Germany and Greece both lose

As expected, Germany blinked and Homer nodded. The Germans had to agree to more money being lent to Greece whilst they have the proper argument about what the future should hold. The European Central Bank continues to bail out Greece via emergency assistance to its banking system. There is a delay in implementing all the requirements of the last loan package, whilst Greece tables new proposals. Germany’s promise to enforce all the old loan agreements and to offer no new money has been broken. The message to other countries strapped for cash and disliking the conditions of loans is to cause trouble.

Greece had to swallow much of their bold rhetoric. Greece has had to apply to extend the old loan agreement which it said it intended to tear up. Greece does have to deal with the troika, though perhaps under a different name, when she said she would not do so. Greece will have to table austerity proposals next week to substitute for any of the current austerity requirements in the loan agreement which she does not like.

Meanwhile, in the real world, Greece will spend and borrow more, with likely overruns on the permitted deficit (called a primary surplus by being struck before interest charges). The European institutions will continue to finance Greece. It is more extend and pretend. The Euro has decided to be a bit more flexible to avoid a Greek exit, despite their fine strong words that a Greek exit would now be a minor matter for all but Greece.

Is this just kicking the can down the road for a couple of days? Or for a few weeks? Or will it result in a longer term fix? Time will tell. It appears that Germany is allowed to make the weather with the words, trying to spin the outcome as a tough settlement, a victory for austerity. Meanwhile the officials and the institutions which increasingly drive Euro policy are working behind the scenes on flexible language to cloak the truth, which is the zone so far has decided to extend more credit and pretend Greece can meet her obligations.

It’s no way to run a serious major world currency. If they carry on like this their economies will continue to malfunction, unemployment in parts of the zone will stay far too high, political protest will grow, and from time to time there will be alarms in the markets and in the weaker national banking systems. Cyprus shows us one way out of a financial mess for a state in the Euro – capital controls. Another way is for the rest of the zone to write off more of the offending state debts. They still have to arm wrestle electorates and some political parties as they seek to impose stricter controls on future spending and borrowing by states that cannot pay their way. Greece does not today suddenly become a paradigm of German virtues meeting all her loan conditions as some German comment would have you believe.

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45p income rate brings in much more revenue

The Treasury official figures said putting the 50p tax rate down to 45p would entail a loss of £100m of tax revenue. Instead, as some of us forecast, it has led to a surge in additional tax.

Self assessed income tax reached £22.5bn in 2008-9 when the top rate was 40%. In 2011-12 it was just £20.33bn and in 2012-13 just £20.55bn when the top rate was 50%. As self assessment tax was up by £1.66bn this January on last January, the full tax year 2014-15 is likely to see a substantial gain on the receipts during the 50% years.

The Guardian tendency claim this is a one off event owing to delays in paying bonuses from the previous year. This does not explain why revenues were lower at the 50% rate in the years prior to the year of the announcement of a cut in the rate, nor does it explain why the revenues were always lower at 50% than they had been at 40% before the increase.

Far from costing the state £100 m the 45% rate will bring in substantial extra revenue. The figures also suggest moving up from 40% has lost the state billions.

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The decline of Capital Gains Tax

London property prices are at new highs. UK share prices have been hitting new decade long highs. Property and unquoted shares around the country have risen in value considerably. It is curious therefore to see a further slump in Capital Gains Tax receipts in the latest January figures.

January is the big month for the Revenue to collect CGT, based as it is on annual tax returns. This January the Revenue collected just £2.45 bn, down by more than a sixth on the £3bn in January 2013. CGT has been running at around half the peak level it reached before the 2008 crash. The interesting thing is the rate was then 18% and the rate today is 28%.

It is quite clear that the new higher rate puts people off realising capital gains. Owners of second properties and holders of shares have plenty of opportunity now to take profits, given what has happened to values. It appears they chose not to. Some may not take profits because they hope values will rise further. Others have instructed their investment advisers, or have decided themselves not to trade, so they do not sell shares that take them over the CGT tax free limit. Owners of buy to let and other properties that are not a person’s own residence also seem to have decided to hold on, in part deterred by the high rate of CGT.

The current rate of CGT is preventing the government optimising its tax take on gains, as the rate is too high to maximise the revenue. It may also be standing in the way of some people moving property into hands of others who might be able to make better use of it. The curious case of the vanishing CGT receipts is more good evidence that a government which needs revenue needs to set realistic rates. It is also more proof that plenty of people avoid tax – in this case by the simple expedient of not selling assets which have gone up in value.

