Dear Lucy,

Just when I thought Ministers were learning of the compromises and commonsense government needs to progress, I am alarmed by some recent developments.

Our carefully crafted compromise over the EU designed to keep the Coalition together is in danger of being broken by the Prime Minister’s latest speech. Many of us are deeply unhappy about his new language. The UK does not need a new relationship with the EU. There is nothing to put to the British people in a referendum, as there is no new Treaty in the making that the Uk is going to sign. Some of us think it a pity we did not join the Fiscal and Banking unions, but understand the political sensitivites at the current time. We think ti will be very difficult to maintain our position at the European table with all this ultra sceptic rhetoric flying around.

The Foreign Office has rightly been saying under this government that it is in the British national interest to be a full member of the EU and to stay engaged. It has been long standing policy of all three main parties that the Uk needs to be a member of the single market. We need to explain this more to some of our current Ministers. They seem to think it is or should be a free market or even a free for all market. That was never the idea. It brings duties and responsibilities. The European single market is about regulation to combat climate change, regulation to ensure high labour standards, regulation to ensure it is a social market, regulation to promote more environmentally friendly methods of travel, and regulation to ensure high standards of health, safety and cleanliness.

We need to explain to the Environment Secretary that the agricultural and fishing policies are to do with solidarity and sharing around the whole European space. These were not entered into lightly, and cannot suddenly be renounced by the UK. We need to tell the Welfare Secretary that the UK does have obligations to people coming to the UK from other member states. We cannot have a welfare state for poeple already here, but deny it people arriving from elsewhere in our Union.

I do hope the Home Secretary’s wish to pull out of many of the Justice measures so carefully compiled in recent years will be tempered by the need to re-enter many of these agreements. We need to co-operate fully on justice matters with our partners, and need to grasp the requirement to share intelligence and enforcement with our partners now most of the border controls have been dismantled within the Union.

I will pass over our major worries with the Education Secretary, who seems to think he needs an alternative civil service to carry out his duties. I would be grateful to hear from you what we can do to prevent the march of unreason over EU matters.

I would also be grateful for guidance on how much we have to accept from the new arrivals in the form of senior Ministerial advisers from outside the service. We must avoid traffic accidents and misunderstandings , which become more likely if Ministers do not trust and confide in us, their faithful servants. The last government wrestled away control of media and communications from us, which was just about tolerable. It is not possible to govern well if they wish to take away control over policy as well.

Yours ever

Roy

I drew attention to the rising UK bond yields and falling sterling sometime ago. Moody’s decision to remove an “A” from the UK rating reflects changes already occurring in markets, and should come as no surprise to readers here. The UK both needs more growth and less public sector borrowing. I have talked about changes that would help bring this about, and will return to this in my pre Budget pieces soon.

I have recently co signed a letter by several Conservative MPs to the Transport Secretary. We have asked him to speed up consideration of airport capacity in London. We think the Uk needs to decide quickly where its main hub airport will be in decades ahead, and start investing in the extra capacity needed.

We point out that it may not help at the next election to be unsure about where a major airport is going to be sited. Far from making it easier to attract votes around London, it could leave many places blighted by the prospect of a major new airport next to them. It also leaves many people with jobs in aviation and at Heathrow unsure of their positions.

Howard Davies could speed up consideration and reach a conclusion this year if needed. The main arguments and plans for expanding Heathrow, for building an estuary airport from scratch, or expanding one or more of the existing airports for London beyond Heathrow are well known. It requires a decision.

I would rule out immediately the idea of building a new hub airport from scratch anywhere west of London. I cannot see the advantage of changing sites from the present west of London location to another around twenty or thirty miles away, further out of the capital it is serving. I can see many political and economic disadvantages, and plenty of people who would oppose such a move. The cost would be huge, requiring a new set of train, underground and road links into the centre of London.

Nor do I see much advantage of trying to shift the main hub airport from Heathrow to an expanded Gatwick or Stanstead. It is true there is more land available at those locations than within the current perimeter of Heathrow. It would be a breach of past promises to place more runways at those places. They are further out of London, have poorer road links than Heathrow, and no tube links.

To me the choice is between expanding Heathrow or building a new Eastuary airport. From the days of Maplin onwards I have been a fan of a new airport with a large seaport to the east of London. Now I fear the success of Heathrow and the magnitude of the investment already made there makes it a difficult prospect. The transition from Heathrow to Estuary could be drawn out, expensive and damaging to the UK’s commercial inetrests. The airlines will be reluctant to go there at first. Trying to run two large airports near London will split service provision and make interlining difficult.

