Some of you have complained about the idea of progressive taxation, some about the use of the word to describe a system which takes more from the rich than from the poor. I used the word because it is the term commonly used to describe tax systems which take more from those with more income and wealth. The alternative is poll taxeor fixed per hominem taxes. Some argue consumption taxes are “regressive”, hitting those on low incomes more. Yet if you look at VAT in the UK, because items like food are exempted, the rich pay proportionately more VAT as well as Income Tax, as all luxuries attract the full rate tax.

             Some of you suggest a flat tax. This is still a tax which taxes the rich considerably more than the poor. If person A is on £20,000 a year, and the flat tax is 20% with the first £10,000 of income tax free, they pay just £2000 of tax, or 10%.  Someone on £100,000 of income pays £18,000, or nine times the amount of the person on the lower income, at 18%.  When Mr Osborne said he liked flat taxes, it still left him supporting the general notion that that the rich should pay a lot more than those on low incomes.

             The June 2010 Red Book set out illustrations of how progressive the current UK system is. A family with one child on an income of £10,000 a year receives  in 2011-12 £6150 from the state  in tax credits after allowing for income tax and National Insurance. Someone on £20,000 a year pays a net  £1800,  on £50,000 a year pays  £14,405, and on £100,000 a year £35,405. The person on £100,000 a year pays almost twenty times what someone on £20,000 a year pays, if they have one  child.  

             Recent budgets have increased the tax on the higher earners, and increased the net payments from the state to lower earners. The top decile of earners have been asked to pay £1600 a year more on average as part of the budget measures to curb the deficit.

            In the March 2011 Red Book the Treasury gave their latest numbers on overall contributions to the state or drawings from  the state. These were based on 2008-9 figures, so the latest would give more to the low income groups and take more from the high income groups. They showed that the top 10% of income earners contributed  around a net £30,000 a year on average, the next 10% around £18,000 a year and the third  from top decile around  £14,000. The bottom three deciles of income recipients  all received money from the state, with the second lowest income group getting most at around  £3000 a year. These figures show benefits received minus all direct and indirect taxes.

             I would be interested to hear views on whether this is fair?  How progressive would you like the system to be?  How progressive can it afford to be, without discouraging people from work or from risk taking?

There has been much sound and fury but little progress in Euroland in the last few days. Far from them saving the Euro, they agreed to differ on some things, and agreed to delay on others. We were told the Uk was isolated, yet most of the nine non Euro members have reservations and none have finally signed up to the package.

At the end of the long meeting of Heads of government in the EU in Brussels last week, the Heads of State or government of Euroland issued a statement.  They agreed a “new fiscal compact and strengthened economic policy coordination”, and “the development of our stabilisation tools to face short term challenges.”

The Statement was not also made by the nine non Euro members of the EU. We were told verbally they were in support but they did not put their names to it.   At the end of the Statement it says  these other countries “indicated the possibility to take part in this process after consulting their Parliaments where appropriate”. That is very weak language, and implies the nine did not sign up to the whole agenda of the 17, and decided  to play it long to gauge Parliamentary and public reaction at home.  It is not quite the UK isolated story we read about. It appears that several countries outside the Euro have reservations about agreeing to major controls on their budgets by the rest of the EU.

The aim of the agreement for the 17 is to create a stronger central economic government for the whole area.  They wish to build on the Stability and Growth Pact, the European Semester (budget approval and control), the new macro-economic imbalances procedure and the Euro Plus pact.  They want these  rules to be more legally binding on the 17 than the old rules proved to be.

At the heart of the new elements in the proposal is the fiscal rule. Each state is to run a balanced budget. They are not allowed to run a structural deficit of more than 0.5%. Were this rule to be applied to the UK today, it would mean additional spending cuts and tax rises to the tune of £60 billion a year to eliminate most of the structural deficit. There would also need to be additional cuts or tax rises for countries with an overall debt higher than 60% of GDP.  Any country failing to produce a budget which conformed with these rules would be required to produce an alternative, and could face sanctions.  Again, if this applied to the UK it would mean additional cuts or tax rises to start to reduce the debt.

