We read that the Uk government wishes to protect home regulation of our banks from the new banking union proposed for the Euro area. We are told that they wish to do so whilst preserving the wider single market in banking and financial services. People are already arguing over the detail, worried lest the stronger Euro area banking regulation impinges on banking regulation in the EU outside the Euro area. A concession has been granted, modifying voting procedures on the European Banking Authority, to ensure some support to new rules from non Euro area members.

            It is time people woke up to the reality. Over the last decade huge powers have been transferred from the UK to the EU, especially in the banking and financial services sectors. The FSA has written on its website that “70% of the FSA’s policy making effort is driven by EU initiaitives”. When the new bodies, the PRA and the FCA, replace the FSA we may well see the figure over 90%. The horse has bolted, long before this latest lock on the stable door comes up for inspection.

           UK financial regulation is now subsidiary to EU regulation. The EU has recently established a European Banking Authority to regulate banks, a European Insurance and Occupational Pensions Authority, and a European Securities and Markets Authority. There is now a grand European Systemic Risk Board overseeing the whole pan European system.

           There is plenty of EU law for them to implement and supervise. The Mifid Directive controls financial services. Banks are under the Banking Co-ordination Directive and the Capital Requirements Directive IV. Insurance has Solvency II. Most investment funds come under UCITs IV. There is the Money Laundering Directive and the Market Abuse Directive to regulate conduct. The EU has been busily working more recently on new legislation to govern OTC derivatives, mortgage credit, Insurance guarantee schemes, short selling, compensation  and a wide range of other activities. There is the well named Omnibus Directive.

        When the new Prudential regulatory Authority and the Financial Conduct Authority spring forward under Bank of England guidance, much of their work will be to enforce and interpret EU law.  The latest proposals do entail an even stronger possibility that European authorities could force on UK banks regulations or requirements which did not please the UK government. It is, however, a matter of degree. That can already happen given the way powers have been systematically transferred over the last decade.

         The latest proposals seek a single supervisory handbook for banks for the whole EU, with harmonised deposit insurance schemes, common capital requirements and a single European recovery and resolution framework. That does not leave a lot to national decision.

         The document from the Commission says:

“To avoid fragmentation of the internal market following the establishment of the single supervisory  mechanism, the proper functioning of the European Banking Authority needs to be ensured. The role of the EBA should therefore be preserved in order to further develop the single market and ensure convergence of supervisory practices all over the EU”

                 The UK government does need to stand up for more domestic control of these important matters. Like most things to do with the EU, just blocking the position getting worse is not enough. The government needs to admit the reality. Today, the UK financial and banking sector is largely controlled and regulated under EU law, with substantial influence from EU institutions. The Single rule book  applies to the UK, and it is about to get much more detailed and wide ranging, even if we stay out of the new  single supervisory mechanism for the Euro area.

 

              There have been rumours that the Chancellor may this autumn announce that he is not going to press on with the elimination of the “structural” deficit as planned. The Autumn Statement is in the diary for the rather late date of December 5th. Some think the Chancellor should offer an early Christmas present of a further “fiscal stimulus”, or more spending.

             The media, to understand this briefing, need to understand the story so far. The present Plan for cutting the deficit and curbing new borrowing is very different from the Plan announced in the summer of 2010 when the Coalition took over. Each time the Office of Budget Responsibility has revisited its forecasts it has had to downgrade growth for the ensuing period. This in turn has cut tax revenue forecasts and raised spending.

             In the first plan in 2010 the government aimed to borrow an additional £451 billion over the five years of this Parliament.  The following year they increased this to £485 billion, and this year to £556 billion, or more than £100 billion up in two years. If there is a further increase forecast in the Autumn Statement that would not be a change of trend or a unique event.

                   Some of this drift can be attributed to the “cycle”.  The first Plan assumed faster growth with better and earlier recovery. This meant an expectation of more revenue and less cyclical spending. Each subsequent revision is in part down to a slippage in the speed and direction of travel of  output.

                     Some of this drift can be put down to an overoptimistic forecast of tax revenues. Higher rates have been more damaging, actually cutting revenues  for Income Tax and Capital Gains Tax, where the OBR assumed rises.

                    There is little evidence that the fiscal stimulus applied liberally in recent years through large rises in cash current spending coupled with slow growth of revenues has produced a spurt to growth. It is difficult to see that a small extra fiscal stimulus on top of the large current budgetary deficit would of itself  change the speed and direction of travel of the economy.

                       There is a lot to be said for a policy which drives public sector productivity much higher, and  which cuts out questionable programmes or  nice to haves which we cannot afford. Eliminating the structural deficit was and remains the best policy. The test is how to do it without damaging the things that matter, and without taxing the country into recession.

