Dec 20 2009
Back to reality – how we are running out of money
Amidst all the hype and warmist theory of Copenhagen the latest UK public borrowing figures showed more of the same – another £20 billion in debt last month. The statistics released showed that this year Income tax is down £8.5 billion, Corporation Tax by £9 billion and VAT by £10 billion.
There will be differing approaches to this “problem”.The government is minded to put rates up to get in more revenue. That might work with VAT, where the receipts have been depressed by their cut in rate, although there is some offset from bringing forward some purchases of larger and less regularly purchased items to take advantage of the lower rate. As some of the VAT is charged on items where there is no great elasticity,like energy, the higher rate may bring in a bit more money.
This government also favours higher rates for Income Tax. It is imposing a 50% rate on higher paid people, and a backdoor extra charge on everyone else through National Insurance. Lower rates may be a better way of raising the amount of tax paid, as businesses and entrepreneurs are nowfootloose between jurisdctions. The UK is moving rapidly from being tax competitive to being a relatively high tax jurisdiction. This policy will impede the economic recovery and limit the recovery in revenues that follows.
The government does seem to think lower corporation tax rates can help increase revenues, or limit the fall in troubled times. The Opposition wants to cut the headline rate by more for the same reasons.
The truth is that all rates of tax on income, whether individual or company, have an incentive or disincentive effect, depending on how high they are. As part of the UK’s recovery programme we need lower rates of tax on both company and individual income. Higher VAT is unavoidable given the size of the deficit, and it will go up shortly. Higher taxes on spending can help cut imports whilst governemnt gets to grip with the main problem, which is overspending. Mr Brown should not have spent the last few days gving more of our money away, but should have spent some of them in a cold and troubled UK working out how to rein in the wasteful and less desirable public spending before the debt overwhelms us. By spending so long in Copenhagen and then not being present at the crucial meeting which produced the “deal” he wasted his time and reduced the UK’s soft power, revealing how little influence he has. He could control UK public spending – and cut state energy bills – if he wanted to. The question is, what is stopping him? Now Copenhagen has gone and with it his opportunity to save the world, can he please return and start to save the UK from financial disaster?
20 Responses to “Back to reality – how we are running out of money”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
“can he please return and start to save the UK from financial disaster?”
He is the architect of this disaster, no way is he of the ability to solve it.
My prescription is to cut the top rates of income tax from 50% & 40% to 35%.You could raise the threshold for the top rate and the income limits for claw back of age related tax allowances & basic personal allowance to £250,000 p/a.Corporate taxes should be cut to one 20% with all reliefs replaced by one allowance for companies who annually reinvest at least 25% of their before tax profits into their business.Capital Gains Tax needs ending with capital gains taxed as income for the first two years and then tax free after that.Stamp duty should be repealed on shares right away.
That would turn the UK into a high growth,low tax country which investors could get on with funding business expansion with new enterprises,products and job opportunities coming on stream.If you tempt enterprising business folk into the UK you get more wealth & prosperity and thus higher revenues in the longer-term.Productivity would be higher and avoidance lower.
The business need a low,simple and stable tax regime so that it is financially worthwhile for them to invest in business start-ups & expansion.With the cuts needed in the bloated public sector there is no scope for expanding the client state to get dole queues down as we need a balanced budget.So strong job growth in the private sector is needed for a meaningful economic upswing to get going.Removing the tax barriers to that process is vital.
Cut benefits, cut bureaucracy, cut taxes.
We can’t continue with a system where people can price themselves out of work by taking unemployment benefits.
We don’t need the bureaucracy to cope with rules and laws that shouldn’t be there.
We don’t want taxes which kill jobs and enterprise.
I learned yesterday that my barber has to pay £4500 each year for her Business Rates, in a non-high street salon the size of the average lounge. This tax is simply a ludicrous burden on a small enterprise, and she is looking at alternative ways of operating when her lease ends in 2010.
Matthew Reynolds Reply:
December 20th, 2009 at 11:56 am
Just link tax thresholds to earnings so that fiscal drag does not erode the incentive to work and/or create wealth.
Yes – come on Gordon – turn some lights off in Whitehall. Physically and metaphorically.