The Statement had less to say on stabilisation.  They say they will rapidly deploy the leveraging of the European Financial Stability Facility. They do not explain how they will borrow the money for it.  They wish to speed up the use of the new ESM to July 2012, still a long seven months away. They say they will pay more financial resources into their funds, without specifying how much by whom and when.

So where do we go from here?  The Euroland area countries have decided to adopt these new proposals in March or at an earlier date. They still want them to be incorporated into Treaties of the whole EU, but clearly this is not possible all the time the UK and other members refuse or  want to discuss and delay. The markets will judge the package by how much money it puts on the table to deal with the large balance of payments imbalances, and the state borrowing demands in the weaker countries. Little progress was made on this. When it come to completing a fiscal union, there was modest progress by the 17, but much more work to be done on what legal framework can be used, how these rules can be enforced, and how you get from the high debts and deficits today to where they say they want to be.

This article was published in collaboration with PublicServiceEurope.com.

               The bad tempered EU meeting last week did little to save the Euro. We still do not know how much money they will have to rescue troubled countries, or to intevene in wobbly bond  markets.

               Meanwhile, the non Euro members have seen the text watered down about their possible involvement in the new budgetary controls envisaged in a new Treaty. There was clearly less agreement amongst the 26 than the spinners said. The socialist candidate for French President wants the whole thing re negotiated. There is going to be plenty of time to do so. There will be months of argument ahead on how much new power the EU should have over budgets that used to be set by democratically elected governments.

                     I cannot believe the Times story today will come true that the UK is seriously thinking of concessions to try to stitch this all back together. The public has been misled by suggestions  this “agreement”  can save the Euro, and into thinking all the other 26 now agree. It turns out there is a lot of arguing to do before they have a new legal agreement for the 17 plus, with the 9 not so keen. The UK is well out of it.

                    They are embarked on a long process to build a new hospital for the Euro, when what they need is a better lfie support system for the Euro’s ailments in the bond markets today.

              We spend much of our time on this site discussing policies that could promote more growth, more jobs and greater prosperity.  Most agree that a growing economy can offer more opportunities, and can lift propsects and living standards for many.

               There is a considerable effort put into the alternative debate, the discussion of how you should distribute all the income and wealth we do have, whatever the growth rate.  The politics of fair shares is especially popular at times of low growth or no growth. All elected MPs in the UK accept that there should be  a progressive tax system, which takes more tax from the rich and less tax from the poor. All accept there should be a benefit system to give more state money to those who are ill, disabled, elderly, or unable to find a job.

             I wish to explore this issue a bit more this week. I will be commenting on the degree of progression in our tax system, and the state of our benefit system. We need to look at Mr Duncan Smith’s proposed welfare reforms to make work more worthwhile. We need to ask if it was right to raise out of work benefits by inflation, when wages are rising by less.

                 I would be interested today in  hearing from you about how progressive a system you think we should have in place. How much more tax should someone on £100,000 a year pay compared with someone on £30,000? Should benefits only be paid to people on lower incomes? If so what should the cut off levels be? Or should some benefits go to all taxpayers as of right?  Is mean testing the fairest way of limiting taxpayer bills, or should the prudent on moderate incomes also be able to receive money from the state? Do means tested benefits send perverse incentives? Does it make any sense to pay universal benefits, so millionaires end up with payments? Should bankers pay more tax on their bonuses than footballers pay on their incomes?

           Today I will give my full support to David Cameron for using the UK veto. His requests were modest in return for accepting a new Treaty for the 27. Indeed I thought his offer was too generous, and I would have been very unhappy if France had accepted and we were lumbered with a new Treaty.The French did not want to do a deal. He had no alternative but to say “No” to their proposals.

                   62% of the public agree, and only 19% disagree. Most of you have written  in support. A few are trying to make out he did not veto the Franco-German proposals. Everyone else knows he did, and the French clearly behaved in a way which shows he did. Please try to keep your comments sensible.  UKIP could occasionally say “Well done” instead of carping at everything. They would have had something to complain about if a deal had been done on bad terms.

