On Monday  I was spoilt for choice for a blog topic. I felt the continuing deaths of British soldiers in Afghanistan was of most immediate importance.  I was pleased to see  yesterday the Defence Secretary had to revise his answer to me and others over the protection of our troops. The US has wisely decided to ban all mixed patrols between NATO and Afghan forces. Some of us want the UK to go along with this.   It was one of the reassurances  Bob Stewart and I were seeking in both  Commons sessions. Just how long does it take to train Afghan police? Why can’t we give any additional  advice now from the base, and let them do the patrols?

                The topic I suspect many of you want to talk about is the question of exams. Mr Gove feels the GCSE is no longer fit for purpose. He dislikes the modular approach, the accent on coursework, and the lack of demanding exam questions in some papers. His critics think these  developments from the last couple of decades have been benign. They have helped more young people to gain  qualifications and give them more self worth.

                 As someone who underwent a  school and university education based entirely on competitive exams, with no coursework that counted towards the final grade, I have no personal difficulties with a system more heavily based on performance in final exams.  I do, however, understand that this method does not suit all people, and is not the only way to assess someone’s competence and learning.  In recent years I have worried more about the people who do not perform well in exam conditions. It was also notable that girls results improved  relative to boys as the educational establishment shifted from the grand final exam to more coursework based approaches.

               If you are studying English literature, does it help that you have to spend hours learning crucial quotes to illustrate points in essays on topics unknown, rather than being allowed to take the text in with you to use to write your critical appraisal? If you are  studying geography, should you need to remember many places and terrains or could referring to a map in the exam  be helpful? The balance between analysis, skill in arguing and problem solving, and memorising is a nice one to debate.

                  Being able to recall a topic and argue or analyse a problem or write well on an   essay subject are very useful skills to have. They are not , however, the only ones. There is a case to  be made for developing skill at researching a topic, drawing on a range of sources and producing a more considered piece.

                    However, there is one overwhelming problem with this latter approach which motivates Mr Gove. If you rely more on coursework, projects, longer submitted essays and the like, how can we be sure it was the work of the student? How much help is a willing teacher allowed to give? Aren’t their variations between schools and teachers over how much they put in to the student’s work?  Doesn’t a child with an able and engaged parent do better than a child without such help? Do we adjust for the very different family environments, where some children have study bedrooms, peace and quiet, and encouragement to use them, whilst others have no such thing? Shouldn’t a young person know and learn enough to be able to answer exam questions without assistance?

                          What is a fair test at 16? Indeed, why do we test at 16, when it is no longer the school leaving age in any meaningful sense? Are 16 year old tests a check to ensure the young people have the basic skills to go on to the next stage of their education? Or should it mainly be a leaving statement for those who wish to go off to apprenticeships and other practical training?

 

 

              A sovereign or state government can often borrow more cheaply than companies and individuals. There are two main reasons. The state, backed by police and the military, can demand people pay taxes so it can pay back its debts. A state can also print or create more money, to meet its bills, if more conventional and straightfoward methods fail.

                     Despite these powers sovereign states can and do sometimes renege directly on their debts, rather than doing it by inflation. This can happen if a state owes substantial sums to foreigners and finds its own currency slipping away, making the repayment of foreign debts too expensive. Even allowing for this, markets usually reckon sovereign debt is better quality than other debt, and give it a premium rating in many cases.

                        So called sovereign debt issued by Euro area countries is no longer  truly sovereign debt. These countries no longer have the backstop ability to print the money to meet their obligations in the way the US and Uk are currently doing.  It makes default more likely, as we have recently experienced in the case of Greece.

                       Whilst these states still have most of the normal powers to tax, the Euro area  intervenes more and more in how they tax and the extent to which they tax. There is a greater danger in the Euro area of a state losing the consent of its electors to the taxation, as resentment builds up against the Union imposed economic policies on that particular country.

                                    For these reasons I think markets should invent a new category of debt. Let us call them semi-sovereigns, or half sovereigns. They do not have the full range of sovereign powers. Their ratings should reflect this changed reality. This seems to have happened in the markets with debt from Ireland, Greece. Italy, Portugal and Spain, which sells at large discounts to most western truly sovereign debt.

                                    It is time to recategorise Euro area government debt. It is moving closer to regional and local government debt than to sovereign debt. The task of evaluating it is made more complex by the rapidly changing rules governing public spending , taxation, money printing and bond purchase in the Euro area.

 

 

 

Given the large sums government feels its must spend in the public sector, one option that is worth pursuing is to ensure non tax paying visitors pay their fair share towards it all.

I have been looking with some Parliamentary colleagues at ways we can ensure visitors pay for what they need and use from the UK public sector, just as we taxpayers do through our taxes.

One obvious area has been the way foreign hauliers do  not have to pay Vehicle Excise Duty to use our roads. They also often avoid diesel and petrol duty by filling up on the continent before and after travelling in the UK. I therefore welcome the government’s decision to introduce a new lorry user fee for our roads, and to rebate UK hauliers by cutting their VED to offset it. It is a neat way of ensuring the overseas lorry tax is not discriminatory and does not fall foul of EU rules. We called for a solution to the problem of penalty charges on UK businesses in the Competitiveness Review before the election, pointing out that UK hauliers pay a lot more tax than some of their continental competitors.

