Author: johnredwood

It will soon be time for me to put in my suggestions for the July 8th budget. I would therefore welcome your comments on what you would like to see.

So far I have said I want to see progress on raising the threshold for Income Tax and raising the threshold for the 40% rate of tax, as promised in the Conservative Manifesto.

I also want to see the rich contribute more. To bring this about I suggest bringing Gordon Brown’s rate of CGT and top rate of Income tax back in, as I think he had got it right in working out optimum rates for maximising tax from the rich. At 18% he collected much more CGT than we are currently doing at 28%. Many rich people now simply defer taking taxable profits or find offsetting losses to take with the rate at 28%. The rate of 45% on income is bringing in substantially more tax revenue than 50% did, and I would expect 40% to bring in more.

Mr Osborne also needs to explain his timetable and approach to Inheritance Tax. The detail on the extra tax free amount promised against a family home will require careful drafting and thought.

As all political parties now understand they need to speak up for strivers and hard workers as well as for the dispossessed and down, they need to grasp that means not just those on modest incomes but also those higher up the income scale. There is less jealousy around than political commentators imagine. Every higher earner has parents or children, brothers and sisters, friends and other relatives who earn less but who not resent their success. Someone may be earning £30,000 a year today, but still think it right to raise the 40% threshold to £50,000, as they hope to be earning that in the future or thin k someone they know or are related to might.

Mr Cameron has reaffirmed his promise to get migration down to tens of thousands, from the net figure of more than 300,000 currently. It is a popular pledge, but it does mean he needs to get control over our borders and welfare system from the EU. I look forward to seeing more of the detail of what he wants for the UK.

The mood has changed in the rest of the EU. Now they know there will be a referendum in the UK on EU membership, many are desperate to keep us in. They want us to carry on sending them a large financial contribution every year. They want to carry on exporting large quantities to us, which I can assure them is not in doubt even if we do leave. They say they value the UK’s general political contribution to the EU’s presence in the world, though they do not seem to want to implement anything like the UK’s vision of what the EU should do, and how much less it should boss us around.

The good news is the bulk of the EU is in the Euro and needs to make more progress to its political union which we cannot possibly join. This means we need to define a new relationship, where they are governed more from Brussels and we are governed less. We also need to call a halt to the black propaganda of some, saying that a Brexit would be a disaster for us and a catastrophe for them. Brexit should mean a freer more prosperous UK, and also mean the rest of the EU can make more rapid progress to the transfer union, common taxation, common budgets and the rest that they need to make a success of their currency. It means the UK could negotiate its own trade treaties with the faster growing parts of the world, decide who to let in to our country, have cheaper energy, and regulate in ways that help people and business.

Mr Cameron has said he wants more control for our national Parliament, has said borders and welfare should be under out control and has reaffirmed his migration target which requires that. Let’s see what he now proposes in more detail to implement a vision of national Parliaments as the main decision takers, as set out in the Bloomberg speech.

The Chancellor has said he wishes to improve productivity as part of his drive for more jobs and higher living standards. He wants to exploit shale gas, improve the road and rail networks, relax planning restrictions to allow more building and investment, cut the costs of doing business by reducing regulation, improve education and training, and boost childcare.

The aim is a good one. Rising living standards require more people to be in work, more people to improve their qualifications and skills to command higher wages, more people working for themselves then going on to grow a small business with employees, and more efficient high quality public service to back all this up.

I want him to work with the Transport Secretary to improve the road networks. There is too much congestion, often resulting from poor junction design and from bottlenecks. Limited spending on allowing Councils to widen approaches to junctions to allow lane segregation of turning traffic from other traffic, more roundabouts in place of traffic lights, better phasing of traffic lights with traffic sensors and more main road priority,more bridges over railway lines and rivers would all help ease traffic jams and cut delays and costs for business and individuals. The government has embarked on raising motorway capacity by using hard shoulders as additional lanes, which is the quickest and cheapest fix to get more capacity. It now needs to address lack of capacity on the principal supporting A roads.

