The imposition of a ban on hosepipe use in the south of England coincided neatly with the arrival of rain bearing winds day after day. It is a very wet kind of drought.

               It goes alongside the very cold kind of global warming we are experiencing yet again this April.

             Spare me the official explanations. I understand that winter rainfall has been below average for two winters running. I  understand that two cold winters and now a cold April may be just patches of weather. We can shivver together, with many still worrying about the long term trend of global warming.

               The problem with all these clever explanations, right or wrong, is they defy the present reality that most preoccupies people. It is easier to persuade people there is a natural crisis in our water supply if  there has been no rain for weeks and if we are living through a freak heat wave. It is much easier to get people to believe global warming if most of the time they feel warmer than they did a decade ago.

                   I do not accept the water industry’s claim that the rainfall has been so unusual that we must blame the gods of nature for the shortage of water. I have been urging the water industry in London and the south-east to build more capacity for over a decade now. I remember sending out a press statement years ago when we won the Olympic bid saying that if we did not build another reservoir in the south we would be welcoming people to the Olympics with water rationing in place.  They did eventually get round to building an expensive desalination plant, which helps. The truth is they need more storage capacity, and fewer leaks, throughout the south.

                  People outside the south cannot understand the fuss about water. They have had plenty of snow and rain for their needs. The problem in the south is successive governments have allowed the entry of several  millions of additional people, many of whom have settled in the south, without ordering the extra water capacity they need.

                 There is plenty of rain, even in the south. We do not collect enough of it, and we do not have good enough delivery systems once captured.  That can be mended, so even after a winter or two of below average rainfall, we can still use the water we want. Water is the ultimate renewable resource. You cannot destroy it. You just need to capture a bit more of it on its way back to  the sea, after rainfall. Other industries take pleasure in meeting growing demand for their products. I do not recall Easter egg rationing or a shortage of turkeys at Christmas.

 Knowing how important many of you think this issue is, I reproduce below the government’s account of what it has done so far to change the immigration system:

• “The first ever permanent cap on non-EU work migrants has now been in place for a year. The limit has not been reached in any month since the cap came into effect, so the numbers are falling while necessary skilled workers are allowed in.

 

• We have also reformed the student visa system – the largest route of entry.  116 licences to colleges have been revoked and another 179 licenses  suspended. The reforms include a new accreditation system for colleges; new rules on the standard of English required for students; new restrictions to limit students working and bringing dependants; and ending the post-study work option for all but the very brightest. The number of Tier 4 student visas issued has fallen by 19% in the second half of 2011, compared to the same period in 2010.

 

• We have cut the automatic link between coming here to work and staying here permanently. Skilled temporary workers wanting to apply for settlement  have to be earning £35,000 per year or the going rate for their job, whichever is higher.

 

• We will shortly set out measures to reform family immigration. A new minimum income requirement will also be introduced, to stop people coming here to live off benefits.  We will extend the probationary period before a non-EEA spouse or partner can apply for settlement from two to five years, which will have the effect of reducing access to benefits for those who have recently arrived.

 

As well as reforming routes of entry, we are also strengthening security at our border.  The UK Border Force is now a separate command within the Home Office under Chief Constable Brian Moore, with a clear focus on law enforcement.  

Each month we stop approximately 1,000 people who should be refused entry to the UK from even boarding a plane.  From this month, we will have advance sight of details of every passenger on non-EEA flights to the UK. This 100 per cent coverage, combined with our strict visa regime, means that all non-EEA passengers arriving from outside Europe will have been checked once, and many twice, before they reach the UK. This summer the border will be better protected than ever before, which is vitally important in an Olympic year.

We are also improving our immigration processes to continue to deliver better outcomes.

 

• 60% of new asylum applicants now receive a decision in just 30 days.
• Last year we removed over 4,500 foreign criminals.
• We now start deportation action on foreign national prisoners 18 months before the end of their sentence.
• We have started interviewing selected visa applicants to test their credibility.”

 

 

 

 

             As always the Red Book published at the time of the last budget rests unread by many MPs and commentators. In it is the following interesting figures:

Revenue from self assessment Income Tax

2011-12    £20.1 billion

2012-13    £22.3 billion

2013-14    £22.9 billion

2014-15    £28.5 billion

Self assessment tax receipts are dominated by receipts from higher rate taxpayers. 2011-13, when they average £21.2 billion a year , is in  the period of the 50%tax rate.  2013-15, when they average £25.7 billion, is a  period  of the lower 45p  rate.

