Month: August 2011

 

          During the run up to the  Coalition budget I argued that increasing the CGT rate would not  yield more revenue. Some Lib Dems wanted the rate raised to 40% or even 50%. The Chancelllor listened to the arguments, and decided on 28%. He said in his Budget speech that any higher rate was likely to lead to lower revenues. He had accepted the Laffer curve argument, the argument that if you raise the rate too high fewer gains are taken, and fewer rich companies and people come here or venture money here to make gains.

           So far so good, you might say. The only problem is, I do not believe that 28% is the optimum rate for CGT. History and past experience suggests revenues are maximised at rates below 20%. Maybe Labour was right in choosing 18% as a good rate for CGT. The Treasury, I was told, was pretty sure 28% was the optimum rate, the magic level at which revenue was maximised.

            Imagine my surprise, therefore, when I looked at the detail of the Treasury and OBR’s own forecasts following the Budget. There quite clearly shown, is a fall of £500 million or 15% in CGT receipts next year compared with this. It takes more than a year for the full effects of a new CGT rate to come in, given the lags in selling the assets, reporting the gains and then paying the tax. So the official forecasters themselves accept that 28% is not an optimum rate . They reckon the higher rate will cost the Treasury £500 million of lost revenue in the first full year. If the rate stayed the same, there presumably would have been no such drop off in tax revenue, given the fact that the economy is forecast to grow and company and London property asset values are likely to rise.  

              The government needs more revenue to meet  its large spending requirements. It cannot afford the £500 million CGT revenue drop next year. So why not take the rate back down to the Labour level, a level likely to increase the receipts? The way to tax the rich more, is to set competitive rates which attracts them here and gets them paying tax in the first place.

               The same is probably true of the new higher rate of Income Tax. Throughout most of its period in office Labour wisely stuck with the Conservative’s top rate of Income Tax of 40%. When first set, this was a very competitive rate which attracted businesses to the Uk with high earning employees. In more recent years many other countries have lowered their top Income Tax rates, making the UK less enticing. The increase to 50% has done damage and is doing damage. It is probably losing the UK revenue. Again, the government should want to tax the rich more by setting a competitive rate. If they reverted to the old cross  party 40% top rate they could well raise more revenue.

             Such reductions, though restoring Labour rates of tax and bringing in more revenue, would doubtless be attacked as helping the rich by the Labour opposition. No amount of explaining  that the aim is make the rich pay more will assuage them. So the Coalition could at the same time take more people out of tax at the other end of the income scale. It could also renew or extend its Council Tax freeze, as this tax hits lower income families hard if they are not on benefits.

             The government should also look at the impact business rates are having. Empty property rates can tip a business over the edge. The present level of business rates is part of the problem on the High Streets, where retailers find it difficult to cover all their costs from current levels of trading.

                        The government needs to tailor a package of tax cuts which help recovery and support business, without costing too much lost revenue. In some cases the tax “cuts” are a no brainer, as they should yield extra revenue.

 

              When the Indian Captain withdrew his appeal, allowing Ian Bell to return to the crease to bat some more, he did a fine thing. In this world of lawyers, rules, and fighting over every detail and advantage, it was a magnanimous and popular gesture.

               Ian Bell was out. He had been given out by the Umpire. He only had himself to blame, as he had not checked whether  the ball was out of play and  the over concluded.  The law said his innings was over.

                 Watching the replays it was also clear Ian Bell had grounded his bat in the crease, completing his run. He had then started to walk off for tea. The two England batsmen were not attempting a further run. In the spirit of the game Ian Bell was not run out, because he was not trying to complete a run.

                   Given the state of the game and the brilliance of Bell’s batting, it was the triumph of the spirit of cricket. It subsequently turned out that England won easily. No-one can say India threw it away with this gesture. At the time no-one knew how well England would bowl, and there was still everything to play for. It was a genuine sacrifice made by India which can make us all feel better about human nature.

 

             The debate about the right level of public spending needs to be put into the context of how much tax politicians think they can impose. If you look at the last fifty years figures, you will see that no government, Labour, Conservative, Labour/Liberal or Coalition has ever tried to impose taxes higher than 38.7% of GDP. That high level was reached in one year, under Margaret Thatcher, when she was trying to bring an inherited deficit under control.

            Labour governments have been careful  about tax levels   – or, in  other words, Labour have spent more based on borrowing, and subsequently Conservative governments have put up taxes to pay for all the extra spending their predeccesors built into the budgets. In the 1970s Labour taxed at 34-35% of GDP. The incoming Conservative government had to increase taxes to pay the bills and curb the deficit, as well as cutting the rate of increase in the spending.  In the 1990s and early 2000s Labour taxed at 35-37% of GDP. The incoming Coalition government has had to raise taxes to cut the inherited deficit.

