Author: johnredwood

There are those who seem to think the UK is too small and too unimportant to be an independent country. They think we need to choose between submerging our identity with the EU and accepting their government, or being a junior partner of the USA and accepting US decisions and standards. The people who think like this favour us being controlled by the EU, and spend their time running down the USA at every opportunity. This doctrine is reflected in the EU’s spin, with President Macron warning us we will be opting for junior status in some kind of USA Union if we dare to implement our wish to leave the EU.

This view is absurd. There are many advanced successful countries in the world who are neither members of the EU nor client states of the USA who are considerably smaller than the UK in population, in total wealth and military power. From New Zealand to Singapore, from Australia to Canada, there are prosperous countries that have alliances with many but are ruled by none other than themselves.

It is also a dangerous myth that the EU or Europe is in some way capable of defending itself. Most European countries like the UK are members of NATO, and rely on the US defence umbrella and the NATO guarantee of mutual assistance for their defence against potential large aggressors. NATO is a better arrangement than the EU, offering mutual support but not enforcing a legal obligation on each NATO member to provide troops and weapons to every NATO action. For many years it has helped keep the peace in Europe and ensured the continuing commitment of potentially huge US forces to the defence of the West.

If we look back at our history we will see that we have in the last 250 years been at war with France, with the USA and with Germany. The war with the USA was in stark contrast to the war with the other two. The UK lost, with many in Britain unhappy about taking up arms against US settlers from the UK who had similar views of liberty, limited government and taxation to the home country. The USA triumphed not only by might but also by right, and since then relations have usually been mutually supportive.

In the cases of the long wars against France and Germany the UK’s role was totally different. Here the UK stood alongside the small and oppressed countries of Europe that had been invaded and quelled by the imperial powers, and fought successfully for their liberation. Once again might and right combined to ensure a happy outcome after terrible violence. These victories made the UK a good European, and showed that many people and nations did value self determination and self government. When British armies finally reached France at the end of the Napoleonic wars and Germany in 1945 those nations were relieved and surprised that the British army was banned from looting, rape and commandeering supplies, and duly paid for food and other items needed. It made the point that this was no army of occupation or oppression, but liberators of Europe from tyranny who planned to go home as soon as their job was done.

Today the problem is of course very different. It is not from violent conquest but from clumsy bureaucracy and poor EU wide economic policies stifling opportunity and limiting the political expression of democratic electorates. Architects of the EU project itself say the UK will become a colony of the EU if we dare to leave. This worrying language or poor joke sums up what is wrong with their analysis. The UK does not have to choose between staying in a centralising EU or accepting poor terms from the USA for a deeper and closer relationship with her. The UK can continue to champion global free trade, democratic self government and a world diplomacy to try to settle world problems. We will continue to need NATO to help with our defence and with our contribution to global security, and we will continue to trade with the EU and the USA with or without free trade deals. We need only accept a Free Trade deal if it works for us as well as for them.

The government has indicated it wants to cut income and wealth taxes. Doubtless the cry will go up from Labour that this will be tax cuts for the rich. In trust in practice it will be tax cuts for all. Today I want to seek your advice on who are the rich that Labour wants to tax.

Let’s begin with a group of millionaires. Many would say automatically all millionaires are rich, because by definition they have a million pounds of assets which no poor person enjoys. Here are some interesting millionaires:

Mr A is an elderly pension living on his own in a modest one bedroom flat in central London. He bought this many years ago, and it is now said to be worth £1m even though it is not in a good state. He has no other savings and lives on the state retirement pension and top up benefits. He cannot afford a car or holidays. He does not want to move as his friends and support group live nearby.

Mr B is another elderly pensioner who lives in a modern flat in a market town, worth £250,000. He has an investment fund worth £750,000. With his adviser he plans to draw down around £50,000 every year to spend, and reckons with the anticipated returns his fund might last him 20 years. He will adjust his drawing up if the investments do better, and down if they do worse. He also has his state pension.

Mrs C recently sold her £750,000 family home on the death of her husband. She also has £250,000 of other savings. She has bought a £250,000 new smaller home. She has given £250,000 to each of her two children to help them with housing and private education costs for her grandchildren. She has bought an annuity with the other £250,000 to provide her with an income of £10,000 a year to add to the state pension.

Mrs D and her new partner have just sold her £1m house and have decided to rent. They also plan to spend their way through the £1m whilst they are still in good enough health to enjoy the cruises, expensive hotel stays, grand events and good restaurants they have always wanted to try. They expect to spend at least £100,000 a year. They take the view that no-one knows how long they will live and you cant take the money with you.They say you can always rely on the state if you live for a long time.

