6. Make our cap­i­tal a self-fi­nanc­ing city

Is­sue ‘Dublin mu­nic­i­pal bonds’ – the long-term IOUs are a com­mon way of fi­nanc­ing other cities

The Irish Times - Weekend Review - - NEWS REVIEW - David McWil­liams

Mayer Am­schel Roth­schild, founder of the Roth­schild bank­ing dy­nasty, is said to have de­clared: “Per­mit me to is­sue and con­trol the money of a na­tion, and I care not who makes the laws”. The im­pli­ca­tion is that par­lia­ments can talk about laws or in­deed change them, but the real power in a coun­try or a city lies with who­ever con­trols the money. Ev­ery­thing flows from this.

The story of Roth­schild’s as­cent from the closed, em­bat­tled, ghetto – the Ju­den­gasse of Frank­furt – to the seats of power in Lon­don, Paris and Madrid is one of the most fan­tas­tic en­trepreneurial odysseys imag­in­able. His abil­ity, courage and dar­ing were ex­tra­or­di­nary and he took ad­van­tage of ex­cep­tional cir­cum­stances and world-shat­ter­ing events.

His im­pul­sive­ness, added to luck and an ap­pre­ci­a­tion of the tec­tonic shifts tak­ing place in the global econ­omy from 1780 to­gether with an un­der­stand­ing of the power and au­ton­omy of money, un­der­pinned Mayer’s suc­cess; he who con­trols the money, con­trols the game.

The corol­lary is also true: with­out con­trol over money, it doesn’t mat­ter how much you talk or dream of im­prove­ments, or how many grand de­signs you may imag­ine, be­cause noth­ing will come of it when you don’t have fi­nan­cial sovereignty. Some­one else will al­ways make the fi­nal de­ci­sion.

This iron law of money is the case for an in­di­vid­ual, a coun­try or in­deed a city, which brings me to Dublin and its fi­nan­cial au­ton­omy.

Dublin is by far the big­gest source of rev­enue for the State. In to­tal, ¤22 bil­lion in tax was raised in Dublin in 2017. This rep­re­sents 56 per cent of the State’s to­tal tax take, de­spite hav­ing only an es­ti­mated 38 per cent of the coun­try’s pop­u­la­tion.

No con­trol

Dublin ac­counts for 61 per cent (¤7 bil­lion) of VAT re­ceipts; 52 per cent (¤8.5 bil­lion) of PAYE/USC in­come tax; 45 per cent (¤1.1 bil­lion) of self-em­ployed in­come tax; 62 per cent (¤5 bil­lion) of cor­po­ra­tion tax re­ceipts, and 43 per cent (¤360 mil­lion) of cap­i­tal gains tax re­ceipts.

While Dublin gen­er­ates ¤22 bil­lion in rev­enue, only ¤16 bil­lion of this is spent in Dublin. De­spite gen­er­at­ing all this tax rev­enue Dublin can’t raise one cent for it­self or its own ini­tia­tives.

It has no con­trol over its own fi­nances and there­fore Dublin lo­cal govern­ment needs to go cap-in-hand to cen­tral govern­ment and the Dáil, dom­i­nated by rep­re­sen­ta­tives from out­side Dublin who raise their hack­les at large, nec­es­sary in­fra­struc­ture projects for the cap­i­tal, ar­gu­ing that money is be­ing “di­verted” to Dublin, when the op­po­site is the case.

As a con­se­quence, Dublin is emas­cu­lated. It has no means to fi­nance it­self and all its am­bi­tions are de­pen­dent on cen­tral govern­ment, which is loath to con­cede com­mer­cial power to the city over its fi­nances. As a re­sult, Dublin’s in­fra­struc­ture is creak­ing, our hous­ing prob­lem per­sists and de­te­ri­o­rates and, most im­por­tantly, the buck stops with no one.

There is a way to solve this and it is through is­su­ing a Dublin mu­nic­i­pal bond or a DMB. The bond would be a long-term IOU is­sued by a re­vamped Dublin City Coun­cil un­der the aus­pices of a di­rectly elected mayor with ex­ec­u­tive pow­ers. This is a com­mon way of fi­nanc­ing a city.