             The Conservatives had got taxes down to 32% by 1973-4, to a low of  32.3% in 1993-4 and to 34.6% in 1996-7 . The Coalition government proposes to keep taxes at the highest levels of the last fifty years for the five year Parliament. The Plan envisages tax rising to 38.5% of GDP by 2014-15.  Labour does not recommend any significant increase in current tax levels. Its bigger bank tax is a matter of a few billion, whilst Labour opposes the VAT increase which raises more than the larger bank levy.

             I think the politicians show wisdom in these decisions. I do not think the UK does want taxes above 38.7% of GDP. Politicians should therefore plan their spending based around a sustainable level of revenue of around 36% of GDP, the level achieved under Labour. Indeed, there is evidence that the UK economy has performed best when tax revenue is below 36% of GDP, as in the 1990s following ERM exit, and in 2002-5.

           It follows from this that unless you  now think the UK could and should go from the conventional level of tax to say 45% of GDP going in tax, current spending levels are unsustainable. This year the Red Book forecasts spending at 46% of GDP, miles above the sustainable tax level.

              These figures are all in real terms expressed as a proportion of output, because that is the way the Treasury chooses to present them. In cash terms, every year has seen increased taxes. Inflation has often eroded the value of allowances and offsets. People pay tax on the inflationary element in income and gains. Over this Parliament tax is scheduled to rise by 2% of GDP, but by a massive £172 billion a year, comparing Year 5 with the last Labour year. That shows the impact of inflation and growth on tax revenues.

                 Tomorrow we will look at how within that suggested total of GDP that the government can take, revenues can be maximised and economic damage minimised. Higher tax rates do not always yield higher revenues. Politics can get in the way of revenue maximising tax rates.

Dear John

Thank you for your further letter of 10 February on behalf of readers of your website, about Intra-Company Transfers (ICTs).  I am very sorry for the long delay in responding to your correspondence.

The Government can (and does) control ICTs in ways other than including them in our annual limit, to provide the flexibility which encourages businesses to invest in the UK, while preventing the route being used to fill regular long-term jobs which could be done by UK workers.

The changes we have made, which took effect from 6 April, mean that only managers and specialists paid £40,000 or more can come as an ICT to the UK for more than 12 months.  In many cases there will be genuine business reasons why multinationals need to transfer other existing staff for short periods, for example to take part in graduate training programmes.  We therefore allow such short-term transfers, but workers must be paid at least £24,000 and can only come to the UK for a maximum of 12 months.  They must then spend a further 12 months outside the UK before they can return.

As I mentioned in response to another recent letter, employers of ICT workers do not derive advantage from tax benefits that are not available to employers of resident workers in equivalent circumstances.  The rules on, for example, temporary workplace relief apply to ICT workers in the same way as they would apply to a worker transferred between workplaces within the UK.

It is true that some short-term transferees may qualify for exemption from National Insurance contributions in the UK.  However, it is likely that a worker who meets the conditions for exemption, and/or their employer, will continue to make social security contributions in the country from which the worker has been posted.  So, an employer who does not incur NI costs in the UK does not incur no NI costs at all.  These may, furthermore, be higher than those that would be incurred here – the UK has low contribution costs compared to similar economies.

A key reason these exemptions are in place is to prevent foreign workers who are here temporarily gaining the benefit rights which accrue from paying social security contributions.  There would not necessarily be an entirely positive benefit to the Exchequer if ICT workers were required to pay NI contributions in the UK.

All ICT workers must be paid at least the appropriate salary rate that is paid to resident workers for the particular type of job in question, as set out in the UK Border Agency’s codes of practice for sponsors.  These rates are applied to the gross salary package paid by the sponsoring employer.  If, as a consequence of tax relief, the gross salary package actually paid to an ICT worker is less than the appropriate rate which would be paid to a resident worker doing the same job, the employer would have to make up the difference in order for the worker to qualify for admission.

Where part of the salary package is given as an accommodation allowance in kind, the sponsoring employer must provide independent evidence of the value of that accommodation.

In my previous reply, I mentioned the need to adhere to our international trade commitments.  The Government strongly supports ambitious Free Trade Agreements (FTAs), which bring considerable benefits to UK businesses.

The temporary movement of skilled professionals (known as Mode 4) is an integral part of FTAs.  The commitments made are largely reciprocal and they enable UK businesses to win contracts and transfer key personnel to their establishments abroad.  At the same time, we take commitments which enable foreign-based companies to send workers to the UK where the presence of those workers is needed in connection with the supply of a service to a UK client.

These commitments do not allow the UK to apply an economic needs test, in other words to link transfers to national skills shortages, but nor do they prevent us from regulating the admission of such workers in other ways.  For example, we can impose requirements concerning their levels of qualifications and remuneration, to ensure that transferees are skilled and are not being used to undercut resident workers.

