Irish Economy

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So How’s the ol’ 1 Percent Getting On?

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The 1-percenters are back in the news with the Oxfam study showing that the world’s richest 1 percent owns more wealth than all the rest of the planet put together. So what about our own 1 percent? How are they doing? Let’s have a look at how that 1 percent and other top earners have been getting along in the crisis.

What follows is based on the EU’s Survey of Income and Living Conditions measurement of income (there may be trouble with the link – go to Eurostat Database/Population and Social Conditions/Living Conditions and welfare/Income and living conditions/income distribution and monetary poverty/distribution of income/the first table). It is a different concept from what Oxfam used: wealth. Wealth ownership refers to assets – real estate (buildings, land) and financial property (shares, bonds, cash, equities, pension pots, etc.). Income refers to the annual flow, whether it is employee or self-employed earnings, investment income, pensions, etc.

Income is only one measure of economic power and influence in the economy. Profits levels, the relative strength of labour and capital, degree of financialisation, place in the production process, social status, ownership of assets – it could be argued that income is the result, not the cause, of unequal power relationships in the economy. But it’s an informative measurement and can reveal something of what is happening around us or, in this case, above us.

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Prior to the crash the top 1 percent held nearly six percent of the share of national income, above the EU-15 average. This fell to 2011 – primarily due to losses in capital and self-employment income arising from property and speculative losses in the crash. However, since 2011 (and the current government), things are on the mend with the 1 percent trending upwards. Still a ways to go to pre-crash levels but with a little time and a few tax cuts, normal business should be be resumed.

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Lower Your Expectations – the Recovery is Settling In

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Remember at the beginning of the recession when we had all those letters to represent the likely course of the economy. There was the V-shape to represent severe decline followed by an immediate bounce-back; a U-shape to represent severe decline, a bit of lingering at the bottom and then a bounce-back; and the L-shape with severe decline followed by flat-lining as the economy stagnated. Between 2008 and 2013 this best fit the economy.

Now the economy is back in recovery mode but under the Government projections we are not going to bounce back to pre-recession levels of living standards. Lower your expectations, sisters and brothers, the recovery is setting in.

Let’s take a historical look at two indicators of living standards. First, consumer spending:

  • Between 1970 and 1995, a period covering two slump periods punctuated with growth, real consumer spending averaged 2.7 percent annually per capita.
  • Between 1995 and 2000 (the good phase of the Celtic Tiger, based on investment, manufacturing and exports), real consumer spending averaged 8.5 percent annually per capita. That was a strong performance, with employment rising, increasing wages and the ongoing shift to a modern enterprise base.
  • Between 2000 and 2007 (the bad speculative phase) real consumer spending averaged 3.4 percent per capita.. A little better than the pre-Celtic Tiger period but as we know, unsustainable.

Then the recession hit and consumer spending fell by over 10 percent. However, as always happens, the economy recovered. In the textbook alphabet, there would be a burst coming out of the recession, representing pent-up demand, and then things would settle back down to past trends. If the Government projections come true, this will not be the case.

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“Wants” A US-style Taxation System?

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The Taoiseach says he wants a US-style tax system. What does he think we have already? Here’s what the EU Ameco database tells us. Ireland data from 2015 comes from the Government’s own budgetary projections.

US Taxation

Ireland already has a US-style taxation system – if we use general government revenue as the benchmark. Before the crash Ireland was awash with revenue from the speculative boom; revenue that quickly evaporated. Since then, Irish government revenue has been steadily falling. By 2017:

  • The Government projects revenue will be below 32 percent of GDP. When we factor in multi-national accountancy practices, this figure rises to 34.5 percent
  • Ameco projects that US revenue will be 34 percent
  • Ameco also projects that Eurozone revenue will be over 46 percent.

A few things stand out in this. First, we are already at low US low-levels of taxation. Second, we are certainly not at European norms. We’d have to raise taxation by a mind-boggling €26 billion to reach the Eurozone average. Even with the demographic benefit of having fewer elderly (which is substantially negated by a higher level of young people) we’d have to increase taxation massively.

Third, the Government projections foresee revenue falling even further out to 2021 when it will be below 34 percent.

