Category Archives: Economy

Mixing up ‘Loopholes’ with ‘Incentives’

Here’s the reason for this recent tax shit-storm: the morons have mixed up ‘tax loopholes’ with ‘tax incentives’.

It kicked-off with an innocuous story  “Millionare Tax Avoiders ‘Shock’ Chancellor”.     The Treasury team intended to show they’re tuned into the zeitgeist of public concern over ‘tax avoidance/evasion’ and sought the front-foot.  Instead, within a week their imbecilic approach pushed them firmly on the back-foot with everyone.   How did they manage such an ‘epic fail’?

Whilst ‘tax avoidance’ is legal, there is no escaping that in common speak the words are always used pejoratively.  So if the chancellor is saying he’s going to crack down on it, you imagine he’s going to be going gunning for those offshore ploys, those spurious salaries for director’s spouses, the deferred payment of bonuses in copper futures or whatever; basically all that ‘creative accounting’ malarkey.

Instead they deliberately allowed the ‘tax avoidance’ label to be linked to everything that properly reduces a bill.  I quote:  “HMRC found the main methods used by people to reduce their bills was writing off business losses, offsetting the cost of business mortgages and borrowing on buy-to-let properties – all against their income tax bills.  Others took advantage of tax relief on charitable donations”.   My lord.  If they’re shooting at that I’m surprised they didn’t lump in ‘paying into ISA’s or ‘making pension contributions’ with equal disdain.

It was Parliament’s intent that folk can offset their business losses against their income before calculating tax owed.  That encourages folk to invest in new business which may take time to grow, or may even fail.  It encourages folk to stick with loss-making businesses a little longer rather than wind them up and make people redundant.  It isn’t a dirty loophole.  It is an incentive to help the economy.

It was Parliament’s intent to allow the cost of securing finance (business mortgage interest) to be treated as a pre-profit expense.  That encourages people to get business finance, to get business going, to help the economy.  It isn’t a dirty loophole.  It is an incentive to help the economy.

It was Parliament’s intent that folk give to charity tax-free to encourage folk to give to charity.  It isn’t a dirty loophole.  It is an incentive to support charity.

The sniping at that last one has generated the most news-print.  Philanthropists are right to be outraged, the way the reportage has been framed I’m pretty sure that most UK tabloid readers now believe that their generous giving has been at no actual net cost to them, and they are all ‘tax dodgers’.

It hasn’t hit the news in the same way, yet, but I imagine the networks of ‘business angels’ who risk huge losses by supplying capital to start-ups, at a time when banks will not, are also feeling equally bruised.   Is George also going to cap or limit the amount of losses you can offset?   Applying the same logic as to the Charity issue that can’t be far away.

I say ‘logic’ but of course there is very little of that.   I really do want to believe that the government intended to target the ‘abuse of’ all of these tax incentives rather than the incentives themselves, but what a cack-handed way of doing it, and what a miss in the presentation if that was the real target.

If there is an issue with folk setting up bogus charities overseas and funnelling money to them then the way to deal with that is to treat it as what it is – criminal fraud.  The policy on the table is basically saying  “we’re going to let it carry on, but don’t worry we’ve allowed people to only use a quarter of their income for this fraud rather than all of it in future”.  That doesn’t sound great does it?  However it is dressed up they’re also limiting the legitimate donations and making sure that stench of ‘tax dodgers’ for legitimate donors remains.

There are cases to be made for scrapping tax relief for charity donations.  A socialist may think that it is the job of the state to do the stuff charities do, so folk should just pay more tax with no relief and let the state do what needs doing.   A Conservative may make the case that the state has no business whatever with this attempt to socially engineer through the tax system with all the unnecessary (and costly) complexity added to the self-assessment system.  You may disagree with either of these on the basis of philosophy but at least they are intellectually coherent.  The government’s current thinking is not.

One feature of this Government, usually described as a weakness but actually a strength, has been that when a U-turn has been necessary it has come very quickly.  Nudge politics is central to Cameron’s view of the proper relationship between the state and the individual, the role of charity is another.   A proposed policy that acts as counter to both is nuts.  He needs to speak to George about that U-turn.  And fast.

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Interns: The Whole System is Wrong

One of the more worrying American imports in recent years is the so-called ‘internship’. Nick Clegg launched an attack on them yesterday, and has opened himself up to ‘hypocrite’ charges as a result.

For anyone with no idea what a internship is – basically employers offer a program that gives students, new graduates or ‘gap-year kids’ the opportunity to get ‘work-experience’ for the company, unpaid, often for a University summer, sometimes for much longer. The argument goes that that the company is doing the kid a favour – these aren’t real jobs, really just admin – but it gives the interns a ‘foot-in-the-door’, a ‘network of contacts in the industry’, the chance to check it is really the right industry for them and most importantly the magic ‘experience’ to add to their CV. This helps escape the job-seeker’s paradox that you can’t get a job without experience and you can’t get experience without a job. The employers are often so impressed with interns that at the end job offers may be made. When presented like that it sounds like the company is doing a great social good. ‘Helping job-seekers!’. Very worthy. The reality isn’t quite so straightforward nor is it the win-win for all it first appeared.

