Author: johnredwood

 

              The public sector says it needs to spend more cash each year to keep going. The private sector cannot or will not pay more tax to meet the bills. We have reached an impasse.

             The original deficit reduction plan of the Coalition government rested on a very large increase in tax revenue. The June 2010 forecast said we would  be paying £176.8 bn more in 2014-15 compared to 2009-10.  That £2800 extra per person (on average), or more than £10,000 extra for a family of four, would take care of the increased costs of public services over the five years and cut the outstanding deficit.

            Instead, as we will see tomorrow, with  tax after tax revenue has fallen well short of the official estimates so far. Growth has disappointed, accounting for much of the loss. It is also clear that more people than expected have planned their affairs to avoid the higher rates brought in. Very rich people have gone offshore.  People have declined to take profits on assets, or have sold assets at a loss to 0ffset.  Housing transactions have been well down on pre crisis levels, avoiding Stamp Duty.

           Many in the private sector say they cannot pay more. They feel the current tax level is quite high enough. They do not have any spare money to give the government. Critics of the private sector say they still have the money but are unreasonably witholding it. They want tougher attacks on avoidance. The problem is you cannot make people take a profit on an asset or buy a different home. They have every right not to do those things and pay less tax as a result. Successful highly paid financial sector personnel can say that they now want to work in low tax Hong Kong rather than higher tax London, and their employer may let them. You cannot make people drive their cars more -indeed the government wants us to drive less – so you should expect a shortfall in fuel duty.

          We have a stand off. As a result the deficit remains dangerously high. The government needs to look again at spending  as well as revenue, to get the deficit down.

 

           There is general enthusiasm for exposing tax avoidance schemes, and trying to get more people and companies to pay their “fair share” of tax. The PAC has said we should shame tax dodgers.

          Those in Parliament keenest on this approach should recognise that the prime source of tax avoidance schemes in the UK is the UK government. It is the laws approved by Parliament. Should they then shame themselves?

            The main ways the better off who live and are taxed  in the UK avoid tax include

 

Pension contributions – paid out of gross income

Pension fund investment income and capital gains – tax free whilst in the fund

ISAs and Junior ISAs – offering tax avoidance on all income and gains on the investments

National Savings – they offer a wide range of tax avoidance products which are very popular

The opportunity to give money and property away to others more than 7 years before death to avoid IHT

The opportunity to give money to charity free of tax

Living on expenses when away on company or government business, free of tax on these

      Which of these do the anti tax avoiders think we should abolish? Do they agree that means of  tax avoidance can be stopped if Parliament enacts a law to stop a particular way of avoiding tax – subject to people still staying in the country to pay it?

          The problem with trying to get international companies to pay their fair share, as the Chancellor acknowledged in his recent statements, is the competing national jurisdictions around the world bidding for more of a company’s business by lowering their tax rates. That, after all, is what the Chancellor is doing by cutting the UK Corporation Tax rate from 28% to 21%. He is right to think that a company will undertake more of their profitable activities here if the tax rate is lower than elsewhere.

 

 

 

 

 

            Let me speak out in favour of spare rooms.  Most of my constituents enjoy one or two.  I am glad I live in a country where many people can afford more housing than they strictly need. People like to have a spare bedroom so they can welcome friends or relatives to stay the night or stay for a few days. Many now like to have a spare reception room or workroom so there is somewhere for members of the family to relax and watch tv, and somewhere else  to do the homework or to answer the business emails and calls that come through out of office hours.

           I want more people to have spare rooms. I want my constituents to become better off, and to be able to buy better housing. I do not want to tax them out of a larger home with a Mansion tax.  I do not want to prevent them buying a larger one with penal Stamp duties.  I do not want to stop them enjoying their surplus space through penal Council tax levels on bigger properties. People with larger incomes usually choose to have considerably more space than the average, as it does make living more relaxing and enjoyable. It’s good to aspire to better housing.

          I well remember the joy I felt as a youngster when my parents took the plunge and moved from Council accommodation to their first home they owned. It sported a spare bedroom so relatives could come to stay.It had two downstairs rooms as well as a small itchen. My parents had worked hard to save a deposit and to afford the mortgage. Their parents had rented all their lives, so it was an amazing move.

