Category: Blog

I do not accept the view that a Chief Secretary has to be a City figure who knows the markets. The Chief Secretary’s job is a very political one, based on doing deals with Cabinet colleagues over their budgets. Mr Alexander’s close proximity to the Deputy Prime Minister and his Lib Dem colleagues is his strength. His success or failure will depend on how well he helps choose the cuts for other departments, and how well he helps Cabinet colleagues sell these to the country. He needs to protect schools and hospitals whilst cutting out waste and less desirable spending throughout Whitehall and indirectly throughout town halls. None of this requires City experience. It requires a close working knowledge of Whitehall budgets and public sector management.

It’s not a topic I wanted to have to write about, but it’s one I can no longer ignore.

I begin by sending my condolences to the 11 people who died in the fire and explosion on the Transocean drilling rig, and my commiserations to all who now face loss of income or livelihood as the oil spill affects the fishery, the beaches and the coastal waters.

I do not wish to comment on the relative responsibilities of BP, the oil company, Transocean, the drilling company and Halliburton, the oil services company which provided various services to assist with the well. They have set out their own views of their roles on their own websites.

Nor is anything here offered by way of investment advice. Holders of relevant shares should take advice as appropriate.

I wish to look at the wider consequences of the accident.

The first consequence is the Presidential decision to delay further deep water drilling. The world is short of oil, and was expecting more discoveries in deep water to fill the gap between current energy demand and future supply of alternatives. This means less exploration activity and fewer finds. There is more uncertainty in governments and even in the oil industry about how much can be done operating 5000 feet beneath the waves. This for choice means slower growth and dearer fuel in the months ahead.

The second consequence is damage to UK/US relations. BP is the oil company responsible for the exploration. The most powerful man in the world, The US President, at the head of the world’s most powerful military, feels he has to engage with the crisis but appears powerless to marshall forces which can stem the oil flow. Naturally he turns to blame BP and to remind American opinion that a foreign oil company is at the heart of this crisis. Many British people look on with a sense of helplessness as well – none more so no doubt than frustrated executives of BP who see the need to stop the flow but have so far been unable to do so.

The third issue that worries me is the impact on corporate UK. The FTSE 100 Index accounts for 86% of the market value of quoted UK companies. BP, even after recent share price changes, accounts for about 8% of the value of the index, or around 7% of the UK total.

Many savers depend on dividends from the larger shares quoted in the UK. Many pension, charitable and other funds still have large positions in UK shares, and therefore also in BP. In 2008 these same funds were hit badly by the collapse of some banks and the sharp fall in prices of all quoted bank shares. Today RBS and Lloyds still pay no dividends where once they paid substantial dividends, and some other banks and financial companies are paying less than they did in their heyday. BA is no longer able to pay good dividends either, as its employees strike and it makes losses. The oil companies, 18% of the Index, and mining companies have come to represent a larger proportion of total dividends following the hard times in banking.

In 2009 BP worldwide made a profit of around £20 billion, paid around £8.4 billion of tax, and offered dividends worth about £11 billion. It is a reminder of what a large Group it has become. However, if the oil continues to gush out, and if the US requires BP to meet large costs for prevention of pollution onshore, compensation for loss of income to local businesses and clean up if oil nonetheless comes ashore, we could be talking big money even by BP’s standards.

Big British business has been badly hit by a series of disasters. The Credit Crunch, the airline cost issues and the accident in the Gulf are unrelated, but they do all have the same effect. They take reveneus away from big British companies, revenues which the Treasury wanted to tax and shareholders wanted to share in. The fragile UK eocnomy cannot afford more accidents on this scale.

Today a government Minister said the government has not yet formulated a CGT proposal – as I have been saying on this site. He also said they were conscious of the needs of entrepreneurs making business investments and savers needing investments for retirement. That’s a little reassuring. The taper idea I have put to them would deal with these issues. It was also important to read that if they are going to tax short term gains as income it will be at 40%, not at the temporary 50% rate.

In 10 days I have received 1163 emails, mainly about CGT. There are strong feelings about this in the country, as practically all of those were in support.

