Category Archives: Economy

Scotland not so left-wing after all…

Last weekend saw another march in London against “austerity”.

This really is an appalling abuse of the word. Food rationing post-War was austerity. Perhaps the three-day week with limited electricity in the 1970s was austerity. An ever increasing gap between rising public spending and falling income tax at a time when public sector wage growth vastly outstrips inflation is, quite obviously, not austerity.

Facts, eh?

Marchers claimed they had public support for their cause. Yet in last year’s General Election right-of-centre parties or those in coalition with them received almost two thirds of the vote in England.

There are those facts again…

At least it was different in social democratic, left-leaning Scotland.

Or was it?

Scottish Labour recently adopted a courageous policy of adding 1p to Scottish income tax. If Scots are opposed to “Tory austerity”, they reason, they will not mind paying a small bit extra to avoid it. In any case, have Scots just not had a huge debate about taking on more powers and thus obviously, by logical extension, using them? And of course, 21p income tax with the much higher personal allowance still means less to pay than when Labour left office.

Such a courageous, honest and rational stance would no doubt see a swing towards Labour in a social democratic country keen to model itself on Scandinavia, of course.

Well, no.

All the evidence suggests that Labour’s new policy is courageous only in the “Yes, Minister” sense – unpopular, in other words.

A survey by the very man whose exit poll pointed towards the real result of last year’s UK General Election shows that the comfortable majority of Scots oppose putting taxes higher than in the rest of the UK. In line with this, the SNP (which proposes no income tax rises, although it would change the bands to see 40% payers paying slightly more) remains well out in front. In fact, far from gaining it ground, Scottish Labour’s new policy sees it in serious danger of being overtaken as the main opposition at Holyrood by the Scottish Conservatives (who oppose any income tax rises or band changes at all).

Scotland is perfectly normal in this regard. As ever, people want more money spent on the services which affect them, but are notably unwilling to put their hand up to contribute any more towards them.

“Get those tax evaders and welfare fraudsters instead!”

Funny, you never hear that line in Scandinavia. But then, whisper it quietly, Scotland isn’t like Scandinavia…

“Tax returns” and fearing for democracy

The fuss over tax returns makes me despair for democracy, and politicians publishing them is actually dangerous.

Of course, the reason politicians are often hypocritical is that so are the voters. We are hearing frankly ludicrous demands for six years’ worth of tax returns made by people who themselves would never dream of publishing theirs – indeed, often by anonymous trolls on Twitter!

The real problem with our democracy is that it is increasingly a closed shop – people get a job in a constituency office, become a Councillor, and move “up” from there. We end up with Ministers who have never run a business, never managed a charity, never worked in the public sector, never in fact had to manage a household budget on anything like the average salary.

What we need in our legislatures and governments are people who have created jobs, promoted charities, worked at the coal face, succeeded in academia, seen the public sector first hand and so on – professional people, who can provide valuable experience and knowledge to the policy-making process. Already, when seeking public office, they have to deal with risking careers, restricting family time and dealing with public ire with no guarantee of electoral success. Now, on top of that, we want them to reveal details of their private lives which none of the rest of us would even dream of revealing even to close friends and family? That is going to improve the quality of public debate, is it?

There is of course the issue here of public ignorance about taxation and public finance. Basics, like the difference between “tax avoidance” (which most of those agitating about it actually do themselves!) and “tax evasion” are missed. Moreover, the very point of an “offshore” investment is it does not appear on a UK tax return! Worse than that, however, is that a tax return actually tells us nothing about a person’s real interests. We learn nothing about what industries they may invest in, what property they may own, and even what charities they may support – all of which is potentially relevant to decision making as public office holders. That is why we have registers of interests!

Add to this the modern social media world where sanctimonious outrage is King and anyone engaging in the actual complexities of managing public finances, reforming a health system or assessing social housing stock is instantly dismissed. It is of course a lot easier and less time consuming to tweet #CameronResign to feel good about yourself, than actually to engage in the complexities of the issues and to influence real change in the public interest.

