China’s strategy

Whilst people in the UK are preoccupied by our election debates, the IMF and World Bank meeting with Finance Ministers  is happening  in momentous times.

The most significant thing that is happening is the rise of China. China has a plan. They are in transition from relying on exports and investment to grow quickly, to depend more on consumer spending at home. After years of making good value goods to sell to foreigners, to build up a large reserve of foreign exchange, China is now making more to sell to her own citizens. Her  economy is also in transition to higher tech and to delivering more service output.

China is liberalising its financial system. It now has more two way investment into and out of mainland China to Hong Kong. It is putting its currency, the renminbi, forward as one of the world’s great trading currencies. It is seeking the entry of the renminbi into the Special Drawing Right basket of the IMF alongside the dollar, yen, sterling and the Euro. It has set up the Asian Investment Bank to extend credit across Asia and the Middle East.

The most dramatic plan is China’s proposal of a new Silk Road and silk maritime road. The idea is new and improved sea and land transport links from China through Central Asia to Russia and Europe. China has in mind a new large economic zone with joint investment projects in transport, communications and  energy, with more common trading and co-ordination of economic and development policies.

China is working with the City of London, recognising UK excellence in finance and valuing London’s ability to make markets in the renminbi. We need to make the right diplomatic response to China’s developing wish to play a bigger role in the world, and to use some of her great industrial and financial muscle to extend her influence. The UK government was right to back China’s Investment Bank initiative.

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You don’t rule well by trying to divide a society

There’s a lot of class war rhetoric around in this election. There are some who seem to think you can make the poor rich by making the rich poor. There are certainly many who speak divisively about society, seeking to set poor against the better off, as if their interests were incompatible.

I have spoken and written before against austerity. I want greater prosperity for all. I want tax cuts for all to help bring it about. I want people at all income levels to keep more of the money they earn, and to pay more tax when they earn more money. Cutting tax rates, and lifting some people out of income tax and some capital taxes altogether is one of the best ways of stimulating more enterprise, more activity and more prosperity.

The Conservatives are not the party of the rich as endlessly stated in Labour and Lib Dem caricatures. We want the rich to pay more tax, and think the best way to bring that about is to set rates that mean they will stay and pay, and rates which encourage them to venture more with their money, employ more people, contribute more to our economy. We want everyone who can work to have the chance of a job. We want everyone in a job to have opportunity for promotion, training, higher pay.

You do not rule well by seeking to divide society, and by thinking that differences of income are of all consuming importance. You rule well by enforcing a fair law equally on everyone. You rule well by ensuring the many can aspire to better jobs, higher incomes, better homes, and by looking after those who cannot manage.

The danger is we spend too much time arguing how to divide the cake up, and far too little time and effort thinking how to bake a larger cake. Some want to break the country up, setting rich parts against less well off parts. Some want people to depend more on the public sector. I want to see policies which promote better training and education, more people setting up their own business and working for themselves, more small businesses expanding, more people owning property and other assets.

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You could get a lot of public service for £742 billion.

 

£742 billion is a lot of money. It is £11,600 for every man, woman and child in the country. It is what the UK state will spend this year whoever wins the election. It is time to ask a few more questions about how this money should be spent.

I agree with Conservative policy that we need a further period of restraint in public spending to help get the deficit under control. I think the cash near standstill for a couple of years is just what is needed as per the present Red Book plans. I do not think this need be difficult for the public sector, as there are some relatively easy ways of achieving it. Having zero inflation helps.

There is considerable scope for better buying, more quality driven systems of management, getting more  right first time and more reduction of error and waste in many parts of the pubic sector. There is considerable scope to reduce the benefits bill for the best of reasons, by helping more people into better paid jobs or into any kind of job.

I disagree with the official party line over HS2. I would cancel this project tomorrow,and did vote against it in the last Parliament. There is no capacity problem from London to the north. There is a commuter capacity problem into the main cities which could be more easily and cheaply solved by improvements to current lines.

The large subsidies being pushed into Network Rail, a nationalised industry, have not bought us cheaper peak hour fares, but have bought us gross inefficiencies. I would seek a new management plan to do more and better for less on the railways. Our railway performance is way below that of comparable European railways.