 

                There are soothing noises again about the Euro. It looks as if there is a wish to keep Greece in for a bit longer. Presumably Greece will be told there is no more money to borrow overall, to try to keep the Germans happy. Greece will also be told she can draw more of it down more quickly, to “tide her over”.  The can is kicked down the road again. More money is lent, but we will be told the tough discipline remains.

                     The European Central Bank has talked Spanish and Italian shorter bond yields down, lowering the cost of financing the governments for a bit.  They have done so by promising to buy loads of these bonds if needed to keep the interest rates down.

                    However, under the latest rules, they will only be allowed to buy bonds if Spain and Italy  first submits to an EU/IMF approved programme to cut the deficit further and faster. The Spanish Prime Minister is clearly reluctant to commit to this. Will the markets require it? Can the halo effect of a promise of bond buying last long enough to allow Spain to raise enough extra money to keep it going?

                  Mr Draghi is hoping the member states will do more. He wants them to supervise errant members more precisely. He wants them to get on with setting up the bail out fund and using that. He made plenty of money available to the banks to buy them time, not to become a permanent part of the system.

                      Meanwhile the southern states just want the European Central Bank to buy up the bonds they need to issue to borrow. They know the ECB cannot lend the money directly to their governments, but it can buy them in the secondary market. They know it does not have lots of money, but it could always like the Fed and Bank of England create it.

                        There’s a lot of people hoping someone else is going to administer the next fix. It does seem Mrs Merkel now wants them to fix it, but not at an any cost and not in a way which is too provocative to cautious German public opinion.

                        No-one is fixing the underlying probelms. The southern states remain uncompetitive at their locked in exchange rate. The northern states are still not sending enough money to the poorer parts of the union. The Euro limps on.

 

            Amidst all the discussions about tax avoidance and evasion there has been little consideration of tax complexity.

             Given the relatively high levels of UK taxation today, there is a perpetual tussle between the government, wanting to collect more, and most people and companies, wanting to pay less. The government makes this tussle more likely, because some of the time it is urging people to take advantage of tax breaks or allowances to affect their conduct, whilst at other times complaining when they do so succcessfully.

              Governments uses the Income Tax system to send a variety of messages about conduct. The government would like us to save more, particularly if that enables us to lend money to the government itself. Some National Savings products are free of Income Tax and CGT. Dividend income is taxed at a lower rate than other income, encouraging people to invest in businesses. People prepared to start up and run their own businesses can gain various entrepreneur’s tax advantages. Venture Capital trusts are free of income tax and  capital gains tax on their investments to encourage investment in smaller and newer ventures if you meet qualifying conditions.

             I am not a tax expert and am not seeking to provide tax advice. Please do not rely on anything on this site when considering your own tax position. In general terms,   if people save through their pension plan they can put away up to £50,000 a year tax free if they earn at least £50,000. If they invest in venture capital trusts or through the Enterprise Investment Scheme they may get a tax break of 30% of the income invested. The limits are £200,000 on VCTs and £1m on EIS. If people give to charity the gift can be offset against their highest tax rate. If people save £11,280 this year they can put  that in a tax free ISA, with up to £5640 of that  in cash.  The Income tax rate on savings is reduced to 10%  up to £2710 in savings income. The personal allowance is £8105, but £10,500 if you are over 65. If , however, your income is over  £25,400 your personal allowance is progressively reduced.  The rate of tax on dividends for a 20% rate payer is just 10%.

              The system is now riddled with twists and turns in an effort to stop people finding ways round the system, and with all sorts of allowances and reliefs to encourage people to save, to invest and as a reward if you are older.

                 The government claims to run a “progressive” Income Tax system. Recent changes have made it a kinky kind of progressive. 40% tax cuts in at a relatively  low level of income now, at £34,370. At £100,000 people have to pay 60% tax over a £16,210  income range, as they progressively lose their Income Tax personal allowance. Beyond £116,210 they  resume the 40% rate, until the 50% rate cuts in at £150,000. The withdrawal of the Age Allowance can also create higher rates of Income Tax than the standard 20% at lower income levels above £25,400.

              This all begins to look too clever by half, and full of complexities which lead to people on similar incomes paying very different rates of tax quite legally. Consider these  cases:

Mr A   has retired with a combined pension of £ 42,000 a year. He also has an income of £25,000 tax free from saving over his lifetime in tax free national savings bonds, and a VCT dividend income also tax free  of £5000.  He pays  £6779  tax on his income of £72,000 a year, or a tax rate of 9.4%

Mr B also earns £72,000 a year. He has a young family and a mortgage. All his money comes from his main employer. He pays £18684 on his income, or 26%.

