The Treasury’s dynamic model of tax revenues still gets it wrong

The Chancellor believes in the Laffer curve. He accepts that when a tax gets to a certain level, if you raise the rate further you will suffer a loss of revenue, not a gain. He has been trying to get the Treasury to include this effect in their models, as  they have now conceded that you can raise a tax too high to maximise revenues.

Labour still find this a difficult idea to grasp. When I last explained it again in the  Commons recently a triumphant Labour MP asked me why as I wanted lower rates for CGT and top rate  income tax, I  did not ask for a lower rate for VAT as well. The answer is obvious. I want rates of Income Tax and CGT that maximise the revenues, not diminish them.  At 17.5% or even at 20% if you raise the VAT rate higher you get more revenue. If you raise the Top rate of Income Tax above 45% you get less revenue, as the government has now proven in its latest figures. The easier it is for people to avoid a tax, the lower the rate has to be to maximise the revenue. The higher the rate of the tax, the more likely it is to be at or above its revenue maximising rate.

This week we are hearing reports in the news that the Treasury has admitted cutting Fuel Duty as this government has done has beneficial effects on output and incomes. Of course it does. Thank heavens the Treasury has tried to redo its sums whilst  recognising this. They have come to conclusion that over the long run (20 years) the Fuel Duty tax cuts will only lose the Treasury 44%-63% of the alleged revenue lost in the first full year of the  cuts.

This study comes up with a laboured and very long term answer to a different question to the Laffer question – what is the tax maximising rate?  We can see the difference starkly if we look at a similar study of the effects of Corporation Tax cuts which the Treasury published with less media interest in December last year. That study, like the Fuel Duty one, concluded that over a 20 year period there would be a boost to GDP from the Corporation Tax cuts. This would recoup 45-60% of the revenue they say the Treasury loses in the first full year of the cumulative tax cuts. This again is a poor long term answer to a different question.

So what has happened with the progressive cut in Corporation Tax from 28% for larger companies and 21% for smaller companies to 20% by 2015-16?  In Budget 2013 Onshore Corporation Tax was scheduled to fall from £35.5bn in 2012-13 to £33.5bn in 2015-16, a decline of 5.5%. (“Is it wise, Chancellor, to “give away” so much to big business when we have such a large deficit?” you could hear the mandarins ask).

In Budget 2014 the Treasury tells us Onshore Corporation Tax rose from the original £35.5bn in 2012-13 to £36.6bn in 2013-14, and is now forecast to rise to £42.3bn by 2015-16. Instead of a 5.5% fall there is now to be a 19% increase.

Of course these figures are sensitive to changes in growth forecasts for the economy, but the changes are so stark you have to conclude the Treasury model  is still unable to handle the Laffer effect. Clearly the  CT rate has fallen and is falling a long way – a fall of 28% in the rate for large companies over the full period, taking it down from 28% to 20%. Far from leading to a loss of revenue as the long term Treasury model now tells us , the actual Treasury forecast is for  a gain of revenue over that time period. Why the difference?

I think the Treasury needs to do some more work on Laffer. I am sure from my own work that the current CGT rate is above the level to maximise revenue. That means if you cut the rate you will collect more money for the Treasury.  I think we can all agree VAT is still below it, as probably is fuel duty. That does not mean I want to raise them.

Corporation Tax is more difficult to gauge. Given the huge swings in Treasury forecasts of Corporation Tax revenue in recent years, the Treasury clearly  find it impossible to predict reliably. These latest studies are far from convincing, and laden with warnings that they are not predictions of revenue for the next few years, which is what we really need to know. I suspect the Treasury still does not want to admit that you can cut a tax rate and get more revenue in, though the evidence shows that is the case.

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Anyone for more rigorous exams?


This item about exam reform has been sent out by Michael Gove. I would be interested in your views on it:

…..”The last Government utterly failed to provide an exams system that was fit for purpose. Exams were so afflicted by grade inflation and dumbing down that, even though official results soared, our performance in international tests stagnated. Every year, Labour ministers would point to constantly rising exam results and boast that this proved their policies were working. In fact employers and universities lost confidence, parents became disillusioned, and students were at best misled and at worst lied to about the value of the qualifications they were taking.

That is why this government is determined to restore integrity to the exams system, with new GCSEs and A levels which are inoculated against grade inflation and pegged to world’s best.