Whilst many of us want to concentrate on the future and the rescue of our economy, the next few months will also see some reappraisal of the Labour years. For the first time we will be able to debate them without the choking blanket of spin coming from Downing Street.

That is why I had no objections to debating with Mr Campbell on Question Time. To those who say he was never elected so he should not represent the Labour cause, I say he was a crucial influence on that Labour government. We need to debate amongst other things whether it was healthy that a Spin Doctor had as much power as he had. He appeared to have more power than any Cabinet Minister save the Chancellor. He was there when the crucial decisions were made and explained on the Iraq war which came to define Mr Blair’s premiership. He created a network of Press Officers throughout Whitehall who changed the way government operated and spoke. He knew the Labour lines better than most, and crafted a good few of them. We are rarely if ever going to be able to debate it with Mr Blair, and he himself is also now no longer elected.

I think Conservatives now need to consider carefully how we should describe the Blair years. After all, Mr Blair beat the Conservative party on three seperate occasions, albeit on a sharply falling vote each time. I always think it best to ask first what is the truth, and then to find the words that best capture that.

Mr Blair’s premiership fell into three phases. In the first he enjoyed amazing popularity and support. The country had high hopes. He and his Chancellor kept to Conservative spending plans, repaid public debt and presided over a continuing strong economy. Unfortunately they wrecked the pension funds through early decisions, and failed in that crucial first Parliament to reform welfare as promised. These choices proved expensive for the country subsequently.

In the second phase they started to spend more, in some cases helpfully, but in many cases in a wasteful way. They were fixated by the volume of spending instead of by what needed doing and the results of spending. The Prime Minister became more and more preoccupied by foreign wars, perhaps partly because his Chancellor made it so difficult for him to involve himself in domestic spending and policy. His naive pro EU stance started the unpopular immigration policy and left him legislating so many unhelpful or irrelevant EU Directives into UK law.

In the third phase Mr Blair was under constant attack from his neighbour who wanted his job, and was very unpopular with the public who had grown tired of the wars and the spin.

So how should we sum it up? It was all a great let down for the country. High hopes were shattered. He failed to achieve the crucial reform of welfare we needed. He came late to the idea of health and education reform, having started out by ditching Conservative reforms that might have begun to do so good if left and developed. He did understand the need to reform public services but failed to deliver. He did teach Labour that they had to be more sympathetic to success and enterprise. He allowed himself to become too committed to Bush’s war.

It was his successor who was unelected, who made the prime cause of Labour in government clinging to power. It was he who drove debt, waste and borrowing to new and dangerous highs, and who bungled his handling of the banking crisis so badly. It was after all Mr Brown who set up the system of banking regulation which ultimately brought him down, damaging the Uk economy massively at the same time. Mr Brown’s socialist authoritarianism was as damaging as Mr Blair’s lack of delivery was disappointing.

There has been a deluge of support for arguing that we should realise that choosing competitive and fair rates of CGT is the way to maximise the tax take and to encourage saving and risk taking. Just a few have written in to demand higher taxes on buy to let property.

Let me explain why I do not agree. We need a decent supply of rented housing in this country. In the next few years there is going to be precious little money to provide additional public sector rented accommodation – as the ex Chief Secretary to the Treasury rightly said “There is no money left”. We will depend on private sector rented homes for the extra we need.

There is growing acceptance that there needs to be generous exemptions from CGT for entrepreneurs who make risky investments to create jobs and provide facilities to the public. It will be difficult if not impossible to design such exemptions in a way which excludes someone from setting up a lettings business in a company format and enjoying such exemptions.

The only people likely to be caught by a high CGT rate will then be the smaller saver and owner of a modest buy to let property. One such family’s case came to my surgery yesterday. The lady said three of them had inherited a single house. The IHT had been paid. There was now a gain on the property which they would take when they wished to sell and distribute the cash to the three beneficiaries. High CGT would mean a second tax on the same inheritance. Many of my correspondents have single properties which they bought to provide them with capital for their retirement but did not place wihtin a pension plan. If they are taxed too much on the sale of the home they may need top up benefits to their pensions. Why must we penalise the saver and the prudent?

