Month: October 2011

 

The  John Humphrys BBC welfare documentary on Thursday night was well made. It reminded us how Beveridge wished to slay the five dragons that included the dragon of Idleness. It told us that the public  overwhelmingly wants a safety net so no-one need be homeless or short of food. Voters  do not want a generous system to support lifestyles for people who are capable of work but do not seek jobs actively or at all, nor do they want benefit recipients to be paid  more  than many enjoy in work.

The questions raised are worthwhile asking and debating. Welfare reform is one of the main preoccupations of the present government. Labour agrees it is unfinished but necessary business.

The first question to ask is who qualifies? Should people have the right to enter the UK and claim benefit once they arrive here? Is Mr Grayling right to resist the EU idea  to allow the free movement of benefit seekers as well as workers?  If we accept genuine asylum seekers should be able to claim benefit, are there any other categories coming in from abroad who should also enjoy that right? If someone comes in from elsewhere in the EU to work, and then loses their job, should they have gained entitlement? At what point should  an illegal entrant qualify for benefits, if at all? If someone has been here illegally for a few  years, are they now the state’s responsibility?

The second question is to ask about housing benefit.  Most of us agree people out of work or disabled should be helped with their housing costs. Most also agree this should be limited in a couple of ways. What level of savings and other assets should disqualify you from getting housing benefit? People with £100,000 in the bank  can presumably pay their own rent or mortgage.  Should there be a ceiling on how expensive a home you can  claim for?  Or at least a limit on how much you can claim, ruling out living in some of the dearest districts and properties?

The third question to ask is what should the state expect by way of action to get a job? If you turn down a couple of offers should you lose benefit? Should you be expected to show progress to getting a job, and demonstrate a certain number of applications? Are there categories other than the badly disabled who should be excused the need to find work?

The fourth question concerns the sensitive area of children and families. What should be expected of absent fathers by way of financial contributions? At what stage should single parents be expected to work as well as caring for their children?

 

Amidst all the talk of a Euro 1 trillion fund to bail out ailing Euro countries, it might help to look at what they done so far.

They set up the European Financial Stabilisation Fund as a Luxembourg regulated Special Purpose Vehicle or company on 9 May 2010. It is  owned by the Euro area member states. It has to rely on borrowing to carry out its purposes.  So far it has borrowed just 13 billion euros, and lent 9.5 bn euros to Portugal and Ireland. It uses the EU Commission to help perform its duties.

The owners were very keen that the fund should be able to borrow at an AAA credit rating, and wanted it to be able to lend up to 440bn euros. To achieve this they had to make each member state in the company guarantee up to 165% of their share of the 440 billion euros, so that the AAA rated states always covered the full amount at risk. The members have had to agree to guarantee up to 780 bn euros. The German share is 29% and the French share 22%.

The legal base used to set up the EFSM and EFSF was stated as  “Article 122.2 and an intergovernmental agreement of Euro area states”. The use of the intergovernmental agreement will become a popular way for the Euro area to move quickly without the legal restrictions of the EU. The legal base of the EFSM, the money provided by all EU states, is the one that has been questioned.

It’s going to take some magic to pump a 13 billion fund into a 1 trillion one.  If the fund is to expand to Euro 1 trillion there are several ways it could do this.  It could first of all issue the full 440 bn of euro debt, adding 427 billion to the current total. It has already pledged 34.2 bn euros in additional loans to Portugal and Ireland which it needs to cover by new borrowing.

It can offer to guarantee slices of a country’s borrowing to help that country carry on borrowing in the normal way. Thus, if Italy needed help to borrow at a cheaper rate, the EFSF could guarantee the top one fifth of Italy’s new debt issues, protecting bond buyers from a 20% haircut or partial default. This would enable them to say they had 5 euros of firepower or capacity to borrow for every one euro of guarantee committed. It might help keep Italian interest rates down.

The company could set up further funds or special purpose vehicles to channel other investors’ money into Euro area debt. That is why they are now asking China if she would like to contribute. They may also ask other sovereign wealth funds in the Middle East and elsewhere if they fancy such an investment. Token contributions or tough terms are the likely result of such requests. If they could raise 100 to 200 bn euros extra, that gets them closer to their trillion objective.

The EU is trying a little spinning and praying for a little magic. Today they have a 13 bn euro company. Tomorrow they want to impress the markets with the possibility of a 1 trillion one. There are ways of getting there. They draw on techniques used by investment banks and others in the run up to the Credit Crunch. The very politicians who have spent so much time condemning the bankers for the ways they behaved in 2005-7 now seem to be copying their techniques to gear the EFSF.

