I read the five shortlisted entries for the Wolfson prize yesterday. The essay competition asked authors to assess how to manage the process if member states left the Euro. The five published yesterday showed ingenuity and offered a range of utopian solutions. One suggested creating two new currencies, called  the  New Euro-White, and the New Euro-Yolk. Another offered a new ECU-2 basket currency. A third proposes an Exit task force with a Task Force Charter driven by Germany. It is difficult to take much of this seriously. The media has decided to trivialise the whole topic by concentrating on a picture of a pizza drawn by a 10 year old.  The other two are less fanciful, but do not tackle the big issue of how exit can be arranged at speed and legally when the current Treaty does not have a mechanism for exit, and  when no country is seeking exit.

             Over the next few days as the run of news permits I will set out what I think might happen in the real world of EU politics and fast moving markets. Anyone forecasting the future of the Euro needs to begin with a firm understanding of the nature and importance of the project to EU member governments. The critics of the Euro mainly  lie outside the Euro member states. The governments of the 17 members all regard this as a central political project. They see the economic problems within their economies as being a price worth paying for the progress to political and economic union that the single currency represents. Many,  indeed,  believe the official line, that the problems of state debt and unemployment have solutions within the Euro framework. They do not blame the currency for state spending levels or joblessness on the periphery of the zone.  They believe they  need to work away at Euro discipline for it to come right.

          The Greek, Portuguese and Irish governments are firmly wedded to the Euro. They are not seeking a way out. Whilst there are now some senior establishment figures in Germany and the Netherlands who might like to see Greece leave, their governments still want to keep Greece in if possible and all agree that the Euro must continue.

            The Treaty does not allow the other member states to force a country out, nor does it allow an individual member state a right to exit. Those essayists who have thought of this issue state that it would require Treaty change to allow or force the exit of one or more members. How likely is this?

             It is my view that the Euro members will all wish to keep their currency going for as long as there is any chance of doing so. I detect no wish to plan an orderly exit for the most stressed countries today whilst the markets are temnporarily calmed by the large injection of ECB money. I do not expect to wake up soon to negotiations over the creation of one or two new currencies with the complex Treaty changes that would require, nor for an emergency exit which they did not put in place in calmer times. No-one is clamouring for new currencies based on unscrambling an egg, with easter titles.  Whilst an emergency exit is always a good idea in case a building catches fire, trying to knock one through when the fire has started might just fan the flames more quickly.  The countries that fear they might be forced out would not sign up to any such clause willingly.  They need all 27 EU members to vote Yes, and for positive referenda results in some member states.

             So what would trigger the exit of say Greece or some other country?  I could only see it happening if an unwelcome crisis forces it.  I could see three possible scenarios that might force  their withdrawal. I hasten to add I do not wish any of these scenarios on a Euro member state , and do not think it inevitable that one occurs. It depends how flexible and creative the authorities are to inspire some growth in the economy, and how generous the neighbours are when it comes to loans and transfer payments to weaker members. The scenarios include:

1. Another intense phase of crisis in the markets, threatening banks, underlining the continuing need for special funding beyond the currently agreed  packages, with or without the spread of uncertainty to the Euro itself and with damage to  the credit standing of all Euro instruments  and the value of the currency. If the stronger countries have to pay a much larger sum to keep Greece going, this could cause doubts about the sustainability of the scheme and the credit worthiness of other countries and banks. If calculations of the scale of transfers needed to the weaker members starts to erode confidence in the stronger members that too could force a rethink.

2. A massive move to hostility to the Euro by the  electors in a weaker state, who up to this point have broadly suported the currency and in the case of Greece allowed a pro Euro technocrat government to take over. If the electors refused to vote for parties wishing to keep the Euro that could force a change of approach by a future  government.

3. An intensification of strike and protest action on the streets on a sustained basis so that government reaches the conclusion that it can no longer govern and protect the Euro scheme  policies.

              If any of these developments occur, the EU could reach the point it reached with the Exchange Rate Mechanism, when it decides the markets have won and will force policy change. In these conditions the EU will need a simple, quick plan for the early exit of say Greece. There will be no time for agreeing and ratifying Treaty changes. I will tomorrow deal with a legal exit under the Treaty.

                Yesterday I argued that 38% seems to be as high a proportion of UK GDP as possible for a democratic government to take in tax. I pointed out that no government in the last 40 years has tried to take more than 38%. I reminded readers that the Treasury itself is now forecasting declines in self assessment income tax and CGT against the backdrop of higher rates. Maybe Labour were right that the practical  limit is lower – they have never tried to raise more than 36% from  UK taxpayers. They have preferred to leave   incoming replacement governments to deal with the big borrowings they used instead of   extra taxes to allow them to spend and spend.