Are all 4 of these people rich? If not, which if any of them are rich?
Mrs C is no longer a millionaire because she chose to give money away. Mr A is very income poor and depends on state top ups for his income. Mr B is on a well above average income, but will be depleting his capital, taking it down to very little over the balance of his lifetime. Mrs D will spend like a rich person but will run out of cash quite quickly as she does.

Do we tax them fairly? Those that spend away their capital will pay more VAT but less income tax and capital gains. Those who keep their savings will pay more income tax and capital gains tax. Those who move will pay more Stamp Duty. Those who run down their capital will not only pay less income tax but will receive more state benefits if they live long enough. Those giving money away before their death will be trying to find ways to avoid Inheritance Tax.

Observant readers will realise that all these people have the same options as each other because they all start with £1m of assets.

Before we entered the EU there was a common travel area with the Republic of Ireland, and after we leave there will also be a common travel area. The checks at the border for people will be the same before and after exit. There is substantial co-operation across the border over criminals today and this will remain.

After we leave the EU it will still be possible for a person from another EU member state to get into the Republic, subject to EU controls on criminals and illegal migrants, and from there to cross into the UK in Northern Ireland. The UK system of control over migrant numbers will be exercised for the whole UK by the need for a work permit if someone wishes to get a job, by the need to establish entitlement if they want to receive a benefit, and the necessity to prove they are legal immigrants if they wish to open a bank account, rent or buy a property or get a car licence.

It is difficult to see therefore why an illegal migrant from the EU would bother to go through the tortuous journey via Dublin, only to find on arrival in the UK that their illegal status made it impossible to live a normal life or benefit from the good things that brought them to the UK.

Eurosceptics do not see there is a problem with the land border between the Republic of Ireland and the UK. As the government has made clear, the UK will not be imposing new barriers or complex new checks at the border once we leave.

The present border is already a complex border. It is a VAT border and Excise border. Trucks do not have to wait at the border while someone in a kiosk works out the VAT owing. It is all done electronically away from the border. States are good at knocking tax off business accounts without needing to collect fivers when the truck arrives. It is a currency border. Again the currency calculations and exchanges occur well away from the transit point. It is an anti terrorist border, which works by mutual co-operation on both sides. The day after we leave arrangements to control smuggling and to intercept criminals will be the same as today. The UK and the Republic of Ireland have confirmed that the long standing Travel Area between our two countries will continue, avoiding the need for extra checks on people crossing.

The UK will continue to inspect food products after we leave as before. The EU authorities will presumably continue to check and certify the products they are sending for export without needing a check at their border, and the UK will continue to regulate wholesalers and retailers with inspections and spot checks on their facilities and product as required, all away from the border. UK retailers will continue to be under a legal duty of care to ensure anything they import from the EU is safe food.

So why is there an issue? The Republic of Ireland and the EU say there may be an issue because they are concerned about “the integrity of the single market”. It reminds us that the single market was never a free trade area, but a heavily protected system ring fenced with tariffs and dependent on detailed product specification and regulation. Anyone inside the EU or outside the EU has to comply with all aspects of the rules and tax requirements in order to sell into this market. Once out the UK as other third countries like the USA and China will have to comply with all the rules on goods exported to the EU, just as we do today. The difference will be that we can adopt different standards if we wish to for other overseas markets and for our domestic market. We may design better ones or we may need to adopt different standards for export product elsewhere. More importantly we will no longer be expected to pay large sums for the privilege of being inside this single market and we will be free to cut tariffs to buy cheaper goods from non EU countries if we wish.

The issue of the Irish border is therefore one for the EU, not for the UK. The question to them is what new checks if any will they impose on the Republic of Ireland border on their exports to the UK and their imports from the UK? Any checks they wish to impose on UK exports will of course have to be proportionate and appropriate under WTO rules. They also cannot impose checks against UK exports that they do not impose against exports from anywhere else in the world. The EU says it understands the history of Northern Ireland and the Republic of Ireland. That means they will not wish to impose new barriers and difficult checks at the border. There are many crossing points, and like all such land borders smuggling is possible over fields and farms as well as along rural roads. There is smuggling today and there will be smuggling after Brexit. Authorities on both sides of the border have an interest in controlling and prosecuting smugglers, and do so today by intelligence led co-operation. The same is the best answer once the UK has left the EU.