The bottom line is the strong states are being drawn more and more into subsidising and propping up the weaker states.

 

1. The single currency

The Euro is the Exchange Rate Mechnism you cannot get out of.

A single currency needs a single country to love it and pay for it.

Joining a single currency is like taking out a bank account with the neighbours. You inevitably fall out over the overdraft.

A single currency starts as an act of friendship with the neighbours, and ends in acrimony like a bad marriage.

 

2. “Seeking to change our relationship with the EU, or pulling out of the EU would destroy 3 million export  jobs” (Usual federalist line)

If the UK renegotiates or the people vote to pull out, Germany will still want to sell us her BMWs and France her wine

The EU would not try to damage our trade with them, as they sell more to us than we sell to them

China has millions employed in making export goods for the EU. Why havn’t those jobs been lost, as China is not a member of the EU?

 

3. “If the UK renegotiated or the people voted to  pull out, she would no longer have any influence over the laws and regulations made in Brussels” (usual federalist line)

The UK has no special influence over the laws made in the USA, India or China, but still trades with them quite happily.

The USA and China have no influence over EU laws, but they sell a lot of goods into the EU

How much influence has the UK had over EU employment laws, social policy, the Common Fishery Policy, the Common Agricultural Policy and all the rest, where the UK has been seeking change but not getting it for years?

4. The single or common market

How many laws do you need for a single market?

Why do you need more than the simple rule that if a product is of merchanidsable quality in the home country , it can be offered for sale in the other countries of the area? (The Cassis de Dijon judgement)

The UK does a large  majority of its service sector trade with countries outside the EU. Service trade requires a deeper relationship than trade in goods and is helped by a common language. Federalists just quote trade in goods figures.

 

 

              Some today will heave a sigh of relief . They will say that Greece is saved. Now she has agreement to write off one quarter of her debt she can go off and borrow some more from the IMF and EU. Her debt burden is temporarily cut.

             They will say the EU banks can  now pay for their share of the  Euro 100 billion of losses they are losing on Greek debt because they are to raise Euro 100 billion of new capital.

             They will point to the Euro 1 trillion fund available to underpin the markets in Italian, Spanish and any other Euro area debt where markets might lose confidence. This money, they say, is available to prop up those debt markets and keep interest rates down.

          They will say that in future there will be more budget discipline enforced on all Euro members through stronger and better EU arrangements.

            Markets may believe this for a bit. The first reactions have been to rally on the news.

             Underneath the press statements we are told work needs to be done on the details. We need to know

Where does the Euro 1 trillion come from? Who has to pay it back in due course?

How much difference does cancelling Euro 100 billion Greek debt make to their budget? How will they control other spending? How does Greece now start to compete within the Euro area? Have all the banks agreed to write off some of their Greek debt? When does it happen?

What is the intervention policy to keep Italian, Spanish and other interest rates down to  an affordable level? Is the ECB going to buy any more bonds? Is it going to print any more Euros?

Where does the Euro 100 billion for banks come from?  Could it be that banks required to improve their position do so by lending less rather than by raising new money? How many investors want to put new investment  money into a bank in order to pay for past losses on Euro sovereign lending?

When will the new political arrangements  stop large deficits and the build up of debt occurring in the future? How will it work? What happens if a country still ignores the requirement to cut its debt and deficit?

We now have confirmed more of the characteristics of the Euro area. We know that it thinks  the private sector should take a big  hit when a country borrows too much. We need to see if the ECB and other public holders are also going to agree to losing half their(and our) money.  Greek taxpayers will still have to pay interest and repay capital to the various public sector lenders.

We know that Euro area leaders think it’s fine to say to private sector pension funds and savers that they should not expect a Euro area government necessarily to honour its debts and repay money owed.They own a lot of the banks that take the hit.  Some will say if one Euro country can get away with this, why not another?

We know that decision making in the Euro zone remains slow and chaotic. Having to get 17 governments around a table and then broker a deal in the full glare of the media is not an ideal way of making decisions that are dissected and assessed by fast moving markets.

This looks like another attempt to tackle the synptoms. The underlying problems remain. Many Euroland countries are not competitive at the current exchange rate. Several Euroland countries have too much debt and are borrowing too much. How much more of the bill will Germany pay? How can they earn their livings and grow their economies?

Meanwhile the two tier EU is taking shape. Euroland is becoming a club within the club. The UK needs to get on with negotiating a new relationship with it. The Uk has to accept that as Euroland presses on to fuller political and economic union, more and more will be decided by the 17.  In  return for this, the UK needs to make more of her own decisions about things that matter most to us, whilst keeping single market matters as the decisions of the 27 EU members, not just the 17 Euro members.