The Nordic coun­tries en­cour­age their cities to raise green-bonds. These are is­sued to cover spe­cific en­vi­ron­men­tal ini­tia­tives such as cy­cling lanes, new trans­port in­vest­ments or the roll-out of green build­ings and homes.

In the United States, lo­cal and city gov­ern­ments raise their own money through the is­su­ing of mu­nic­i­pal bonds backed by city taxes to fi­nance city-spe­cific in­fra­struc­ture.

Once the city has a pot of its own money, raised from its own cit­i­zens, it be­comes an­swer­able to its own cit­i­zens, thereby strength­en­ing lo­cal govern­ment enor­mously. The mayor of the city be­comes a fi­nan­cially sig­nif­i­cant in­di­vid­ual, and the process of break­ing free from cen­tral power be­gins. The first way to de­cen­tralise is to de­cen­tralise the bud­get.

In the US, lo­cal govern­ment has is­sued $249 bil­lion (¤218 bil­lion) worth of mu­nic­i­pal bonds in the first nine months of the year. There are more than 50,000 dif­fer­ent state and lo­cal govern­ment au­thor­i­ties’ is­suers. An av­er­age of $442 bil­lion (¤388 bil­lion) in new mu­nic­i­pal se­cu­ri­ties was is­sued per an­num over the past decade.

This money is used to pay for large-scale pub­lic in­vest­ment like roads, hospi­tals and schools.

The over­all size of the US mu­nic­i­pal bond mar­ket stands at roughly $3.85 tril­lion (¤3.38 tril­lion) – that’s about nine times Ir­ish gross do­mes­tic prod­uct. The big­gest owner of mu­nic­i­pal bonds in the US is av­er­age house­holds, ac­count­ing for roughly $1.6 tril­lion (¤1.4 tril­lion) or 42 per cent of out­stand­ing mu­nic­i­pal bonds.

We could do what the US does and give sig­nif­i­cant tax ben­e­fits to these bonds. In­ter­est pay­ments from mu­nic­i­pal bonds are typ­i­cally ex­empt from fed­eral in­come taxes if you are res­i­dent within a given is­suer’s ju­ris­dic­tion.

So, if you live in New York City and hold a lo­cal mu­nic­i­pal bond, you can en­joy a steady stream of tax-free in­ter­est pay­ments. Imag­ine the take-up of a Dublin bond from the es­ti­mated ¤90 bil­lion on de­posit in Ir­ish banks, yield­ing noth­ing.

In the US, aside from the ob­vi­ous ap­peal of muni bonds as­so­ci­ated with their var­i­ous tax ex­emp­tions for res­i­dents, they typ­i­cally of­fer an at­trac­tive yield, com­pa­ra­ble to high-grade cor­po­rate debt, but with a bet­ter credit rat­ing.

A Dublin mu­nic­i­pal bond could trade

any­where within the Euro­pean mon­e­tary union.

These would soon be liq­uid se­cu­ri­ties, at­tract­ing traders as well as in­vestors. In fact, given the tax base in Dublin vis-a-vis the rest of the coun­try, a DMB would have a higher credit rat­ing than an Ir­ish govern­ment bond. This would give the city am­ple scope to raise money.

It is not hard to see how rais­ing a Dublin bond would be good for the city and Ir­ish in­vestors. The an­nual in­ter­est on the bond could be paid by prop­erty taxes, ren­der­ing

in­come gen­er­ated from ex­ces­sive Dublin prop­erty avail­able to the rest of the city in in­fras­truc­tural projects.

This eco­nomic logic slams into the po­lit­i­cal rock of Roth­schild’s ob­ser­va­tion about money and power. Is Ire­land’s hyper-cen­tralised sys­tem of govern­ment ready to set Dublin free in a world where cities, not coun­tries, are in com­pe­ti­tion with each other for com­pa­nies, tal­ent and cap­i­tal?

I’m not sure the rest of the coun­try is ready for this – more’s the shame.

BLUE-SKY THINK­ING FOR DUBLIN Have you a pro­posal – big or small – that could make a real dif­fer­ence to Dublin and its cit­i­zens? Share it with The Ir­ish Times at irish­times.com/cap­i­tal­ideas

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