              I agree with those of you who said it would be safer if a government taxed at a lower rate than the current 38%, and agree that a rate around the 31% lower limit of the last 40 years expereince would generate faster growth in the economy than the current tax level. However, getting anywhere near there is difficult, and will itself need growth to help bring the figures into sustainable shape. 

                 Today I wish to draw attention to the difficulties countries like Greece and Spain are having collecting their taxes. Both countries have keen deficit cutting governments. Both governments want to close a lot of the gap by taxing more. Both realise that their economies have lost substantial revenue already, as people put their assets and cash offshore, and as locals trade more and more in cash or by barter to evade and avoid taxes.

                 Spain is trying an amnesty for people who have been evading and avoiding. It is also offering a knock down 10% single levy on any money Spaniards choose to bring onshore or to find under the mattress with no questions asked. They need the estimated E 2.5 billion this will bring in. That shows they think there is an easy E 25 billion to come home. It would also mean they could tax it and the income it generates in the future, as they will then know where it is and who owns it. Maybe tax dodging Spaniards will not regard this as such an attractive offer as their government.

                The Spanish government is encountering resistance to its latest extra property tax. Property taxes anyway are likely to be weak compared to the boom conditions prior to 2008, as Spanish property is in turmoil after the Credit Crunch.

                In Greece travellers tell me the economy functions with a lot of cash transactions. Apparently many Greeks do not see government as a good institution to trust with a share of their earnings, so they would rather shelter as much as they can. The Greek government believes this is true, and is pursuing various anti evasion campaigns to try to get them to pay.  When  a country feels it is above the tax saturation level all sorts of people decide they will no longer play by the rules. Some go in for every tax avoidance trick they can find, others break the law and go in for evasion. 

                 It is no good governments getting on their moral high horse about run of the mill avoidance. After all, they are the main proponents of it. In the UK the government encourages people to avoid tax by buying tax privileged government debt, by saving in Pension funds and ISAs, and in the past paying some of its own employees through companies.

                 Most people go in for a b it of tax avoidance. Now there are high Stamp duties on property, buyers and sellers tend to choose prices just below a Stamp Duty threshold rather than just above. Some people choose their service providers from smaller  craftsmen and women who are below the VAT threshold. Why shouldn’t they.

                 The danger as you approach tax saturation is more people, including those in professional careers and positions of trust, start moving from a bit of legal avoidance to a spot of questionable avoidance/evasion. When the doctor, teacher, lawyer or even the local accountant is happy to pay cash for his building work or even to accept a special cash quote you know your country is moving from the rule of law to the wilder south of Euroland’s non compliant culture. The informal economy may bloom from 5-10% of the total  to 20-25% as some Latin countries believe has happened to them already.  Then governments have a problem. They start offering amnesties, in a desperate bid to get some money back. The question is, will enough citizens play ball? If they think general taxes are too high and likely to go higher, they may prefer to chance their arm and keep the money hidden.

           This site is of course against all illegal actions to evade tax and does not wish to post comments from  people alleging infringements  by themselves or others without proper evidence. Good legal tax saving tips are fine, but are well covered by the  financial pages of papers and the adverts of the savings industry and the government.

           Argentina is indulging in a new wave of rhetoric about how the Falkland Islands should be Argentinian. Their latest ploy is to paint a rosy  picture of how the current islanders could live happily ever after under Argentinian government. They condemn the UK as the old colonialists, as if the UK had placed the Falklands under some kind of hated military rule that needed throwing off for freedom.

         This is such a grotesque caricature of the truth, that it is worrying that the US and others think we should sit down with Argentina and talk about it. There is nothing to talk about, other than Argentina’s unreasonable conduct. The Falkland islanders asked the UK to liberate them from Argentinian colonalism when Argentina last invaded the islands and tried to establish government by force.  We did so, and the islanders are grateful. At their request the UK pledges military support to defend  against any future invasion. The only menacing colonial power as far as the islanders are concerned is Argentina, not the UK.

            I pay tribute again today to all those UK service personnel who gave up their lives, and to those who risked their lives, to restore freedom and self determination to the Falkland Islands.

            Recent events interrupted my series on taxes. 

            Taxes are too high. Taxes have in  recent years  got higher. They need to come down.  There are too many of them. Too many of them stifle enterprise, success and saving. They deter investment, encourage tax avoidance, lower incomes, and  slow private sector recovery.

