Category: Blog

The Chancellor told us his preferred mixture of tax increases and spending cuts to curb the deficit was 20% tax rises and 80% spending cuts. Mr Ed Miliband favours something closer to 50/50.

In the government Budget Red Book we learn that the public sector net borrowing requirement was £154.7 billion in 2009-10. This falls to £37 billion by 2014-15 on the government’s plans. Over that time period tax revenue rises by £176 billion and total public spending by £68 billion (currrent spending plus £92 billion, capital spending minus £24 billion). Calculated crudely, tax increases account for practically all the deficit reduction.

The Treasury scores it differently. Presumably they count reductions in the rate of growth in spending as contributions to deficit reduction. On their figures in 2010-11 tax increases account for 41% of the deficit reduction and in 2011-12 for 43%. It pays to examine the figures before using the soundbites.

I will be speaking at the following meetings:

Monday 4th October 9 am Open the Freedom Zone
followed by “Free Trade not state aid” Austin Court

5.45 The Role of manufacturing in the Uk economy Enterprise Forum Fortissimo Room Hyatt Regency B1 2JZ

Tuesday 5 October 8 am Tax Reform Policy Exchange Room 101 Jury’s Inn Hotel 245 Broad Street

I was glad to hear this morning that the Conservatives intend to inject some hope and optimism into the government’s narrative. You can overdo the dire warnings about cuts to come, especially when the plan is to increase public spending each year for the next five years. If they do announce difficult cuts in particular departments and programmes it will be because the public sector is unable to manage with a 6% cash increase this year and another 2.5% next year.

I have long been pointing out that over the five years of this government’s plans total public current spending will rise by an annual £92.1 billion from the last Labour year. I should also add today that over the same time period tax will go up by £176.8 billion a year. In the last Labour year they collected £479.7 billion in tax. This government plans to collect £656.5 billion in tax in 2014-15. ( Budget Red book forecast p 100). The annual tax increase by year five of the planned increases will be £3000 for every person in the country or £12,000 for a family of four.

I look forward to Conservative Ministers dealing robustly with those who like Ed Mililband think there is scope for yet more tax increases. Mr Osborne has already proposed raising more than 20% of the planned deficit reduction from tax increases, and has made tax increases do more of the work in the first two years.
This morning we learn that maybe 1 in 4 hedge fund managers has already changed their personal domicile to avoid 50% income tax, whilst some whole funds have also gone, taking their substantial tax payments with them. Many politicians do not like hedge funds. They may discover there is one thing worse than having them in your tax jurisdiction, and that is to lose them.

Looking at the figures it is very difficult to claim that the Uk is undertaxed, or that tax is not carrying more than its fair share of reducing the deficit. The Chancellor wisely backed off from putting CGT up to 40% or 50%, realising that such high rates would result in less revenue, not more. He should also do some more analysis of the impact on revenue of our current income and capital tax rates. I think he would find on any sensible analysis that he would raise more tax if the rates were set at more competitive levels internationally. I always say we need to tax the rich more, and the way to do it is to lower the rates.

In 1989-90, Maragret Thatcher’s last year as PM, total taxes raised brought in £190 billion. It’s quite a thought that the Coalition government plans to raise taxes by almost as much as total taxes 20 years ago.

Before Mr Ed Miliband had been elected or had uttered a word as Leader Labour his party was ahead in the polls. Just five months after their mauling in the General Election, the public was giving them more than 40% support. How can this be?

I do not find it very surprising. For the last few months the main message coming out of the Coalition is the message of “deep cuts”. The long rambling spending review has allowed Labour politicians to get on the airwaves and excite concern about a long list of possible cuts. It has allowed all sorts of special interest groups free rein to parade the importance of their public spending and imply it is about be cut in clumsy ways. It has allowed Mr Balls to confidently predict a double dip recession based on the cuts he expects. It has damaged domestic confidence, and even led to a Monetary Policy Committee member demanding more money printing. Labour’s focus groups and polls show them they need to project some optimism and hope into the bleak economic and spending landscape. The government should do so before they lose the argument.

I do find it suprising that Conservatives leaders have allowed this to happen . I thought they understood that an image of a party that wants to cut well loved public services is not helpful. Nor is it a true reflection of past Conservatives in government. An image of a party which can cut out waste and less desirable public spending cannot be won by words. It can only be won by quietly and successfully doing just that. Five months into Coalition government, and public spending is more than 10% higher than a year ago, yet the government already has a reputation for cutting hard and cutting too much.

Coming out of past recessions Conservative government in 1981 and 1992 did cut the rate of growth in public spending and the plans for extra public spending as a necessary part of delivering a decent recovery. This time it was important to make it clear that the deficit is to be brought down more quickly than under Labour’s plans. That part of the strategy has worked, bringing interest rates on government borrowing down and seeing off a possible Greek or Irish style borrowing crisis. So far so good. Now we need to hear from Ministers that they can bring the deficit down whilst still increasing public spending every year. Their aim is better public service. They intend to achieve this with smaller increases in money. The previous government showed it was possible to shower the public services with extra money but get very little back for it. This government should be able to reform and improve public service with smaller extra sums.