If Mr C earns  £116,210 with no offsets, he will pay a sharply higher rate again owing to the withdrawal of the entire Personal Allowance.

Of course Mr B and Mr C could save for a pension, put some money into tax saving schemes  and take other measures to get their tax rate down, if they have spare income to save. They would not have gains in their spending power as  a result. Mr A has been smart and prudent over his life, and is reaping the rewards from playing the Income Tax game successfully.

Is this a great system? Or could we move to lower rates for all, with fewer offsets?  What would the incentive effect of that be? We could do so whilst preserving the benefits for those who have made long term decisions already based on the present system. I am not recommending making Mr A pay more tax.

I would also add that some of you have written in to say rich people living in  the UK can use trusts to avoid tax. If someone sets up a bare trust the beneficiary pays full Income Tax and Capital Gains on the benefits as the property in the trust is treated as his own. For most more complex trusts the Trustees have to pay 50% tax on most of the income and the 42.5% top rate on dividends on divident receipts, with the beneficiary getting the relevant tax credit to avoid double taxation. Most trusts are not a route to avoid UK taxes for a UK taxpayer.

 

There are now two rates of CGT, 18% and 28%.

There are various exemptions. Cars, corporate bonds,  and  currency for personal use are exempt. So too are all sorts of ways of lending to the government. Gilts are CGT exempt, as are some National Savings. ISA savings schemes also escape. It shows that the government  is not against capital gains per se, but wishes to channel investment into preferred areas, especially into loans to the state. Entrepreneurship is less valued than lending to the government, but can attract a preferential rate of 10%.

There are some strange rules. You can carry forward losses, but you have to offset losses against gains in any given year even where you have not used up  your tax free allowance on the gains. On death losses can be carried back 3 years to get a rebate for the estate.

CGT is the most voluntary of taxes. People can and do delay taking profits if they think the rate is too high. They can buy assets which are exempt, as there is plenty of variety, and there are tax free wrappers. CGT in a way began as a Treasury device to stop people owning bonds and selling them just before they paid the interest to capture the income as a tax free capital gain. They stopped that sometime ago by making people buy gilts with adjustment of accrued income, so people do have to pay income tax. Yet the tax remains.

Should gains be taxed? Should gains on so many things be exempt?  What rate is likely to maximise the tax take if you wish to keep a CGT?  In the US and the UK over the last thirty years rates under 20% have collected more tax than higher rates. Could it be that we are well above the best rate to optimise the take? Is the 28% rate the reason the Treasury is forecasting lower receipts this year?

 

(This site does not offer tax advice and I am not a qualified tax adviser).

 

Before the election Mr Osborne promised big changes to Inheritance Tax. This proved surprisingly popular, despite the fact that most people will  not be  in the bitter sweet position of having to pay it. There is a £325,000 tax free allowance, which takes care of most people’s estates that they wish to pass onto their children or other relatives. It is of course tax free to pass it on to your spouse, partner or charity of your choice. A married couple effectively have a £650,000 tax free sum available if they have that much wealth.

I guess the reason it was popular is many people think their family might become trapped by IHT. After all more and more homes in the dearer parts of the country are now worth more than £325,000. That does not even buy you a bedsit in central London, nor a house in much of the rest of Greater London. There are areas of expensive property in a wide range of locations around the nation, from Sandbanks in Dorset and Newquay in Cornwall  to Cheshire and central Edinburgh. Maybe it also shows that jealousy is not such  a great political emotion , with many thinking those who have saved and built up assets for their family have a right to pass more of it on.

I am not recommending any reduction in IHT given all the other tax priorities and spending needs of the  present fiscal bind. There is, however, plenty of complexity to grapple with. It might be possible to make it easier to understand and follow. Much of the complexity comes from the idea that you should be able to pass all your money on to your family tax free if you can guess when you are going to die, and give any excess away seven years before you do so. You can then keep £325,000 worth for yourself, and give that away tax free at the end. The government has put in a series of complicated rules and rates to keep people to the 7 year Russian roulette.

If you do transfer assets and dare to die sooner than seven years you pay the tax, but  there is taper relief so the tax is reduced the longer you managed to hang on. Gifts of up to £3000 a year are exempt, as are small gifts of up to £250. CGT can also come into play on death as well, adding to the complications, if you gave away an asset prior to death or sold it below true value which counted as a disposal.   It all makes profitable work for the solicitors and accountants who are needed  now to help people organise their dead relative’s affairs.