                It is said to be  axiomatic that the UK needs to be in the EU in order to be in the single market.  It is implied we would lose all 3 million jobs said to be dependent on exports if we fell out with the EU. We are told that business would never forgive us if we lost influence over the rules and regulations affecting business and trade.

             As someone who has in the past led industrial businesses exporting from the UK, these comments seem very unrealistic. When you export to a foreign country you expect to have to comply with their rules and with the customer requirements.  The UK has no special influence over the rules and laws in Asia, Latin America, North America or Africa, yet we export substantial amounts to those places. The UK exports far more goods and services outside the EU than within it, and even in the case of physical goods the true total is around 60% of our exports go to non EU territories. It shows that having a say over the rules is not crucial to winning an order. Nor would France and Germany want to lose the very profitable trade they enjoy with us if the UK demanded different arrangements with the EU.

             The danger for us as the  EU tries to become a unitary highly regulated state is that the EU imposes rules and regulations on us which as a member we will have to follow at all times. This means applying their expensive   demands even when  making for export to non EU countries, or for the home market. Our competitors outside the EU do not face similar impositions. Whilst business people put up with regulatory demands in important customer countries where all competing there have to comply, they do not like us facing higher costs and controls when exporting to parts of the world where no such similar rules are enforced.

           The Uk needs a new relationship with the emerging Euroland country on the continent. We would like arrangements to facilitate trade, and allow friendly collaboration where it makes mutual sense. The Lib Dems seem unhappy about the use of the veto, and will doubtless try to prevent  a move towards the renegotiation we now need, or to a referendum so the UK electors can express their view.  They should look at the polling. The Uk electorate is keen to have a looser and more worthwhile relationship with the continent. The Commons may still have a federalist majority, but this is wholly unrepresentative of the public view on the question of the EU. I doubt the Lib Dems want an election anytime soon.

           I will turn to other topics tomorrow, but the EU has been the dominant news issue for the whole week-end.

          The veto of a new EU Treaty was necessary ground clearing.

          It has confirmed that the UK is different from the continent. We are not now in a two speed Europe . The UK has no intention of joining a later train to European integration. Changing the ever popular EU analogy, the UK is on the by-pass, to avoid the likely  Euro crash on the main EU street.

          Today we are still in many ways  in the same position as we were in last week. We are out of the Euro. As a result we have never been at the “top table” discussing high finance and Euro matters, because it does not apply to us. This is not some new exclusion crisis. We have not been thrown out of the room by Mr Cameron’s actions. We were out of the room thanks to Mr Blair and Mr Brown sensibly keeping us out.

           We now have confirmed what many of us feared. Our EU partners are out to tax, regulate and damage our financial services industry, just as they have done to our fishing industry, our alternative remedies businesses and many others.

           We have sidestepped much of the bail out cash and action needed for the Euro, which is good news. The current government has been better on this than its predecessor, who wanted us to pay our full “share”.

           In at least one important respect we are in better position today than last week. The EU now knows that this Prime Minister can say “No”. The EU has got used to dealing with weak previous governments under Blair and Brown, who always were willing in the end to rub out a red line or allow a UK national interest to be damaged in the interests of a deal. They accepted three new treaties which transferred major powers from the UK to the EU.  Even John Major, who achieved the crucial opt outs from the social chapter and the Euro itself, was not willing in the end to veto a whole Treaty. The EU now knows that this PM might veto, and could veto again. That changes the game a bit.

          So far so good. Now the UK needs to define its national interest and tackle the immediate problems where the EU agenda does not suit us. The Tobin tax is presumably history, as the veto can apply to that as well. I doubt Germany and France will rush one in for Frankfurt and Paris, though London would be delighted if they did. If they believe in it, why not do it?

           The EU financial regulations are a growing reality. The UK will need to push harder for working versions that allow good successful business to remain somewhere within the EU. Many other business and environmental regulations harm EU competitiveness, costing us jobs.

          The Uk should present a constructive plan for jobs and growth which includes repeals and amendments of EU regulations. In an ideal world the rest of the EU would see they need to make changes with us, as all of the EU has a jobs problem. If they will not, the UK needs to start negotiations on what it needs in order to have a sustained growth and recovery programme at home.