The figures also include, of course, the impact of the reduced allowances on the tax revenue, which the Treasury forecasts to increase revenues by £490 million in 2014-15, but to have no impact in 2013-14. So if we exclude that effect, the average Self Assessment revenue for the second two year period comes out at £25.45  billion, still £4.25 billion higher per year than at the 50p rate.

So according to the government they will average £4.25 billion a year more at the 45p tax rate they are currently averaging at the 50p tax rate. It is of course possible that the government’s forecasts are wrong. Revenue may be lower in 2014-15 than they suggest.  It is even more likely the revenue loss from  the 50p rate in the last year of that rate will be bigger than they think, making the revenue gain from the lower rate that much larger.

It is difficult to marry these figures with the Red Book claim that they will lose £100 million of revenue from the rate change,which they say will be offset several times over by the changes to the allowances and the Stamp Duty on expensive properties.

On any normal basis you would say that cutting the rate seems to yield £4 billion more annual revenue, averaging two year figures in each case to try to deal with the shifting of income phenomenon. Presumably the official statisticians ascribe a high amount of the increase to their forecast of economic growth. It is difficult to believe tax revenues will leap as much as they suggest just from an increase in the growth rate. I suspect they underestimate the changes of behaviour these rate changes induce.

 

           As we get ready for the meetings of the IMF and World Bank this coming week-end a familiar Euro crisis is brewing again. Yesterday Spanish ten year bond yields rose more, to 6.16%.  This week Spain is planning to tap the 12 and 18 month money market on Tuesday, and to raise 2 and 10 year money on Thursday. It needs to carry on borrowing, to keep pace with its deficit, to pay all those public sector bills. Some are alarmed at how much it will have to pay to carry on borrowing.

        Spanish shares have been falling. Markets have raised more doubts about some Spanish banks. The government has taken powers to be able to move in and run any regional government in Spain which does not do a better job this year of running its own finances. In March Spanish banks were borrowing Euro 316 billion from the European Central Bank, a large sum.

          The original idea of the EU in response to earlier versions of the crisis was to set up a big “firewall” or fund of money to bail out countries in trouble. They then wished the IMF to put a lot more of its members money at risk to back up the European funds.  This has been held back by German reluctance to sign up to a very large European fund, and by US resistance to the idea that it should contribute through the IMF when Euroland does not do more for itself.

          The Germans successfully pegged the total funds available from Euroland and the EU to a possible Euro 800 billion, of which 300 billion is already pledged to Greece, Portugal and Ireland under existing programmes. Much of this money has to be borrowed by the European Stability Mechanism in due course, which is a Luxembourg intergovernmental organisation backed by the credit ratings of the Euro area countries.

             The IMF is being asked by the Euroland countries to have more money available to stand behind the possible borrowed funds the Europeans might raise on their own credit account. Japan and China are indicating that they might  put some money in. They do not wish the Euro to flounder, and they would like the Euro to stay higher against their currencies for trade reasons. So too might some of the other emerging market economies. It is unlikely the US will change its stance from “No”, as it is difficult to imagine Congress and Senate voting to ratify such spending, especially in an election year. The UK’s position is also undecided.

                 The truth is large firewalls cannot solve the big underlying problems. The emergency funds dispensed so far have bought some more time. This time has to be used to tackle the underlying huge imbalances. Somehow member states in the Euro have to show they can finance their budget deficits in the normal way without needing subsidised finance. Somehow the Euro zone has to finance its trade with itself comfortably. Somehow the zone has to strengthen its banks without forcing yet more austerity and recession on the weakest countries. That would be a useful agenda for the IMF to work through. Instead the Euro part of the discussion may turn out to be yet another talk about the extent of firewall funds, who pays the bills and when they might get set up. Instead of discussing how to finance failure, more thought needs to be given about how to get member countries out of the need for subsidised loans in the first place.

 

              Several contributors want to hear more about the many ways in which the EU affects or controls our lives. There are all too many ways, following years of EU directives and regulations, based on the huge powers transferred in The Treaties of Rome, Nice, Amsterdam and Lisbon, to name but four that rarely get mentioned.

