Author: johnredwood

The government  rightly tells us it wants to promote growth in the March budget. To do so it will need plenty of investment from companies already here, and new commitments  from companies attracted to the UK by the opportunities. To do  that it is going to need competitive  business tax rates. It should not be putting Corporation tax up by 31% in April just when it needs a boost from the  business sector. It  needs to get companies  to put in a wide range of additional capacity in everything from energy to food. Without that taming inflation is more difficult. It is also the way to level up and to create the extra better paid jobs we want.

 

The aim of taxation should be to raise the tax you need to pay the bills with the least damage. All taxes do some damage. Governments use taxes to discourage people from doing things like smoking, excessive drinking, and  polluting . When they turn to taxing jobs and  investment they need to be careful. Do it too much and you put too many off doing the good things of working and serving the customers better. You can end up with less revenue, not more, as well as with an unhappy country.

 

It is best to tax the rich and profitable, as they have a lot more money to tax. Rich people and big companies also have many more options than the rest of us. They can switch their business, their residence and their investments to somewhere else if a given country puts the tax rates up too high. The way to get more tax revenue out of well off companies and people is to set rates they will stay to pay. Hike rates too much and you can have an exodus of the money you want to tax. High rates of income tax under Labour in the 1970s led to the brain drain as talent went elsewhere, contributing to a bad economic decline. They ended up with insufficient tax for their wider aims and a trip to borrow from the IMF which landed them with spending cuts.

 

George Osborne knew this when it came to Corporation tax. His steady reductions in rate, eventually down  to 19% led to good increases in tax receipts as more businesses came to the UK and more UK businesses ploughed profits back into more UK taxable activity. Meanwhile our neighbour Ireland opted for a much lower rate. At  just 12.5% they scooped the investment  pool. Ireland now gets four times as much business tax per head than we do. Large corporations have chosen to base substantial activity there to take advantage of the low rate. It has also led to Ireland having a GDP  per head more than double the UK’s and more than two and half times  above the lower figure for the EU.

 

So why would you want to turn down the offers of world business to come, to create jobs and make money? The reason seems to be strange. It is based on  Treasury and OBR accounting and estimating. The OBR is having a difficult time with the  numbers. They forecast  a  deficit of just under £100 bn for this year in the March budget. In the November Financial Statement they put this up by more than three quarters to £177bn. Now just two months on and with only two months left to forecast they are putting it down again by £30bn. Yet it is on these volatile and inaccurate forecasts that the Treasury hangs the judgement they need to put taxes up.

 

To try to  get the forecasts right the OBR has to forecast spending and revenue. Spending should be fairly easy to forecast as there is a complex system of spending control and approval, though of course energy subsidies have introduced a more volatile component. They find forecasting the revenue difficult, as it depends on how fast or slow the growth is. As a general rule when growth is faster the OBR tends to understate the revenues and when it is slower they tend to understate the deficit. It appears that their tax model is not dynamic enough.

 

There is  no magic money tree, but there is a strong behavioural effect on taxes you can legally avoid. The government accepts this is some cases. The whole idea for example of a congestion charge or a carbon tax is to get people to avoid it. They are urged  to drive less or burn less fossil fuel. In the  case of business profits tax we can see worldwide the turnover and profits gravitate much more to the lower tax rate places ,as with Ireland. The  official models do  not seem to capture this. The forecast that a big hike in the corporation tax rate will  bring in an extra £15bn more by the second year seems unlikely. The absence of tax rate rises in January did not prevent and may well have assisted the unexpected surge in revenues that the OBR did not foresee.

 

The UK is crying out for so much new investment and business. We are short of electricity grid and cable capacity, short of reliable electricity generation, short of glasshouse and polytunnel market gardening, short of water supply in some places and during dry spells, short of steel capacity, battery production, short of home caught fish, short of domestic timber, short of good safe road capacity and short of much else I could mention. Many of these needs can be met by private sector investment. They often require government leadership of the projects, provision of the licences, and lower stable tax rates that companies can rely on. The UK was doing so well promoting itself up the league table of international tax competitiveness. It would be a tragedy to throw that all away today in the  vain and self defeating pursuit of a lower deficit. Higher tax rates will lead to less growth and lower business tax revenues. Follow Ireland. The Chancellor himself when a free man argued just this case.

 

 

One year on from the Russian invasion of Ukraine we send our condolences to all those families who have lost loved ones in the conflict. We condemn the needless violence and the damage to Ukraine’s cities.

