It’s that time of year when children agonize over their present list. The lucky ones get to visit Santa’s grotto to tell him in person what they want for Christmas. Our party leaders have been especially keen to meet  Santa this year  with a General election coming up. Their conversations have not gone quite as they hoped. When Santa came to Westminster he was in an argumentative mood. I have obtained a transcript for greater accuracy.

First to arrive was Nicola Sturgeon. She thought Christmas was going to be early this year so she did not want to miss her big ask. As so often, the person who had the furthest to travel got there before the start. When Santa saw her, she said:

” What I would like for Christmas is an increased SNP membership, clear leadership in the Scottish polls, and the certainty that we can win all the seats in Scotland in the General Election. That’s all I want for Christmas. It’s not asking a lot, as I lead the only party that has Scottish in its name, and the only party which really cares about my country. We need this to stop all those English MPs going back on their word over Home Rule”

Santa looked cross, and replied:

“Last year I gave you the wonderful present you had been asking for, a referendum on Scottish independence. You didn’t look after that present and managed to lose the vote. What you are now proposing is I should give you effectively  the same present again this year in the hope that you could look  after it better. If I grant your wish all your SNP MPs will claim they now have every right to independence because they have just won  an election campaigning for  Out. I have to ask you to think again, and try and find a present you would like which matches with the settled will of the Scottish people to stay within the Union”

Next to arrive, fresh from a pub in Thanet, was Nigel Farage. He had decided to be moderate in his requests in the hope that Santa would be kindly to him. As he spoke, however, the significance of the moment and the opportunity started to overtake him:

“Hi there Santa. You’re doing a great job. I don’t want to make your life too difficult. So all I want for Christmas is momentum going in to the General election. You know the sort of thing – a few good opinion polls, the odd Tory defection. You see I reckon I need just 30 seats in the Commons to make me the third largest party. Then I can decide who the Prime Minister should be, and require him to hold a referendum, and then get us out of the EU and then we can close our borders, and then everyone will be so grateful to UKIP we will be on a roll…”

Santa was dumbfounded by the gap between the ambition and the current polls  and Parliamentary forces of Mr Farage. So he said in a friendly but slightly patronising way:

“Well Mr Farage last year I gave you exactly that same present. You have had two defections, some good opinion polls and you came first in the European elections which I thought were your best opportunity to make your point. What have you and your colleagues managed to do for the UK now you are the largest UK party at Brussels? What single law have you stopped or expenditure have you cancelled? What progress have you made on changing the UK’s border arrangements?  If I granted your wish, how do I know that you  would be any part of a new government, and that you could carry out  the things  you promise? I think you need to choose a more suitable present, that is not the same as last year.

By now The Deputy Prime Minister was getting angry, because he was having to wait outside whilst Santa talked to  Mr Farage . It seemed like salt in the wounds of the Clegg/Farage debates, which some had dared say Mr Farage had won. His wait  came on top of poll after poll showing UKIP well ahead of the Lib Dems in the fight for one of the minor places in the next Parliament. At last he was told Santa would see him. Mr Clegg asked

“I don’t want to ask for much for myself this Christmas. I would just like you to make sure the British people understand how difficult it has been for my party in this coalition. You know, we are not the sort of people who believe in cutting welfare or other spending. We do not like having to keep public sector pay and pensions down. We would be much happier imposing new taxes on the rich, but the Tories wouldn’t let us do any of these things, We only went along with all this because we thought it was grown up and responsible to help form a government, but we do think it would be very unfair if people thought we were to blame for anything the public thought was  wrong.”

Santa appeared dismissive as he came to reply. “I cannot possibly give you such a valuable present. Of course all political leaders would dearly love to be absolved of all blame for what they and their parties have done, but the whole point of democracy is they have to stand or fall by what they did. It certainly helps them if what they did squares with what they said, but that is all too rare these days.It was your Dr Cable that put through the unpopular tuition fees proposal when you had all promised the opposite in the election. It was your Mr Davey who pressed on with dear energy, making it difficult for families to pay their power bills. It was you yourself who wasted so much time on constitutional changes which the public did not want. Your whole party said they would help get the deficit down, now they all want to distance themselves from any difficult decisions. Think again, Mr Clegg, about a present appropriate to your straitened circumstances”

Tomorrow we will see what the famous duo, Ed and Dave, asked for.