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I am a huge advocate of the importance of both meritocracy and competition (see my philosophy page). Meritocracy is key to social mobility, which in turn is key to attaining social justice. As we drift to internships becoming a ‘cultural norm’ in the UK we’re creating a blocker to meritocracy. In the long run this will harm our economy and society.

When you listen to the work that interns really do they are typically not ‘work-experience’ in the sense of shadowing someone doing their day-job or having a go while the incumbent looks on. No, more normally they have interns doing ‘real jobs’. They’re expected to arrive and work set hours, and often kicked out of the program if they do not. They have set administrative duties to perform which keep the business going. To me this crosses the line from ‘work experience’ to outright exploitation. If the interns weren’t doing this work then somebody in paid employment would be. That person would then be off the unemployment register and paying tax and NI and pumping those earnings back into the economy. Instead we have them still on the dole whilst the student extends their debt and works for free with no guarantee of any reward at the end. I can only spot one real winner in the arrangement.

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We need to consider who has the means to take internships: Who can offer three months of their lives working without pay, living in a big city? Only people with alternative financial support. Straight away that excludes a whole chunk of society. The kids from the estates to who we’ve been preaching if they work hard they can achieve anything; who then put their heads-down, ignored the peer-pressure, worked hard, got the GCSEs and A-Levels, went to Uni and got the 2-1 or first degree’s now find themselves stuck in the old job-seeker’s paradox and flipping burgers, angry and disenchanted with society and saddled with university debt. Meanwhile, the well-to-do kid who scraped through their GCSEs and A-Levels thanks to the kind of one-on-one educational attention you only get at the best independent schools, who drank their way through uni but pulled their socks up just enough to get an OK 2:2 sails into the intern post because they can stay with Mum and Dad and have an allowance. They get the magic experience on the CV, they get the contacts and the reference, they get the end job. Now, they may well be ‘able’ enough to do the job, but the ‘better’ candidate has missed out. That stinks to me every bit as much as those well meaning, misguided affirmative action plans companies have in place. Both spit in the face of the idea of meritocracy.

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The trend is embedding. In some industries it is almost becoming a pre-requisite to entry that you have done an internship. We must level this playing field. It pains me to say it, because by nature I’m against regulation but to get proper meritocracy and competition working we should legistlate that if the internship has the characteristics of real employment then legally it must be treated as such with a formal contract, fair selection process, and at least a minimum wage salary. In the long run this will be a real win-win for every player in the economy.

Rather than wait for such regulation I hope the companies realise now that they are being short-sighted by saving pennies here which could cost them pounds later. The barrier to entry means they’re potentially missing out the very best, hungriest talent. The outlay of paying minimum wage for administrative support is minimal. The return on genuinely recruiting the best people into your firm for the long-run will pay back that tenfold. Meritocracy is not just good for society – it is good for business too.

[This is a rehash of an article on the subject I first wrote in Nov 2009]

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The Daily Cost of Servicing Our Debt

This diagram graphically represents the size of our daily spending on servicing our debt in comparison with our daily spend on other areas.    It is a sobering reminder ahead of today’s budget of why eliminating the structural deficit must be a priority.   The depressing thing is that controlling the deficit will not change the daily interest on the existing debt – it’ll just stop it getting bigger and bigger.   We’re going to be paying for the party in the 90s for a long, long time to come.

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“1.6 Million Children in the UK Live in Severe Poverty”. Erm. Really?

Today there has been an alarming headline that 1.6 million children in the UK live in ‘severe poverty’.   Examples of the reportage can be seen at the BBC and Guardian.  Every now and again a news stat sets off a little alarm bell in my head.  This was one of those times – according to the Office of National Statistics there are somewhere around 12.1 million children in the UK (2000 census, I suspect little variation since then).   So according to today’s reports approximately 13% of children in the UK must live in ‘severe poverty’.   That little alarm in my mind was making a coughing noise which only thinly disguised the words ‘bull-shit’.   I usually go off on one when pointing out the rotten state the UK was left in after 13 years of Labour but even with blue-tinted specs on I would never claim that they left us with 13% of all kids living in ‘severe poverty’.    This figure needed some sniffing.

