the market will move against them.
There is also the tangled question of fundamental value. If it is believed that house prices are well above their fundamental value, it follows that wealth estimates based on these prices are also likely to be overstated. Hardly anyone wants to say that houses are overpriced because most people have a vested interest in seeing prices stay at their current levels. No doubt youngsters without a foot on the property ladder would be keen to express an opinion on the emperorâ€™s clothes, but we must await a survey of disenfranchised youth to support that view.
When talking about wealth, it is important to realise that investing in property to the extent that has taken place in Ireland does not add much to real national wealth. A house, for example, has many of the same characteristics as a consumer good. It is not as â€œproductiveâ€