NATO has made clear it does not want a war with Russia. It has told Russia NATO is no threat to Russia’s land or people. As proof of this it will not send NATO personnel onto the battlefield nor will it allow Ukraine to fire off NATO supplied weapons outside Ukraine’s borders into Russian territory.

NATO under Biden got off to a slow start helping Ukraine but has now escalated its support by sending a much greater range of weapons and technical assistance. Putin argues that NATO provoked the fight as he seeks to provoke the West. The Ukrainian forces stopped the Russians reaching Kyiv and are now counter attacking in the South east where Russia has made gains.

Neither side currently want peace talks, as both think they can achieve more on the battlefield. China talks of a possible settlement but has yet to spell out how and what it would look like.

What would you like NATO to do next? What kind of a peace would be fair?

The government since 2019 has not been shy with the cash. Record increases and record sums have gone into the NHS. The output of operations, treatments, medical consultations has not gone up as hoped for with all the extra money.

Of course more money was needed. There needed to be pay rises as inflation picked up. There needed to  be extra capacity as the population expanded considerably given a generous policy towards inwards migration and difficulties in stopping illegal  arrivals. There also needs to be good management choices about how to spend the extra money. There needs to be good employee relations. Management needs to design achievable workloads and create a favourable environment for productive endeavour.

The 36,000 managers need all to contribute to a better mood and mutual support of staff. All need to be focused on delivering more healthcare. More of the extra money has to buy extra capacity – more beds with staff to look after patients, more GP and nurse consultations, faster tests for diagnosis.

Above all the extensive  management and personnel functions need to grade, evaluate and create worthwhile and feasible jobs that people are proud to hold. Too many staff leave, work on short term contract and feel unhappy about their job spec and remuneration.These are the very issues within their large budgets managers need to sort out, given the staff unhappiness on display. Did they put in the right  evidence to independent pay review? Can issues be remedied in next years settlement? Did the Pay Review body think enough about the impact of higher inflation on their settlement?

It is becoming more and more difficult to see an accurate picture of the nations finances given changes to the definitions and runs of data and the  accounting methods deployed.

Yesterday we learned that there was a £5bn surplus of revenue over expenditure in January., This was considerably   better than the OBR recent forecast. We should expect there to be a healthy surplus each January, as substantial sums of self assessment income tax, CGT and other annual taxes are paid following the filing of returns.

I found the more interesting figure was the one for the government’s cash surplus last month. That was a much healthier surplus of £21 bn for the one month. That is the excess of revenues over total bills paid by the government that month. The big discrepancy with the headline figure of just £5bn can be explained by non  cash items like the payment of £4.2bn of taxpayer  cash  to the Bank of England for its losses, where the cash sent to the Bank remains within the wider public sector, and the so called interest bill including the indexation changes on indexed government borrowings. The state does not pay these out as cash payments but they are rolled up until the maturity date of the bond which may be 20 years or more away. It will then be reborrowed, not  requiring tax revenue to pay out.

The figures suggest there is what the Treasury call headroom for some tax cuts in the  budget. The OBR will score lower tax rates  as losing the state revenue. There is an issue with this, as cuts in tax rates for taxes like Corporation Tax and higher rate Income Tax have always in the past led to more revenue  not less. Overseas experience as I highlighted yesterday is a lower rate of  business tax brings in much more revenue, encouraging so many more businesses to locate and invest in low tax jurisdictions. The headroom will be enlarged by Treasury accounting. By the year end when many expect the inflation rate to have more than halved there will be a big saving in the interest programme as the Treasury charge the  non cash item of indexation increases on inflation linked state debt to the debt interest programme. The energy subsidy programme will also produce large savings after the wind down in April.

Among the ideas the Treasury should adopt to assist growth and more capacity in our economy are cancelling the Corporation tax rise, improving the tax system for the self employed, raising the VAT threshold for small  business and suspending VAT on domestic fuel.

It looks as if some at the heart of government thought a trade agreement over red and green lanes would be sufficient to fix Northern Ireland and EU issues. It seems that the meeting with Unionists pointed out to the Prime  Minister that the application of EU law in Northern Ireland was the bigger matter where the EU had  not made the changes required.  Under the Protocol itself parties are meant to give priority to the Good Friday Agreement which needs  the consent of both communities to any changes . The Unionist community does not agree to the EU approach to the Protocol and to lawmaking for NI.  As a result the Prime Minister doubled down on his words that there was still no Agreement to publish. He required his negotiators to return to the EU to sort out the issue of law making and enforcement in NI.

The Protocol was meant to be a temporary or holding arrangement. The EU needs to reconsider it position on these matters to assist in restoring  Stormont and the tradition of working through the agreement of both communities.