Is this the right way to handle inter generational transfers? What is the magic of the seven years? Is transferring most of your asset seven years before you die prudent management, or unacceptable tax avoidance?  Is £3000 a year of gifts per person  a sensible allowance? Is £325,000 too low a tax free limit? Or are you against inheritance in principle, and would you like to see a much lower tax free amount?

 

 

According to Stephanie Flanders, BBC Economics Editor, the Euro has been saved. She believes if the Head of the European Central Bank had said a long time ago what Mr Draghi said this week, there would have been no Euro crisis! The BBC Economics Editor degenerated into putting forward  uncritically appraised Euro propaganda. She had no grip on the story at all.   At least they later interviewed Norman Lamont, who was able to explain all the hazards from here with the new Draghi plan. Let’s look at what she should have considered after hearing the Draghi spin.

Mr Draghi has said the ECB will buy 1-3 year bonds of problem countries. He will sterilise the intervention. Why does this make such a difference?

First, the ECB will not buy any more bonds of Greece, Portugal and Ireland who rely on money from the EU/IMF. So this statement does nothing to tackle the Greek  problem. Second, the ECB will only buy 1-3 year bonds of countries that can still raise money on public markets, if they have asked for help and have submitted to programmes of deficit cutting supervised by the EU and IMF. Spain seems reluctant to ask for such help, so no buying can take place.  Third, artifically propping up a bond market does not solve the underlying fiscal or balance of payments problems. They will bubble out in some other way. Fourth, how will they sterilise the intervention? Is thECB going to raise all the money needed for bond buying on its own credit rating? How easy will that be? Has Germany agreed?

The markets love the hint of easy money, and love the idea of quick profits at the expense of taxpayers who would be dragooned into propping up these bonds for a time. It does not solve the problems of the Spanish or Italian economies or budgets. It does not create a fiscal and political union.  The BBC should have put the other side of the case as well, instead of stating this has solved the Euro’s problems.

We have heard many times that the Euro area has at last solved its problems. We have heard of many big bazookas. We also hear that several of these countries remain in severe financial trouble, with overspending and overtaxing governments, declining output and high unemployment. Their political systems are no longer allowed to elect governments that speak up for the unemployed and offer a different economic strategy.

 

     The Uk government is being asked to approve Euro 1033 billion to be spent by the EU between 2014 and 2020. We have a veto on such a proposal. I  would like to see us use it.

          The EU wishes to spend  Euro 386.9bn on the Common Agricultural policy. That’s the one where Mr Blair told us he had negotiated a right to reform it, in the interests of a better deal for EU taxpayers and food buyers. Now seems like a good time to demand delivery.

                 The EU plans to spend  Euro 376bn on regional aid. Much of this goes to regions in  relatively rich countries. Given the stated aim of the EU to  bring budget deficits down around the EU, wouldn’t this be another good place to make major changes and reductions? Shouldn’t regional aid be concentrated just on the poorest regions in the poorest countries, at a fraction of the current cost?

               The EU plans to spend Euro 70 billion on the External Action Service, or its rival system of diplomats to our own. Why do we need all this? Why can’t we carry out our own diplomacy through our own Embassies, without all this doubling up?

                The EU plans to spend Euro 63 bn on administration. In the UK the government has said it plans a one third cut in administration costs. Why not do the same in the EU?

                  There are a host of smaller sums for a wide range of differing departments, as if the EU was running  a full EU government. There would be scope to reduce or eliminate several.

                    Of course, if the public was given a referendum and voted to come out, we could save  our share of the whole  lot. On the assumption that we stay in, there is huge scope for the EU to lead by example. The EU is always lecturing governments to get their budget deficits down to just 3% of GDP. They could show us the way, by taking the knife to their own wasteful spending.  That would in turn lower the budget deficits of member states, who have to raise the money to support the EU.

                 A Uk veto to lavish new spending plans might be just the catalyst needed to start to sort out the huge deficit problems of several EU member states.

   We have talked before about making work pay.  It is time to ask how is the Coalition government getting on with implementing its popular pledge that it would make it more worthwhile working?

     Over the last two years average pay in the UK has risen by just 4.2%. Meanwhile JSA and other out of work benefits have risen by 8.5%, or twice the rate of earnings.

       The government is introducing compulsory membership of  NEST, a new pension scheme, for lower paid employees and others not already in a private scheme. This will entail a 4% levy on employee earnings, and a 3% levy on the employer.

       Petrol, diesel, and public transport fares have gone up by more than inflation over the last two years. As many need to drive or be driven to work on train or bus, we could pencil in a further 1% loss of net income from travel to work costs.

        Putting this altogether, it shows that so far the governemnt has found it difficult to make it more worthwhile working.

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