 

 

In July we were told 440 billion Euros would fix it. More recently we were told 3 trillion would do the job and would be available last Sunday. Then we were told  2 trillion was enough, to be confirmed today. Now we are told there might be just 1 trillion along sometime soon.

The Euro is a currency in search of a country to love it and a governemnt to support it. If it doesn’t find them soon, it will inflict yet more eocnomic damage on the various countries tied up in its embrace.

There is a large state debt problem in Euroland. They need to spend less and borrow less. The countries meeting today to rattle the collecting tin and to construct yet more fanciful leveraged vehicles should instead do something useful. They should cut the EU budget, so the EU makes a contribution to the lower spending the weaker members need.

The EU should stop grandstanding over spending and deficits, and make a contribution to resolving the problem.  The rest is another attempt to kick the can down the road. If they do not want to live together with a single budget, single government and single  currency, they had better plan an orderly expulsion of the weak or of the strong before yet more economic damage is done.

 

                   This September Income Tax receipts were £9.5 billion.  In September 2010, a year ago, Income receipts were £10.3 billion.

                  An 8% fall in Income Tax revenue is unusual. The government hopes there are special factors. Perhaps you should not read too much into one month’s figures.

                   The problem is, there is evidence that successful and well paid people are  taking action to avoid paying the 50% tax rate.  Why not, they reason,  leave some of their high remuneration in the company or other financial structure? Maybe the rate will come down, and then it can be distributed as income. Or maybe they can sell the company and get a capital gain with the accumulated extra profit. Or maybe there is a way to switch the company overseas. The one thing some want to do is to avoid  paying too high a salary or bonus and having to part with 50% plus to the taxman.

Maybe some  teams and highly paid individuals within financial institutions are simply going to lower tax centres elsewhere. In which case the income is permanently lost.

September also showed no increase in fuel duty receipts compared to a year earlier. The higher  fuel price and the current level of fuel duty is stopping people from buying as much fuel as they could afford a year ago. The revenues have for the time being plateaued, after years of good growth.

I have written before about the lower revenues that follow naturally from slower growth, compared to the Chancellor’s five year forecast. We need to add in the impact that the squeeze on incomes across the income scales, and the 50% tax rate are having at the top end.It may be that higher rates of various taxes are self defeating. The Budget book forecasts less Capital Gains Tax next year when we get the full year effects of the higher rate.

This month there are  also signs of a revenue squeeze on Income and fuel duties as well.

 

 

                Yesterday Parliament staged a good debate. Voice after voice was raised to condemn the lack of democracy in EU government. MP after MP warned their leaderships that too much power has passed to Brussels without gaining the consent of the British people.  MPs asked their leaders what part of the 80% public opposition to the imposition of a 3 line whip they did not understand. MPs praised the idea that the public can raise issues in Parliament through the petition system. They asked why the 67%  of the public who want a referendum on the EU are not to have their wish granted.

                 A few MPs argued with the official spokesmen of  Labour and the Conservatives and with the Lib Dem party  that we need to stay in the EU on current terms, and should not hold a referendum. As heralded here yesterday, they used three main arguments.

               We heard as always the argument that 3 milllion UK jobs are based on exports to the EU. We were told we must not put those at risk. I asked Labour why it is that many jobs in China are based on exports to the EU. On their argument as China is not a member of the EU these jobs should not exist.

               We heard that now is not the time for a referendum because the Euro is in crisis. As Charles Walker asked, “If not now, when?” We explained that the Euro crisis is long, deep seated, and means Euroland needs changes. This is exactly the time to renegotiate and to ask the people.

               We were told that now any tfransfer of power through a Treaty will command a referendum. We asked about all the transfers of power taking place daily without a Treaty, and all the powers transferred by past Treaties where governments refused to hold a referendum.

                I don’t know what the leaderships expected on the vote. 81 Conservatives voted for or acted as tellers for  the Yes camp. 19 Labour MPs voted for the motion as well. 111 MPs in total supported the motion.

               As I have explained on this site before, this is a federalist Parliament. Solid ranks of Labour and Lib MPs can be expected to vote for more EU government. Coalition Ministers often join them. The heart of the Conservative party is Eurosceptic. Last night more showed their heart. Many of the remaining Conservatives who voted No did so whilst they saying they wanted less EU government, and wanted a referendum at some other time.

               The drum beat of the Conservative party is to renegotiate. It is to get a new relationship with Euroland. The party is united in this. It speaks for the overhwelming majority of the UK electorate.