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.

 

There are now two rates of CGT, 18% and 28%.

There are various exemptions. Cars, corporate bonds,  and  currency for personal use are exempt. So too are all sorts of ways of lending to the government. Gilts are CGT exempt, as are some National Savings. ISA savings schemes also escape. It shows that the government  is not against capital gains per se, but wishes to channel investment into preferred areas, especially into loans to the state. Entrepreneurship is less valued than lending to the government, but can attract a preferential rate of 10%.

There are some strange rules. You can carry forward losses, but you have to offset losses against gains in any given year even where you have not used up  your tax free allowance on the gains. On death losses can be carried back 3 years to get a rebate for the estate.

CGT is the most voluntary of taxes. People can and do delay taking profits if they think the rate is too high. They can buy assets which are exempt, as there is plenty of variety, and there are tax free wrappers. CGT in a way began as a Treasury device to stop people owning bonds and selling them just before they paid the interest to capture the income as a tax free capital gain. They stopped that sometime ago by making people buy gilts with adjustment of accrued income, so people do have to pay income tax. Yet the tax remains.

Should gains be taxed? Should gains on so many things be exempt?  What rate is likely to maximise the tax take if you wish to keep a CGT?  In the US and the UK over the last thirty years rates under 20% have collected more tax than higher rates. Could it be that we are well above the best rate to optimise the take? Is the 28% rate the reason the Treasury is forecasting lower receipts this year?

 

(This site does not offer tax advice and I am not a qualified tax adviser).

 

Before the election Mr Osborne promised big changes to Inheritance Tax. This proved surprisingly popular, despite the fact that most people will  not be  in the bitter sweet position of having to pay it. There is a £325,000 tax free allowance, which takes care of most people’s estates that they wish to pass onto their children or other relatives. It is of course tax free to pass it on to your spouse, partner or charity of your choice. A married couple effectively have a £650,000 tax free sum available if they have that much wealth.

I guess the reason it was popular is many people think their family might become trapped by IHT. After all more and more homes in the dearer parts of the country are now worth more than £325,000. That does not even buy you a bedsit in central London, nor a house in much of the rest of Greater London. There are areas of expensive property in a wide range of locations around the nation, from Sandbanks in Dorset and Newquay in Cornwall  to Cheshire and central Edinburgh. Maybe it also shows that jealousy is not such  a great political emotion , with many thinking those who have saved and built up assets for their family have a right to pass more of it on.

I am not recommending any reduction in IHT given all the other tax priorities and spending needs of the  present fiscal bind. There is, however, plenty of complexity to grapple with. It might be possible to make it easier to understand and follow. Much of the complexity comes from the idea that you should be able to pass all your money on to your family tax free if you can guess when you are going to die, and give any excess away seven years before you do so. You can then keep £325,000 worth for yourself, and give that away tax free at the end. The government has put in a series of complicated rules and rates to keep people to the 7 year Russian roulette.

If you do transfer assets and dare to die sooner than seven years you pay the tax, but  there is taper relief so the tax is reduced the longer you managed to hang on. Gifts of up to £3000 a year are exempt, as are small gifts of up to £250. CGT can also come into play on death as well, adding to the complications, if you gave away an asset prior to death or sold it below true value which counted as a disposal.   It all makes profitable work for the solicitors and accountants who are needed  now to help people organise their dead relative’s affairs.

Is this the right way to handle inter generational transfers? What is the magic of the seven years? Is transferring most of your asset seven years before you die prudent management, or unacceptable tax avoidance?  Is £3000 a year of gifts per person  a sensible allowance? Is £325,000 too low a tax free limit? Or are you against inheritance in principle, and would you like to see a much lower tax free amount?

 

 

According to Stephanie Flanders, BBC Economics Editor, the Euro has been saved. She believes if the Head of the European Central Bank had said a long time ago what Mr Draghi said this week, there would have been no Euro crisis! The BBC Economics Editor degenerated into putting forward  uncritically appraised Euro propaganda. She had no grip on the story at all.   At least they later interviewed Norman Lamont, who was able to explain all the hazards from here with the new Draghi plan. Let’s look at what she should have considered after hearing the Draghi spin.

Mr Draghi has said the ECB will buy 1-3 year bonds of problem countries. He will sterilise the intervention. Why does this make such a difference?

First, the ECB will not buy any more bonds of Greece, Portugal and Ireland who rely on money from the EU/IMF. So this statement does nothing to tackle the Greek  problem. Second, the ECB will only buy 1-3 year bonds of countries that can still raise money on public markets, if they have asked for help and have submitted to programmes of deficit cutting supervised by the EU and IMF. Spain seems reluctant to ask for such help, so no buying can take place.  Third, artifically propping up a bond market does not solve the underlying fiscal or balance of payments problems. They will bubble out in some other way. Fourth, how will they sterilise the intervention? Is thECB going to raise all the money needed for bond buying on its own credit rating? How easy will that be? Has Germany agreed?