I would spend money on overseas aid in relation to the need of countries for help and in relation to the priorities of UK foreign policy. I would charge all the costs of the military in the ebola mission and similar activities to the aid budget. I would also charge all treatments offered free in the NHS to visitors from abroad to the aid  budget. I would do more to ensure the NHS recharges all treatments for visitors from the rest of the EU through the EU recharge system to the relevant member state governments, and expect most overseas visitors  to have insurance or cash  to pay for any non emergency treatment whilst here, if not covered by the EU arrangements.  The government has been taking action to remind the NHS of the need to charge people from abroad who are not eligible for free treatment.

I would also expect a major reduction in our dues to the EU. Either we will negotiate a new relationship based on trade and political co-operation, which should include lower charges, or the UK electorate will vote to leave. Either way there should be large savings.

 

 

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Labour now say they want to cut the deficit

According to the Labour Manifesto they now buy into a policy they criticised as being a policy of austerity . They seem to wish to cut the deficit from £90 billion to £30 billion by 2019-20. Their tax increases are modest in terms of how much revenue they will raise, even on their own figures. Some of their tax proposals may end up losing the Exchequer revenue if Labour won and implemented them. It must mean they are planning a lot of what they used to call “spending cuts” to achieve their goal.

The single main message of their Manifesto is that the last government was right – the UK government  did need to get the deficit down, and we do need to finish the job of getting it down. Labour leave it to the Greens and the SNP to make the case for bigger spending and more borrowing. Labour give us the headline that they will get rid of the deficit, and suggest the debt will be reducing. If you examine the numbers more carefully you see that in practice they will push up borrowing by considerably more than the Conservative plans, and will not be cutting the stock of debt by 2019-20. They will carry on borrowing to finance investment.  Debt  may be falling as a percentage of GDP, depending on how much growth is left. The detail does not back up the headline.

Some of the high level rhetoric of their Manifesto is often inoffensive or sensible. They want “hard work to be rewarded” – who doesn’t. They want more “high skill high wage jobs” – who doesn’t. They want more new homes. The problem is the policies to bring them about may be counter productive.

They now mention immigration.  They wish to curb EU migrants from getting any benefits for the first two years here, compared to the Conservative four years. They think all public service workers should be able to speak English.

Perhaps the dearest ( and entirely uncosted)pledge in the whole document  is their wish to remove all carbon (dioxide?) from electricity production by 2030 and to set more demanding whole economy targets for carbon. They offer little to England, with no English votes for English issues in the Commons, and no detail on how the finance would be negotiated once Scotland has more of her own tax raising powers.

The Manifesto is full of proposals to intervene and regulate business more. Their proposals on energy are especially complex,  and could be dangerous given the overriding need for more investment in more capacity as soon as possible to keep the lights on.

 

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Unfunded promises and hypothecation – let’s talk about some big numbers

The election debate has got tangled up in discussion of a few billion extra spending, rather than a sensible analysis of the  £742bn of total spending this year.

Worse still Labour and some in the media seem to think if you wish to propose any additional spending you need to show hypothecated new revenue to pay for the item.  They rarely propose offsetting economies in public spending and never discuss the overall  balance of the budget and the rate of increase in tax revenues. Uk government does not of course work on the basis of hypothecation.  Most revenues are aggregated in the Treasury and used to pay for whatever bill comes up next in the general public spending budget. Thus NI contributions, Road licence fees, Vat, Stamp duty and the rest are just part of the general pot.

Conservatives say they will increase Health spending by £8Billion a year by 2019-20. It will be paid for out of the general rise in tax receipts likely over the next five years and already in the Treasury budget figures from economic gr0wth. The Conservatives point out that health spending is up £7bn in real terms over the last five years, paid for out of rising revenues,so the deficit was still able to fall. Over the next four years the Treasury forecasts an increase of £124 billion a year in tax revenues on present tax rates.

Labour say they will increase health spending by £2.5bn a year paid for out of specific new taxes. In practice anyone running the government will end up spending  more than an extra £2.5bn a year for the NHS.