           Today there is a difficult debate about spare rooms in Council accommodation, or accommodation where the rent is paid for by Housing Benefit. I understand only too well the strong feelings many people have towards their homes. I also see the desirability of more people having spare rooms so there is somewhere quiet for homework, or somewhere to put up a relative or friend. I also understand the frustration of people who cannot secure Council accommodation at all or of the right size, when they see others living in properties larger than they would qualify to receive if applying today.

            Most people agree that when someone asks for subsidised accommodaiton it is right to allocate just the size they need and not something bigger. If they like the rest of us want something bigger, then there are all sorts of help on offer to assist them into jobs, where higher incomes will in due course lead to being able to afford a larger home.  Good luck to them.

            Most also agree that people with special needs, or the elderly, should be allowed to stay in larger accommodation and not required to downsize. The cases in dispute are those of people of working age who happen now to be living in larger homes provided by taxpayers than they would qualify for. Should the government encourage downsizing by offering suitable properties, but take no other action? Or should it say there will be less benefit to help pay the rent, as the home is larger than needed? I would be interested in your views.

       I want a view with a room from you.

 

            Some politicians in the UK are only happy when they are thinking how they can take more money away from people to spend as politicians see fit. Far from wanting a private sector led recovery, they wish to shrink the private sector further in order to pay for a larger public sector.

            This week-end has seen the news dominated by Labour’s plan for a Mansion Tax on properties worth more than £2m, and the Lib Dem’s possible plan for a wealth tax on assets of more than £2m. The Coalition have already increased Stamp Duty substantially on dearer properties, put Capital Gains Tax up to 28% from 18%, and cut the amount of money people can save in a pension fund from unlimited to £1.8m, then to £1.5m and in due course to £1.25m. Maybe that sets a precedent for how a Wealth Tax would work. It would start at a larger sum and work downwards quickly as politicians got a taste for spending the revenue from it.

             These new proposed Wealth taxes are on top of our existing wealth taxes – people with wealth pay CGT on any gains, income tax on any income the assets generate, Inheritance Tax on passing it to the next generation, and a host of other property and spending taxes.

              Labour’s tax might entail a person with a £2m property having to pay an extra £25,000 a year to live in it. That might be fine for a multimillionaire with a big income, but might be impossible for a pensioner living in a two bedroom flat in central London  which they bought years ago for a small sum, when they have only a modest income.  Income Tax is at least based on ability to pay. An asset tax is not based on that, and forces asset sales by people who are asset rich but income poor.

             A Mansion Tax might lead to people knocking down part of their property to reduce its value below the threshold. Window taxes led to blocking up windows. Mansion taxes could lead to the demolition of the conservatory or the conversion of a spare room into an outbuilding. Maybe people will invite in teenagers to have a week-end party in their place, to do enough damage to take £50,000 off the value to keep it below the threshold.  Unchic shabby will become the new decor for the flats hovering aroungd the £2m. People will be declaring noisy neighbours and anti social behaviour in their street to drive the values down.

             The Lib Dem’s wide ranging possible Wealth Tax will create many more anomalies and problems for many more people. The widow in the £1.999m flat will not want to be given gem jewellery or a good painting, as it could take her  into territory where suddently she would have to pay £20,000 a year wealth tax at 1%. It will give the very rich another reason to go offshore altogether. Buy to let landlords will be dumping their properties, and rushing to spend their surplus on better holidays or more expensive cars that depreciate rapidly. Maybe new businesses will spring up to take valuables off people, in return for letting them use or enjoy them without owning them. The Parliamentary draftsmen will need to be sharp to make the tax difficult to avoid.  Assets are likely to be shared out more evenly amongst family members, with informal arrangements on their use that the taxman might find difficult to crack. The government is likely to lose out on Inheritance Tax, as more better off parents decide the give things to their children early so they no longer have to pay a Wealth Tax on them.

            I would be  interested in your thoughts on this latest wheeze from the politicians.

 

 

 

    The US budget deficit is coming down faster than the UK for two reasons. Yes, revenue is rising more quickly, thanks to economic recovery. But spending is also under much better control. The Federal government is now cutting defence spending, to assist the cuts made by the various states to a range of other programmes. In the latest figures Federal spending was only up by 0.5% in cash terms. The deficit is down to 6.6% of GDP and falling.

      The President was an angry man in a hurry when he addressed the House and Senate with his state of the Union message recently. He wants to tighten gun control,seeks  a strong anti global warming policy, and favours tax rises rather than spending cuts. He knows, however, that much of this agenda is not possible given Republican control of the House.

