Investors face tight turnaround to react to ECB bond-buying decision
AS much as €3bn could be lost to the Irish Exchequer as low-emission vehicles become the norm by 2030, according to industry experts. Huge amounts of revenue used to fund essential services are generated by vehicle registration tax, motor tax and fuel tax and could largely disappear as the petrol engine is slowly consigned to history.
Almost €5bn — or 7pc of government revenue — is generated through Vehicle Registration Tax (VRT), fuel tax, tolls, motor tax and Vat, it is estimated. As yet, there is no clear plan as to how this money can be replaced.
A government taskforce has been set up to explore options to accelerate the uptake of hybrid, electric and other low-emission vehicles. It will propose a package of measures for inclusion in October’s Budget to promote electric vehicles in particular.
That, of course, is a laudable aim and fits with a pressing need for measures to mitigate climate change. Pictures over the past week from Houston and Donegal dramatically illustrate the good sense of this policy. Such measures are also absolutely necessary if Ireland is to avoid massive EU fines.
They will also help curtail the air pollution caused by the thousands of combustion engines that daily clog our towns and cities, damaging people’s health. Just 8,000 electric vehicles will be sold in Ireland by 2020. But as this figure jumps — as it must — it is far from clear as to just how big a hole will be blown in Exchequer finances over the next 10 to 15 years.
A range of support measures encourage the adoption of electric vehicles and other environmentally THE European Central Bank has a tight timetable for deciding the future of its bond-buying programme, but investors may face an even tighter one to adjust to the outcome.
The governing council will hold its first formal talks next week on the pace of asset purchases after December, when the current programme is scheduled to expire.
Yet it’s conceivable that the decision won’t be finalised until the December 14 meeting, according to euro-area officials familiar with the matter.
That would leave around 10 trading days, during a holiday season when volumes are typically low, for market participants to sort out their strategy for the New Year.
The ECB’S 25 policymakers have plenty to talk about: some say the euro area’s robust economic recovery warrants the winding down of bond purchases — currently running at €60bn a month — while others point to feeble inflation as a reason to keep stimulus going.
Yet leaving a decision too late could unnerve investors and push up the euro and bond yields, undermining the efforts so far.
“We’re all aware of the reality of the clock that they face,” said Charles Diebel, head of rates at Aviva Investors in London. “But markets have got very used to being told what’s coming a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like asking for trouble.”
Officials are aware of the risk of waiting too long, with two of the people saying they shouldn’t surprise investors by holding back every detail on the future of QE until the final meeting of the year.
That suggests the ECB is still likely to deliver signals on the plan for asset purchases after one or both of the next two meetings. friendly forms of transport. Up to €10,000 worth of grants and VRT relief is available. While the grants are likely to be scaled back as the electric fleet grows, it will be politically difficult to reintroduce VRT on such vehicles, with the system now directly related to a vehicle’s emissions. In 2014 VRT generated €0.54bn.
Motor tax rates are also increasingly related to CO2 emissions. Motor tax generated €1.12bn in 2015 and was used to fund the country’s local authorities, but this funding stream will only decrease as motorists leave behind their petrol guzzlers. As the environmentally friendly fleet grows, the Exchequer will take an increasing hit and the biggest hit of all will come from a dramatic fall in the amount of tax collected from fuel.
In simple terms, how do you levy fuel tax on an electrically-powered vehicle that does not use fuel? In 2015 alone, the Exchequer received €2.3bn in diesel and petrol excise and carbon taxes, excluding VAT. Indeed tax accounts for 70pc of the price of a litre of petrol. Little wonder it is known as one of “the old reliables”. Not for long. As the huge fleet of petrol cars disappears in the next decade or so, the impact could be dramatic.
The big question that needs to be asked is how A spokesman for the central bank declined to comment.
Neither would a tapering decision at two weeks notice be unprecedented. When the US Federal Reserve decided to cut its own bond purchases starting in January 2014, it made the announcement on December 18, 2013.
The difference is that the Fed started formal talks on tapering at their June 2013 meeting and frequently talked in public about tapering in the following months.
The ECB has so far explicitly avoided putting the topic of next year’s purchases does this income stream for the State get replaced even as the country makes the absolutely crucial shift to low emission vehicles?
And it is not only an issue for motorists. Taxes raised by motoring pay for essential services right across society, such as health and education. Future governments will face some stark and difficult choices as they look to replace all of this lost income. Taxes on property, income and business may have to rise to fill the hole.
Indeed, in Norway, where subsidies and other measures saw the electric vehicle fleet grow to over 100,000 last year, the government has been forced to row back on some incentives due to their overwhelming success.
A more likely approach is the introduction of extensive road-user pricing. That is already implemented through tolls on motorways in Ireland and by congestion charging in cities such as London. But in its most developed form, this would see technology introduced to charge drivers per kilometre of road driven. For some drivers it could even mean a saving on the high level of taxation they face through other means at the moment, and it is the approach slowly being adopted right across Europe. But look at the debacle over new water charges to see just how difficult an issue this could become for any government operating in a four-year electoral cycle.
The Government should still accelerate its efforts to replace dirty, carbon-emitting vehicles as quickly as possible. But careful consideration is needed as to how the revenue this fleet generates is replaced, so that there is still cash to fund schools, hospitals and other essential services. on the council’s agenda. At July’s session, it agreed to start discussions in “the fall,” but even then opted not to say if that necessarily meant the September 7 meeting.
The slide in the euro in reaction to the news that the full details of the assetpurchase plan may wait until December might encourage those policymakers who expressed concern at the July meeting of a possible overshoot of the single currency.
The euro’s gain after President Mario Draghi’s speech in Portugal in June — when he spoke of “reflationary forces” — and the currency’s jump again last week when he opted not to try to talk it down in a speech in Jackson Hole, Wyoming, showed how sensitive markets are.
That justifies extreme prudence, with changes to communication and policy likely to move even slower than originally expected, two of the people said.
Some policymakers are more sanguine. Bundesbank President Jens Weidmann and Estonian central-bank governor Ardo Hansson have both said recently that the euro’s strength reflects the economy’s upturn and is nothing to worry about. Austrian Governor Ewald Nowotny said on Friday that he wouldn’t “dramatise” the gain.
But Nowotny also added that policy normalisation can’t be about “abruptly stepping on the brake.”
Holding off until December would allow the ECB to tie its final decision to updated forecasts for growth and inflation, which will be published at that meeting.
The central bank has frequently used revisions to the outlook to justify policy changes.
But for some commentators, the urgency for action is mounting because the ECB looks set to run into its self-imposed limits on how much debt it can buy from each nation, issuer and bond issue.
The current schedule will take its purchases to €2.3 trillion, equivalent to almost a quarter of gross domestic product. The ECB’S balance sheet — fuelled by free loans to banks — has soared to €4.3 trillion.
“Sticking your head in the sand until December and hoping the problem goes away is not a communication strategy,” said Richard Barwell, an economist at BNP Paribas Asset Management in London.
“The issue limits are going to force them to exit prematurely. They cannot duck the consequences indefinitely.” Bloomberg
Reaction to ECB President Mario Draghi’s latest speech illustrated market sensitivity