 

Let us suppose  that someone’s spending over recent years was as follows:

Date   of spend                          Total          Total day to day spending

2009-10    (last Labour year)            £6693                      £6009

2010-11                                                  £6944                     £ 6328

2011-12                                                   £6936                    £6438

2012-13                                                  £6737                     £6572

2013-14                                                  £7200                    £6679

2014-15                                                  £7371                     £6717

I don’t think anyone would say that person had experienced “colossal cuts” . Some would write in and say this person had done better than they had, as their day to day  spending had gone up each year. Others would point out that inflation meant not much of a real increase, though in practice it is a small real increase in day to day to spending.  A fair commentator would conclude that the person had done all right considering the overall background, where others  had suffered actual falls in income and spending. It had been tight but was  not a case of a massive cuts.

If you multiply that person’s spending by 100 million you have the government figures for its total spending (including capital) and its total current spending. So why when we have the big figures for the government do some go on about massive cuts?

Some say in real terms it was a cut. The OBR now tell us not even that is true. Now they say it is a cut as a percentage of GDP. Yes, that’s true, because GDP is going up faster than public spending. However, that does not make it an actual overall cut. Today the government is delivering more school places, more doctors appointments, more operations in hospitals, more subsidised rail services and more success in controlling crime than five years ago.

If we are to have a sensible debate about public spending we first need to start with an honest factual base of what has been spent and what planned spending looks like. Over the next five years on current plans public spending rises by a further £42bn a year. That’s tight, but it only becomes a real cut if public sector costs escalate and if the public sector is unable to deliver say 2% per annum productivity and efficiency gains which are the bare minimum in much of the private sector.

The biggest lie of all is the one which says we are going back to 1930s levels of spending by 2010. This country is many times richer now than in the 1930s, so we will be spending many times the real level of the 1930s by 2010.

I reproduce below my case to abolish the slab approach to Stamp duty and to offer us all a cut in the amount of this transaction tax. I first wrote this in August 2013, and renewed my proposal in a debate in the Commons this year.I would like to have seen a more generous reform, but the one the Chancellor has proposed does mean some reductions in Stamp Duty for all homes under £940,000 in value, which is good news.The interesting question will be what impact the new 12% rate has on high priced homes, especially in central London where most of them are concentrated. As the Chancellor needs the continuing revenue from these dear properties he will need to watch carefully what impact this tax has on transactions volume.

Stamp duty – make it a progressive tax

By johnredwood | Published: August 26, 2013

I do not like Stamp Duty. Houses are dear enough, without imposing an extra tax on people trying to buy a home.

I am also a realist. This Coalition government, and any likely successor, will need revenue from taxing property transactions. They are not about to abolish the tax and give up the money. We need to find a fairer way of charging the tax, and set rates which are more affordable so there can be more transactions. That way homes can be cheaper, and the taxman can still raise substantial sums of money in a more buoyant economy.

One of the worst features of the current Stamp Duty is the cliff edge approach to the rising tax rates. Buy a home for £125,000 and you pay no tax. But a home for £125,001 and you pay £1250 of tax.

The increases in tax at threshold points become very high as the price of the property rises. Pay £1 over £250,000 and your Stamp Duty bill shoots up from £2,500 to £7,500, a 200% increase, or an extra £5,000 on your purchase. Pay £1 over £500,000 and your Stamp Duty bill surges from £15,000 to £20,000, another £5,000 increase, though a smaller percentage.

Pay £1 over £1million and your Stamp Duty bill is a hefty £10,000 more, rising from £40,000 to £50,000. That’s £50,000 tax to buy a one bed flat in central London, for example. Be in the fortunate enough position to be able to buy a 2 or 3 bed flat in the best parts of London and you would have to pay £100,000 of Stamp Duty at £2m. Pay £1 more and the tax bill climbs to a giddy £140,000, a £40,000 increase. Just the increase in the Stamp duty is considerably higher than average annual earnings.