As someone who has already curtailed spending on this and that, and shifted to cash as far as possible, I am already paying a lot less. Too many of the really high rate taxpayers able to switch have already done so to avoid taxes leaving fewer and fewer who cannot to do the paying. Inevitably, they will be looking at other options in income structuring. The tax base is and will diminish leaving some very politically unpopular options. A full scale Property Tax may have to come, and this is the one nobody wants to talk about, until after the next election.
We certainly need to cut taxes that undermine enterprise and we need many tax incentives to be offered new companies getting off the ground. Here David Cameron has made a good start with a promise of a employers NI holiday for the first ten employees. We might also consider the cost benefits of extending this to established businesses that take on unemployed people. I would like to see VAT on Gas and Electricity payments at least frozen, but hopefully cutback as unlike most indirect taxes this is one bill that a poorer person cannot avoid. I do expect our tax burden to rise, as we pay off the National debt, of course it makes sense to raise indirect taxes rather than direct ones, as that reminds far fairer than hitting income tax, most especially as we to maintain the incentive to find work. The upper band tax rate is a hot potato in political terms but of course it is a short-sighted Labour class war tactic. We most likely will be rid of it in our first few years in power.
“can he please return and start to save the UK from financial disaster?”
On his current record I would urge him to stay as far away from London as possible, he would of course be far more use, either in the Lords or possible doing that real world job, experience of which might have impressed upon him the real difficulties that are faced by those of us who work hard and save hard. In this respect he has let all of us down.
John
Your comments are spot on, but unfortunately for us and the Nation, Mr Brown has no intention of cutting any expenditure, or even informing us that he will, until after the General Election, and then it will be only tinkering with it until 18 months time or more.
Meanwhile the Tax raising policy will continue as planned, and we as a Country will get even further in debt.
Why does the state have to fund itself through stealing?
If people don’t want to pay for government services out of free choice then they can’t very useful.
What is stopping him is the prospect of an election: were he to take action, he would be admitting the failure of what he has done. Indeed, he seems to be keen to pursue scorched earth policies – including his stance at Copenhagen, ironically – knowing that he will not be the one reaping the whirlwind. The sooner he and his government are gone the sooner attempts can be made to rescue the situation.
This government’s conduct of fiscal policy can be explained only in terms of leaving an incoming Conservative government a poison pill of massive proportions. Public sector debt has rocketed from 40% of GDP to close on 60% of GDP in little over a year, and they are proposing that the deficit for FYR 2010/11 should be £176 billion, just £2 billion less than the £178 billion for FYR 2009/10. They can not possibly mean it, and if they did the markets would not let them.
It looks like our first (emergency) budget in 2010 will involve an increase in VAT and some public expenditure cuts to reduce the deficit for FYR 2010/11 by at least £40 billion. Really deep public expenditure cuts take time to design and prepare for, and we are looking at the 2011 budget for that. What is really difficult is to avoid cutting capital expenditure too much. Both the Labour opposition and the Civil Service will assert that current expenditure is sancrosanct; it isn’t.
There is inevitably a problem in our Manifesto. If we specify deep cuts in too much detail, we might frighten the horses. If we do not, our mandate will be less clear cut.
Mr Brown is a no hoper. So let me say what I would really like for Christmas 2025:
Not more than 30 million people of all colours and religions in a Christian country all living happily together in peace and each person admiring and learning from the others, however different their beliefs, cultures or whatever. Sort of open minded.
Very little government at all really. Cut the Library system, cut the national health, cut the vile education swindle, cut the farming control system including the hand outs. Small parliament, real Lords whom I can respect. A Royal on the throne. Counties instead of regions. Skeleton Civil Service which I can look up to.
Very little tax and lots of encouragement (knighthoods?) for manufacture, business, innovations, universities (professorship?)
Shame I shall probably be dead by then, isnt it!
PS: Why am I paying taxes for seriously rich people’s pensions? Why are my future taxes on heating, car, plane emissions being paid to one of the richest men in the world, the head of the IPCC?
When my income drops my expenditure needs to reduce accordingly – quite simple really. Pity politicians have a spending obsession and won’t do the same. Mind you, after all those years of spending our money even to buy items for their personal use which we would have to pay for ourselves from our own taxed income, it’s perhaps predictable. We don’t want any higher taxes. We want spending cut and politicians to enter the real world and live within our means.