(Recently) we published revised content for GCSEs in science, history, geography and languages, which will be taught in schools from September 2016. This set out that:

  • In science, the level of detail and scientific knowledge required will increase significantly, and there will be clearer mathematical requirements for each topic. Content will be added on topics including the study of the human genome, gene technology, life cycle analysis, nanoparticles and space physics.
  • In history, every student will be able to cover medieval, early modern and modern history – rather than focusing only on modern world history, as too many students do now. British history will in future account for 40% of a GCSE, rather than 25% as now. There will also be an increase in the number of geographical areas pupils must study.
  • In geography, the balance between physical and human geography will be improved – so that students will learn more about the world’s continents, countries and regions – alongside a requirement that all students study the geography of the UK in depth. Students will also need to use a wide range of investigative skills and approaches, including mathematics and statistics, and we have introduced a requirement for at least 2 examples of fieldwork outside school.
  • In modern languages, greater emphasis has been placed on speaking and writing in the foreign language, thorough understanding of grammar, and translation from English into the foreign language. Most exam questions will be set in the language itself, rather than in English.
  • Finally, ancient languages have been given a separate set of criteria for the first time, reflecting their specific requirements. Students will now need to translate unseen passages into English, and will have the option to translate short English sentences into the ancient language.

A levels

We also published revised content for A levels in English literature, English language, English literature and language, biology, chemistry, physics, psychology, history, economics, business, computer science, art and design and sociology, for first teaching from September 2015.

The content for these A levels was reviewed and recommended by Professor Mark E. Smith, vice-chancellor of Lancaster University, drawing on advice from subject experts from universities and elsewhere. We hope this input from higher education will mean these new A levels better prepare young people for progression to undergraduate study. The new content set out that:

  • Mathematical and quantitative content has been strengthened in each of the sciences, computer science, economics and business: for example, understanding standard deviation in biology and the concepts underlying calculus in physics.
  • In computer science, basic ICT content has been removed and emphasis has been placed instead on programming and far more detailed content on algorithms.
  • In the sciences, there will also be a new requirement that students must carry out at least 12 practical activities, ensuring that they develop vital scientific techniques and become comfortable using key apparatus. At the moment, some students can take a science A level without having any practical work assessed at all.
  • In history, as well as covering the history of more than one country or state beyond the British Isles, students will also now be required to study topics across a chronological range of at least 200 years, up from 100 years presently.
  • In English literature, specified texts will include three works from before 1900 – including at least one play by Shakespeare – and at least one work from after 2000. We have also reintroduced the requirement for A level students to be examined on an ‘unseen’ literary text, to encourage wide and critical reading.
  • Finally, in economics, content has been updated to include the latest issues, such as financial regulation and the role of central banks.

Alongside these announcements on the content of exams, Ofqual has set out how these new GCSEs and A levels should be assessed – with linear assessment rather than modules, and a greater focus on exams rather than controlled assessment.

New A levels and GCSEs in arts subjects from 2016

I also announced yesterday that a number of exams in other subjects will be reformed for first teaching from September 2016.

At GCSE, this includes art and design, music, drama, and dance, as well as five further subjects – citizenship, computer science, design and technology, PE, and religious studies. This means students will be able to access high-quality, rigorous GCSEs in the arts subjects at the same time as reformed GCSEs in languages, history, sciences and geography. Only GCSEs in English and maths will be reformed more quickly. At A level, music, drama, and dance, as well as design and technology, PE, and religious studies, will be reformed.

This announcement has been widely welcomed across the arts world and elsewhere. I am delighted that children will now be able to learn about Britain’s cultural heritage and develop their creativity while striving for qualifications on a par with those in academic subjects.

Overall, our changes will increase the rigour of qualifications, strengthening the respect in which they are held by employers and universities alike. Young people in England deserve world-class qualifications and a world-class education – and I hope you will agree that is what our reforms will deliver.”



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Finding England’s voice


The debate about the future of Scotland raises an even bigger debate – what will be the future of England? More and more people in England feel we are getting a raw deal, as the political classes concentrate on improving the offer to Scotland, and burnishing special arrangements for every part of the union of the UK except that of England.

I have tabled questions again asking who speaks for England?  When can we have the policy of English votes for English issues applied in the Commons? Why don’t Labour  MPs for Scottish seats recognise the long term political danger of voting for or against English matters when the same issues about Scotland  are determined by the Scottish Parliament in their own constituencies?