              In recent years the EU has been granted large new powers to regulate banks and financial institutions. This week-end reports ciruclated that the EU is now considering imposing capital surcharges of as much as 10% of a bank’s assets on EU large banks on top of the minimum 7% capital ratio required already.

              The aim is to stop EU banks getting into the mess they got into in the 2008-12 period. That is a worthy aim, but this remedy does not seem to be based on any sensible analysis of why various large EU banks got into difficulties in that period or what is needed to get us out of the mess. There is little  recognition that Central Banks and regulators got it wrong as well as the commercial banks, producing a toxic mixture. It does not tackle the problem we have often discussed here, of weak banks lending money to overborrowed countries, which in turn undermines the value of the loans to those states made by the banks. The way the Regulators and the ECB have encouraged banks to hold more of their own government’s debt has caused problems for banks in countries like Greece and Portugal, instead of strengthening them.

               Forcing banks that are weak to hold much more capital does not ease the problems we face. Rather it intensifies them. It will mean that banks are even less able to finance recovery in weak economies. It will help drive asset values down further, leading to more bankruptcies and further losses for the banks. If a weak bank is told to hold more capital  relative to its lending, its easiest option to c0mply is to lend less. If banks in recession ridden economies lend less, asset values for things like property are likely to fall further. More firms go bust, and more assets return to the banks for fire sales. The banks lose  more money, so they hold less capital. They then need to lend less again, to comply with the Regulator’s wishes. A country can get into a downward spiral.

                 This regulatory policy, alongside the policies demanding higher taxes and lower public spending, will reinforce any deflationary tendencies in these weakened economies. The EU does not need less growth. It needs more. We need counter cyclical regulation. This is the worst kind of regulation, which intensifies the cycle. It makes things worse.

 

         I did not watch the Grand National. I saw some of the events on the TV news later. Surely it is time to change the course and the race so that the safety of horses is looked after?

          No-one would find it acceptable if a couple of drivers died in every Grand Prix car race. Formula One has responded to driver and spectator worries about past fatalities of drivers by making the circuits safer and improving the safety of the cars. We can now enjoy Formula One racing  in the knowledge that the death of a driver is extremely unlikely, even in a  bad crash.  

          So how can we enjoy a race which has led to the death of  two horses in 2011 and another two fine horses in 2012?  I am not suggesting legislators should ban the race, but I am suggesting all those in the racing industry should recognise that there is now a very strong feeling amongst many of us that the injury and death rate is unacceptably high. It is time the racing authorities took sufficient action, as Formula One seems to have done.

 

        Out on the doorsteps  the voices of  voters can be heard complaining of just how much money government takes from them in differing ways. There are many complaints about public sector car park charges, the Congestion Charge in London, the Council Tax, taxi licence charges,  planning fees, Stamp duties, Child Benefit withdrawal, tax credit changes, higher National Insurance, rising  postage stamp prices, the failure to increase the Age Allowance for pensioners, the charity tax allowance changes: I have even had a strong complaint about ice cream vendor licence charges. From public sector workers come worries about their pension contribution increases and the worsening of the terms of their pension plans.

           The doorsteps are reflecting the growing feeling  I have that we have reached tax saturation point. Councils are looking for all sorts of fees and charges to raise, as a way to maintain spending levels without large Council Tax increases.  Central government is looking for ways to tax individuals more, including  their own public sector employees, through increased taxes, charges and deductions. Some on the doorsteps demand more cuts in spending, and give examples of less desirable or wasteful expenditure they could do without. Many others are more reticent than in previous years about demanding more spending, as they appreciate that money is tight and that maybe we are up against the limit.

          There is a growing frustration with all political parties. People do not feel the parties are listening to them about how squeezed they feel. In one nearby Council area I was told that a single person ice cream vendor in a  van has to pay £3000 for an annual licence, on top of his fuel duty and VAT on inputs, National Insurance and Income Tax. At the petrol pumps  the best part of £1 a litre is now paid as tax on every litre of diesel. If you travel 20,000 miles a year on busienss in a 40mpg diesel your fuel tax bill would be around £2000. Someone trying to buy a modest one bedroom flat in Central London would pay £20,000 or more in Stamp Duty for the privilege. A typical Council Tax bill is now well into four figures.