If people come to the UK from overseas from a country without reciprocal free health service rights, they should be invoiced for any health care they need whilst with us. A Ten  Minute Rule Bill was proposed last week and passed its second reading without division, as a prompt to the government to get on with ensuring fair charging for non taxpaying visitors for the health care they use. They can come insured, or they can pay as they go, but they should expect to be charged. This Bill is unlikely to become law owing to Parliamentary time pressures. The government and the NHS  has the power anyway to require payments.

We need to think about Museums, Galleries and other freee public institutions. Shouldn’t there be a charge for tourists visiting these facilities, just as they pay for entry into National Trust or other private sector Visitor attractions?

The government is reviewing the issue of the free movement of workers within the EU. The UK accepts the free movement of those with jobs to go to, or of  people who can maintain themselves whilst seeking a job in the UK.  The Treaty did  not say anything about the free movement of benefit recipients. There is need for greater clarity about what rights a worker has who comes to another EU country and who then wants state financial assistance.

The government also needs to answer the questions raised this week-end in the Sunday Telegraph about payments to foreign consultants from the Overseas Aid budget. Why did they need any consultant at all? Why, if they needed one,  did they not find UK consultants that were capable of delivering the job at a good price?

 

                The US Fed’s decision to print some more was clearly designed to show Mr Obama they are doing something, at a time when he needs to show his determination to get unemployment down.

                There was no great need to print more dollars. The US banks are better placed than European ones. The US money supply has been expanding modestly anyway. The US economy has been performing better than most EU economies.

               The immediate joy in world markets at the thought of yet more money in circulation was to be expected. Maybe Mr Bernanke is right and this latest round of money printing will not be too inflationary in itself. However, the promise to keep interest rates on the floor until 2015 at the earliest is another blow to savers. It is also surprising. There could come a time before then when the Fed needs to brake the inflation it is currently trying hard to provoke.

               On the other side of the Atlantic Mr Draghi has been hinting that he wants to print, but  his stated policy still does not allow that. He has to watch his back, as Germany is no fan of money printing after their bitter experience of it in the 1920s when it led to hyperinflation. Markets also seem to ignore the fact that Spain and Italy will have to enter IMF programmes before the ECB will buy their bonds.

           The UK is pressing on with its latest programme. With RBS and HBOS still troubled banks, and with the stiff regulatory controls on new credit, the QE’s inflation consequences are for the moment restrained. In recent weeks the thought of more US QE has knocked the dollar generally, including against the pound. The pound, of course, devalued so much more early in the Credit Crunch when all this monetary experimentation first began.

            There is no substitute for creating stronger and more competitive banks, and for both the private and public sectors getting on top of their excess debt problems. Money printing may delay some of the adjustment, but it does not replace the laws of arithmetic. Mr Micawber still was right to say keeping income slightly higher than  expenditure made for greater happiness.

 

           We have discussed before the current slow progress with the government’s One In, One Out approach to domestic rules. We have noted that EU regulaitonm is not included within this programme, and that continues to expand.

            The arrival of Michael Fallon as Minister of State at the Department of Business is a good opportunity to review it all again. I am sure he wishes to beef up the programme. What obstacles will he face?

             He inherits the ambitious Red Tape Challenge system. 6500 domestic regulations are being exposed to criticism and comment, linking them around major industry groups and taking those in turn. The aim is to “abolish or reduce 3000 regulations” out of this tally.  The review will be completed by December 2013.

              We are not told what the split might be between scrapping and reducing, an important issue. Nor are we told if the ones to be scrapped are in effect being replaced by new EU ones anyway.

               Some of the ones to be scrapped apparently impose no costs on business, demonstrating that they are obsolete. I have no problem with them being swept away, but if they impose no cost their removal brings little benefit, other than a tidier and simpler list.

                  Some of the ones to be scrapped will be replaced by  a single consolidated regulation. Again I have no problems with doing this, but it is unlikely to cut the burden by much.

                 What is needed is the reduction or removal of regulations that are costly, where their costs do not bring sufficient benefit to justify the financial demands they impose. So far we have been told they will remove the need for  a paper driving licence, just requiring the plastic card; remove employer liability for any misconduct by customers under the Equality Act; lessen the costs and compliance needs with Employment  Tribunals saving £40 m a year; and deregulate some live music performances.

                 What I fear the civil service have decided is to surrender gradually some UK domestic regulations, safe in the knowledge that bigger and better ones now apply from the EU anyway. Given the huge range and scope of EU regulation, and the inability or unwillingness  of most UK governments to do anything about this, it is difficult to see that we need much domestic regulation any more. There are not many things the EU has not thought of controlling.

                           The role of the EU in governing us makes Mr Fallon’s task especially difficult. I wish him well with abolishing more of the old domestic requirements, but the big cost is increasingly to be found from Brussels. As we noted yesterday, if the UK abolished its own domestic  financial regulation, there would still be a comprehensive EU system in place.

                         Total regulatory costs may be around £100 billion a year in this economy. Achieving savings of a few hundred millions of pounds, whilst welcome, makes little difference.  The challenge is to find significant savings without leaving  areas without protection where regulation can help.

    I was pleased to read today that Mr Hammond now tells us he can bring more troops home early, and have fewer UK troops on patrol in Afghanistan. As readers of my previous post will know, the sooner the better as far as I am concerned.

 

            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.