The last General Election saw the Conservatives win a comfortable majority in England. Because Labour MPs for Scottish seats intend to vote on English issues as well as Union issues, the Conservative leadership had to set up a coalition government for England as well as the Union. England now has to accept policies which were defeated in the English part of the General Election as a result. Conversely Scotland gets exactly what it votes for in big areas like education, health, local government, law and order and the environment because these matters are now determined by the Scottish Parliament. Scotland can be on the losing side in a General Election but still get much of the government  it wants through devolution. England can be on the winning side in a General Election, and still end up with a government it does not want thanks to the presence of Scottish MPs at Westminster. (All this of course is subject to the increasingly stifling impact of the EU on all parts of the UK)

England’s sense of grievance is sharpened by the persistent attempts of the EU and its Labour and Liberal Democrat supporters to deny the existence of England and to seek to split us up into a series of meaningless regions. They want Liverpool to accept government from Manchester, Sunderland to accept government from Newcastle, and Exeter to accept government from Bristol, as they seek to steamroller city identities into convenient regional administrative units. In my own case they  cannot make up their mind whether my area is the Thames Valley, the rest of the South-east,  Wessex, the south or some other monstrous bureaucratic birth.

England is the part of the UK least happy with the EU relationship. English voters will want to use any change in the Scottish relationship as further reason to change our subservience to the continent. More English people now want to have a voice, and for us to have more say over our own affairs, if everyone else in our union is allowed such freedom.

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Catalonia, Crimea and Scotland


The Spanish Parliament with the support of the EU has decided that Catalonia will not get a legal referendum on whether to stay in the Spanish state or become independent. The Crimea has just had a referendum which the EU condemns as illegal, and the Ukrainian state with the support of the EU failed to offer Crimea a legal one. The Crimea has left the Ukrainian union regardless, with the help of the Russian army. The EU is right that this was not done legally or by agreement, but maybe wrong to imply a majority of the Crimean population would have voted NO to the move in any legal referendum.  Maybe Catalonia will now hold its own referendum, creating a clash between the Catalan and Spanish governments.

Scotland has been given a legal referendum on whether to stay in the UK or not. The EU does not seem to approve of that process very much, threatening Scotland if she dared to vote to be independent. All this implies the EU does not believe in the democratic self determination of people. They need to change their mind and be more accommodating, as do the European states who wrongly seek to block the free expression of opinion about identity within their current territories.

There is a paradox about the EU’s approach. In the earlier days of its long journey to superstatedom the EU seemed to encourage regional government and regional identities. It saw this movement as a way of weakening the member states from below, and claiming greater affinity to the people of the EU by identifying the EU more with the regional interests. As the EU has grown in power and taken more control over the member states, its enthusiasm for regional identity has waned where  it looks like becoming a movement for new smaller independent states.

I believe in the democratic self determination of people. I am glad we are about to see what Scotland really wants. We should then accept the verdict and get on with implementing the consequences either way. Allowing a vote when there is a serious question to answer is an important part of democracy which the EU seeks to stifle. Continuous referenda on the same subject until  one side gets its way, having lost in the past, is not such a good idea. Indeed, when the EU is forced into referenda that is their style: to keep on voting until they get the answer they want.

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Official figures don’t always tell you the whole story


Yesterday we learned that the official figures for inward migration from the EU had been understated in the last decade. An additional 356,000 arrivals have been added to the numbers for the period 2001-10, with 10,000 fewer in 2011. Apparently they undercounted children and people arriving at regional airports.

It is always unfortunate when official figures need substantial revision. Honest mistakes or careless compiling can look like something more sinister to those who worry about the underlying reality the figures seek to capture.  In this case the errors were all ones of understatement, at a time when many people were worrying that the figures were too high anyway.

Similar problems arise if economic figures for growth, jobs and wages have to be revised down, or numbers for unemployment, inflation and other bad news have to be revised up. We learned this week that in an effort to harmonise our economic numbers with the rest of Europe we will witness upwards revisions to our apparent savings rate to reflect those in final salary pension funds, and to our output to credit us with the benefits of R and D being undertaken. It serves as a reminder that all these figures are approximations dependent on assumptions about what you count and what you leave out. All are also prone to understatement as it is difficult in a complex economy capturing all the activity for inclusion in official figures.

What does emerge is the casual way the past  migration figures were compiled, relying on surveys and not on counting people in and counting people when they left. It will come as a surprise to many that when you have a border system with everyone having to show a passport and visa where necessary people have not  not been counted in and logged. The government is trying to remedy this defect so our border control system can have more ability to furnish us with accurate data, and to remind people whose visas expire that they should leave.

Having accurate data is important for a variety of sensible purposes. We need to know how many people need housing, how many children need school places, how many people may need to visit a Dr or hospital. In the last couple of years Wokingham and other places have been playing catch up, trying to add to the school and surgery provision to deal with the extra people we now have in our community. More accurate figures sooner from our border system might have helped make provision earlier, as well as informing a better debate on numbers.