The £1250 tax rise at £125,000 and the £5,000 tax rise at £250,000 are particularly onerous on many people trying to buy a family home in many parts of the country. It can be the last straw, that stops people buying the home they need and want.

The cliff edge thresholds of course distort the market. Homes for sale cluster just below the threshold points. There are large tracts of pricing territory but sparsely populated with homes for sale. £250,000-£260,000, £500,000 to £525,000, £1m to £1.1 million are not popular. The tax intervention creates a lumpy and jumpy market, where there are gaps in price availability, with vendors either holding down the price or leapfrogging it upwards, clear of the danger zone.

So my main recommendation for reform would be to make the Stamp Duty levy progressive like Income Tax. A home priced at £300,000 should pay no Stamp duty on the first £125,000, 1% on the next £125,000, and 3% on the last £50,000 of the price. Total Stamp Duty under this system would be £2,750 on a £300,000 house, instead of £9,000 today.

This would make homes more affordable. Could there be a loss in revenue? There may not be. Transactions would increase. The loss of revenue at the top end, where much of the duty is raised, would be very slight. The London market with its £10m plus transactions at the top end would still see such buyers paying nearly £700000 as today on a £10m purchase. The higher the price, the lower the loss of revenue as a proportion of the tax from the system I have described.

Given the political dislike of rich people and high property prices in modern UK, the government could introduce a hybrid system, where anything over £2m still had to pay 7% on the lot.

In 2010 I pointed out that public spending was going up every year of this Parliament in cash terms. I also forecast that this government would control the costs of public spending better than the previous government, so real current public spending would also rise. Most commentators, politicians and journalists thought this wrong and talked about the real terms cuts to come.

The OBR now confirms that real public consumption rose 2010-2013 inclusive at a rate of 1% per annum. They state ” Real government consumption continues to contribute positively to GDP growth despite ongoing restraint in nominal spending. “(restraint here means modest increases). (pp 79-80 of the OBR book)

The OBR also says that in the next Parliament the plans in yesterday’s statement should mean continued control over the costs of public services, which limits the impact of the future restraint on cash public spending on its real level. Indeed they expect the costs of provision to fall, as they assume productivity and technology gains in delivery of services. What is odd is that we did enjoy such gains in the previous decade.

It is curious that no-one else seems to read this section or use it in the debates on what has happened and what might happen to public spending, presumably because it stands in the way of the austerity and cuts stories. Whilst it is obviously true that some budgets have been reduced and some may be reduced in the next Parliament, the overall position is now confirmed that both cash and real public consumption has risen. Capital spending, which was cut sharply by the outgoing Labour government, remained cut at the beginning of this government but has now benefitted from substantial increases from the new lower base.

The Autumn Statement plans for the next five years are very like the 2010 Coalition plans to eliminate the deficit. They rely on modest cash increases in total public spending and large increases in tax revenue, mainly coming from economic growth. The approach so far has succeeded in controlling spending within the totals set out, but tax revenue as we have seen has fallen well short.

The Green Book provides a full five year profile of spending and taxing. It shows public spending continuing to rise in cash terms, by £42.8bn or 5.8% over the period to 2019-20. Revenue is forecast to rise by £140.8 bn or 23% with the big gains coming from Income Tax, VAT and National Insurance.
This enables the government to forecast the end of the deficit by 2019-20, with the current deficit disappearing in 2017-18.

The original plan to bring down the deficit was explained as relying mainly on spending cuts. This was calculated by looking at inherited planned increases in public spending and in real terms. In practical terms the government planned to increase public spending, but to increase tax revenue at a much faster rate, mainly by economic growth, to eliminate the deficit. For the next Parliament the plans assume tight control of public spending, with only modest increases in the cash spending amounts. Once again the main method of cutting the deficit in cash terms is an anticipated substantial increase in tax revenues from economic growth.