I conclude we need to get on with developing Heathrow. It may need to expand to the west over the M25, and may need more fast transit sytems between terminals and into London to make it user friendly on its already spread site. The sooner we have more capacity the better. Local residents rightly want an effective night ban on movements, and want less noisy aircraft taking off and landing in ways which cut the noise footprint.

              After a good bout of rich bashing, it is time for the politicians to move on to some London bashing. After all, London is  much richer than the rest of the country. It can’t be fair. London should pay more to the rest, and the rest should be given bigger favours to stem the tide of London’s success.

             In the Economic Policy Review I wrote with my Committee in 2007 I pointed out that the London economy had grown 41% between 1998 and Q3 2006, the UK economy by 27% and the Scottish economy by just 16%. This large outperformance of London has continued in the troubled years since.

              Why should this be? London has benefitted from substantial inward migration of talent and money from abroad. It has been host to the very successful financial and business service sectors. It has offset some of the damage of inadequate UK bank finance for property after the crash by the strong flows of foreign money into its market.

           Some now say that London is doing damage to the rest of the UK, sucking up too much of the talent and wealth. They do not seem to appreciate that London is crucial to the financing of the rest of the country. The recent collapse in financial service  and banking profitability has been one of the reasons tax revenues are disappointing, after years of relying on large tax revenues from this successful sector. High earning teams shifting arboad is another part of the low tax revenue problem. If London loses this business it is unlikely Leeds or Bradford, Manchester or Stoke will pick it up. It will more likely vanish to Hong Kong, Shanghai  and Singapore.

            Much of the world’s wealth and progress is coming from the rise of vast and energetic cities. In China it is the move into the cities which is fuelling the growth. In Western Europe the Paris basin is far more prosperous than most of the rest of France. Around the world growing and successful vast cities are locked in competitive struggle for the world’s rich, and for the world’s creative, financial and  industrial talent. These cities are asked to help support the populations closest to them in their nation state or federation.

            It is important to keep one of the world’s large cities here in the UK to help pay the bills. There may be all sorts of issues over who comes and what they expect, but there would be one thing worse than having a city like London on our doorstep – not having one. I am all in favour of more jobs, more enterprise and higher living standards throughout the UK. I just do not think that bashing London will help bring that about. Using London is a brighter means of spreading the good news.

 

           In June 2010 the OBR/government forecast a big rise in tax revenues, based on increases in CGT, top Income Tax and Stamp Duty rates, Fuel duties and much else. The country could afford to increase cash public spending, and cut the deficit, thanks to buoyant tax revenues. (All the figures here come from the official  June 2010 Red Book, and the December 2012 Autumn Statement  Green Book)

          They said self assessment income tax, running at £22.5bn in 2008-9, would rise to £29.2 bn by 2012-13, thanks to the higher rate of tax on top incomes and growth.  This autumn they are forecasting just £22.6bn for this year, almost the same as four years earlier. That is 23% below the 201o forecast.

          They did say  CGT would fall heavily from the £7.8bn recorded in 2008-9, to just £2.7bn this year, a fall of  65%. The December 2012  forecast is for a smaller decline to £3.7bn. This is still a fall of 52%. The higher rates have not raised additional revenue compared to pre crisis.

           They said Stamp Duty Land Tax would double from £4.8bn in 2008-9, to £9.3bn in 2012-13. Instead this December they forecast £6.5bn. That still does represent a useful rise on 2008-9, a year of low transactions in the property market, but a fall of 30% compared to plan.

           They forecast Fuel Duties at £30.3 bn for this year in 2010. The latest estimate is for just £26.2bn, the same as 2009-10. The government has been forced to cancel some of the rises, and the rises have made people economise more on amounts of fuel used.

            Total Income Tax is running £13bn below the 2010 forecast, but VAT is up a little and National Insurance around estimate.

             It looks as if the government has reached tax saturation point with many of these taxes. High Stamp duties impede transactions in the property market, where the number of sales of properties over £1m fell by 11% in the first half of 2012 compared to 2011.  Fuel duties have stopped people using so much fuel, making it difficult to get more money out of fuel buyers. Capital Gain Tax receipts are forecast to fall following the rise in rate. Income Tax receipts have suffered badly from the attack on top incomes, and from the general lack of growth in pay and the economy.

          Governments of all persuasions have previously kept tax below 40% of national Income.  As the government nears this point it encounters substantial resistance from taxpayers to paying more. In some cases it seems the tax rates set reduce the amount of revenue collected.

 

              The public sector says it needs to spend more cash each year to keep going. The private sector cannot or will not pay more tax to meet the bills. We have reached an impasse.

             The original deficit reduction plan of the Coalition government rested on a very large increase in tax revenue. The June 2010 forecast said we would  be paying £176.8 bn more in 2014-15 compared to 2009-10.  That £2800 extra per person (on average), or more than £10,000 extra for a family of four, would take care of the increased costs of public services over the five years and cut the outstanding deficit.