And here’s the kicker: this doesn’t factor in tax cuts that a future government may introduce. For instance, Fine Gael wants to abolish USC. That will drive tax revenue down further, potentially falling behind US levels.

When measured as a percentage of GDP, Ireland is at the bottom of EU tables – fighting it out with Romania and Latvia for the rock bottom prize. Nods towards quality health and education services, childcare and eldercare, public transport, pensions and incomes supports are made, but these are little more than nods; perfunctory gestures in a debate that effectively excludes the social.

What the Taoiseach really wants is for Ireland to be a basement-without-a-bargain economy where public resources are squeezed, investment is starved, and the energy bulb frequently cuts out without any window to let in the light.

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Everyone on Board for the Great Hamster Wheel

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Feel like your pay rise, if you get one, is barely covering the cost of living?  That the tax cut you’re going to get next year will only bring you back to where you were this year?  Feel like you’re running just to stand still (if you’re lucky)?  Welcome to the great Hamster Wheel where you can run and run and go absolutely nowhere.

Christmas is coming and Santa is bringing a big bag of price increases.

Health Insurance:  Now is a busy time for health insurance renewals and Charlie Weston reports a series of price increases.  Aviva is to increase prices by 5.1 percent in January. 

‘The Aviva price adjustments come just months after similar hikes. At the start of the year, the insurer announced a rise of 3.5pc. And in the summer, it announced rises of 5.1pc, effective from the start of last July.’

Other insurers have also announced prices increases. 

The health insurance market is getting more complicated.  72 Aviva health plans (yes, 72) will experience increases, many won’t while 47 plans will be withdrawn.  These will entail increases of €150 to €200 per year for many policy holders.  Weston quotes one independent broker as saying that most plans only have a life-span of 12 months.  Sign up if you will but realise that your plan may not exist after 12 months. 

Hands up all those who would just rather pay for their health through social insurance – one plan to cover all contingencies – and share that cost with employers.

Public Transport Fares:  urban bus, Luas, rail and Bus Eireann fares are going up, though some travellers will experience a decrease with a number of zones being merged.  Some of the increases will reach 15 percent meaning an additional €70 per year.  But while there will be winners and losers in these price increases and changes, over the last four years public transport has experienced considerable inflation:

  • Rail fares:  17.3 percent
  • Bus fares:  21.4 percent
  • Overall inflation:  1.6 percent

That’s a substantial gap.

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Reflections on Water Movement and Right2Change Development

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Probably the most encouraging development that has come out of the water charges movement has been the accentuated understanding of ‘them’ and ‘us’; the idea that society is organised so as to benefit the minority at the expense of the majority. This is the starting point that all of us on the left had been yearning for since the beginning of the crisis. Undoubtedly, it was slow to arrive but when it finally did so, it was truly an explosion of struggle and organisational prowess, as we finally said ‘enough is enough’.

Any lingering illusions that the mainstream media, establishment parties or big business exist to better our lives, will have been dispelled for those at the heart of the movement. However, conclusions on how to change society for the better are numerous, unclear and disjointed. This comes as no surprise with an embryonic movement, which lacks ready-made and large radical institutions to provide solutions.

Ireland is a tax haven for big business

Rome, or Dublin for that matter, wasn’t built in a day. Economies and societies are incredibly complex systems that have developed over centuries. Ireland’s economy, in particular, presents many structural challenges for the left that simply cannot be wished away or eradicated overnight. The most successful capitalist economies are those which have the strongest industrial bases, specifically economies which actually make things and have goods or raw materials to trade with others countries or markets.

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Championing the Self-Employed

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The Left and trade union movement should champion the self-employed.   While the Right gives promises of tax breaks, the self-employed need so much more:  a stronger welfare state and public sector intervention to empower self-employed workers in the market place.  Indeed, what the self-employed need is what PAYE employees need: social security and market strength.

 Let’s do some background numbers.  In Ireland, there are approximately 320,000 self-employed or 17 percent of total employment.  Of these, 69 percent are own-account workers – that is, they don’t have employees.   Throughout the EU-15, the self-employed make up 14 percent with the same proportion of own-account workers.  In Ireland, nearly one-in-six in the workforce are self-employed.