John – why does no party end the Nimby planning laws? Business can’t pay tax and employ people if plans are delayed by NIMBYs.
If you want UK airlines to pay more Corporation Tax why not help make them profitable? The Heathrow Third runway is desperately needed by UK airlines based there and yet is opposed by which party?
The attraction of Copenhagen for Brown was not climate change but a chance to show us his importance.
- war on terror
- climate change
- flu pandemics etc
These are the unquantifiable issues on which politicians posture whilst being completely ineffective on those issues which the majority want them to tackle.
I see that David Cameron gives us a list of reasons for us to be optimistic – this includes, of all things, England’s World Cup chances ! (how very Tony Blair.) He mainly dwelt on the possibility for economic recovery.
The two most important items which would most definitely raise the morale of the people were missing from his list and he might wish to ponder them when dismayed at his low poll ratings (these reflect what I’m hearing on the ground too btw):
- dealing with uncontrolled immigration
- hitting criminals hard
The fact is that the people don’t want much from their parliament but controlling crime and controlling our borders are two essentials (you’ve all failed to deliver.) The rest we can do for ourselves and in recent decades we’ve been operating in SPITE of politicians and not BECAUSE of them.
Please stop being global superheroes – do what we pay you to – and otherwise keep the **** out of our lives.
Britain escaped the 1970s with North Sea Oil and easy credit and Brown pursued Reductio Ad Absurdam by following Greenspan’s Pied Piper act to flood each downturn with credit expansion. Now he has reached his apogee by monetizing debt which is all silly phrases like QE realy mean.
Simply expanding high-powered money through the banking system inside a closed-loop to fund the government at the expense of private households and business is what caused Brazil so many problems and made the banks slaves t Brasilia and New York with a Washington link to restrain New York. Meanwhile the domestic economy stagflated.
The British Socialist Republic is locked into a ‘doom loop’ as Andy Haldane stated. The financial system needs to contract to be in line with this small island economy but taxpayer support has bloated it to the point where the country has become a giant hedge fund like Long-Term Capital Management.
It is not simply cutting spending but de-leveraging spending along the chain. Every asset is pledged and every income is leveraged, together with future tax revenues pledged to service debt interest (prinipal aside) and PFI leveraged leases run through tax havens which lock in current spending leaving payroll as the only possible flex.
The Treasury economic model is hardly useful going forward and it is hard to see how stabilisation can be attained in a world without the certainties enjoyed before China and COMECON countries entered the global economy. Britain has overpriced land, poor infrastructure, expensive energy, poorly educated population, and manufactures few things that cannot be made cheaper elsewhere.
British Manufacturing data includes Printing which is hardly a profitable sector; in fact much of the leading edge manufacturing worldwide does not make the kind of profits British companies like – it is only volume production that keeps many Asian companies in the black. They are funding an economic war and accepting paltry returns on capital to gain market share and destroy competitors with 30% RONA expectations.
It takes a very long hard slog to build a company and Britain is not an ideal place to start; better rewards flow in banking or politics or media or public sector without any great risk. Much of British business was built by Non-Anglicans denied access to universities and the professions who engaged in trade; anti-discrimination legislation nowadays may make self-employment significantly less attractive than employee status as relatively the independence of self-employment has been whittled away relative to the security of professional employment.
Britain is a Socialist Republic and that within 20 years of Margaret Thatcher leaving Downing Street
This is what will happen; my sister, who is a banker in the City, has asked me to investigate private English speaking schools in the Frankfurt area. Banks are more mobile than industry. Do I need to say more?
George Osborne arguing in the Telegraph today to keep interest rates low…. so if the Tories were in power now would you be working an interest rate policy regardless of exchange rate, or targetting exchange rate, or RPI, or what? Very unclear.
His sole interests are himself and that of his Labour chums.
He will do anything at all to put off any sign of any ‘reckoning’ until the election – mostly printing more money I’d guess – irrespective of the damage done to the economy. It will then be blamed on the Conservatives.
Print the money ourselves instead of Borrowing it, at full face value and at interest.
No Govt debt, no need for the public to be taxed.