The government has an ambitious programme to increase the number of apprenticeships, and to raise the numbers of people gaining good quality vocational qualifications. The continuation of school reform is an important part of this process, ensuring that more pupils have sufficient skill at maths and English to be able to do the more advanced vocational courses.

The UK wishes to remain as a first world country with high living standards for all. Most people accept that it should always be worthwhile to work, and that those who work hardest and smartest should be better rewarded for their trouble. It is government’s task to enable many more to do well at school, to gain qualifications that give them access to better paid jobs, or to encourage them to work for themselves and set up businesses.

I have sought before to explain how the Barnett formula works. It is the way of determining increases in Scotland’s bloc grant money each year, based on the increases in England for similar programmes. Those who think the debate is simply whether you are pro or anti Barnett are misjudging the issue.

The bigger issue is what is the base grant? Someone has to decide which items of spending are devolved to Scotland that need bloc grant. They now also will need to decide what reduction you make to the bloc grant to allow for Scotland directly setting her own tax rates and collecting her own revenues for some taxes. Is the own tax simply going to be a general deduction from bloc grant expenditure? Are some items of spending going to be taken from the bloc grant and allocated to own taxation? Those methods produce different answers.

Presumably a fair settlement for the Union as a whole has to allow Scotland to spend extra if she raises extra from setting higher or lower tax rates that raise more revenue.If this does not happen what is the point of more fiscal independence. I have no problem with Scotland wishing to raise more tax to spend more. It will be an interesting experiment. Conversely Scotland will have to accept that if she chooses to raise or lower rates in ways which cut the revenue, that should mean Scotland spends less. England will not accept an asymmetric system, where England pays what Scotland does not raise.

The disadvantage of hypothecating particular spending to Scottish tax is they will then lose their right to more money from England to support those services, which they enjoy at the moment. The advantage is the other services will be fully underwritten by the rest of the UK. There is a justice in some part of the Scottish budget giving Scotland full control over both the spend and the amount of tax they collect to pay for that part.

The other route is to deduct the present amount of tax revenue raised in Scotland from the taxes that are being devolved, and to increase that amount annually by the amount those tax revenues go up in the rest of the UK – a new Barnet formula for revenue.This works fine unless and until the rest of the UK changes the rates or does something structural to the tax, when the grant deduction would need to be recalculated somehow. There might be other indices which could be used to approximate the tax revenue assumed in the calculation – e.g. some factor of GDP growth which was based on the past buoyancy of that tax.

Your thoughts would be appreciated.

The one thing which worked in the referendum campaign to persuade more Scots to vote for the union was the united refusal of the main parties to allow Scotland to stay in the sterling currency union if she wanted to be independent. It was a defining moment which meant I thought the union was safe. I saw no need to go on and make a better offer on devolved powers, but others thought otherwise.

I regularly pointed out the contradiction of a party claiming to want to create an independent country, at the same time saying they needed to share a currency with its much larger neighbour, a neighbour it otherwise wished to leave. The fact that the SNP could not bring themselves to say they would have their own currency or join the Euro showed that they judged Scots voters wish to remain part of the transfer and mutual insurance system that is the UK state and sterling union. Their cry was make me independent, but also still dependent if need arises.

Party leaders have now latched on to the argument that a single country with a single currency is a transfer union, switching money from rich parts to poorer parts, and insuring parts of the country against economic adversity. If Scotland’s oil industry is riding high and generating a lot of taxable income, the rest of the UK should share that. If Scotland’s oil industry is in sharp decline, abetted by a collapse of oil prices, then Scotland should expect the rest of the UK to cushion the blow. Scotland has the same benefit rates and entitlements as the rest of the Union, whether oil tax is high or low, so they are underwritten by general UK tax revenues.