           Mr Cameron did the right thing to veto the Treaty for 27. It was clear there was no wish on the part of our partners in the EU to take our growing frustration with the drift of the EU seriously, no wish to help the UK at all. Our demands were modest. They were  for the EU to interfere with us less. They were not demands that cost money or  tried to change the way anything works on the continent. Many people in the UK will remember how they treated us, for what comes next. I am glad the extensive lobbying and arguing by the Conservative Parliamentary party before the meeting helped shape the debate and influenced the decision.

          We always need to remember no single party won a majority in this Parliament. Recently Conservatives have been very frustrated about the EU issue, making this clear through various rebellions on votes for EU measures, through the vote for a referendum, and through various speeches, articles and questions. The feeling against current EU policy with the backdrop of the Merkel German Europe plan is stronger today than at the time of the referendum rebellion. Recently elected Conservative MPs are being radicalised by events, and pressurised by Conservative members and many non party constituents, into speaking out for  UK democracy.

            The government can often ignore rebellions as it has a large inbuilt majority. So far it has not mattered if  30,40 or even 81 Conservative MPs defy the whips on the EU, because Labour has always been there to swell the government’s vote, or has abstained, leaving the government with enough votes  to do the business.

          Mr Miliband finds himself  with choices. He can continue his party’s stance of the last fifteen years, to be a federalist party and loyally support the Coalition government on EU matters. EU measures can then pass the House easily.

             Alternatively, Mr Miliband can decide that Labour too has had more than enough European integration, and that his party is now going to vote against the Merkel scheme for a German Europe and whatever else the EU has in store for us. If he does this the Coalition is wise to accept they have no majority for any EU measure, unless they have Mr Miliband’s assurance in advance. The numbers of Conservative rebels will doubtless wax and wane, but there is now a hard core of at least 45 who are likely to vote against unsuitable EU measures, meaning the Coalition needs some Labour support or help should they want to put through more EU decisions.

             Appeals for party loyalty to get an EU agenda through are unlikely to  work. When Conservatives  disgree within the  party about health reform, or benefit upratings, or tax rates, or railway lines, there can be give and take. Those who are on the losing side may come to accept the view of the leadership or the majority, safe in the knowledge that the decision can be revisited, the issue rejoined, at a later date. You might decide to be loyal today, thinking you might win tomorrow. You might genuinely be swayed by colleagues.  The EU issue is altogether more toxic because if you lose something  you lose it  for a long time. The scheme is a ratchet. It goes to the heart of whether our country, people and Parliament are allowed to make the decisions at all. That is why it does not permit the same kind of compromises or understandings that normal domestic politics thrives on.

              It is these points which mean Mr Cameron was very wise to refuse to sign a new Treaty yesterday. It would need a Parliamentary majority to put it through. Conservatives would be most reluctant to help.

                Now the UK is confirmed as being out of the room on Euro matters – as it was thanks to Labour’s wise decision to continue with the Euro opt out Conservatives had obtained – the Uk government needs to turn its mind and energy to negotiating a new relationship with the EU. What some thought worked with a grouping of 27 does not work once 17 decide to press on more rapidly towards full political and economic union. It is not Mr Cameron’s decision to veto a Treaty that has created this. It was created by the thoroughly different aims of the Euro countries and the UK. The Euro countries want to press on to a be in a coutnry called the EU. The UK has always said it want to be in a common or single market. It is fast approaching the time to sort out this huge difference.

           The “debate” about the EU and Euro remains higgled by misunderstandings  that serious people peddle out. Let’s just deal with a few of them.

1. If the UK makes a stand or declines to support the Merkel plan, we could lose the 10% of our National Income based on exports to the EU.

Response: Whatever happens at summits, Germany will still want to sell us cars and France will still want to sell us wine. The UK will still be selling products and services in the EU, under existing EU rules and WTO controls. That does not change, whatever we do or say  on the architecture of the EU and Euro.