There is little leeway in the figures for any new government to spend more without having to borrow more. Hitting the tax forecasts will require a long period of good growth, and setting tax rates that remain internationally competitive. Many of the individual taxes have fallen short of expected receipts over the last four years. The latest forecasts show the impact of lower oil prices on falling oil tax revenues, and assume some increase in revenue from the anti avoidance measures and new corporate taxes set out in this Statement.

The CGT receipts have been well below the peak levels prior to the 2008-9 Crash, illustrating that lower rates raise more revenue. The self assessment and top end income tax receipts have fallen well short, suggesting the 50% rate reduced receipts. VAT has been buoyant, with the higher rate bringing in more revenue as planned and a bit more on top. This government’s experience shows that you have to judge carefully which taxes will bring in more if you raise the rate. The Stamp Duty changes will have a substantial impact on the property market and it will be interesting to see what happens to revenues there.

The Coalition came together to cut the deficit. So far they have kept their spending increases within plans, but have experienced a shortfall on receipts, so the task is half done.

The Autumn Statement provides a suitable opportunity for all main parties to set out their intentions for the next five years. Would any wish to go further and faster in curbing spending? Do any want to go faster with tax rises? Do any have a way to boost tax revenues with lower or similar rates, through promoting growth?

The UK economy needs to develop higher productivity, which in turn can lead to higher pay. The efforts going in to strengthen education and training, to improve the science base, to bolster manufacturing and to make it more worthwhile to work are all policies designed to foster more and better paid jobs, which are the key to economic improvement and to lower welfare and benefit spending.

The main policies revealed by Labour and Liberal Democrats reveal nothing of substance about how they wish to tackle the deficit. Labour’s cuts are tiny, and their tax rises all absorbed by spending pledges. In addition Labour wrongly think increasing the top rate of Income Tax to 50% would increase revenue, when history shows it would cut receipts. The Lib Dem’s Mansion Tax will not make a lot of difference to total revenue.

The Conservatives have got furthest in talking about the magnitude of public spending reductions they will need to eliminate the deficit in the next Parliament. The OBR figures today will show us where the government thinks it has reached on the long road to balanced books.

In the 2010 budget the Chancellor forecast Income tax receipts of £158.4 bn from PAYE and £35.1bn from self assessment for 2014-15. In March 2014 these forecasts had fallen to £142.2bn and £27.2bn. This decline of £18.4 bn reflects the decision to raise Income Tax thresholds more, cutting Income tax receipts from lower earners. It also reflects the higher top rate of tax which has collected less revenue than expected, and less than a lower rate would have collected.

In 2010 the government forecast £1.6bn of Petroleum Revenue Tax for 2014-15, recognising the likely fall in oil tax revenues.Today we must be looking at a figure of practically nothing, given the decline in output and in the oil price.

In 2010 the forecast was for £33.4bn of fuel duties. They are now forecast at £26.8bn following successful campaigns to cut the rates.

Value added tax was put up, and this has both increased the revenues and resulted in outperformance of the forecast for money raised. National Insurance is £10 bn down on the 2010 estimate for 2014-15, despite the increase in employment. Offshore (oil based) corporation tax is down by a massive £6bn, and total Corporation Tax is down by £18bn overall, in part owing to the cuts in rates.Capital Gains Tax remains way below the £7.8bn it reached at the 18% rate in 2008-9, owing to the large increase in the rate.

When some of the main taxes in the country yield in excess of  £50bn less than forecast it is time to ask some questions about tax policy.

In a minority of cases – CGT and the top rate of Income tax – the rates are too high. Cutting the rates would increase revenues by increasing the number of rich people based here, and changing their behaviour to undertake more transactions and to receive more dividends and other remuneration.

In other cases like tax thresholds and fuel duty the revenue is lower thanks to tax cuts. Personally I support those cuts, but they do mean you have to spend less as a result, or find something else to tax.

The interesting question is Corporation Tax. The idea of lower rates should be attractive to companies looking for a place to invest. However, the rate cutting has clearly taken the rate below the optimum rate for maximising revenue. There is a feeling in the country that large multinationals should make a proper contribution to the UK as host country for part of their operations. The interesting question is how could this be done without deterring investment or driving them out of the country.