I do not accept that the purchase of homes to rent out is the prime cause of house price inflation. I agree with those who say housing is too dear, and too many struggle to get onto the housing ladder. As I have often explained on this site, that was brought about by the crazy monetary and credit policies of the decade up to 2007, when too many mortgages were available and when banks accepted ever higher multiples of the price and of incomes. To get house prices more into line with incomes we need saner credit and monetary policies. Deterring private rented accomodation will be insufficient to slash house prices, but will put rents up.

Last night on Question Time we were asked to explain why both Ed Balls and Ed Milliband are now critical of the Iraq war. The answer is obvious. They both wish to lead the Labour party. Many Labour MPs and Trade Union members always had their reservations about assisting in “Bush’s war”. Other Labour MPs and members are tired of having to defend it, now we know there were no weapons of mass destruction and no 45 minute threat to these islands.

Alastair Campbell defended himself and Tony Blair doggedly.He claimed they acted in good faith, and only found out later that the intelligence was wrong. He did not think the Labour party has anything to apologise for. Piers Morgan thought the actions of the two Eds cynical and unbecoming.

It was fascinating to watch this row on the left. There can be no doubt that the Iraq war was the most decisive and defining action of the Blair Premiership, just as the explosive money printing, devaluation and debt build up was the defining action of the Brown Premiership. Both have to be explained to the British public by the heirs to Blair and Brown. Maybe an apology as well as a convincing explanation of why they made these mistakes would also be wise.

Amidst all the over hyped media talk of cuts to come and massive public sector pain ahead, let’s spare a thought today for all those who have been living with cuts for many months. People in industry lost their jobs or suffered pay cuts in the deep 2008-9 recession. Savers have seen their income from deposits slashed by the low interest rate regime. Most people today in the private sector are accepting little or no pay increase at a time when prices are rising by 5.3%.

So far the spending cuts have been modest. We have not yet cut anything like as much as Ireland. Portugal and Spain, which now have lower deficits in relation to their economies. This autumn’s public spending review is going to have to identify less desirable spending as well as waste, to get on top of the problem.

It is always a good test for an MP saying such things to ask what he is prepared to see cut from his own area. Let me make two suggestions.

The first is I want to see the South East England Regional development Agency abolished. There have been words in some papers saying that maybe we will get a cut budget for this body rather than its removal. I have even had lobbying from another quango asking me to support SEEDA. Any quango which has the time and money to write to me in support of SEEDA should have its own budget and rationale examined. Getting rid of bodies like SEEDA should be easy in this climate.

The second is the case of a new secondary school for Wokingham Borough. This was placed in the Borough’s budget with an £80 m price tag owing to the large increase in homes required by the last government’s regional planners. The last government of course did not include any money to build the school, and I warned that I did not think if they stayed in office they would come up with any. I also warned during the election that I did not expect a new giovernment to be able to afford a new school in the next three years either. The Council now has the option instead of lowering the housing targets and getting by for longer without a new school.

The UK is battling to avoid the collapse in economies we are seeing in peripheral Euroland. Last night an Irish entrepreneur was telling me that many companies are going bust in Ireland. The phoenix companeis that arise in their place may cut wages and salaries by a third, and end up paying rent at half the previous level. That is savage.

We can avoid such a path. To do so we need to stay ahead of the markets in reducing the deficit. Reducing the deficit requires us all to be realistic about public spending. It also requires vigorous and sprightly private sector led revival, which in turn requires pro enterprise policies.

David Gauke MP
HM Treasury
Whitehall
London SW1

Dear David,

I am writing with a proposal on how you can amend CGT in line with Coalition government objectives. I understand your wish to tax short term gains as income, to prevent conversion of income into capital and to ensure short term traders and speculators pay their fair share of tax. I also appreciate the Coalition’s need for more revenues overall. The government has said it wishes to assist a substantial private sector led revival, and wants to see the enterprise sector create more jobs and homes for rent. The government needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provison for their families and their futures, and is fair.