The only issue here is whether people making decisions in the public interest are being up front and honest. We can assess that on the public evidence – and not on private and irrelevant tax returns, which are already assessed by the tax authorities.

We have now spent days discussing tax returns – both a practical and political irrelevance – in a way which can only damage the chances of new blood entering the political system. Meanwhile decisions on Health, Housing and everything else that actually affects us have been made completely without scrutiny. What kind of farcical democracy are we creating for ourselves?

Steel issue shows limitations of sovereignty

The debate around the future of the UK steel industry has demonstrated just how ludicrously parochial political debate here has become. People lined up to argue over how losing hundreds of jobs in Port Talbot was the UK Government’s fault, the Welsh Government’s fault, the Remain side’s fault, the Leave side’s fault, the fault of any politician I don’t like…

It is just possible that it isn’t any politician’s fault.

The fact is, since the mid-’90s in particular, we have all literally bought into an economy based on cheap supply from the Far East.

We are not necessarily wrong. Upon retirement in 1997 my father bought an Internet-capable (US-built) PC for the modern equivalent of around £5,000. Its capabilities would be comfortably passed by a basic (Chinese-built) £100 mobile phone now.

So it goes on across a vast range of goods – phones made in China, vacuums made in Malaysia, electronics made in Indonesia, etc etc. In such countries, wages are much lower and workers’ rights much inferior (even basic welfare or pension provision is almost unknown).

But we don’t care, as long as we get the goods cheap and can spend the rest of our wages on leisure activities, fancy cars and holidays (perhaps to places like Dubai, largely built by migrant workers on pitiful salaries with no basic rights at all).

Let us be clear, any politician seeking to deny us this standard of living, even though it is in effect based on slave labour (just not our slave labour), would never attain office.

China and other countries have used this income to grow their economies and create a burgeoning middle class – which, just every few years, grows by a size equivalent to the entire population of the UK. One of the inevitable consequences was a construction boom in the Far East (most obviously in China), and then something of a bust, with a further consequence that China had an excess steel supply which it dumped cheaply on the world market.

So it is that Chinese economic decisions affected an Indian company to the extent that hundreds of jobs were put at risk in South Wales. This is globalisation, an inevitable consequence of the cheap supply economy into which we have all eagerly bought – not “politicians”, us!

Such also is the limitation, or indeed near irrelevance, of the concept of “sovereignty”. It was not a current Welsh Government or UK Cabinet Minister’s decisions which threatened the UK steel industry; it was a Chinese economic decision and an Indian company board’s reaction to it.

This is the ludicrous nonsense of “take back control”. This is a globalised world of quality European imports and cheap Far Eastern imports. We need to be part of a big team, not exposed on the sidelines.

 

Corporation Tax cut must make NI think again

I found last week’s UK Budget slightly scary. The speed at which the Chancellor is reducing growth forecasts, raising tax thresholds and cutting corporation tax hints more at “make it up as you go along” than “long-term economic plan”.

Much of it, quite by accident, was good news for Northern Ireland. The next Assembly gets another £220 million to spend over the term; a population which has few rich people but a lot of comfortable ones will gain from the rise in tax thresholds (a household of two senior public sector workers gains £1410); and the basic stability apparently on offer provides comfort to a region particularly hit by the Great Recession.

However, perhaps most striking from a Northern Ireland viewpoint was the Corporation Tax reduction, with the (UK Standard) rate set to reach 17% just two years after the NI Executive introduces a “Northern Ireland rate” of 12.5%.