             For small businesses the level of compliance costs with regulations, licence fees, initial banking charges, and the continuing round of public sector fees and charges can be enough to put people off starting, or to drive the business under in the early years. Tax saturation is a serious condition which undermines enterprise, reduces demand, and makes many individuals and families feel bad about their own personal circumstances. That is why government and local government need to ensure every pound they spend is well spent, on a cause supported by many voters. The country is down about the extent to which people on modest incomes are having to pay the government’s bills.

 

I thought this government was going to extend our civil liberties. They made a good start, removing the threat of compulsory ID cards, and changing detention without trial. I have no wish for them to increase the surveillance of the state, and hope Mr Clegg wins his battle over the latest database issue.

Nor do I think it a good idea to cut the tax relief available for charitable giving. As I wrote on 8th April here, that policy is at variance with the Big Society idea.  The Treasury needs to grasp that large donors to charities do not make money themselves out of the gift – they are just being generous. The charity gets the extra advantage from the tax break.

I was surprised to hear Vince Cable say he did not want this proposal. Not because I expect Vince to keep to collective responsibility and defend the government, but because I thought the limitation of total tax relief available to the rich was a Lib Dem idea brought into the budget.

As I have been trying to point out for some time, one person’s tax avoidance is another person’s rational tax planning, is the government’s encouragement to better behaviour. A lot of tax avoidance has a moral purpose – to give money to charity, to save for retirement so you are not a charge on the state in old age, to save for a  rainy day to avoid benefit claims or to set up an enterprise which may have a wider social purpose. That is why governments of all persuasions offer a series of tax breaks, and why many people take advantage of them.

The charity break is perhaps the most altruistic. It is certainly the one with no benefit to the donor, other than a feeling of doing good. I am not surprised that a campaign is building up to change this proposal. I am glad the Prime Minister has said this is a consultation, and they are listening carefully.

The truth is simple. All the time the state spends so much more than its normal level of  income there will be stresses and strains trying to collect more. The government  has discovered that a few very rich people happen to be very generous to larger charities. They have eyed this money, as being an easy way to raise more tax. They are discovering it is not as easy as they thought. It comes down to a simple question – is what a Cancer or disability charity doing more valuable work than the government? Many people think so. They would prefer the rich person to give their money to the charity rather than giving it to the state. It can’t go to both. Parliament has to make a choice.

The sad truth is that even if the state took all the donated cash instead of charities, there would still be a huge gap between state spending and state revenues. This a very simple question – should the state get the money or should a charity – either way the rich person gives it away. How you answer such a question will say something about what sort of society you want to live in.  Should a rich person be made to give more to the state, or encouraged to give more to a good cause by offering tax relief to the charity?

 

            Part of the planned recovery of the UK  economy from the recession, credit crunch and over extended public sector is forecast to come from an export boom. Yesterday’s figures for March were disappointing, but they are just one month’s figures. They show a fall  in exports of goods from January to February, a rise of £1 billion in the overall deficit, with exports of services still yielding a very handy £5.4 billion surplus.

           Within the goods export figures, the weakeness was greater with the rest of the world than with the rest of the EU, despite the gathering economic weakness on the continent.  What more should be done to improve the position?

            The Prime Minister and other leading Ministers are well aware of the need to improve the UK’s export performance to the faster growing parts of the world. They realise that the EU market is going to be stagnant at best for some time to come, given the obvious stresses in the Euro and the policies of mutual deflation being pursued there. They are hopping on to planes to take senior business people off to Asian, Middle Eastern  and Latin American destinations, and  doing their bit as super salesmen where government can make a difference or is expected to be in support.

             Meanwhile, back home, it is taking time to create  the extra factory output needed when the UK does have a success on its hands. Consider the case of Jaguar/Land Rover. Last year they launched an attractive new vehicle, the Range Rover Evoque. It was clear from the pre launch expressions of interest, and from the early reviews and orders, that this was going to be a big hit. Now there are  frustrated UK buyers, told to wait six months for delivery, now facing a minimum of nine months wait for their vehicle. It is taking time  to crank up production to the levels needed to satisfy buoyant home and export demand. Home demand may in part be import saving, as the prospective purchasers may otherwise  opt for a foreign made vehicle.