           Let us introduce a couple of  ideas to help the analysis. The first is that we should accept there is a maximum sustainable taxable capacity in any country, a level of national income that a government can take, before avoidance, disincentive and other factors kick in to make it difficult to collect more. It is the level elected politicians feel is the limit to their ambitions to spend more.  The second concept  is that if a government goes over this level, it can reach Tax Saturation, the level at which revenues start to fall, as the tax levels hurt enterprise and reduce activity and income. This is a kind of Laffer curve applied to the whole economy and to the totality of taxes levied. 

            You can see the UK this year has reached the point of tax saturation on Self Assessment Income Tax, which is forecast to fall by almost 10% despite some modest growth in the economy as a whole.  There has been a sharp reduction in higher incomes in response to the 50% tax rate imposed. That was before news came of its future reduction. The higher CGT rate is forecast by the government to induce a  fall in revenues from that tax next year.

             So what is the maximum sustainable level of total taxation in the UK?  If we compare the percentage of national income taken in taxes since 1970-71  (Red Book June 2010 p 104) we see that the maxmimum tax take  was 38.2% of GDP in 1982-3 and 1984-5, both years when the then Conservative government was trying  hard to get the inherited deficit down against a background of a recovering economy.  The highest under Labour was 36.4% in 2007-8. The lowest was 31.8% under the Conservatives in 1993-4 and 33.1% under Labour in election year 1978-9.

               All this would imply that at the very least democratic pressures seem to prevent a government taxing much  more than 38% of GDP.  It  is especially interesting that socialists who tend to believe in higher public spending on a wider range of items than Conservatives have thought the limit of our taxable capacity is around 36% of GDP during their eighteen years in office since 1970.

                Total current public spending is forecast at 42.5% in 2011-12, with total public spending at 46%. If the aim is to  pay for current spending out of current tax revenue in normal years, only borrowing in cyclical downturns, it implies that we need a lot of growth to get public spending down to the Sustainable tax level without making further cuts.

                There  is another theoretical level which is difficult to estimate, the level of taxation which would maximise growth. It will be below the sustainable level of taxation, but the question is how far below?  Would it be better to get there quickly to speed recovery? What reductions in public spending would be necessary to achieve that without losing fiscal credibiltiy?

1 April 2012

Sometimes you need to get in your retaliation early.  The answer to anyone in government who thinks we need an email tax is No, No, No.

These things begin for the most plausible of reasons. The Business Department is saying emails are now doing huge damage to the public investment in the Royal Mail. As they grapple with the problem with higher stamp charges, the wish is to hit the free private sector rival with a tax to show that emails are not harmless or costless competitors.

I think maybe the idea started in the Climate Change department . Apparently regular use of emails and websites means people are keeping on their computers for many more hours, so much more power is used with all the consequent carbon dioxide effects that produces at the power stations.

Meanwhile the Treasury never needs much encouraging when someone suggests a new and very buoyant source of revenue, especially one where there is a clear record of use which you cannot erase unless you smash your computer hard drive. Even Number 10 is said to be considering it, despite the obvious downside of its unpopularity, because they hope it can be angled in a way which stops so much unhelpful blogging and comment. Wouldn’t people think twice before being rude about the government if there was a tax on it?

I guess Ministers know it would be unpopular. I expect they will deny it if asked prematurely.  They will probably say it is the privileged who are digitally enriched and dominate in the email stakes. The very poor after all may be on the wrong side of the digital divide and will not have to pay a penny of this tax. They will also doubtless have some large figures for the amount of carbon they could save by getting the nation to ration their use of the email and websites.

Ministers will wish, of course, to keep quiet the growing pressure for an EU directive regulating email traffic on a cross border basis and endorsing a tax on them, as they appreciate this would get in the way of a fair hearing for this idea amongst Eurosceptic newspapers and voters in the UK.

I am afraid I am supporter of free speech in this case. Free speech should mean just that. I do not want to have to pay a levy every time I send an email or put out a blog entry. I invite my readers to join me in getting in our retaliation  fast. Today’s the day to do it, don’t put it off til tomorrow.  I am very grateful to a Parliamentary colleague for giving me the tip off about this idea.

          The latest polls show that the Conservatives are now losing their shine, following the Lib Dems down to unpopularity.

          It is interesting that Labour are 10% ahead, when most people agree that Labour left the country in a dreadful financial mess. Most of the problems the Coalition are grappling with come from the inheritance.

            It goes to show that  opposition to government  is not strengthening votes for parties on the side which wants spending cut and the deficit reduced faster. It’s good old Labour who are the main beneficiaries of the Coalition’s little local difficulties. For the purpose of this argument I accept the national opinion polls who do not forecast Respect taking off in other places. Labour agree that the deficit needs cutting, but disagree over the  timing and  magnitude of the adjustments.