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Unsurprisingly, self-employed in the agriculture and fishing sectors make up a quarter of all self-employed.  This is followed by construction and retail, with professional and technical self-employed making up 10 percent.  There are smaller numbers spread throughout all economic sectors.

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Begruding the Recovery

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Cliff Taylor asks why President Michael D. Higgins is not celebrating the recovery we are experiencing. 

‘The President is not comfortable saying anything positive about the Irish economic recovery.’

Apparently, the President is a bit of begrudger; indeed, all of us who opposed austerity are.

‘But if you are in the anti-austerity camp then the fact that the Irish economy is now growing strongly is an inconvenient truth.

Not only is reality inconvenient, we are guilty of being fantasists.

‘The anti-austerity brigade seems to assume there was some way for Ireland to magically escape cutbacks when a huge gap had emerged between annual spending and revenue even before the bank bailout costs.’

But then Cliff bemoans the lack of ‘measured discussion’.   Does labelling people begrudger, reality-deniers and fantasists constitute measured discussion?  At the risk of further labelling, let’s try to engage in some of that – measured discussion, that is.

A good starting point is the Central Bank’s recently published Economic Letter which summarises a major study on fiscal consolidation in the Eurozone between 2011 and 2013. The study used two models to measure the impact of austerity – the EU and the ECB model.  They further utilised three scenarios:  a baseline, one where business debt was factored in and, thirdly, credit-constrained households.  In short, the study found:

  • The impact of austerity measures were much more severe than previously estimated – so much so that for €1 billion of austerity, the economy fell by €1 billion and more
  • That spending cuts had a more severe impact than tax increases
  • That debt rose in the years after the austerity measures were introduced – only falling some five or six years (and possibly longer)
  • That the austerity measures were the primary reason behind the Eurozone’s slugging growth performance

They concluded by saying it was a mistake to pursue austerity measures while the economy was in a slump; addressing the debt should have been postponed until after the economy recovered.  If this were done, the debt would fall more quickly and the economic damage (unemployment, falling wages, business bankruptcy) would have been less.   While this was a study of the Eurozone as a whole, there is no doubt that Ireland experienced this – especially as our level of austerity was nearly double that undertaken in the Eurozone as a whole.

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This Wealth is Your Wealth, This Wealth is My Wealth

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Recently, RTE aired ‘Ireland’s Great Wealth Divide’.  Though there were some problems with the analysis (ignoring the wealth of data published by the CSO, the confusing conflation of income and wealth, the unsubstantiated assumption that Ireland was ‘good’ at wealth generation) and the prescriptions (there wasn’t any) it at least gave an airing to a subject that doesn’t get much airing: inequality. 

A major gap in the programme, however, was a failure to acknowledge one of the biggest wealth divides – that between public and private wealth. First, let’s define wealth.  It is the value of all assets, whether those assets are held by households, businesses or states.  It can comprise physical assets such as buildings, land, machinery; liquid assets such as cash; and intangible assets – assets are not physical and are hard to value (e.g. a brand’s goodwill).  It is on the basis of this wealth that we generate income.

Private wealth is owned privately – by individuals or businesses.  Wealth indexes – likethe Credit Suisse report featured in the RTE programme – measure the wealth that is held by households.  Public wealth, on the other hand, is held by a public agency:  Government Departments, public agencies, local authorities and commercial enterprises.  These, too, generate income, create economic and business activity and are used for individual and social need (e.g. a local authority house). 

The amount of public capital is vast and under-appreciated.  Let’s run through a list that is far from exhaustive:

  • Land
  • Commercial, residential and heritage buildings – in use and derelict
  • Hospitals, schools, prisons, clinics, galleries, museums, libraries
  • Waterways – rivers, lake, canals, on-shore and off-shore
  • Roads, bridges, rails, airports, docks and seaports
  • Assets of commercial public enterprises
  • Financial assets:  Strategic Investment Bank, cash balances, Central Bank, retail banks

This is a vast portfolio of assets that generate income, business activity and living standards.  Much of it difficult to value – how do you measure, in Euros and cents, Lough Ray or the off-shore seas (though this can be done if the property can be privatised; anyone want to buy the Shannon?). 