2. The Merkel plan for greater fiscal controls will save the Euro.

Response:

The Merkel scheme does not suddenly  shrink the Greek deficit, or miraculously refinance the large Italian debt. Printing money could buy them a bit of time, but is not conditional on changes to rules and Treaties. Nothing in the Merkel plan solves the twin probems of too much debt and too little competitiveness in the problem countries.

3. If the UK does not agree with the Merkel Plan, we lose our influence in the EU!

Response: If we capitulate to the Merkel Plan it shows we already have no influence in the EU.The UK has imposed on it vast swathes of legislation and regulation we would not choose for ourselves. We do not have the influence to change or repeal this. That is why we need to negotiate a new relationship with the EU, that does allow us to make more of our own decisions about how we are governed.

4. The UK must do nothing to damage the Euro. Break up would be a disaster.

Response: Orderly but rapid break up would be the least cost option. It would liberate the countries allowed out, and permit them to adjust their competitiveness by a devaluation which would be swift and easier to sell than large wage cuts. There is  no foundation to the proposition that the EU would lose 10-50% of its output if they changed currencies. To my knowledge 87 countries have left currency unions since 1945. In most cases they have prospered more after exit. The successful break up of the 16 member rouble bloc could be the model.

            Mr Cameron has a simple choice. He can either go along with the plans for a German Europe, and be hailed by federalists as a good European, or he can call their bluff and speak for the UK.

             The Merkel plan will not save the Euro. It does nothing to tackle the underlying problems of too much government borrowing, and too little competitiveness. It increases the gap between the governed and the governing.  Fining countries who have no money is ludicrous. Refusal to print the cash hastens  market retribution. If they decide to print they can buy time, but that has nothing to do with a new Treaty.

             Mr Cameron needs to say the UK needs a new relationship based on trade and friendship, and refuse to sign anything without agreement to that. He can offer them the ultimate solution for the UK problem. The UK can opt out of the intrusive government in return for letting them go ahead.  If he sits in silence, or presses for a small concession, he will suit neither the home audience nor please Mrs Merkel. Looking at yesterday’s Question Time performance of many Conservatives,  he only has a majority for Merkel”s Europe   if Labour supports him.

              The problem in Euroland is not just a problem of a few countries which are no longer competitive. There is a problem of too much government debt. The same issue haunts the US, where there is a poltical war over how to get the deficit down. The UK now has a government which says its main purpose is to eliminate the deficit.

             The problem of the west rests in a series of countries that could properly be called DOGS – Democratic overspending government sovereigns. In Euroland these dogs are in trouble, as well as the Pigs.  The pressures of democracy have led politicians of many different parties and persuasions to offer both higher public spending and lower taxes than they need to cover the spending  in the pursuit of electoral success and wider popularity. They have decided they can get away with this, as they have been able to borrow large sums to cover the gap. In more recent years some have even argued that borrowing more is essential to sustain demand or to lift their economies out of the slump their boom/bust policies created.

              In Euroland countries are discovering there are distinct limits to how much markets will lend to governments. As interest rates rise, so countries become unwilling to borrow. They seek subsidised credit from elsewhere. The US and the UK during the recent deep recession turned to printing money. This was advertised as a policy to augment demand at a time of falling output, but it became a convenient way of sustaining very high public borrowings at low interest rates. The new money created was used to buy government bonds to keep the government borrowing rate down.

             Euroland is having an internal row about whether it too should extend the eternal credit approach to public budgets by printing more, or whether it just needs to get tougher to control deficits. The US and UK are pledged to cut deficits by raising more in tax and reducing the increase in spending, but meanwhile print some more money.

           When you look across the world at the rise of China and India, you see that the west does not have a sufficiently competitive model for modern conditions. Parts of western business and economic activity are still world beating, and earn their producers good incomes in the global market. The more western economies rely on state activity and subsidy, the narrower the base of competitive activity, and the more money the country needs to borrow to sustain its relatively high living standards.

          Euroland needs to worry not just about the Pigs but also about the Euroland  Dogs. German cars, French food and wine, and Italian fashion  may still be world beaters, but in too many areas now the production and the incomes are moving to the east from the west. That is why the west needs to change its model and get on top of its debts.