There are two important  issues  to discuss. How quickly can tax revenues rise? With more growth and lower tax rates there should be faster growth in total tax revenues, which will help. That is why the main deate should be about how to sustain the current good gr0wth rate of the UK economy. Higher taxes as in France will not do that.Labour knew that in office but has forgotten it in opposition. How can total spending be brought under control and how can we secure more value for the large sums now being spent and promised?

Debating the odd  additional billion is debating the rounding errors or ralatively small changes in total public spending. There is too much sound and fury over a few billion of “new” money and far too little debate about how to spend the bulk of the money wisely. I will deal with these issues in future posts.

 

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The cause of England

There are 18 Parliamentary constituencies in Northern Ireland, 40 in Wales and 59 in Scotland. In the last General election the Conservative party won 8 seats in Wales, one in Scotland and none in Northern Ireland. Conservatives won a substantial majority in England, taking 298 of the 533 seats. It was not enough to give an overall majority in the Union Parliament.  Owing to the way our Parliament works, that meant in England Conservatives had to share power with Liberal Democrats to govern English health, English education, English local government and other English matters. Meanwhile these issues in Scotland came under the control of the SNP who won the Scottish Parliamentary election,  in Wales under Labour who won the Assembly election, and in Northern Ireland under the Northern Irish parties.

Now that more devolution has been promised to Scotland, Wales and Northern Ireland, there has to be a settlement for England.  The polls do not point to a substantial  breakthrough for the Conservatives outside England, so the Conservative party will depend heavily on England for a majority in the Union Parliament. It would be quite unacceptable for Conservatives to win again in England, but for there to be no devolved power to English MPs to deal with the matters for England that are devolved to Scotland.  This will be especially true over taxation. Once Scotland has the power to fix her own Income tax, Wales has the power to fix business rates, and Northern Ireland the power to fix Corporation tax, England will expect powers to fix her own taxes too.

I look forward to the publication of the Conservative Manifesto setting out a policy to offer some justice to England. I also fear that the Labour and Lib Dem manifestoes will be silent on this weighty matter, hoping that it will go away. It will not go away. The SNP will make sure of that. As the SNP send new MPs to Westminster, they will do so backed by Scottish voters to improve  Scotland’s deal within the Union, and to demand more devolved powers. As they do so England will find her voice and expect some fairer treatment. Just as Labour took Scottish voters too much for granted in recent years when the SNP was upping its game, so today Labour and Lib Dems ignore England and refuse to listen to the reasonable demands of the English for English votes for English needs, let alone to the voices of those who want a separate English Parliament.

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Tax cuts for millionaires?

Labour’s slogan that they will not allow tax cuts for millionaires is a slippery one. A millionaire used to be someone who owned £1 million of assets. These days a lot of people are millionaires, because they live in a  one bed flat which they own in central London, or because they own an executive home in a good location in many parts of the UK, along with some pension savings for their retirement. They may not have a large income. Some millionaires are standard rate taxpayers only. I want tax cuts for all, and have no problem with someone with a pleasant house and  pension savings  qualifying for a tax cut.

What Labour now sometimes means by a millionaire is one of the very few people in the UK who earns £1 million in a single  year. There are a few footballers, singers, financial executives and entrepreneurs in this tiny privileged group that bare the brunt of Labour’s ire about excessive rewards. Conservatives, I can assure the Shadow Chancellor, are not pondering schemes to award this small group special  tax cuts, but nor do we think that if we increased the tax rates on this group it would solve the nation’s financial problems. There are not enough of them and not all of them would stay and pay.

It is a great pity that the UK debate is mesmerised by the word millionaire, and that it is used in such different ways so that it muddles the conversation. It is also a pity that jealousy drives much of the debate on taxation. Of course someone on a mega income should pay a lot of tax on it. We also need to bear in mind that an individual may only be able to enjoy mega earnings for a brief part of his or her life, so allowing them to save some money for the future also makes sense. We  need to remember that if we try to tax too much the earnings can often be shifted elsewhere, so  the UK ends up with no tax from that person.