How did this wealth come into being?  Apart from natural resources, these came about because of investment.  Public decisions in the past to invest in infrastructure, businesses, public services and capital assets form the basis of our public wealth today.

In fact, there is so much public wealth around us that sometimes we take it for granted without understanding how absolutely important it is – and what role it can play in future wealth and income generation for all of our benefit.

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A Return to Boom-and-Bust

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Never mind the details.  If we are to believe even half of the media leaks, the Government is preparing to return us to the kind of boom and bust fiscal policy that dominated the pre-crash period.

The context is different but the character is the same.  Between 1997 and 2007 corporate tax was slashed, capital gains and inheritance taxes were halved while the effective personal tax rate fell by 25 percent.    During that period budgets rode the wave of property tax revenue but when the crash hit our hollowed-out tax base was exposed. Revenue fell by over 22 percent or €16 billion in the first three years of the crash, resulting in a massive deficit.   The economy was built on the quicksand of unsustainable tax revenue.

Fast-forward to the 2016 budget to be presented tomorrow and a whole number of tax-cut goodies are being dangled in front of us:

  • USC
  • Self-employed
  • Landlords
  • Inheritances
  • Capital gains
  • Corporate tax (knowledge-box) and other business taxes

The Taoiseach has made it clear this is the first of a series of tax-cutting budgets.   We are hurtling back to the future.

Some may argue that increased tax revenue can more than make up for this.  But budget management now determines that excess revenue will have to be used to pay down debt – paying for tax cuts and/or spending increases will require equivalent tax raising and expenditure reduction measures (beyond the fiscal space of €1.5 billion).  The EU fiscal rules put us in a whole different game.

However, this game doesn’t prevent fiscal irresponsibility any more than they wouldhave prevented the pro-cyclical polices prior to the crash.  And this is where the problems arise.

Today, tax cuts will be subsidised, not by property boom revenue but by depressing badly needed public spending increases.  The Government has set aside €750 million for spending increases.  But:

  • A minimal €200 million has already been assigned to capital investment.
  • The Government’s Spring Statement and the Irish Fiscal Advisory Council state that €300 million is needed just to keep pace with changing demographics.
  • And a further €200 million is needed just to inflation-proof non-pay expenditure on public services. 

That’s €700 million before we even get out of the starting gates.  And this doesn’t include the Lansdowne Road Agreement or increases in social protection (somewhat offset by declining unemployment payments).  More importantly, this doesn’t factor in the considerable social repair that needs to be undertaken in the wake of austerity.  And as for expanding public services to European norms – that’s not even on the agenda.

While expenditure may exceed this €750 million, it will have to come from somewhere – including cutbacks in other areas of expenditure.  This is not as ominous as it sounds; savings from reducing the prescription medicine bill can be redirected into other areas.  But there is a limit to these savings.

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Renua’s Carnival Ride Back to Boom-and-Bust

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The silly season usually refers to August.  Now we have the silliest of seasons –the run-up to a budget in the run-up to a general election.  Minister Richard Bruton has recently called for a low flat rate tax on immigrants and returning Irish, along with cutting capital gains tax to 10 percent.  Brian Lucey has called some of the ideas both bad and stupid.

But Minister Bruton runs a poor second to Renua in the race-to-the-ridiculous stakes.  Renua has called for a flat-rate tax.  It represents a massive transfer from the lowest income groups to the highest income groups.  It will require low and middle income groups to fund not only their own tax cuts but even higher tax cuts for those on much higher incomes.   As Brian says of Minister Bruton’s proposals – it is an idea whose time has not come (and hopefully never will).

Renua proposes that income tax, employees’ PRSI and USC be abolished and replaced by a flat-rate tax of 23 percent.  This will be complemented by what is called a ‘Basic Income’ that tapers out slightly above average earnings (this is not actually a basic income – it is a hybrid of a tax allowance and negative income tax).  Renua doesn’t detail how this tapering works so we can’t do an income distribution impact assessment for all income groups.  However, here are a couple of examples from their own pre-budget submission with some estimates of my own.