The markets love the hint of easy money, and love the idea of quick profits at the expense of taxpayers who would be dragooned into propping up these bonds for a time. It does not solve the problems of the Spanish or Italian economies or budgets. It does not create a fiscal and political union.  The BBC should have put the other side of the case as well, instead of stating this has solved the Euro’s problems.

We have heard many times that the Euro area has at last solved its problems. We have heard of many big bazookas. We also hear that several of these countries remain in severe financial trouble, with overspending and overtaxing governments, declining output and high unemployment. Their political systems are no longer allowed to elect governments that speak up for the unemployed and offer a different economic strategy.

 

     The Uk government is being asked to approve Euro 1033 billion to be spent by the EU between 2014 and 2020. We have a veto on such a proposal. I  would like to see us use it.

          The EU wishes to spend  Euro 386.9bn on the Common Agricultural policy. That’s the one where Mr Blair told us he had negotiated a right to reform it, in the interests of a better deal for EU taxpayers and food buyers. Now seems like a good time to demand delivery.

                 The EU plans to spend  Euro 376bn on regional aid. Much of this goes to regions in  relatively rich countries. Given the stated aim of the EU to  bring budget deficits down around the EU, wouldn’t this be another good place to make major changes and reductions? Shouldn’t regional aid be concentrated just on the poorest regions in the poorest countries, at a fraction of the current cost?

               The EU plans to spend Euro 70 billion on the External Action Service, or its rival system of diplomats to our own. Why do we need all this? Why can’t we carry out our own diplomacy through our own Embassies, without all this doubling up?

                The EU plans to spend Euro 63 bn on administration. In the UK the government has said it plans a one third cut in administration costs. Why not do the same in the EU?

                  There are a host of smaller sums for a wide range of differing departments, as if the EU was running  a full EU government. There would be scope to reduce or eliminate several.

                    Of course, if the public was given a referendum and voted to come out, we could save  our share of the whole  lot. On the assumption that we stay in, there is huge scope for the EU to lead by example. The EU is always lecturing governments to get their budget deficits down to just 3% of GDP. They could show us the way, by taking the knife to their own wasteful spending.  That would in turn lower the budget deficits of member states, who have to raise the money to support the EU.

                 A Uk veto to lavish new spending plans might be just the catalyst needed to start to sort out the huge deficit problems of several EU member states.

   We have talked before about making work pay.  It is time to ask how is the Coalition government getting on with implementing its popular pledge that it would make it more worthwhile working?

     Over the last two years average pay in the UK has risen by just 4.2%. Meanwhile JSA and other out of work benefits have risen by 8.5%, or twice the rate of earnings.

       The government is introducing compulsory membership of  NEST, a new pension scheme, for lower paid employees and others not already in a private scheme. This will entail a 4% levy on employee earnings, and a 3% levy on the employer.

       Petrol, diesel, and public transport fares have gone up by more than inflation over the last two years. As many need to drive or be driven to work on train or bus, we could pencil in a further 1% loss of net income from travel to work costs.

        Putting this altogether, it shows that so far the governemnt has found it difficult to make it more worthwhile working.

I asked my service provider to put in a facility to allow you to edit or correct a posting awaiting moderation. Unfortunately whilst this work is being done I cannot myself get access to any comments to post, so there will be a delay pending resolution of this technical problem. Please keep them coming  – I will catch up as soon as the system is free again.

Mr Cameron was wise not to have a general  reshuffle for almost two and a third years. There is a good case for stopping them in future.

The problems with reshuffles are legion.  If you try to make lots of changes all at the same time, it only takes one change to go wrong and then the whole process becomes rushed and can looked muddled. There is not time  to think it through and square all the people involved. When Iain Duncan Smith refused to be moved from DWP, and Nick Herbert turned down an alternative job,  there had to a be hasty redrawing of the lists.

The reshuffle gets people excited or worried ahead of the date, and then allows them all to relax thereafter. It is the oppposite of continuous review and continuous improvement that is more normal in the private sector. The boss only has real authority in the run up to the big change over.

Concentrating all the moves at once means a lack of thought for many of them. People may be  put into jobs they do not want or they are ill equipped to do. They may be put into a job with a potential conflict with something or someone  else in their life the PM knows nothing about. These days many MPs have wives or husbands with important jobs and have to be careful about family conflicts of interest.

In  summary it is all too easy to make mistakes, and all too difficult to correct them once the media spotlight is watching everyone’s move and trying to eavesdrop on every meeting.

So what could be done instead? Whilst I think there are too many Ministerial changes, I am not against change. It is an important part of motivating and managing. Some new people need to be brought in and some older people be asked to retire. Some should be promoted, and some given a chance to shine at the same level in a different department.  It needs to be linked into a system of personnel management that makes sense, that avoids unpleasant surprises, and allows those making the big decisions to make them at leisure, reflecting on them and talking it through with the interested parties.  A sensible system would have mini reshuflles from time to time to tackle a problem or highlight an issue, which were properly managed, were no surprise to those involved but were a surprise to  the press and public.