A lot of the commentary around this issue is misleading. The application of a Northern Ireland rate is complex; specifically, it is not true to say that “corporation tax” in Northern Ireland can be reduced. Under the Act, the “Northern Ireland rate” must be applied for, and such applications may only be to “trading profits of SMEs whose costs and employee time are largely (75%) in Northern Ireland and to the profits of a large company attributable to a presence in Northern Ireland” (and limited other circumstances); and even then certain sectors are excluded. This means two important things – first, not all businesses qualify (so it is not quite fair to say that, if the “Northern Ireland rate” were set at 12.5%, its Corporation Tax regime would fully match the Republic of Ireland’s); and second, the implementation of any differential “Northern Ireland rate” would attract a significant administrative cost (regardless of how different the rate was from the UK Standard rate).

So, although the reduction from the Northern Ireland grant (i.e. from public spending here on devolved issues such as health and education) would be reduced by each percentage point that the difference between the “UK Standard rate” and the “Northern Ireland rate” were reduced, the administrative cost (which must also be borne exclusively by Northern Ireland) would remain the same.

This then brings us neatly to the point that the administrative cost and bureaucratic complexity which would be brought about by implementation of a differential “Northern Ireland rate” has to be worthwhile (and not just the reduction in public spending). Back when this was first proposed, in 2010, the headline gap would have been a full 15.5 points (the UK Standard rate was 28%). By the time anyone gets around to implementing it, in 2020, that gap will be just 4.5 points. Add to this that the current Chancellor’s speed in the direction of lower Corporation Tax is increasing (i.e. that he may well, in future budgets, announce a further reduction of 2020, quite possibly to as low as 15%), and the differential is scarcely noticeable. We may note also that the aforementioned bureaucratic complexity would not be borne solely by the administrators involved on the government side, but also by the businesses applying for (and proving their qualification for) the “Northern Ireland rate”.

The issue is simple. If they want a 12.5% rate, can Northern Ireland Ministers point with any confidence to a single company which would invest in Northern Ireland with a 12.5% profits tax (noting also the complexity in successfully applying for it) but not with 17% (or 15%)? Can they point to a company which chooses the Republic over Northern Ireland solely for tax reasons (given that employees in Northern Ireland enjoy significantly lower household taxes, more generous tax bands, and more limited VAT)? Can they point to a single company which would choose Northern Ireland over Great Britain because of four-and-a-half (or maybe even two-and-a-half) point profits tax gain? To be clear, it is possible such companies exist – but the public would need to see some evidence of them.

The other question is why, exactly, is the NI Executive so determined to set the “Northern Ireland rate” at 12.5%? Why invest so much time “matching” the Republic (in a limited way with added complexity) when it would now cost the same to beat it? If a lower rate is to be the key argument for choosing Northern Ireland over Great Britain, why not also set a lower rate to encourage choosing Northern Ireland over the Republic? Either a lower corporation (profits) tax rate is important, or it is not!

All of this ultimately suggests that a lower “Northern Ireland rate” of 12.5% will make no difference – merely matching the Republic while offering a steadily decreasing advantage over Great Britain. Northern Ireland’s problems are more fundamental – disinvestment in key skills (teachers over computer scientists), focus on the wrong areas in early education (RE over ICT), a laughably inefficient and instinctively anti-competitive planning system, an energy grid which is unfit for purpose and comparatively illiberal general attitudes (in general and towards incomers) are vastly bigger obstacles to real wealth creation than tax rates.

Not for the first time, the world is changing and Northern Ireland is still behaving as if it is as it was years ago. It is time to offload the “silver bullet” of differential corporation tax and move on to tackling the real economic problems we face – starting by tackling the vested interests which hold us all back.

Scotland’s messy tax decision shows need for real federalism

Amid the genuine trauma of the Brussels attacks yesterday (which remain too raw to write about), something of great constitutional significance happened in the UK.

From 2017/18, on the safe assumption that the SNP will remain in government at Holyrood, Scotland will have a different income tax band from the rest of the UK (with the 40% rate applying from £43,337 in Scotland but from £45,000 in England, Wales and Northern Ireland). The SNP also announced that the rate at which 20% applies would be raised to £12,750 from 2021/22, which is theoretically higher than will apply elsewhere in the UK (although in fact, I am sure that a Conservative UK Government would at least match it by then, given the current rate of travel).