            Instead, as we will see tomorrow, with  tax after tax revenue has fallen well short of the official estimates so far. Growth has disappointed, accounting for much of the loss. It is also clear that more people than expected have planned their affairs to avoid the higher rates brought in. Very rich people have gone offshore.  People have declined to take profits on assets, or have sold assets at a loss to 0ffset.  Housing transactions have been well down on pre crisis levels, avoiding Stamp Duty.

           Many in the private sector say they cannot pay more. They feel the current tax level is quite high enough. They do not have any spare money to give the government. Critics of the private sector say they still have the money but are unreasonably witholding it. They want tougher attacks on avoidance. The problem is you cannot make people take a profit on an asset or buy a different home. They have every right not to do those things and pay less tax as a result. Successful highly paid financial sector personnel can say that they now want to work in low tax Hong Kong rather than higher tax London, and their employer may let them. You cannot make people drive their cars more -indeed the government wants us to drive less – so you should expect a shortfall in fuel duty.

          We have a stand off. As a result the deficit remains dangerously high. The government needs to look again at spending  as well as revenue, to get the deficit down.

 

           There is general enthusiasm for exposing tax avoidance schemes, and trying to get more people and companies to pay their “fair share” of tax. The PAC has said we should shame tax dodgers.

          Those in Parliament keenest on this approach should recognise that the prime source of tax avoidance schemes in the UK is the UK government. It is the laws approved by Parliament. Should they then shame themselves?

            The main ways the better off who live and are taxed  in the UK avoid tax include

 

Pension contributions – paid out of gross income

Pension fund investment income and capital gains – tax free whilst in the fund

ISAs and Junior ISAs – offering tax avoidance on all income and gains on the investments

National Savings – they offer a wide range of tax avoidance products which are very popular

The opportunity to give money and property away to others more than 7 years before death to avoid IHT

The opportunity to give money to charity free of tax

Living on expenses when away on company or government business, free of tax on these

      Which of these do the anti tax avoiders think we should abolish? Do they agree that means of  tax avoidance can be stopped if Parliament enacts a law to stop a particular way of avoiding tax – subject to people still staying in the country to pay it?

          The problem with trying to get international companies to pay their fair share, as the Chancellor acknowledged in his recent statements, is the competing national jurisdictions around the world bidding for more of a company’s business by lowering their tax rates. That, after all, is what the Chancellor is doing by cutting the UK Corporation Tax rate from 28% to 21%. He is right to think that a company will undertake more of their profitable activities here if the tax rate is lower than elsewhere.

 

 

 

 

 

            Let me speak out in favour of spare rooms.  Most of my constituents enjoy one or two.  I am glad I live in a country where many people can afford more housing than they strictly need. People like to have a spare bedroom so they can welcome friends or relatives to stay the night or stay for a few days. Many now like to have a spare reception room or workroom so there is somewhere for members of the family to relax and watch tv, and somewhere else  to do the homework or to answer the business emails and calls that come through out of office hours.

           I want more people to have spare rooms. I want my constituents to become better off, and to be able to buy better housing. I do not want to tax them out of a larger home with a Mansion tax.  I do not want to prevent them buying a larger one with penal Stamp duties.  I do not want to stop them enjoying their surplus space through penal Council tax levels on bigger properties. People with larger incomes usually choose to have considerably more space than the average, as it does make living more relaxing and enjoyable. It’s good to aspire to better housing.

          I well remember the joy I felt as a youngster when my parents took the plunge and moved from Council accommodation to their first home they owned. It sported a spare bedroom so relatives could come to stay.It had two downstairs rooms as well as a small itchen. My parents had worked hard to save a deposit and to afford the mortgage. Their parents had rented all their lives, so it was an amazing move.

           Today there is a difficult debate about spare rooms in Council accommodation, or accommodation where the rent is paid for by Housing Benefit. I understand only too well the strong feelings many people have towards their homes. I also see the desirability of more people having spare rooms so there is somewhere quiet for homework, or somewhere to put up a relative or friend. I also understand the frustration of people who cannot secure Council accommodation at all or of the right size, when they see others living in properties larger than they would qualify to receive if applying today.

            Most people agree that when someone asks for subsidised accommodaiton it is right to allocate just the size they need and not something bigger. If they like the rest of us want something bigger, then there are all sorts of help on offer to assist them into jobs, where higher incomes will in due course lead to being able to afford a larger home.  Good luck to them.