Sensible taxation is based on balance and judgement, not on jealousy and revenge. I want to see tax cuts for standard rate payers, and a higher 40% threshold for starters.

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Greek climb down?

Greece decided to repay her debt owed to the IMF, after press speculation that she might not. Greece did not apparently ask Mr Putin for money. Mr Putin for his part is reported as offering to buy privatised assets in Greece, a far from helpful comment to a government elected to stop privatisation. Greece has also managed to borrow another Euro 1.14 billion this week by selling 6 month Treasury Bills. So far, so orthodox.

It is true the Euro area had to grant permission for the Treasury Bill sales. It is also true the European Central Bank keeps lending to the commercial banks if they lose deposits. So far, so orthodox by them as well. Both parties are currently behaving as if they have a normal relationship. The Euro area hopes to wake up one morning soon and find a proper Greek programme to cut the budget and live according to the loan agreements. Greece hopes to wake up one day to a Eurozone which agrees austerity has to end and money has to be given to Greece to allow some growth and some relief from past debts.

The Euro area does not want to force Greece out of the Euro, but does the bare minimum to allow the Greek state to continue to function. Allowing more 6 month Treasury Bills delays the problem until the refinancing, or until next month when Greece will need more cash to carry on. The Euro area is playing it fairly tough, but is acting as the ultimate banker of the Greek state in its current strait jacket.

We normally read that the Greek government has no wish to leave the Euro, as the Greek electors claim to still support Greek membership despite the resulting policies which they hate. More recently there have been some comments to the effect that Greece might like time out from the Euro, to cut her exchange rate and write off some debts, before asking for readmission on better terms with less debt. This may just be others flying kites. However, it is still difficult to see how Greece and the Euro area can come to a long term financing agreement which suits both sides. The fact that so far there has been no sign of a decent draft agreement tells us just how far apart the two sides remain.

The Euro area does want privatisation sale proceeds, a lower spending budget and labour market reforms. Syriza is relaxed about promising higher taxes and less tax avoidance and evasion, but reluctant to do much on spending, asset sales or economic reforms. Debt relief by offering lower interest rates, cancelled or postponed interest charges, and delayed repayments now will have to hit the other member states of the Euro area and the IMF, as the private creditors took their losses last time round. It all makes it much more difficult to agree.

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Taxing the rich

Taxing the rich is extremely popular with the main political parties. It is based on two propositions. The rich have more money to tax. Taxing the rich is popular with many who are not rich. So what could go wrong?

Most of us agree the rich should pay more, and that income tax should go up with  income level. The problems come about because the very rich have more scope to decide where to live, where to work, and where to pay taxes. If a country overdoes its taxation of the rich, as France did recently, many of them go and live, work and earn somewhere else. The ones who stay employ better tax lawyers and accountants to minimise their bills.

Nor is heavy tax on  the rich  popular with everyone who is not rich. Some aspire to be richer later in life. Others are not jealous and see nothing wrong with people having more money if they are better footballers, singers, business people or whatever and earn more as a result.

Labour under Blair and Brown decided they needed more rich people in the UK, and needed more rich people to work, risk and venture. They decided to continue with the outgoing Conservatives 40% top rate of Income tax. They brought Capital Gains Tax down to a more  competitive 18%. They allowed Non Doms to come and live in the UK, paying full UK tax on all their earnings, savings and ventures in the UK but avoiding tax on assets and income they had elsewhere. This Labour system worked well, and the rich made a substantial contribution to tax revenues as a result.

The last days of Gordon Brown, followed by the Coalition, changed this approach. Mr Brown put Income tax up to 50%. Mr Osborne brought it back down to 45%, where more money is collected than at 50%.

CGT was put up by the Coalition to 28%, where it collects far less revenue than at 18% before the crash. This is despite share and property values now being back above the pre crash  levels.

Mr Brown introduced a Non Dom tax or payment to allow people to live here and only pay on their UK income and assets. Mr Osborne increased that payment substantially.