The SNP has left the above £150,000 rate at 45% (as opposed to the 50% it once supported) and has left the actual tax rates the same, but the significance is that it now effectively controls the rate of income tax and the bands at which it applies – income tax is now, in effect, a devolved tax. Whereas once you had to move to the Channel Islands or the Isle of Man to enjoy different tax bands, you will now be able to move within the UK.

This is bad news for the political Left generally, because whenever tax differentials begin to be an issue, they inevitably become a race to the bottom. However, it does make devolution slightly fairer – within Scotland, there is now a real debate between Labour (which would put income tax up to “fund public services”), the Conservatives (which would keep rates and bands in line with the rest of the UK to “keep money in people’s pockets”) and the SNP (which will keep rates in line but change bands in the interests of “fairness”). The practical impact is that Scotland will have marginally more money for public services but also that a couple each earning over £45,000 a year will be over £1400 better off in England, Wales or Northern Ireland in 2017/18 than they are now; but in Scotland this gap will be under £500.

There is a further issue that this differential will for the first time challenge the tax authorities to specify who lives in Scotland and who does not (already an issue with the Channel Islands and the Isle of Man). Inevitably, people who spend time on both sides of the border, and perhaps have homes in both, will argue they live in England. This, added to the sheer administrative burden, means that in fact Scotland may make no practical gain in terms of money available for public services than it currently has.

These issues are the result of an increasingly messy devolution settlement. It is time it was tidied up. It is time for proper federalism.

Public debate misses point on FASA closure

The commentariat’s reaction to the closure of FASA (like Public Achievement and others before it) was the usual one. There are people struggling with addictions yet apparently we cannot afford to keep open an organisation which tackles addictions. Politicians, quite naturally, jump on the bandwagon. Yet it completely misses the key question.

This is the usual logical fallacy.

All cats have four legs. My dog has four legs. Therefore my dog is a cat.

There is a problem with addictions. This organisation says it tackles addictions. Therefore this organisation is essential to tackling addictions.

No one thinks to ask the obvious questions about how that follows.

Was FASA actually any good at helping people with addictions (what were its outcomes)?

Was FASA efficent (or can another, better run organisation do it better)?

Did FASA’s structural and funding model, given the range of issues which need to be looked at in tackling addiction, make any sense?

The assumption that a particular organisation is absolutely inexpendable to tackling a particular issue, just because it says it is, is a very peculiar one.

Maybe FASA was a fantastic organisation, brilliantly run, properly networked, delivering concrete results. If so, its closure is a scandal.

But then maybe it wasn’t. And if it wasn’t, then taxpayers’ and ratepayers’ money should not be spent on it, quite obviously.

Yet again, we have a public debate (complete with the usual moral outrage) focused purely on funding, but not on value.

And we know what Oscar Wilde said about that!

 

Brexiteers the real scaremongers

The standard strategy of Brexiteers is now established. Someone brings out a report showing that jobs may be lost, services may be removed or opportunities may be restricted if the UK leaves the EU, and they describe it as “scaremongering”.

It is not “scaremongering” to warn a child that if they put their hand on the hob it may get burned.

It is not “scaremongering” to warn a driver that if they go too close to the car in front in slippery conditions they may collide.

Nor is it “scaremongering” to warn that leaving the EU may make cross-border trade harder, may make farmers’ incomes uncertain, and may make educational opportunities more restricted.

It is, however, scaremongering to suggest that border patrols should be put back in place on the island of Ireland because ISIS terrorists want to move from Dublin to Belfast, as one UKIP elected representative did yesterday.