The European Union (EU) India FTA is expected to have considerable benefits to UK businesses trading with India, in the region of hundreds of millions of pounds per year. The EU’s offer to India on the temporary movement of skilled professionals has not been finalised, nor has the UK’s contribution to the EU offer.  We will ensure that any commitments placed on the UK by this agreement will be consistent with our commitment to reduce net migration to sustainable levels. 

To pick up on a couple of other points raised by your readers, the Government is currently consulting on breaking the link between working temporarily in the UK and settling here.  The consultation is open until 9 September and your readers can respond via the UK Border Agency website.  In addition to the proposals set out in the consultation, we have already introduced a new income requirement for settlement applications, as well as a criminality test which requires all migrants (except refugees) to be free of unspent criminal convictions in order to settle.

We are also introducing major reforms to the student route, including new restrictions on students’ permission to work.  These reforms are designed to ensure that every student who comes to the UK is genuinely coming here to study, not to work or with a view to settling here.

Yours

Damian Green MP

 

               This week I want to examine the UK economic strategy in more detail.

               The last year has shown that  running a very large public sector deficit does not give you fast growth. Those who say we need a bigger fiscal stimulus, a polite way of describing more borrowing, need to explain why the present massive  fiscal stimulus has produced so little growth.

                 Critics of the large deficit, including the government, rightly warn that if the “stimulus” becomes too large markets worry about the level of borrowing and force interest rates up. It becomes self defeating. In cases like Greece and Ireland the borrowing country reaches the point where it is forced into making much larger cuts in public spending  because the markets will simply no longer lend on normal terms.

                  The trouble with the fiscal stimulus theory is it ignores the fact that borrowing is just deferred tax. If the state borrows to spend more,  much of the beneficial impact of more spending on demand and jobs is offset. The private sector has to lend the money to the government and cannot spend that same money itself. The effect is similar to the impact of higher taxes, which clearly damage private sector demand. Only if the money is printed or borrowed from outside the country can there be a better  temporary stimulus. That comes at the risk of international money lenders putting up the price when they think you borrow too much, and at the cost of future inflation in the case of printed money.

              Inflation  turns into a tax on the private sector, cutting demand once again, as people can afford to buy fewer items. The combined effect of the inherited inflation, running now at 5% on the RPI, with higher taxes and low wage increases has been a big squeeze on the private sector, bigger than the squeeze so far on the public.

               The UK government is correct in saying it wishes to restrain public spending. Its rhetoric of self denial has helped keep interest rates low. The problem is that the restraint in public spending will be more severe in later years than in the first two years of the strategy. This means that the powers of compound arithmetic work against the government, as the early years increases stay with us and increase the base on which future public spending is calculated. In the first year current cash  public spending rose by £33 billion, and this year it will rise by a further £24 billion.

                 The strategy of keeping spending down has also been subject to a number of distractions that have served to boost it in unforeseen ways when the initial Coalition budget was drawn up.  The government decided on the Libyan military intervention. It went to the aid of Ireland through loans. It backed a substantial recapitalisation of the IMF. It was talked into increases in the EU budget despite seeking to stop them, as it has no veto on the immediate budget. If you wish to stop public spending  rising you need to be single minded in your determination to do this.

                  The government  also decided to have priority areas like Overseas Aid where it wished to put through substantial increases, and sensibly recognised that a large scale reorganisation of the NHS coupled with rising demand for services necessitated increased cash spending.

                   It has found implementing its good ideas to curb the costs of the overhead difficult. According to one estimate it spent £1 billion in the first year on redundancies. I am seeking to get detailed  figures through Parliamentary Questions. Meanwhile it has not taken full advantage of natural wastage, replacing around half the numbers leaving . It has decided to go ahead  with two very large computerisation programmes, which will be costly even assuming they are better controlled than previous such schemes in Whitehall.

                          The mood of many in the country is to get on with the adjustment of spending levels. Some of the government’s chosen areas for increased spending have proved to be more unpopular than some of their cuts, reflecting that mood. As I travel the country there seems to be an abundance of cash available to remodel many railway bridges, to put in a wide array of aggressive kerbs, new paving, restricted lanes, new surfaces and the like. It does not feel as if everything is cut the bone, but in some Councils it does feel as if the priorities are not the ones that many of us would choose.

            Reducing the rate of increase in cash public spending can be achieved by relatively straightforward means. The large planned savings in overhead can be brought about by a refusal to appoint any new people from outside, coupled with an active policy of promotion, retraining and movement of people already on the payroll. Expensive redundancies can largely be avoided. The two year wage freeze will help, if sensibly enforced.

            The government needs to continue making good progress with its ambitious programme to get more people back to work. Switching people from benefit to work incomes is central to curbing public spending and creating a richer nation.