The border issue is of course mainly a political issue designed to make it difficult or impossible for the UK to leave the single market and customs union. It only achieves this end if the UK accepts the faulty premise, that new barriers are needed at the border if we just leave. The UK government has stated clearly it does not think that. The EU also likes to claim there is no technology answer to this conundrum. They should remind themselves that their borders today work with much help from electronic manifests, off border settlement of taxes and dues,a low number of sampling checks at borders, checks at the factory or farm originating the product or at the wholesaler or retailer receiving the product, TIR transport systems and the rest. Computers and the internet offer plenty of ways of having smooth borders, reflected in the Facilitation of Trade rules of the WTO. The UK imports quite easily from non EU sources today despite EU rules and controls affecting such imports.

I would be interested to hear from people about whether HS2 should proceed, be cancelled or built from the North first, leaving open the question of improvements into London.

I voted against HS2 when Parliament made the original decision and set out then the problems I saw with high costs, possible cost escalation, and optimistic revenue forecasts. Following the Mrs May review I accepted that government and Parliament want to build it, but now there is another government review after further large cost escalation.

The decision of the Italian Prime Minister to resign rather than face a Confidence vote brings to an end a curious government experiment. 2 populist parties with very different programmes and outlooks tried to govern together. Both found the restrictions of the EU budget rules and Euro scheme difficult to live with. Lega were keen to cut taxes and 5 Star wanted to introduce a more generous basic income payment by the state. The PM, not elected for either governing party, sought to keep the government more in line with EU requirements and tried to keep co-operation between the two leaders of the two main parties in the coalition against a background of disagreements. Meanwhile the Italian economy stagnated, and fell into a shallow recession for the second half of last year.

There will be efforts for the pro EU New Democracy party to ally in government with 5 Star to avoid an election both of them might do badly in. They might be able to establish a temporary government. It would have to pass a budget that appears compliant with EU rules. If they do this Lega will look for any way to bring on an early election which they think would give them more seats and more clout in the Parliament.
They will be looking to the new EU Commission to see if there is any scope to relax the current tight settlements, given the wish of many in Italy to spend more and be taxed less. They will also be hoping the new President of the European Central Bank follows an even more accommodating policy, and will expect Italy to continue as the number one borrower from that Bank under the Target 2 balances arrangements.

Italy is an interesting test of whether populist parties can govern in any way in the Euro area that keeps faith with what their electors want and what they promised. The Lega/5 Star coalition compromised with the EU to avoid a worse conflict in ways which prevented the implementation of much of their respective economic and financial programmes. Mr Salvini of Lega is hoping to bring about an election which he thinks he can win, when he would doubtless be less willing to compromise. This in turn raises bigger questions of Italian electors. Would they trust a committed populist government to challenge these EU orthodoxies? How far would they let such a government take their demands? When Syriza in Greece tried it they ended up backing down. Greece is a much smaller country that does not have the same weight as Italy financially and economically, so we would be in uncharted territory. Italy owes large sums to the ECB, which is Germany’s problem as well as they have lent most of it.

This Friday at Jackson Hole Jerome Powell, Chairman of the Fed, will make a most important speech. The financial markets are expecting confirmation that there will be further interest rate cuts from the USA to promote faster growth and a weaker dollar. The self same market commentators  that claim not to like Mr Trump very much nonetheless back the President’s often repeated mantra that the Fed is holding up growth and more jobs and needs to cut rates by at least 1%, almost halving them.

Others point out that the US economy is growing much faster than the European or Japanese economies already, that money growth is strong, job numbers are increasing and real pay rising. They worry that further rate cuts could fuel an inflation after a decade of no serious  inflationary pressures.

The Fed did it get badly wrong at the end of last year, when it was threatening major rate rises at a time when the world economy was slowing and markets were worried that slowdown could become recession. Jerome Powell backed off then, and reversed policy, promising not to raise rates. He went on to cut them. Now he needs to set out a new theory of how the Fed will set rates in future, to avoid the problems the current system created in 2018. The data on the economy suggests there is less need for rate cuts than many commentators suggest.

The Bank of England needs to study the work being done by the Fed as they seek a new consensus on how to run their monetary policy. UK money policy has not this year assisted the economy, being very tight at a time when the world and UK economies are slowing. The Bank has not followed either the Fed or the ECB in trying to offset some of the slowdown with monetary easing. China has now announced some more easing, alongside rate cuts from Australia, New Zealand, Russia, Brazil, the USA, Indonesia, Turley, Thailand and others in recent weeks.