They just make the task a whole lot harder if they allow the impression to gain hold that they are in it for the cuts. That will unite the Union hotheads with Labour to fight harder. It might even make firebrands of some moderates within the public services. We are all in this together. Temperate language about public spending which reflects the truth of how much money is available will serve them better than the harsh language of cuts.

I was sent Nick Boles’s “Which Way’s Up” to review. The first couple of chapters was full of loyal support for the Coalition government, and discussion of how Lib Dems and Conservatives had a lot in common. It seemed unremarkable.

Then I came to passages on equality. He takes the argument often used by the left that societies like Sweden and Japan are happier ones because they have greater income equality. He suggest instead that these societies are happier because they are more homogeneous, allowing far less inward migration than the UK has experienced in recent years.

Warming to his theme, he devotes a whole chapter to making a series of very radical and contentious proposals on immigration. His critique states that 70% of the new jobs have gone to workers born overseas since 1997. He says:

“We will not be able to sustain a social contract in which schooling and healthcare are provided to all citizens free of charge and are funded by taxation if we continue to allow, every year, hundreds of thousands of people from around the world to join the queues at A and E and send their children to British schools. Nor can we sit back while eight million British citizens of working age are either shun or shut out from all forms of useful economic activity because employers can find migrant workers who will accept subsistence wages to do menial jobs”

There is a raw edge and anger in his language, backed by figures higher than the official ones. His remedies are equally contentious:

“Britain needs a new immigration settlement, involving tighter controls on the number of people who can move into the UK every year (from both inside and outside the EU), greater selectiveness about who is allowed to settle here, tougher financial demands on new immigrants and those who want to employ them, more robust measures to remove those who break our laws, and more intensive efforts to ensure that all those who do settle in Britain adopt British values and become part of a truly united kingdom.”

So what does he propose?

1. A cap on the numbers of non EU migrants each year of up to 20,000 to 50,000 – putting a number on stated Coalition policy.
2. Requiring a surety deposit from all non EU migrants. This would be repaid after they had paid taxes here for a number of years, or forfeited if they committed an offence or lived here without paying income tax.
3. For EU migrants the UK should enforce the Directive which only requires a member state to allow free movement for the purpose of residence supported by work income or independent means. “Whenever a migrant from within the EU applies to a central or local government authority for benefits or housing or part of the NHS for non emergency healthcare, that authority should be required to check whether the individual in question has a job or sufficient funds to support themselves in the Uk. If they don’t, they should be told to leave the country…”
4. No-one should be eligible for social housing until they lived here for five years.

So what do you think of that? I am sure there will be some strong views out there on such radical proposals.

The intense public lobbying by all three services, leaked letters and the parade of unacceptable options for cuts amidst a culture of secrecy does not make for a good review. Given the need for a wide ranging debate about the UK’s needs, options and capabilities, it might have been better to have called for evidence and invited public hearings to look at the main issues before Ministers came to make conclusions. Alternatively, the documents needed to be held secure and confined to just a few people if the aim was to have a review conducted in secret without leaks.

It will be a pity if the defence Review is driven by current needs in Afghanistan. Of course this government must provide all support and equipment it can for the remaining months of our troops in the Middle East, but it should not regard fighting a war there as normal or an essential future requirement. Better still, we should be seeking to accelerate the transfer of responsibility to Afghan forces, and getting our troops out of combat duties well before the deadline of 2015.

UK defence should have three main aims. The first is to be able to defend the home islands against any possible attack. The second is to make a contribution to expeditionary warfare, peace making and policing through NATO. The third is to ensure maritime protection of our main trade routes and our overseas territories and less powerful friends.

Defending the UK requires a nuclear deterrent, as all three main political parties believe. It requires a substantial navy with air protection, to ensure that no-one can threaten invasion by sea or air. Modern defence may come to rely more on unmanned weaponry and on smart and stealth weapon systems. The UK should retain its involvement in the development of sophisticated weapons systems that rely less on men and women risking their lives to offer credible defence.

The second and third also require a substantial navy with air support. The expeditionary capability requires a mixture of carrier based task forces with possible long distance air support operating from appropriate bases. Maritime patrolling relies on sufficient ships, sometimes needing carrier assistance,sometimes just needing helicopters carried on board smaller vessels.

Of course a highly professional and well trained army with special forces is also important. The army units provide the core of any Uk defence on land, and provide the bulk of the fighting force taken on any expedition. It is difficult to see why we still need an army of 20,000 in Germany as part of this pattern.