Renua

Yes, you’re reading the graph right.  A low-paid worker on €20,000 would end up paying more tax.  Someone on an average wage would benefit by €800.  However, it’s bonanza city for those on €100,000 and more.  Calculations for €36,000 and higher are my own.

There is a similar regressive impact when considering couples.   Renua states that a couple on €50,000 (both working, same salary) would gain €1,665.  A couple on €100,000 would gain €9,741 – or more than six times the nominal amount.  Couples on even higher incomes would benefit disproportionately more.

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The Desert of the Irish Debate

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There is an old American saying:  if you have nothing to say, wrap yourself up in the American flag and recite the constitution.  In Ireland, today, if a politician, a political party, has nothing to say, no new ideas to advance, then call for tax cuts.  The current deluge of leaks in the media about impending tax cuts are not evidence of sources having something to say; it is evidence of how the debate over future economic and social strategy has been turned into a desert.

And what tax is being hammered?  The most efficient, transparent, potentially progressive tax we have – a tax that even an army of accountants acting on behalf of the rich can’t get around:  the Universal Social Charge.  It is called a hated tax, an unfair tax, an anti-entrepreneurial tax.  Everything that is wrong with our income tax system is blamed on the USC whereas the reality is that the USC has the potential to repair much that is wrong with our income tax system, distorted and misshapen by the myriad of reliefs, allowances and exemptions – most of which benefit high-income groups.

People have been put under pressure from the tax increases during the period of recession.  It was irrational to reduce people’s take-home pay when economic growth was falling, wages were being cut in real terms, working hours and income supports (e.g. Child Benefit) were being cut.  Between 2008 and 2012, the effective tax rate rose by 30 percent.  This was a major contributor to lengthening and deepening the recession.

Today, however, the issue is not ‘high taxation’; it is that people’s living standards are low by EU-15 standards.  The debate over cutting taxes, however, shows how incapable political parties are of addressing this issue.  Rather than admit intellectual impotence, they propose tax cuts – which will only exacerbate the very problems they are incapable of addressing. 

Tax Cuts:  Giving More to Those Who Have More

Ireland has one of the highest levels of market inequality in the OECD.  As the recovery becomes embedded we are in danger of accelerating this trend.

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Could We Have a Little Bit of that Corbynomics Over Here?

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Jeremy Corbyn is now leader of the British Labour Party.  A Sunday Times article likens Jeremy to Caligula – an insane, murderous tyrant who appointed his horse Consul.  According to the Tories, he is a threat to Britain’s national security, economic security and, well, galactic security (watch out for those Corbynite Klingons).  Well, at the risk of Roman despotism and an alien invasion force landing on the Blaskets could we please have a little bit of Corbynomics here in Ireland?

For at the heart of Corbynomics is something quite modest:  a modernising investment drive to re-tool the UK economy.  It is a testament to the perversity of a debate that investing in high-speed broadband, public transport, social housing, school and hospital construction, green technology can be labelled as extremist.  Does anyone really suppose that British businesses would be outraged if they had a world class broadband system?  Or that the economy would dive into the abyss if more energy came from renewable resources rather than fossil fuels? 

Maybe the extremism comes from other aspects of Jeremy’s proposals.  Renationalise the railways and energy companies?  Yeah, so extreme that even a majority of Tory voters support renationalisation.  Combat multinationals’ aggressive tax planning and avoidance?  Yeah, forcing companies to pay taxes like the rest of us.  Build low-cost housing in London?  I’m sure tenants would be up in arms.  Everywhere you look in Corbynomics, you see common sense. 

Even orthodox commentators would seem to agree:

‘It is hard to exaggerate the decrepitude of infrastructure in much of the rich world.’

So begins a provocative article in the Economist, not noted for alarmist language.  It points out:

  • One in three railway bridges in Germany is over 100 years old,
  • So are half of London’s water mains.
  • In America the average bridge is 42 years old while the American Society of Civil Engineers rates around 14,000 of the country’s dams as ‘high hazard’ and 151,238 of its bridges as ‘deficient.