            So what has gone wrong?

           The first problem must be inflation. As we discussed yesterday, the Bank’s failure to control price rises has led to a surge in domestic energy, fuel and other prices rises which have badly squeezed family budgets. This cut the purchasing power of family incomes.

          The second is the way the government decided to direct the squeeze  or the cuts to the private sector instead of the public sector for the first two years. Whilst people are  not clamouring for spending cuts, they do not like the high tax strategy imposed to try to pay more of  the public sector bills. Between the outgoing Labour government and the incoming Coalition government, we have seen rises in VAT, National Insurance, Income Tax above the standard rate, CGT, Stamp duty, petrol and diesel tax and others.  The reaction to freezing  the pensioner tax allowance is a symptom of the pent up frustration at ever rising taxes.

              The third is the inability of the government to make decisions that UK voters want, owing to differing views from the ECHR or Brussels. Votes for prisoners, asylum rules, extradition and a host of other matters leave the government looking powerless when the public expect them to be able to tighten things up.

                 Mr Cameron experienced a surge of popularity when he announced his intention to veto the budgetary treaty. Many people would like him to follow that up with demands for a new relationship for the UK. Mr Osborne experienced a surge in popularity when in opposition he announced a tax cut and flat taxes. In government has has been unwilling to follow it up,as he has so much spending to pay for.

                 The Conservative leadership said they wanted to rebalance things – to grow the private sector and get the public sector to concentrate on the essentials. That was a good idea. Maybe they should do more to implement it soon.  People are getting restless at the high taxes and the ever growing tentacles of EU and UK government. The private sector still needs more progress on tax, regulation  and banking reform to be able to grow at faster rates.

             Congratulations to George Galloway. The old fashioned virtues of beliefs, passion and consistency have powered Mr Galloway to an amazing victory. He has shown all the established parties that people can vote them out if they are fed up enough with them. I do not agree with a lot of Mr Galloway’s views, though I do think he was right to challenge the establishment wish to fight wars in the Middle East.

             The established parties will all explain it away as a one off, something that only happens in by elections. That is fine as a public position. In private they would all be wise to realise that there is discomfort with what is happening, and to adjust. Many write into this site telling me of this mood againsty the main parties, telling me UKIP will rise on the back of it. Not in Bradford West. Their 3% in this seat should lead them to  ask  some searching questions as well, just as their failure to win in Buckingham in 2010 where there were no main party candidiates was a warning sign about their approach of mainly  being an anti Tory party.

The government forecasts rising price inflation as measured by the Retail Price Index in the middle of this decade, following a further decline this year.

I regularly warned about too much inflation in recent years, and disagreed with the Bank of England. They were unable to see the inflationary consequences of their policies, which duly led to well above target price rises.  More recently I have agreed with them that inflation would fall this year, as the VAT increases dropped out of the figures and as we got some respite from the falling pound.

So it has turned out. Inflation has fallen a bit as hoped.  Whilst the official government forecasts say that target inflation, (2% on the CPI) will be just fine for the next few years, I think we do need to worry whether this is true. Could the official RPI forecasts be nearer the mark? Could the CPI also rise more than they think in later years?

This week we have been hit by further pressure on pump prices for diesel and petrol. Meanwhile, the near monopoly postal service, still in state hands, has decided on an enormous increase in prices.  We are being made to pay for the decline in traditional mail volumes, and for the continuing inefficiencies of the monopoly service.  The price rise is so high that there could be a sharp fall in volume of use, once the favourable effects of pre buying of stamps at the old prices wears off.

The post item is a one off and a small component of the general price indices. It is, however, a reminder that because the state still is heavily involved in our economic life, there remains plenty of monopoly pricing power that can be deployed against customers and taxpayers. We may see it in car parking charges from Councils, in licence fees, in energy taxes, in public  transport fares, in Council taxes from next year. If at the same time world monetary looseness drives up commodity prices, and UK money operations encourage a lower pound, we could find that inflation once again outperforms the Bank’s forecasts and targets. We may also be entering a period when the Chinese and other producers of cheap export goods for us want fairer prices for what they make.

The government needs to remember that high inflation in its first two years of office has depressed living standards. Fuel and energy prices have become central political issues, as they above all else have squeezed family budgets.  The government should pursue a more energetic competition policy to break up monopoly power and  allow new competitors in crucial services. It should also want the Bank to be vigilant about inflation, after such a long period of letting it be well above target.  With all that Quantitativbe Easing money out there, as the banks do mend so there could be a surge  of credit leading to more inflation. That is not today’s problem, or even tomorrow’s, but the Bank should be thinking well ahead to what can happen. The government itself now forecasts higher inflation and higher house price inflation in due course. They could be right.