Yesterday’s spending and borrowing figures show the government is making some more progress in cutting the deficit, thanks to rises in revenue from Income Tax, VAT. Stamp Duty and Corporation Tax. There was further confirmation that high earners earn more and pay more at 45% than they did at 50%.

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The Euro shatters the old politics

The gripping drama being played out between Syriza and the rest of the Euro area is not just a struggle between creditors and debtors, or between countries who will play by the rules and one who thinks the rules are absurd. It is also an enthralling battle over the future of democratic parties in a variety of Euro area countries. Syrzia swept to power by crushing the centre left traditional Greek party and by defeating the centre right alternative. Both those parties were sullied by submission to EU austerity policies which had led to a decline of one quarter in Greek living standards and mass unemployment. In Spain the issue is how well will Podemos do with its anti establishment stance. In Italy can a combination of the Grillo 5 star movement and the Lega Nord put the traditional centre right and centre left to the sword? In France both the Gaulist opposition and the governing Socialists are behind Le Pen’s National Front in Presidential polls.

The interesting feature is how comprehensive the collapse of a traditional party can be under the extreme impact of Euro policies which national governments are unable to overturn or even influence much. The Socialist party of Greece, not so long ago the governing party, collapsed to 5% of the vote in January this year. In Italy Forza Italia, the old centre right governing party of Berlusconi, is today on just 12% in the polls. In France the socialist party of Mr Hollande is on just 23%.

The future of Syriza matters to both the traditional parties and the new challengers. If Syriza caves in and accepts new loans with a string of austerity conditions, traditional parties will breathe a sigh of relief. They will think that extinguishes the reason to vote for change in such an inflexible system. It may of course, just make Greek voters even angrier, looking for a new challenger party to support. It may also anger challenger parties and voters elsewhere, increasing their resolve to stand firm if their chance comes. If, on the contrary, Syriza hangs tough and gets major concessions, then the challengers elsewhere will expect to do well to enjoy the same treatment. They may of course encounter new barriers and new language against them, as the rest of the EU will be reluctant to allow others to get away with such a challenge. Greece will be portrayed as a very special case, and ring fenced.

In the UK without the austerity of the Euro and with a better performing economy, the two main parties support is holding up better than on the continent. In 2005 Labour and Conservative commanded just 67.6% of the vote in the General election. Today they have around 65% in the polls. In the UK the dramatic decline has taken place in the third party support of the Lib Dems. They had 22% in 2005, and 23% in 2010. They are now down around 6%. The top three parties of 2005 had 89.6% of the vote. In 2010 they had 90.7%. Today those same three have 71%. Most of that fall is down to third party, the Lib Dems. Protest is moving to others now the Lib Dems have been a party in government. Their enthusiasm for all things European clearly does nothing to help their popularity.

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Tomorrow can be better

You do not make the poor rich by trying to make the rich poor. High tax societies do less well than sensible tax societies. Societies that welcome in rich people and companies and give them some freedom do better than societies that let jealousy rule. Cuba and Venezuela show what poverty socialism can breed. France has just demonstrated under Mr Hollande that high personal taxes lead to a flight of talent out of the country and less growth and prosperity, forcing him to cut the rates.

The UK is the fastest growing European economy at the moment. It is aided by low corporation tax rates and the recent decline in the Income tax rate. Lower taxes for all is the first policy requirement to speed growth and raise prosperity.

The UK has done best when it fosters an ownership revolution. The twentieth century saw progress from most people renting to most people owning their home. It also saw some modest progress with shareholdings for the many, not just the few, largely through pension and insurance fund investments.

In the twenty first century so far there has been some backsliding on property ownership. A combination of high house prices, the great crash of 2008, and mortgage finance problems from 2007 has made it more difficult for young people to become first time buyers. A new generation of twenty somethings is as likely to be living at home with Mum and Dad, or sharing flats with friends, as to be climbing the property ladder.

I want the next government to tackle this problem vigorously. To let a new generation have the same opportunity to own as their parents we need to control migration numbers to limit demand, and take further action to improve the supply of new homes. The government’s Help to buy scheme can assist, given the tougher requirements of the mortgage regulators affecting the banks and building societies.

I als wish to see the tax regime help people set up and grow their own businesses. More of the talent we are nurturing at university and College should be encouraged and mentored to have a go at developing and selling their ideas directly to the market, forming their own enterprise. We need more direct contacts between financiers, venturers and the universities, more incubator business units and science campuses, more direct training in how to speed things to market through the web.

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Everyone an owner?