Mr Osborne changed the rules over the payment of Stamp Duty on homes bought through companies. He also imposed large rises in Stamp Duty on the more expensive properties. Income from Stamp Duty as a whole has risen.

The art of taxing the rich is to choose rates which bring in large sums without triggering an exodus from the UK, or without allowing too many ways to pay less, often by earning and doing less. This election is seeing an auction of promises by parties of the left to tax the rich more. There are promises to raise Income Tax to 50%, to increase property taxes, bring in a  Mansion tax, and now the abolition of Non Dom status. They run the risk of taxing the rich less, as there will be fewer rich people to tax, and the rich who stay may generate less income and venture less of their wealth for higher returns.

The abolition of Non Dom status was opposed by Mr Balls throughout his government years, and condemned by him quite recently, stating that it might cost the Treasury lost revenue.The first round effect of abolition is to cut revenue, as the Treasury loses all the Non Dom special payments for Non Dom status. The second round effect depends on how many people decide to leave rather than pay tax on their non UK interests, and how many deciding to stay can rearrange their non UK assets and income to minimise UK tax. The scope to lose revenue out of this change is considerable.

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The Bishops should have second thoughts

 

This Easter I have been re reading the Anglican Bishops letter for the General Election. It doesn’t make better reading the second time round. Rather it does now seem even more unfair and inaccurate  given how the economy has developed.

The Bishops main case is that all the political parties have failed, hence the need for their intervention. They tell us “The problem is no-one in politics today has a convincing story about a healthy balance between national government and global economic power”. “Our democracy is failing because successive administrations have done little to address the trends which are most influential in shaping ordinary people’s lives”.

I thought one of the big arguments in this election is just that balance between the state and the private sector, with different visions and versions from Conservative, Labour and SNP/Green. All the main parties think they are addressing the issues that most worry people, in their own way. Conservatives have put through a change to get multinationals to pay their fair share of profits tax. Labour wants to place further controls and taxes on big business.

This aggressive attack on all politicians and parties may be popular, but as I expected there is no evidence that the Church is going to put up candidates to show us how to do it, and little evidence that the Church has found an agenda which can unite electors and get them enthusiatically going to the polls where the parties in the Church’s words  “fail”.

So what are these trends in “ordinary people’s lives”, as the Church somewhat disdainfully calls us?

The first is rising unemployment which the Church says we have been experiencing since 2010 (p46). It is a pity they were unable to read the official figures which show great progress in cutting unemployment since 2010, and a pity they seem unaware that tackling nunemployment has been a central priority of the last government. Nor did the Opposition disagree with the aim. The argument is over how best to carry on cutting unemployment, and over how to ensure the jobs are well paid.

The second is their allegation of rising inequality.On page 49 the Church says we need to halt the move towards more inequality of wealth. On page 33 they wrongly state that material inequality continues to widen. Once again they failed to read the national official statistics. The Gini coefficient, a recognised measure of inequality,was at 34.7 in 2006-7 and has fallen since then under the coalition, where a lower figure means less inequality. The richest have made the biggest contribution to getting the deficit down through a substantial rise in the tax they pay.

The third is the Church’s belief that we need to share a cultural identity with the EU, not with the Commonwealth or other global groupings. Page 30 seems to be an attack on Eurosceptic opinion. There is no mention anywhere in the tract of the huge damage being done by the Euro,  by the EU austerity policies and the high energy costs that come from Brussels. Nor is there any sympathy for the unemployed on the continent or anger about the mass unemployment in some continental countries, and the especially high youth unemployment, let alone any suggested remedies.

I do think  Bishops  should set themselves higher standards of drafting and evidence before sounding off on these very sensitive issues. Have they yet had time to research the true trends of unemployment here and on the continent? Have they yet checked their facts on inequality and who is paying the extra taxes?  Will they correct their mistakes?

It would be good if the Bishops recognised  that Conservatives set out to create the conditions in which the economy generates  more jobs and better paid jobs, as we wish to tackle poverty vigorously. Their absurd caricature of the Thatcher years is too wrong to be able to rebut in a sensible space. I want to live in a prosperous society where there is opportunity for all and decent state support for those in need.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU

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