            Most also agree that people with special needs, or the elderly, should be allowed to stay in larger accommodation and not required to downsize. The cases in dispute are those of people of working age who happen now to be living in larger homes provided by taxpayers than they would qualify for. Should the government encourage downsizing by offering suitable properties, but take no other action? Or should it say there will be less benefit to help pay the rent, as the home is larger than needed? I would be interested in your views.

       I want a view with a room from you.

 

            Some politicians in the UK are only happy when they are thinking how they can take more money away from people to spend as politicians see fit. Far from wanting a private sector led recovery, they wish to shrink the private sector further in order to pay for a larger public sector.

            This week-end has seen the news dominated by Labour’s plan for a Mansion Tax on properties worth more than £2m, and the Lib Dem’s possible plan for a wealth tax on assets of more than £2m. The Coalition have already increased Stamp Duty substantially on dearer properties, put Capital Gains Tax up to 28% from 18%, and cut the amount of money people can save in a pension fund from unlimited to £1.8m, then to £1.5m and in due course to £1.25m. Maybe that sets a precedent for how a Wealth Tax would work. It would start at a larger sum and work downwards quickly as politicians got a taste for spending the revenue from it.

             These new proposed Wealth taxes are on top of our existing wealth taxes – people with wealth pay CGT on any gains, income tax on any income the assets generate, Inheritance Tax on passing it to the next generation, and a host of other property and spending taxes.

              Labour’s tax might entail a person with a £2m property having to pay an extra £25,000 a year to live in it. That might be fine for a multimillionaire with a big income, but might be impossible for a pensioner living in a two bedroom flat in central London  which they bought years ago for a small sum, when they have only a modest income.  Income Tax is at least based on ability to pay. An asset tax is not based on that, and forces asset sales by people who are asset rich but income poor.

             A Mansion Tax might lead to people knocking down part of their property to reduce its value below the threshold. Window taxes led to blocking up windows. Mansion taxes could lead to the demolition of the conservatory or the conversion of a spare room into an outbuilding. Maybe people will invite in teenagers to have a week-end party in their place, to do enough damage to take £50,000 off the value to keep it below the threshold.  Unchic shabby will become the new decor for the flats hovering aroungd the £2m. People will be declaring noisy neighbours and anti social behaviour in their street to drive the values down.

             The Lib Dem’s wide ranging possible Wealth Tax will create many more anomalies and problems for many more people. The widow in the £1.999m flat will not want to be given gem jewellery or a good painting, as it could take her  into territory where suddently she would have to pay £20,000 a year wealth tax at 1%. It will give the very rich another reason to go offshore altogether. Buy to let landlords will be dumping their properties, and rushing to spend their surplus on better holidays or more expensive cars that depreciate rapidly. Maybe new businesses will spring up to take valuables off people, in return for letting them use or enjoy them without owning them. The Parliamentary draftsmen will need to be sharp to make the tax difficult to avoid.  Assets are likely to be shared out more evenly amongst family members, with informal arrangements on their use that the taxman might find difficult to crack. The government is likely to lose out on Inheritance Tax, as more better off parents decide the give things to their children early so they no longer have to pay a Wealth Tax on them.

            I would be  interested in your thoughts on this latest wheeze from the politicians.

 

 

 

    The US budget deficit is coming down faster than the UK for two reasons. Yes, revenue is rising more quickly, thanks to economic recovery. But spending is also under much better control. The Federal government is now cutting defence spending, to assist the cuts made by the various states to a range of other programmes. In the latest figures Federal spending was only up by 0.5% in cash terms. The deficit is down to 6.6% of GDP and falling.

      The President was an angry man in a hurry when he addressed the House and Senate with his state of the Union message recently. He wants to tighten gun control,seeks  a strong anti global warming policy, and favours tax rises rather than spending cuts. He knows, however, that much of this agenda is not possible given Republican control of the House.

      More interestingly, does he know that far from following an anti global warming policy, the USA is following a cheap energy policy – one of the reasons for her relative economic success. Presumably the President knows that the USA did not sign the Kyoto Treaty nor its successor recently on his watch, leaving the EU almost on its own with these expensive dear energy commitments. Presumably the President knows that his country is engaged in an amazing dash for gas, with much shale gas now beeing extracted despite the protests of environmentalists. Presumably he sees all around him people and companies who heat their homes and offices to a  higher temperature in winter than they cool them to  in summer. Presumably he sees the gas guzzling cars and the reluctance to use public transport. How can he say he is a strong anti global warming crusader with all this going on?

 

The US economy is in better shape than the Uk or Euroland. They sorted out their banks more quickly. They took a much bigger hit on property prices than the UK or Euro core, and now have them recovering. They are cutting overall public spending in real terms, and cutting defence spending and some state spending in cash terms and bringing the deficit down. It shows it does work.