Such a state of affairs is not only highly inefficient, but potentially very dangerous.

Public investment is well down throughout Europe, the US and Ireland.

Corbynomics

Almost all EU countries have significantly cut their public investment budgets – especially those countries that needed it most:  the poorer Mediterranean countries, Ireland, Romania. 

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The €2 Billion Start

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Today, Unite has published its 2016 pre-budget submission.  You can read the full submission here and the summary here.  In short, it calls for a €4.8 billion budget package comprising a €1.9 billion increase in expenditure on public services and social protection, a €550 million increase in public investment and focused tax reductions on the low paid (e.g. reform of the PRSI step-effect, refundable tax credits and indexation) worth €220 million.  This is to be paid for by tax increases on wealth and capital, along with increases in the social wage (employers’ PRSI) and the fiscal space allowed under the EU fiscal rules.

However, I want to focus on one particular proposal in the submission:  the temporary, once-off investment programme of €2 billion for social housing; in particular, focusing on the homeless and households with special needs.

This has been discussed previously on this blog.  Back in April 2014 I suggested that instead of the Government spending €7.1 billion on paying down debt, it should invest half of this into a special once-off investment programme in social housing.  The actual turnout for 2014 was €5 billion used to pay down debt.  At that time I wrote:

‘Let’s start with the conclusion: if by this time next year if there are people still homeless, it’s because the Government made a policy choice.  And the policy choice was to tolerate homelessness.’

Back in May 2014 Fr. Peter McVerry warned of a ‘tsunami of homelessness’:

‘In all the years I have been working with homeless people; it has never been so bad. We are, even I would say, beyond crisis at this stage.’

16 months later the situation has become worse. 

A comprehensive housing programme, one that addresses the myriad of issues such as homelessness, local authority waiting lists, rising rents and limited supply, house prices, planning, land prices – this is a big, big subject and is not amenable to sound-bite policies.  It will require joined-up strategies, long-term thinking and the intellectual courage to go beyond the ‘housing as just another market good’ thinking that dominates policy-making.

However, with winter coming on and more people becoming homeless, sleeping rough and / or living in wholly inadequate accommodation, we need short-term stop-gap remedies.  That’s the thinking behind Unite’s proposal for a €2 billion once-off investment programme – to address this immediate crisis. 

There are any number of options open to the Government in using this €2 billion:  fast-tracking refurbishment, acquisitions of short-term tenancies, conversion of idle buildings, extensions of current emergency accommodation, etc.  The key is that accommodation can be brought on stream quickly and efficiently.  One hopes that it is not too late.

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Reflections on Irish Water

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Despite its small size, the Emerald Isle, situated between England and America, boasts more than 12, 000 lakes, or loughs. The largest lake in the British Isles, Lough Neagh, is in Northern Ireland, reputed to be formed when the sod of earth that Fionn MacCool dredged up to throw in combat at a fellow giant, displaced water inland from the Irish Sea.

Lough Corrib and Lough Mask contend for first place in the Republic. Strangford Lough, a bird sanctuary, and Lough Hyne, a Marine Nature Reserve, are both sea-water lakes. The rest are regularly refilled by famously high levels of precipitation that seep into the ground. An abundance of streams and rivers are also found. No other country in Europe contains more bog-land. Twenty per cent of Ireland’s territory once consisted of bogs.

Ireland is completely surrounded by water. It is divided from Britain and Scotland by the Irish, or Manx, Sea, containing the Isle of Man, Anglesey and other islands. The Irish Sea meets the Atlantic Ocean, lapping remaining shores, through the North Channel, or Straits of Moyle, facing Scotland. It meets the Celtic Sea at the southerly St. George’s Channel, stretching out to France.

The copious rainfall irrigates the land to grow vegetation decked in forty shades of green. The temperate oceanic climate keeps the weather mild and moist, preventing temperature extremes. The North Atlantic Current flowing nearby bestows the year-round advantages of an ice-free coastline, and warmer temperatures than are enjoyed in other places on the same latitude. There are between 151 and 225 recorded wet days, receiving more than 1mm of rain, out of every 365 days of the year, with most falling in the west. Ireland is not short of water.

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