Calendar year

Revised Net migration estimates

Original Net migration estimates



+  179

+  171

+    8


+  172

+  153

+   19


+  185

+  148

+   37


+  268

+  245

+   23


+  267

+  206

+   61


+  265

+  198

+   67


+  273

+  233

+   40


+  229

+  163

+   66


+  229

+  198

+   31


+  256

+  252

+    4


+  205

+  215

-   10

Source: Office for National Statistics

Posted in Uncategorized | 83 Comments

Unpicking the United Kingdom?


I spent last year ignoring the forthcoming vote on Scotland’s future, as the opinion polls showed strong support for no change to the current position. More recently I have taken an interest, as the polls have narrowed. I  have also commented that the “Better together” campaign is a bit  negative  in some of its content and tone, and might be more successful if it was positive and sought to ally feelings to “facts” about economic matters.

So maybe today I should ask what will happen and what should happen, if the unlikely event occurs and the Yes campaign wins for splitting the UK.

The first thing that should happen is all MPs representing Scottish seats in the House of Commons should withdraw from all business relating to the rest of the UK, especially business relating to the negotiation between the rest of the UK and Scotland. The government should pass a Bill excluding Scottish MPs from rest of the UK business if there is no voluntary agreement to this

The second thing is a negotiating team of senior Ministers should equip themselves to negotiate on a wide range of matters that need settling between the two new countries. This will include splitting the state debts and assets, sorting out responsibility for banks and money, the transition to a new currency for Scotland, the transfer of benefits, pensions and other state liabilities to Scotland for their people, and the trade and border arrangements which will apply following the split.

The third thing is to notify the EU of the need to change our relationship with the EU. Our partners will probably deem the rest of the UK to be the successor state to the UK, but they will want to cut our number of MEPs and our votes around the table. The rest of the UK will need to cut our financial contribution, and may as well regard the exit of Scotland as triggering  a much more fundamental renegotiation of our relationship. There will have to be Treaty changes anyway. It would accelerate the task Mr Cameron has set himself for a future Conservative government, and give rise to an IN/Out referendum on possible rest of the UK membership of the EU. Whilst as a Unionist I would prefer a willing Scotland to stay with us, as an Englishman I can see advantages in being able to sort out this wider EU relationship sooner and from a different bargaining position where England’s view is more central.


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The Death of Britain?


In 1999 I wrote a book asking this question. I hear that people are reading it again. I stand  by my conclusions then, now tested by 15 years passing.  When I wrote the summary I said

“Can the UK survive devolution, European integration, reform of the Lords, slimming of the monarchy, proportional representation?

Will Scotland  now seek to shatter the Union by demanding full independence? Will the new House of Lords be anything more than a rubber stamp full of the friends of the PM? Would the abolition of the pound mean common taxation and political union with France and Germany?

….Viewing the Blairite revolution as the agency for wider changes  coming from the agenda of France. Germany and the European Commission, I  ask the questions: are these changes inevitable, are they desirable, and what will they mean for us here in Britain? In the name of the people, the people’s right to a voice and justice is being damaged. More and more decisions are being made behind closed doors, in quangos and in Brussels. ”

I enjoined people to fight the battle to save the pound, the one part of the scheme we could prevent because we were offered a referendum. The last decade and a half was not in vain, because we won the battle of the currency. If we had lost that Britain would have been well and truly dead and buried.

Commenting on devolution I said ” The end result will be a more divided, more factious, more overgoverned, more overregulated UK…It will not reconnect the people with the politicians. It will confirm the public in their view that politicians by and large do not solve problems, do cost too much and are good at misleading the public in their own interests”

I concluded the book by saying  ” Labour’s constitutional blueprint is nothing more than a plan for the destruction of UK democracy. It threatens splits within the kingdom. It threatens transferring far too much out of democratic control. It gives far too much ground to the federal plan on the continent. It dares to do all these things in the name of democracy, when the result will be less.”

Today we are facing the consequences of those bad decisions. We are trying to resolve the question of Scottish independence, because devolution did unsettle not solve the problem. We have to tackle the problem of excessive powers passing to Brussels. We are living with the consequences of quangos like the Environment Agency controlling large parts of our lives. We need a new settlement, which gives people back their power to sack accountable MPs and so change the government. In turn MPs need to take responsibility back for governing the country so they can serve the country well. .



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Taking the speed out of High Speed II


           The Commons Environmental Audit Committee is not reknown for its sense of humour. So when they said in their recent Report into HS2 that they would like “the government” to “examine the scope for requiring a reduced maximum speed for the trains until electricity generation has been sufficiently decarbonised” they were definitely not joking.

           A High Speed train that goes slow? Now there’s a novel idea. The government, after all, could say it has recently switched its case for HS2 away from speed towards “capacity”, so agreeing to put some speed limits on the new trains would not upset that aim too much.  So why has the Committee reached this conclusion?