               UK manufacturing is restricted in output when it has popular products. It takes time to get planning permission, to recruit and train a good workforce, to negotiate all the regulatory hurdles, if you can obtain the capital  needed to establish the larger plant.  Meanwhile energy intensive business is under pressure from the high energy costs that a UK and EU base entail compared to US and emerging market competititors. The government is trying to abate the high prices for the largest users of energy through subsidy, but energy cost remains an obstacle to successful competitive manufacturing in the UK. it needs instead to trigger more energy developments, and to pursue a policy of cheaper energy instead of interfering with the market in a way designed to raise prices.

 

 

 

The Governing law

 

Changing a currency entails dealings with several  jurisdictions depending on the transaction or agreement.  There are broadly four categories we need to consider. There are agreements and contracts within the country leaving the Euro. There are contracts and agreements between people and companies in the exit country and people and companies elsewhere in the Euro zone. There are agreements and contracts between people or companies in the exit country, and people and companies outside the Euro zone. There are contracts and agreements between people and companies outside the exit country using the Euro for their own purposes.

 

Contracts and agreements between people and companies within the exit country.

 

These contracts and agreements can be changed by domestic law in the exit country. If the recommendation is accepted that these should be changed automatically into new currency contracts and agreements, the exit state needs to pass the relevant law making it clear this has to happen.

It would be wise in the new law requiring this to deal with the issue of whether adversely affected parties could appeal to European jurisdiction against the change. The domestic law could include a clause pointing out that the exit country has now become an EU country with a derogation over belonging to the Euro. It could also explicitly suspend appeal on these matters to the ECJ. This could be buttressed by a decision of the EU to say that the EU approves of the decision to convert these contracts into the new currency, making an appeal futile or impossible.

 

Contracts and agreements between people and companies within the exit country and people and companies within the rest of the EU

 

This is a more difficult set of cases, if the decision is taken to convert these into the new currency as well. Lenders from other EU countries will lose from devaluation, though borrowers will of course benefit.  Unless express legal action is taken there could be law suits by losers from outside the country complaining about the compulsory conversion of their contract.

If the decision is taken to proceed with compulsory conversion of these contracts it would be wise to change EU law expressly and accordingly. The EU could pass a regulation  denying redress to individuals and corporations who had lost money as  a result of the compulsory switching of their assets to a different currency.

 

Contracts and agreements between people and companies within the exit country and people and companies from outside the EU

 

Varying these contracts would be an assertion of extra territorial powers, which might be going too far in the circumstances. The easiest option is to leave these contracts and agreements in Euros, as the Euro survives as a trading currency if one or a few countries leave it.

 

The EU did of course assert such jurisdiction when it established the Euro. By destroying big trading currencies like the DM and the French franc it forced conversion of contracts and agreements. It got away with it, without a big legal challenge to its chosen course of action.  Were the EU to decide to abandon the Euro and to return all countries to their own currencies, then it would have to take a similar legal risk to the risk it ran when establishing the currency. There would be limited point in people challenging the decision, as the Euro would cease to exist, making enforcement of the Euro contracts impossible.

 

The decision could be taken to convert all these contracts into new currency. Individual contracts might be exempted, depending on the governing law determining the contract. It would be a matter for individual negotiation and decision in the light of the general policy and the governing law in each case. The author has ascertained that the US might accept such assertion of power over US nationals  if it were endorsed and supported by the IMF.  It is recommended that the EU does not seek to assert jurisdiction on non EU individuals and companies  if presiding over limited exits from the zone.

 

Contracts and agreements between people and companies outside the exit country in Euros.

 

In the circumstances where the Euro continues as a main currency, it would be best to leave all these contracts in Euros.  Whilst some of them relate to assets and liabilities within the exit country, neither the EU nor the exit country government have clear powers over the contracting parties. It would seem to be a needless complication to try to assert power to convert against the wishes of one or more of the contracting parties. They might decide to do so for their own reasons, but that can be left to private negotiation.

 

Contracts between people and companies in countries remaining in the Euro area

 

There can be a genuine choice of options here. The EU as a whole would have the legal clout to enforce compulsory conversion of contracts into the new currency. There would, however, be no pressing need to do so, as the contracting parties would still be working on most of their other budget matters in Euros and may well have Euro streams of revenue.

There is a case for the compulsory conversion of Euro contracts relating wholly to exit country assets and liabilities into the new currency. There is also a case for leaving it to individual negotiation. For the sake of simplicity  I recommend not seeking compulsory conversion.