These issues need to be thought through before the question of money comes up. Fortunately the defence budget is one of the smaller ones, and the overall level of public sepnding is rising, so it should be possible to support strong defences for the UK built around a realistic view of what we can and should do.

Today we are told that Mr Miliband will show some humility. He will tell us he understands how angry we are that Labour said they had abolished boom and bust.

He should wake up and understand that what made people angry was not the soundbite – that was just silly. What made people angry was the huge boom and bust Labour presided over and helped engineer. They wish to blame the global economy and the US credit crunch, but the UK credit crunch was made in Britain by British Regulators and by the Bank of England under the supervision of Labour Chancellors. Northern Rock, Bradford and Bingley, HBOS and Alliance and Leicester were UK banks supervised by Mr Brown’s very own design of banking regulator

To please his audience Mr Miliband will say Labour were wrong to go for a deregulated City. This remains one of Labour’s biggest lies or misunderstandings. The City was more regulated in 2007 than in 1997. Mr Brown set up an independent banking regulator, kept the Bank of England involved, and made the Chancellor the Chief Regulator of the whole structure. He introduced extensive mortgage regulation which regulated the wrong things. All his regulators, far greater in number and better paid than in the 1990s, got the main judgement call wrong. They did not control cash and capital sensibly, and allowed a boom. They then controlled money too fiercely, and brought on a bigger bust.

That is what Mr Miliband should apologise for. Don’t hold your breath.

Last week on Question Time I still had to rebut the Labour lie that I advocated the scrapping of regulation of mortgage banks, when the Report I wrote for the Conservatives warned of excess credit and said they should regulate cash and capital more tightly. It turned out to be correct that their box ticking mortgage regulation failed to stop the worst mortgage crisis in our history.

Mr Bean lectures the prudent, the savers, that they must go out and spend more. He tells us the whole point of providing practically no return on our desposits and savings is to persuade us to spend more.

Doesn’t Mr Bean – or the Bank – realise that the UK has a treble deficit problem. It’s not just the public sector that has borrowed too much. In the boom years individuals borrowed too much as well. We are all collectively embarked on cutting the mortgage and putting some more money into savings and pensions. We also have a balance of payments deficit. We need to export more and import less.

Consumers might spend more if they got a better return on their savings and had more savings income. With the current cripplingly low level of savings income people are saving more to try to compensate. As house prices fall, people become more alarmed by the level of the mortgage. Mr Bean doesn’t understand human nature, let alone economics.

David Miliband’s refusal to answer the simple question, does he want to be in Shadow Cabinet, is a distraction Ed Miliband could do without. Mr David’s carefully contrived soundbite that he does not wish to distract from Ed’s day and week achieves the opposite of what it says.

If Mr David wants to help his brother he should make a simple statement that he will support him in any way the new Leader chooses, and will – or will not – be running for Shadow Cabinet. It is difficult to see why people think he would make a good new Head of the IMF. I seem to remember Mr Davidf Miliband supported all of Mr Brown’s disastrous economic policies which got the UK economy and banks into such a mess. The world does not need more of such misjudgment. I do not recall Mr Miliband warning against the credit boom, nor warning that the authorities then overdid the bust.

A combination of Corporation Tax, 50% income tax on higher incomes and 28% captial gains tax was always going to put some people off coming to the UK. The question was how many would it also send away.

Yesterday one of our large companies, Wolseley, announced it was going to the Channel Islands and Switzerland to get away from UK tax rates and the Inland Revenue. It follows Shire and Ineos, and various investment businesses. It should have come as no surprise, as some of us have been warning for some time that the UK is no longer tax competitive. It’s a footloose world out there for entrepreneurs and businesses. Other jurisdictions now are friendlier and set lower tax rates than we do, so people and companies take up their offers.

The British political class is indulging in one of its phases of moralising and bashing anyone with a bit more money than the neighbours. We are told they should not seek to minimise their tax bills. They should stay here and help the country pay off its debts. They may not be easily persuaded.

All this would be easier to sell if the political classes themselves sought to maximise their own tax bills. There have been cases of prominent Labour, Lib Dem and Conservative MPs, peers and donors who have taken good advice to lower their tax bills legally. I see nothing wrong with them doing that, but the parties should not then turn round and tell people taking sensible precautions to keep their own tax down that such an approach is unpatriotic, immoral or worse. Most sensible people seek to reduce their tax bills by legal means. The government itself encourages that with its tax shelters for National Savings, pension investment, ISAs, charitable giving, family gifts seven years before death and the like.

I found myself agreeing with Mr Darling yesterday. He said that it would be increasingly difficult to collect more tax from income and profits, as successful people and businesses will simply shift tax jurisdiction if the UK puts up its rates. He might have added the way to increase the UK tax take from the rich and successful is simple – cut the rates, then more will want to come here and stay here.