Into this largely happy transfer and currency union the SNP have injected the idea of fiscal independence. They want to decide how much income tax to raise, how to tax property transactions, how to tax air travel and much else. The logic of this move is to arrive at a place where Scotland spends what Scotland raises from her own economy.

You can do this in a currency union, though the Union Parliament would still need to control Scottish total borrowing as that will be a claim on the currency zone as a whole. It could become difficult if the Scots chose to set tax rates that either made Scotland very attractive for jobs and business, or were very hostile to jobs and business, as that would distort the labour market where there is free movement of labour. It would have implications for any common welfare system still in place.

Opinion amongst politicians and the public is divided over whether fiscal independence within a currency union is a good thing. As a result we are moving to a compromise system, where the Scots will enjoy some rights to raise their own taxes, but will still also draw on general UK tax revenue to pay some of their bills. Reaching a political compromise on this at a high level of generality was relatively easy. Making it work in practice is more difficult. The first requirement will be to draw up a new grant regime to pay for the items that are not paid for directly out of Scottish taxation. I will consider some of the complexities in a subsequent post.

In the run up to the General Election Conservatives and UKIP candidates and supporters were fighting each other for the seats available in Parliament. That process required both sides to stress their differences as part of the cut and thrust of democratic debate. That’s democracy.  

However, in the months ahead we need to prepare for an even more important vote, the vote of the UK people on whether to stay in the EU or not. To win that vote for Out if that becomes necessary  will require all Eurosceptics, of whatever party and of greater or lesser conviction, to unite. Subject to what the Prime Minister manages to agree with other EU members, many Conservatives and many UKIP supporters may well find themselves on the same side of the referendum argument.  If Mr Cameron cannot persuade the other members of the EU that the UK needs a new relationship with the Euro area which restores our domestic democratic control over the things that matter, including welfare and borders, then we need to  urge the public to vote to leave the present treaties. A vote to leave would  trigger a negotiation of a trade based relationship which the rest of the EU will of course wish  to have, given how much they export to us.

In order to win the referendum for Out, if it comes to that, it will be essential that all those who think the EU has too much power and who think the present relationship unsatisfactory to unite around the strong proposition that we  leave. UKIP will need to help Conservatives persuade those who feel much less strongly about the matter than UKIP itself, which will require the right tone of voice, a positive message about how life can better outside the EU, and a willingness to compromise with those who are not strong believers in Out.It will also be easier to persuade those with less sure convictions on this topic than UKIP members if the Prime Minister is seen to have tried to get a decent deal for the UK, only to be rebuffed by other EU states.

It is not for me or others outside UKIP to say who should lead you or how you should be led. That is a matter for you and your party. It is for me, someone who has campaigned long and hard for the restoration of democracy in the UK by  getting back control over important decisions from the EU, to urge you all to have the new task of the referendum in mind when you make your decisions.

Mr Carswell left the Conservative party for UKIP to make a point. I did not agree with him then, as I hoped the Conservative party was close to winning a majority in the Commons so we could vote through a referendum which  we all  want. I felt Mr Carswell’s decision made that more difficult. Fortunately Conservatives in Parliament can  now offer that vote. Mr Carswell urges his new party to work tirelessly for the referendum in 2016/17, and points out it will require  a positive, optimistic friendly tone of voice to carry the day. We will need to show how the UK can be more democratic, more vibrant and more successful outside the Treaties. It is important to recognise we need a new relationship based on trade, friendship and political co-ooperation.

Yours sincerely

John Redwood

I do not want the UK to play New York State to Euroland’s USA. I would rather we played Canada. The Euro area is rushing towards political union. It has to take more powers to the centre, and redistribute tax revenue more fairly around the zone. The UK does not wish to join that. That is why we need to negotiate a new relationship, based on trade and friendship, that excludes us from political union

I have one simple requirement for the negotiation of a new relationship. I wish to restore the sovereignty of  UK voters, so that their UK Parliament can make the important decisions they want.