Let us take one of the most controversial cases in this reshuffle, the case of the Transport Secretary. When the government reconsidered its stance on the Third runway for Heathrow, that should have led on to discussion with the relevant Ministers on how to handle any change of policy and how to deal with the constituency interests and views of the then Transport Secretary. If the government  has decided to make a third runway at Heathrow a likely option, despite past promises, then of course they need to shift the Transport Secretary and explain why they are doing it. If they have no such intention the best way to deny the rumours is to keep her in post.

Making her move part of a general reshuffle does not persuade people it was just one of those things, unconnected to Heathrow. Rightly or wrongly they will think it is about that. It leads directly to the strong views of Zac Goldsmith and wider issues with handling MPs from both Coalition parties who have strongly defended the old policy.

When appointing new Junior Ministers it would  be better to say to them the typical experience would be 4-5 years as a junior Minister. They should be told they will probably have a couple of departments during that time, unless they are keen to stay in  one which they know well and are strongly committed to. They should be told promotion comes only  to some, with ideas on how the Minister can shine to make promotion more likely. They should be told they will be given plenty of warning if they are to be dropped. They should have regular reviews with their Secretary of State whose job should include mentoring and supporting the junior Ministers.

Cabinet members should have regular meetings with the PM or a senior Cabinet Minister responsible for them. The Chancellor could look after the Chief Secretary, Transport and DWP. The Foreign Secretary could look after defence and Overseas Aid. Cabinet members should always know what is expected of them and their departments, and be told at regular intervals how well they are doing and what needs to be improved.  When the PM thinks it is time to bring their stay in Cabinet to a close there should be an orderly process of management to avoid embarrassment and last minute decisions.

There will occasionally be times when urgent action is needed or surprise is a necessary weapon of management. In  most cases Ministers would appreciate knowing where they stand and being able to manage expectations. They would keep it quiet if it were handled well and was obviously in their mutual interest to do so.

I think it a sad loss that Charles Hendry has left the government.  He had a good command of his energy topic and was the voice to “keep the lights on” in energy policy formation. So too it is sad to see the end of Bob Neill, a local government Minister with a love of  localism and a good knowledge of the Council world. Tim Loughton was a model Children’s Minister and Michael Fabricant a natural in the whips office. Gerald Howarth was a round peg in a round hole in the Defence Department, a job he loved.

 

 

            If you call spending “infrastructure” or ” investment” it gives a   magic halo to it in the UK debate. Mr Brown was well aware of this. He called much government current spending “investment” as he sought to reassure people that his fast growing state financed by big increases in debt was sustainable and desirable.  If it was all “investment” it implied there would be  a pay back, that we need not worry about the debts.

            The difference between investment or capital spending and current spending is clear in many cases. Building new school buildings is capital spending, because those buildings will be available to the public sector for their educational purpose for many years after the money has been spent. Conversely paying the teachers’ salaries is current spending, because this month’s pay only buys this month’s teaching. Next year you will need to pay them next year’s pay. Mr Brown called teachers’ and lecturers pay an “investment” in the future of the young people they were teaching, which is true. That does make the spending capital or investment spending in the normal sense.

          In the private sector the difference between capital spending and current spending is central to the compilation of company accounts. There the difference is clearer. Capital or investment spending is different and necessary. It is spending on  the plant and equipment you need to make future goods. There is a profit or cash return on it. Successful investment allows you to make and sell more goods to people bringing in more cash and profit to your business.

                     Capital spending can be for growth. You add extra factory space and equipment because you need to make more. It can be for better efficiency. You replace obsolete plant with more modern, which allows you to produce goods that are better and cheaper. It can be replacement. Your old machines are worn out. These different reasons produce different answers in terms of how much extra cash and profit the investment will generate relative to its costs.

                    It can be different in the public sector. Much capital expenditure yields no extra revenue or profit. A new office building for the civil service is usually just an extra cost, though it may be desirable or necessary. A new High speed train will add more to the costs of the railway than it will add to the revenues, increasing the need for current subsidy. An extra or new school  may be welcome, but it too simply increases the costs of educational provision by the interest on the extra debt.

                 The problem with public capital provision is how you allocate capital between the different sectors in the absence of a popularity or profit test from the market. Free enterprise companies can decide easily to put more capital investment into supplying ipads than into supplying record players, because that is what the market demands. The car industry can decide to spend more capital on expanding production lines for popular cars and shutting down lines for the unpopular ones.  In government there is no accepted measurement of the relative popularity of a new road or railway line for potential users, and many other issues crowd in  to complicate such a decision.

                  The outgoing Labour government decided to slash public capital spending to start to get the deficit down. The Coalition only reinstated a modest proportion of the cuts.Now it is popular to say we need more public capital spending to stimulate the economy. We need to be careful about such slogans. White elephant public sector projects, borrowing huge sums for projects that are going to be very costly and not very popular with users, is not a good idea for a heavily indebted country to embark on. I will look in a later post  at what is sensible by way of a capital programme.