The UK debate has been depressing during and after the deep recession of the last decade. There has been much discussion of how to share the diminished income and output, with rather less talk of how more people can own more and participate more fully in the economic life of our country. Recently there has been enthusiastic discussion of how to tax rich people and companies more, with no discussion of how more people can be well off and more can own and run their own successful companies. If we get better at generating more wealth, there might be less bitterness about how to distribute what we already have achieved.

It is a common British attitude that things should be fair. Some on the left interpret that as meaning they should be equal. That is not the majority view. Many people’s idea of fairness encompasses the opinion that those who work hard, achieve to high standards, perform well should be entitled to earn more and keep more of their earnings. There is surprisingly little resentment of the fabulous income and wealth of many footballers, and little envy of the earnings of pop stars, top tv talent or even of successful entrepreneurs like Mr Branson. There is resentment of high salaries in both the public and private sectors for leaders who do not have distinctive talent, or who fail to lead well, or who preside over chaos or corruption.

The tax debate has been typically negative. Doubtless there are some who have got away with evasion without prosecution or even without being made to pay back what they should have paid. We all wish to see them pursued successfully and energetically. As some critics of tax avoidance have discovered, their own family tax and legal affairs can be complicated. Once you start to hurl allegations around about particular individuals avoiding too much tax, others will think they are entitled to know whether you yourself have ever used legal tax avoidance methods. As many of you have remarked, MPs who dislike current legal avoidance should change the law.

Tomorrow I want to look at some positive ideas on how we can promote an ownership society. If more have a realistic chance to earn well and build some wealth if they wish to put in the effort, it will help social mobility and satisfy many people’s sense of fairness. We need some optimism, some sense that opportunity can defeat injustice, some guidance that shows the future can and will be better than the past. Bring on hope. Elections based on fear and jealousy are not good for a society. The way to help the poor is generate a more prosperous society that has more money to share, more buying of goods and services to generate more jobs, and more tax revenue to help those in need.

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The politics of donors

Sensible people want to hear from their politicians during an election about the plans and intentions they have for the next five years, if chosen to govern. People are quite interested in examining the record of leading parties in power, so there does have to be some discussion of the past to help form impressions of whether a party in government is broadly helpful, reliable and good at handling crises. The main preoccupation is what will happen next? Will we be better off? Will things that currently annoy us be improved or changed?That requires an intelligent examination of what parties say they wish to do, and probing to make sure they have thought through their plans and are resolved to carry them out.

There is a danger that too much knocking copy and too many fights over Westminster issues distracts from what really matters to individual voters. Labour’s decision to make “dodgy donors” the issue was always going to cause trouble, and may help put more people off politics. Any named Conservative donor was going to deny the dodgy label and maybe sue if Labour pursued the charge. What does dodgy mean? How do you prove dodgy? Is it aggressive tax avoidance, or does it have to be tax evasion? Presumably it’s more than having a large pension fund or a few ISAs. It also meant that some in the press and in other political parties would start the trawl for Labour dodgy donors. If there are dodgy donors, they will not all support the same party.

Relying on private donors has its difficulties for all political parties. They have to show the donors cannot “buy policy”. The donor may give because he or she likes what the party is saying, but should not give to get the party to change what it is saying. They do have to obey the law and turn down donations from people who do not qualify as donors. For the party’s sake, they also need to satisfy themselves that a large donor can withstand any unfriendly enquiries from jealous party rivals.

However, the main alternative, of requiring taxpayers money to finance parties seems to me to be far worse. Why should I as a taxpayer help finance parties I disagree with? How do you prevent taxpayer funding acting as a buttress to old parties who are well established and stifling new or challenger parties? What is a fair way of giving out the money? Should today money be given out based on how many seats parties won in 2010? Or how many votes they won then? Or should modern opinion polls have some role? The difficulty in defining who should join a leaders’ debate would b e mild in comparison to the squabbles over how much state finance each is due.

The donor battles will be damaging to all involved. There can be no winners. The best answer to limit the damage would be to reform the current system in two ways. The first would be to drop the long campaign, and to limit the election campaign to the last month. The second would be to impose a lower limit on how much any party can spend, so limiting the number of rich donors or the amounts parties need to take from any one source. That seems to me to be the least bad control.

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Greece and Germany blink – who is winning?

Greece said she could not proceed with a new version of the loan agreement, but seems now to be negotiating over its terms. She has conceded she accepts 70% of the old conditions. Greece refused to sit down with the troika of the EU, the ECB and the IMF, but Greek officials have held exploratory talks with each of those bodies apparently. It appears that Homer nods.