The Prime Minister rightly said in his Bloomberg address that national parliaments are the fount of authority and the bodies to whom government must be accountable. I agree.

I do not favour a negotiation based on a list of items where we currently do not like EU laws and common decisions. Even if we could get all of the worst ones right this time, there will be occasions in the future when existing EU laws prevent us governing as the people wish.

Today people want us to restore control of our own borders, and reduce the numbers of new migrants to lower the pressure on homes and public services. In future it might be the EU’s dear energy policy, or their foreign or criminal justice policy that causes us trouble. In some case we have opt outs, and we have the right to veto future proposals. In other cases we do not. Our veto has been under remorseless erosion for many years.

Now is the time to build a new relationship based on trade, co-operation and a series of mutual agreements about things that cross borders. The rest of the EU will not want to damage their profitable trade with us. They might like to be free of our reluctance to sanction further deeper union.  There is a new relationship to be forged, as the Euro turns into full political union for its members.

We should restore our national democracy whilst they create their political and monetary union, based on benefit and tax transfers around it as they clearly  need. The UK will be part of the trade system but not part of the common government.

 

At its simplest productivity is the  value of output produced per hour or  per year by the average worker. The Bank of England is said to be worried because UK productivity is lower than the USA and some countries in the EU, and has not been going up as quickly as before the crash in recent years.

The Bank has struggled to explain why. Let me have a go to help them. It is not all bad news.

The first reason is the sharp decline of North Sea output – which is bad news. Oil production is one of the most productive types of activity as conventionally measured, as oil output has a high sales value, and uses relatively little labour to achieve it, once the wells and platforms are in place. The North Sea is now a province in sharp decline, so we have just lost a lot of highly productive output.

Pre the banking crash, the UK also had a lot of very  expensive banking and financial output. This too appeared to be achieved at very high levels of productivity, as each individual investment banker or trader could undertake very large turnover with modest supporting labour input. The fact that some of this output turned out after the event to be loss  making does not require the past productivity figures pre crisis to be rewritten, which are flattered by the apparent high turnover and profit announced at the time. Since the crash there has been a deliberate run down of bank balance sheets and activity levels, and the loss of some high end business to centres like Switzerland and Hong Kong where taxes are lower. This has also depressed UK productivity.

The third more positive reason UK productivity has fallen is the success of the UK economy in adding a lot of more labour intensive lower priced service sector activities to its high end manufacturing, commodity extraction and expensive service activities.  The French  barrister may go to the office and get a coffee from the workplace drinks dispenser. His UK equivalent may stop off for a coffee from a coffee shop produced in a labour intensive way by a barrista. The French may be more productive at getting their coffee, but the UK employs more people and produces a better served product in  this  example. UK shoppers  now expect a much higher proportion of cafe, pub and coffee shop space in their preferred retail centres, with a higher staff ratio for delivering the service.

To the extent that UK productivity has stagnated because we have added a lot of extra lower productivity labour intensive services, that is good news. It means we have much lower unemployment than Spain  or France. On OECD figures for 2012 (last I could find)  the UK generates $48.5 worth of output per hour worked, compared to $50 in Spain, $59.5 in France, $58.3 in Germany and $40.1 in Japan. The UK is just a little above the OECD average.

However, if you adjust these figures for the levels of unemployment, the  Spanish figure drops to $38.5, the French figure to $53 and the UK to $46, as by definition the unemployed are making no contribution to output but  do not get included in average productivity.

The Euro area as a whole has similar productivity to the UK. US productivity remains considerably higher than Europe’s. Norway has the highest of the Europeans, thanks to a large oil and gas sector. Switzerland is also high, with a large financial sector.

Raising output per hour is a good thing in most cases. The UK’s very average productivity figures tells us more about the new balance of our economy. It does not mean our best industrial companies are uncompetitive or themselves have poor productivity.