      More interestingly, does he know that far from following an anti global warming policy, the USA is following a cheap energy policy – one of the reasons for her relative economic success. Presumably the President knows that the USA did not sign the Kyoto Treaty nor its successor recently on his watch, leaving the EU almost on its own with these expensive dear energy commitments. Presumably the President knows that his country is engaged in an amazing dash for gas, with much shale gas now beeing extracted despite the protests of environmentalists. Presumably he sees all around him people and companies who heat their homes and offices to a  higher temperature in winter than they cool them to  in summer. Presumably he sees the gas guzzling cars and the reluctance to use public transport. How can he say he is a strong anti global warming crusader with all this going on?

 

The US economy is in better shape than the Uk or Euroland. They sorted out their banks more quickly. They took a much bigger hit on property prices than the UK or Euro core, and now have them recovering. They are cutting overall public spending in real terms, and cutting defence spending and some state spending in cash terms and bringing the deficit down. It shows it does work.

 

One thing the last Blair/Brown government was good at was spin. They got their MPs and supporters to repeat over and over again the same mantras.

Whatever the question about the economy, they told us “No more Tory boom and bust”.

Whatever the complaint about yet another Labour tax rise, they told us “No more Tory tax rises”.

Current state spending was called investment. They told us it was all for better schools and hospitals – “no more spending on Tory economic failure”

They posed as the architects of a more equal UK, and told us they would lead a manufacturing revival.

Instead, we had a bigger boom and bust than any of the cycles since the 1930s. We had more tax rises than under the Conservatives. Social security spending leapt upwards. Inequality rose. Manufacturing continued to sink as a proportion of the total.

Today some of the spin lives on. There are times when the Coalition seems driven by inaccurate Labour spin, frightened to challenge the totems of the former era.

The Coalition is also shy about making its own claims for itself.

What is the purpose of the health reforms? I say to offer more choice and better treatment.  What is the official official slogan?

What is the attitude to taxation? Is it a necessary evil which on the whole does harm, or is it a moral crusade, a way of changing people’s lives and behaviour?

What is the attitude to savings? Are savers good? If so, why are they penalised with ultra low interest rates and inflation?

The Coalition needs some strong new high level messages. It would also be refreshing if they are accurate, unlike the Brown/Blair ones.

 

 

 

 

         One of the reasons I stand for Parliament is I want to help create the conditions in which living standards can rise. I want everyone to have the chance to be better off through their own efforts, or to be able to participate in the nation’s economic success if disability or old age means they have difficulty in providing for themselves.

        The recent prognosis by the Governor of the Bank of England that inflation could well stay above target for longer came as no surprise. It may be one of his more accurate forecasts, after years of understating the rate of price rises and overstating the rate of economic growth. The bad news  is higher inflation  could well prolong the period of falling living standards, which started with the collapse during the deep recession of 2008-9.

          You would have thought the main objective of the government’s economic policy would be to create the background where living standards can start rising again. You would expect the Opposition, seeking to rebuild their reputation for economic competence after the disaster of the Big recession, to be equally keen to set out views that could help bring about some restoration of living standards.

              There are two ways of doing this. The first is to get on top of inflation, so people’s wages buy more. The second is to grow the size of the economy, making sure the extra income generated goes to people who already live here.  The first aim does not seem to figure prominently in current political debate. Let me make the case as to  how it could be done.The second is proving difficult, with much of the extra effort being made by recent arrivals so it does not add to per capita output and income.

                  Getting inflation down is not as difficult as it might at first seem for government, because government itself is one of the main causes of it. There are three immediate areas where better public sector management and different policy could make a big difference.

                The first is energy. Go for cheap energy, so people on low incomes can afford to keep warm, and businesses can afford to make things here. The government has imposed large extra costs whcih the US, China, India and others do not incur.

                  The second is transport. Fares are far too high, especially on the railways. The government now accepts that the railway is massively inefficient, but there are few signs of a culture change that might make an impact with lower fares and less subsidy. The poor management of the road network also adds greatly to business costs. The public sector sees private road travel as an easy source of large amounts of revenue which makes us all poorer.

                 The third is the stifling cost of tax and regulaiton on a wide range of activities. Just consider the very large costs now on buying, improving and selling property. CGT at 28%, high fees for planning permissions and building regulations, high stamp duties. These all stand in the way of more jobs in construction and home improvement. They block off one of the main ways people in previous generations have made some capital.