Meanwhile Germany and her allies in the rest of the Eurozone have allowed the European Central Bank to lend more money to Greece. It is being done by the Emergency liquidity assistance scheme, where Greece has now run up a bill of Euro 65 billion. The money has been needed to pay for deposit flight from Greek banks. Those same Greek banks have been buying Greek state Treasury Bills, to allow the Greek state to spend more than it collects in taxes, something it was not meant to do under the rules of the loans. It appears that Germany has given way on the hugely important issue of no more borrowings. Germany bows.

The outgoing Greek government was pleased to announce that after many cuts it was only spending day by day what it was raising in tax revenue, leaving aside debt service. This government seemed to think that would continue and placed it in a stronger position, as it did not need new loans for current spending. Instead in January tax revenues fell, leaving the accounts back in deficit.

There can be no winners in a compromise. The two sides started so far apart that both sides will have to surrender a lot if there is to be an agreement. Greece will have to accept some creditor imposed discipline and controls over both her spending and revenue collection in return for new loans. She will not like all the policies this requires. The rest of Euroland will have to lend Greece yet more money, and probably agree to a cut in the money they will get back for past loans by some new debt deal. Such a compromise will not be the end to the saga, as it is likely to leave Greek finances still precariously placed. All may agree new language about growth and an end to austerity, but when a state is spending more than it earns, and has outlived its creditors’ patience, there do have to be cuts in spending it does not want, and creditors have to come up with more money or demand less back. There is no third way, no win win.

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What would a new UK relationship with the EU look like?

Those who want the UK to stay in the current EU at all costs argue either that there is no alternative, or argue that any kind of trade based relationship outside would be worse. They say we would have no influence over the rest of the EU from outside. They say we would have to accept whatever rules and regulations they set for trade within their area. They conflate this with wider influence in the world.

Most of this is silly nonsense. The UK will never have the same relationship as Switzerland or Norway, the two cases usually trotted out. The UK is a much larger country, a much more important market for the rest of the EU, and above all a global power as a leading member of NATO, the Commonwealth and the UN security Council. The UK is in many global networks. The UK from these positions can both seek to influence and persuade others, and in turn is courted for her support.

The UK should begin its renegotiations with the rest of the EU with two simple propositions. The first is that the UK fully accepts the logic of the single currency. The UK will not stand in the way of Eurozone members completing a political union to complete their currency union, as long as the rest of the EU understands this necessitates a new and looser relationship for the UK. As the one large country that can never join the currency union for democratic and economic reasons, we need an honest analysis and new deal based on that obvious truth.

The second is that the UK wishes to remain or become again a national democracy, where the main decisions are taken by Parliament, and where the voters can change government, policy and the law at a General Election when they cease to please. This means the UK cannot sign up to irreversible EU laws. The UK may by agreement accept joint laws, but it must in important cases reserve the right to change its mind.

Once these two simple propositions are grasped, the rest falls into place. The UK may agree to common foreign policy actions, but we will always have a veto on whether to join in or not. The UK can discuss and see if there can be common cause on laws governing business, energy or whatever, but they will only be common all the time both sides still consent. UK exporters will of course meet EU requirements on all goods and services exported to the rest of the EU, just as they observe all US requirements on exports to the US. In some cases the UK will find it easier and better to have exactly the same rules for EU exports to us. In other cases we will have our own rules. They will all be compliant with World Trade obligations and be designed to promote freer trade.

If we take the one issue usually produced as an attempted show stopper, the 10% external tariff on car exports, I would expect both sides to agree not to impose such a tax in either direction. The UK will be a willing partner in measures which cut tariffs and other barriers to mutual trade.

The UK will have enhanced influence in the rest of the world as it will no longer have to submit to common EU positions in global talks on issues ranging from climate change to trade arrangements. With the EU the UK will have the clout of a major trade partner who imports more than she exports from the rest of the EU, and the status that one of Europe’s large and powerful countries will always have when leading European countries sit down to discuss many global and regional issues.

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Delay in posting

Yesterday I was particularly busy – speaking to a local business seminar in the morning, attending a lunch meeting, then dealing with constituents’ queries and on to the Wokingham Conservative AGM to speak.
If people send in very long submissions, and include allegations about named individuals or companies, there will be a delay in posting. I do not have the time to check out all the allegations about named people and companies and cannot publish them without a clear factual basis to support them. Your contributions will get posted more quickly if you take this into account.
I also delete some which are offensive to others as I do not always have the time to edit them. As you know I do not edit from a party perspective.

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