                We are told that trains travelling at 225 mph use three times as much energy as a train travelling at 125 mph. We know from using our cars on motorways that cruising at 70 mph  uses more fuel than cruising at 50mph, but we of course are stopped from doing anything like  current train speeds. That’s partly a safety judgement, and partly an environmental one.

           It’s no good saying these are electric trains, so that makes them just fine for environmentalists worried about CO2. A lot of our electricity is still generated from fossil fuels that emit substantial CO2. The more fast trains we run, the more CO2 we will let out into the atmosphere. The Committee also worried about the impact of the new train route on ancient woodland, but did not press on the question of the environmental impact of this railway on urban areas, especially in London. That too could be quite considerable.

            People who had not thought through their CO2 accounting rashly assumed trains would be better than cars and planes from the environmental point of view. They had also failed to consider carefully the impact of a new line and the carbon cost of the construction.  The CO2 output of the finished railway  all depends on how many passengers use the trains, how much energy people use up getting to and from stations, how heavy the trains are and how fast they go. Trains like cars and planes require energy to drive them, and much energy to build them. CO2 accounting is not a simple case of trains good everything else bad.

           Nor is the safety case as overwhelming as some believe. Trains travelling at very high speeds are dangerous. As a result the lines have to be completely isolated from any external intervention by people, plants  or animals, to avoid items on the line and to avoid any clash with pedestrians, cycles, children playing and anyone else who would be at risk. Motorway carriageways  too are segregated from cycles, children playing,and  traffic coming in the oppposite direction so they like railway lines are a lot safer than general roads. The speed limit placed on cars at 70mph, allied to rubber tyres with grip and steering systems to avoid collisions means cars have a better chance of keeping safe if a motorway is disrupted somehow. Trains are more likely to plough to disaster at high speed if a train track gets disrupted, as can happen at level crossings or through unplanned access to the tracks by others. Speed limits help reduce accidents on roads, we are told. The same must be true for trains.



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The UK’s financial services are mainly regulated by the EU


In recent years there has been an avalanche of new regulations from the EU governing banking, financial services and insurance. I attended a seminar last week to catch up with the latest developments. It was a long meeting.

We are witnessing the early developments of regulation from the main European Supervisory Agencies (ESAs).

UCITs V has been developed to regulate investment funds. CRD IV is to regulate bank capital. The EU is working on a Bank Resolution and Recovery Directive, and on proposals for bank structural reform. The banking ESA is undertaking stress tests on banks and is seeking extra powers including binding arbitrations.

The Single Resolution Mechanism (SRM) will propose  a resolution mechanism to be approved by the Commission, to be triggered by the ECB. The Resolution fund will be paid for by all the Euro member states, but will be 60% mutualised within two years of its establishment.

The EU is working on changes or improvements to its anti money laundering legislation, on payments, benchmarks, and KIDIP consumer protection. It is backing the Asset Quality Review (AQR), and will allign EU leverage ratios for banks with Basel III international agreement.  The SSM, the new banking supervisor in the ECB, plans 1000 staff to supervise the main EU banks.  There will be a single rule book for banks across the single market, not just the Euro area. The system of living wills for  banks will be incorporated into the new system.

The aim will be a comprehensive system of consumer and professional market regulation in all financial areas. Every area will need to conform to the general rules against financial crime and money laundering. There will then be differing individual requirements sector by sector depending on the type of business and the nature of the customers.

Increasingly the UK regulators will be enforcing EU requirements. I mention this in a neutral spirit, but if we wish to have a well informed debate about the relative powers of the Uk and EU governments it is always now wise first to ask what are their respective powers and responsibilities. In the area of financial regulation the EU is clearly now in charge.

The EU is also  keen to increase its involvement in taxation. The UK has declined to join the scheme to introduce a Financial Transaction Tax, but other countries will go ahead without us. The EU is also planning to require more exchange of information over savings taxes, extanding the range of current proposals, as they wish to move closer to common savings taxation.

The UK says that as it is not in the Euro area it can still have its own distinctive system. Yet developments show that in so many ways membership of the EU as a non Euro member still sucks us into the general movement towards EU control.

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One law for everyone


Some of the comments coming in about the behaviour  of the European  governing class remind me of King Lear’s discovery:

“Even a dog’s obeyed  in office…

Plate sin with gold,

And the strong lance of justice hurtles breaks;

Arm it in rags, a pigmy’s straw doth pierce it…”

I think things have improved a bit since Lear’s day, but at least it shows it is not a new problem.

Posted in Uncategorized | 64 Comments
  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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