Inflation is theft by other means. It may  not even be smart theft. Whilst it does erode the real amount the government has to pay back to those who saved and lent it money, as we saw over the last two years it can also depress demand and lead to the need for yet more borrowing. The recent inflation has depressed spending power and impeded recovery.

            Pastygate is a such a load of nonsense.

            A Labour MP is out to  say that because some top Tories have not recently bought and eaten a pasty they are uniquely out of touch with how others live. They say that Francis Maude’s ownership of a dining room makes him very middle class.

              Let me explain a little about the MP  lifestyle. The Commons meets in the evenings. It has dining rooms where you can buy a silver service dinner whilst waiting for a 10pm vote. I often see Labour MPs doing just that. At 8pm they sit down and tuck into three courses and coffee as their main meal of the day. It is modelled on country house life in the England of the 1930s, and similar to Oxbridge High table or officers’ mess dinners in the military.

               I daresay many Labour MPs also own detached houses which still sport dining rooms, or were originally built with such features. MPs who say some MPs are out of touch because of their  lifestyles should remember their own. On a minimum of £65,000 a year no MP shares in personal experience the money worries of someone on £10,000 or £20,000 a year facing the current inflation rate.

                 Living an MP’s life on an MP’s income does not, however, prevent a good MP understanding how others live and representing them well.  I felt best represented by a female Prime Minister. She could not experience any of the male  feelings and  wishes, yet she represented my outlook better than her male successors. A good MP or PM has sensitivity to the position and feelings of others. He or she has intuition and perception about how others live and what they are seeking to achieve. For much of the day you are dealing with the problems of others which are not your problem, which often gives you a better impartiality and fairness of judgement. You call on empathy. You think yourself into the position of the constituent.

                Modern life is thankfully far less class based than 1930’s Britain. Those same MPs who eat dinner at 8 in the Commons, might well buy a pasty and pint or  a sandwich on the run another day at a different time. Let’s break away from the old class stereotypes. By the way I have not bought a pasty for a long time. I do not think that prevents me from representing the pasty eaters. I  deal with both motherhood and apple pie, though I will never be a mother and have not bought a shop apple pie for months.

It’s good news that most of the old planning framework has been dumped. It was complex, unwieldy, and suited few. I had hoped to enjoy its replacement more than I did on first read through. It 65 pages and 207 clauses is a great improvement on what went before, but it’s not a clear and snappy read.

The five principles of sustainable development that overarch the whole are far from precise. As others have pointed out, this is a hand me down from the last government. It’s not clear how important they might be in any individual case, or how they will be interpreted.  The three aims are unexceptional. The economic aim is to allow all the building we need for a growing economy. The social aim is to make sure we have enough homes and other facilities. The environmental aims are various, including  protecting and enhancing the natural and built environment. The large question is how the possible conflict between protecting the countryside and finding enough land for new homes, offices and factories is to be resolved in case after case.

The government has listened to criticisms of its first draft. Brownfield sites are now usually to  be preferred.  Green belt protection is reaffirmed. Local communities can designate  land as local green space, giving it Green Belt like status within their communities for important smaller areas, as long as they do this through an approved plan.  There are new tighter  rules on traveller sites in another document, following recent controversies.  Car parking ratios are relaxed so new developments in areas where people need to use cars can reflect the reality of car ownership after years of artificial restriction on car parking. Town Centre lovers now learn that new shop development should occur in the centre, or on its edge, with out of town only if all else fails.

The big issue at the heart is how many homes should be built? This  still has  a plan led answer, where Councils have to assess demand for many years ahead, state a figure for the annual need for new homes, and then ensure five years supply of land plus a reserve is continuously available.  Planners find this notoriously difficult. Recent years have seen huge disruption to the plans on the downside, as mortgage money dried up in the Credit Crunch and as housebuilders reined in their activities. England will divide into those places which already have local plans, where the local plan will guide and restrict development as long as the five year supply of land is available, and the rest where the presumption in favour of sustainable development will dominate in decisions.

Existing local plans were of course often drawn up under the past government’s guidance, requiring higher housing targets.  I do not buy into the criticism of the document that it will restrict new planning permissions.  The aim is clearly to expand provision in places where there is demand by appealing to the presumption in favour of sustainable development in the absence of a plan. In the areas with plans, they anyway have quite high housing targets in them reflecting the past government demands.

I do not think housebuilding need to  be held up by a shorttage of land under this regime.  Local communities will need well crafted local plans in order to assert their own views on development, and in order to restrict development to acceptable locations. The issue for the housing makret, at least temporarily, is not land but is prices and mortgages.