I suggest that you tax gains of under one year as income. I would suggest you tax them at 40% for higher rate payers, as I understand the 50% rate is a temporary measure. Were you to use the 50% rate it would need to be clear that you intend to go back to 40% for both Income and Capital Gains as soon as possible.

There is some suggestion that longer term gains should also be taxed at 40% with reliefs for business assets. This would deal with one of more damaging features of a high CGT rate regime, allowing entrepreneurs to set up and grow businesses which they can subsequently sell without paying a penalty rate. However it would leave long term savers, people owning buy to let properties, and people with savings for retirement which are not held within a pension fund having to pay substantial tax. This would include paying tax on inflation. Under previous CGT regimes people were allowed to deduct the inflationary element of the gain from the taxable amount. This Indexation allowance was removed in return for a much lower overall rate. It would be unfair to ignore this in a new scheme.

A big increase in the overall rate could well damage the revenue. The US and UK have both shown in the past that raising CGT rates cuts revenue. In the case of the USA where the figures are not affected by other changes to the tax base the figures are dramatic.In 1981 the US collected $28.5 billion with a tax rate of 24%. In 1982 they raised $26.95 billion with a lower 20% rate, only to see receipts soar to $37.85 bn the next year and as high as $97.33 billion in 1986.

In 1987 they raised the rate to 28%. Revenue plunged to $59.83 billion. They raised it again to 33%. Revenue briefly rose to $66.23 billion in 1988 then plunged again to $57.3billion, lower than when the rate was 28% and well below the levels when they had a 20% rate. In 2002 they raised $55 billion with a 20% rate. In 2004 this soared to $78 billion by lowering the rate to 15%. In 2006 they were bringing in $110 billion at the 15% rate.

I therefore suggest that longer term gains should be taxed at lower rates. If you taxed 2 year gains at 30% and three year gains at 20%, higher rates than the current one, you could tax gains of four years or more at 10%. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location.

I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good. We should remember that competitor countries including Singapore, Hong Kong, and Switzerland impose no CGT at all.

Yours ever

John

Bloggers might like to send a version of this letter to their own MPs or the Treasury.

Some of you objected to my carefully chosen words on changes in the 1922 Committee. Some of you thought I needed to oppose the changes, whilst others thought backbenchers should give united support to the Leader.

As I said at the time, I am more than happy with the Leader’s proposal that Ministers should come to 1922 meetings, breaking the tradition of previous Conservative governments. I never thought they would stand for election to the backbench Executive, and it has now been clarified that of course they will not. It has also been clarified that there is no intention for Ministers to have a vote in backbench Committee elections. Again I did not think they would, as the ballot was about Ministers attending, not about them voting. Readers need to read these pieces carefully to understand what is going on.

I have often argued we need to tax the rich more – ever popular with Lib Dems and Labour. The way to do it is to lower the rates.

The Adam Smith Institute has just sent out the figures for the impact on capital gains tax collection from raising and lowering rates in the USA since the 1950s. Whenever the rate has been cut revenue has risen – often in the first year and normally in the second. In 1981 the US collected $28.5 billion with a tax rate of 24%. In 1982 they raised $26.95 billion with a lower 20% rate, only to see receipts soar to $37.85 bn the next year and as high as $97.33 billion in 1986.

In 1987 they raised the rate to 28%. Revenue plunged to $59.83 billion. They raised it again to 33%. Revenue briefly rose to $66.23 billion in 1988 then plunged again to $57.3billion, lower than when the rate was 28% and well below the levels when they had a 20% rate.

In 2002 they raised $55 billion with a 20% rate. In 2004 this soared to $78 billion by lowering the rate to 15%. In 2006 they were bringing in $110 billion at the 15% rate.

The Uk experience is similar. Lower rates increase the yield. Austria, Switzerland, Belgium and Luxembourg have a zero rate. The USA has a 15% rate and Japan a 10% rate. If the UK hikes its rate too much it will end up with less revenue, and make itself needlessly uncompetitive in a world where capital and talent is footloose.