Will the UKIP Leader distance himself from such ludicrous scaremongering? Will Vote Leave explain how this could not be described as scaremongering? It is not unusual to accuse others of the things you do yourself – it is called hypocrisy, and Brexiteer scaremongers are getting pretty good at it.

Brexit has no effect on Corporation Tax

It is well known that, if Northern Ireland chooses to reduce its Corporation Tax rate, it suffers a consequent reduction in public spending to “make up” for this advantage over the rest of the UK.

Somewhat bizarrely, this internal matter for the UK and obvious issue of basic fairness has made it into the “Brexit” debate, with some Brexiteers mischievously and frankly erroneously suggesting that somehow leaving the EU would mean the reduction would no longer be necessary.

It would absolutely still be necessary.

The arrangement long pre-dates the European Union; in fact, it pre-dates the War. In 1938 the UK Chancellor, Sir John Simon, agreed to meet any shortfall in Northern Ireland’s expenditure for as long as it maintained the same level of welfare provision and main taxation. This is known as the “parity principle”, and it is under this principle that Northern Ireland would have to pay any difference in welfare provision or taxation (such as reduction of Corporation Tax) out of its own budget.

Given that Scotland and Wales now also have devolution, the importance of that parity principle is greater now than ever.

If a reduction in Corporation Tax would take £250 million from the NI budget inside the EU, it would take £250 million from it outside the EU too. It is a UK principle – something you would think Brexiteers would know about.

So let us hear no more of that particular Brexit fantasy!

EU is all gain, no cost

This is, literally, a random UK tax bill (shared last week on social media) – showing how taxes are allocated.

image

Now, spot the EU contribution…

And here is the thing – outside the EU, many others of these expenditures would increase:

  • Health costs would increase as reciprocal arrangements, generally advantageous to UK taxpayers since the British spend more time in other EU states than vice-versa, would likely be withdrawn;
  • Education costs would rise as Erasmus opportunities and other exchanges became more limited (ask any Norwegian about that);
  • Defence costs would rise as it became harder to form mutual arrangements under common regulatory frameworks, notably key ones with France;
  • Public Order and Safety costs would increase as data sharing inevitably became more limited;
  • Culture would become more expensive and cultural exchange became trickier;
  • Business costs would increase (no doubt with some government assistance required) to overcome tariffs now introduced with our largest export market – this would likely also see utility costs rise;
  • Government administration would increase as functions currently pooled with 27 other states (not least negotiating overall trade deals) had to be managed by one alone;
  • … and this is all before we get to the point that the average household would have less to contribute in tax because the cost of imports would have risen.

“Brexit” would cost. Be in no doubt about it.

Google, Apple, and tax…

Apple last year announced the creation of 1000 jobs in Cork.

This was cause for rejoicing, of course. 1000 jobs means 1000 incomes in the area – created externally but spent internally. Contributions in income tax and social insurance will help the revenue, which will also benefit from VAT paid on items and services in local retail outlets, eateries, dry cleaners and all sorts of others – whose business will also itself be further boosted, potentially creating further jobs (even if part time) and so on.

There will even be indirect effects, such as house prices rising, not least because half of the jobs will be taken by foreigners coming into the area and spending locally who otherwise would not have been there to do so.

To repeat, all of this is created by an external company, at no cost to the Irish taxpayer beyond the investment made in the IDA, who try to encourage such job creation for the quite obvious reasons noted above.

Oh, one thing: Apple does not pay any tax in Ireland.

Is that a problem?

That question maybe is not quite so easy to answer in practice as it is in principle, eh?

Indeed, the Irish Government is quite determined that Apple not pay it any tax; precisely because if it was forced to, it may not operate in Ireland at all (thus depriving it of the income tax and VAT revenue its employees deliver and promote).

As a side point, Google’s owner “Alphabet” recently overtook Apple as the world’s most valuable company. It employs 3000 people in the UK, who contribute £150 million to UK revenue in income tax alone.

How is that principle versus practice coming along?

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