In yesterday’s press we learned that the Autumn Statement this week will include substantial extra sums for the NHS budget, and an enlarged roads programme.

This does not represent an increase compared to original plans for this year set out in the summer of 2010 by the new Coalition government, though it does represent a shift of priorities within the budget totals.

In June 2010 the government announced that it would increase total managed spending from the £669bn of the last Labour year to £737.5bn by 2014-15. Current spending would go up faster, at the expense of capital projects. Current spending was forecast to rise from Labour’s £600 bn to £693 bn by 2014-15.

In March of this year the Treasury published new forecasts for 2014-15 and beyond. They then estimated £680 bn for current spending, down on the 2010 forecast, with higher investment producing a total expenditure figure of £732 billion, down a little on the 2010 forecast.

These figures illustrate that the government has kept current spending under control as it wished to do, and has been able to increase capital spending whilst still keeping the totals below the original forecasts.

The higher deficit than planned is entirely down to weaker revenues, not to higher spending. Most people think spending has been cut heavily, though these figures(as I pointed out originally) meant some quite substantial cash increases in some areas, and allowed small real growth overall, with some departments nonetheless suffering cuts. In explaining the higher deficit, however, we need to explain deviations from the original plans. The adverse ones are all on the revenue side.

As I have explained throughout we are borrowing substantial sums in order to sustain further cash increases in public spending. This Autumn Statement is unlikely to bust the spending limits of 2010, and will allow more investment at the expense of current costs.

Yesterday I attended a seminar on harnessing science, great universities and new enterprise to promote growth.

The UK has several universities in the top ranks of world academic achievement. Oxford, Cambridge, Imperial London and other leading London establishments provide homes to some of the greatest world scientists and thinkers. However, if you compare our leading institutions with the Boston and Californian clusters of academic excellence which often top world tables we score less well when it comes to attracting private sector donations, harnessing venture capital and developing more new business on the back of the university achievements.

There is a growing interest in the idea of a golden triangle linking Oxford, Cambridge and London. There is also some success in all three main university locations in developing new business, attracting in new capital and encouraging more entrepreneurs. Oxford, Cambridge and London now have their own clusters of science and technology based businesses with good links and connections into the universities. Our success is one many other parts of the world would like to emulate, even if we are still behind the two best of the US on some of the qualifying results.

I trust the Autumn Statement will assist these important areas with improved transport links. They are developing critical mass for themselves in areas like nuclear, pharmaceutical and genetic developments. They can help generate the more interesting better paid jobs which a first world economy needs.

On 25th March 2013 David Cameron made an important speech on immigration in Suffolk. He said:

“Immigration has to be properly controlled. Net migration needs to be brought down radically from hundreds of thousands a year, to just tens of thousands”. He reported good progress in curbing non EU migration and went on ” Now what we need is to work across government so that our immigration policy is factored into our benefits system, our health system and our housing system”. He wanted to stop Britain being a “soft touch”.

Yesterday he had to report disappointment in hitting the targets, explaining that continued recession and poor economic performance on the continent was pushing more and more people to the UK to find work. Yesterday he announced further measures to curb new migrants access to benefits and housing for the first four years after their arrival. He said

“I want to get net migration back to the tens of thousands which it was in the 1990s. This is not some sort of outlandish unachievable pledge”. “It is not wrong to express concerns about the scale of people coming into the country. It boils down to one word. Control”. In the 30 years to 2004 net migration totalled 1 million. In the next 7 years there were an additional 1.5m people from migration.

Both the 2013 and the 2014 speech shows he fully understands the level of public concern, and shares the worries about how we provide sufficient healthcare, housing, welfare and other public services for all the people currently coming.

The main things he now wishes to do to control numbers is to require people to be here four years before getting any tax credits, child benefit or access to social housing. He also wishes to stop people claiming child benefits for children not living in the UK.

Do you agree with his aim of controlled migration in the tens of thousands? Do you think these new measures will do the job?