The original report is from Save the Children.  It can be downloaded here.  It’s pretty hard to find how they technically defined ‘severe poverty’ for their ‘research’. After a bit of digging it turns out they define it as those living in households with incomes of less than 50% of the UK median income (disregarding housing costs).   A median single income in the UK is circa. £20k. I have no idea how they then use their methodology to ‘disregard’ housing costs – but the top and bottom is that a couple with two kids who, after housing costs are paid, have an income of £12.5k a year are classed as in ‘severe poverty’.

When you look at the methodology the metric they use is not about poverty – it’s a about income distribution.  Without wishing to belittle the quest for more equitable income distribution- I can’t help but think that such loose use of language cheapens the words ‘severe poverty’ and so insults those millions in the world (including in the UK) who, very literally, do not know where their next meal is coming from.    We could have a very important national debate about income disparity and this data could be used to support the case of those who believe the gap is too wide – however to hijack the language ‘severe poverty’ is a distraction from all that is valid in that debate.

Now don’t get me wrong: that couple with those two kids on that income are going to have a horrible time.  The report does do a good job of highlighting the very real issues they face.   I am also under no illusion that genuine severe poverty exists in this country – the kind were parents go and beg on the street to feed their children – I see some of this here in Birmingham.   Some stories that happen right now in my City would make you weep – but to say ‘severe poverty’ is anything other than at the very margins of our society is a fantasy.  To suggest, as the words they have chosen do, that 13% of all children live in squalid, desperate circumstances is ludicrous.  By overstating it, all Save the Children have done is muddle two debates and distract some focus from tackling those very real cases that do blight our society.

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Ed Balls: The Return of Brownite Economics

Let’s face it:  Ed Balls was to Gordon Brown as Laurel was to Hardy.  His return will no doubt lead to ‘another fine mess’.   This surprise reshuffle does change the calculus of Labour’s electability.   When Ed Milliband decided not to appoint Balls to the role in October it was a deliberate and calculated move.   It was possibly the only truly leader-like think young Ed has done since he got the gig.   The reasoning at the time was surely:

  • You would not want someone so intimately connected with the entire economic calamity facing this country back on point for economic policy
  • You could not want someone who has had an insider view (and leading role) in using the office of Chancellor to undermine and oust a previous leader, sitting there ready for another metaphoric stab.

Well, nothings changed.  Those reasons still stand.  Yet here Balls is.  He’s got the job he craved from the moment he realised he was out-of-the game for the last leadership shot, and young Ed will be feeling his breath on his neck from here-on-in.

To give him his due Balls is a bruiser.  A political big-beast.  From today George Osborne will be looking forward to his turns in Parliament with a tummy rumble.  Balls knows his stats and figures and will not be easy to trip up.  Worse, he’s more than capable of scoring some points through sheer statistical battery.   But that’s all just fluff in the Westminster village.   Balls fundamentally is the living, breathing embodiment of the leftish or centre-leftish vision of Big Government/Big State/Spend and Tax Labour.  As Shadow Chancellor he will push them more so.  Even with all the current national woes, when push comes to shove that positioning is simply electoral poison.   The ‘squeezed middle’ – the people who count – the very people who switched to Labour in 97 and switched away from them in 2010 – those floating voters just don’t drift in that direction.

And that is the reel rub for Labour.  The one man on the Labour front bench who could appeal to that ‘thinking middle’ was Alan Johnson.  He was simply impossible to dislike.  Even though he was struggling to catch-up with his brief, even though he talked rot – people, even me, warmed to him.   For a politician that curious ‘nice bloke’ charisma is the X-factor stuff.  It is priceless political alchemy.  Blair had it.  Johnson had it.  Brown didn’t.  Balls doesn’t.   And so the Labour party is a weaker party this evening.

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As I say, for reasons I cannot put my finger on I like Alan Johnson despite his politics.  I have no idea why he has stepped down.  I wish him well and sincerely hope that whatever the personal issues are they are the kind that can be put right and have a happy ending by making this move.

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Put the armour on. 2011 is going to Hurt

Happy New Year.   Or is it?  The reality is that 2011 is going to be pretty miserable for the whole country.   Any honeymoon period for the Coalition (if there was one) is up.  The reality of austerity measures are kicking-in.  Turning the economy is like turning an oil tanker.  Things will get worse before they get better.  We will see more public sector redundancies, we will see more cuts to other services,  the VAT rise will trickle to the till,  we wont see pay rises in the private sector, even the employed will feel  -and actually be in real terms – poorer this April than April two years ago.  Health and education reforms will spook the Unions.   Protest will spread.

The Government has to accept this and hold its nerve.   It cannot do what it needs to do and be popular in the immediate or short term.  It needs, in the national interest, to do the right thing rather than the popular thing.  With eyes wide-open it needs to understand that its popularity will fall this year and it needs to carry on regardless.  The instinct and philosophy of this government is the right one.  The challenge now is to be competent in delivery.   The quicker we get the pain over, the quicker we start the recovery.  If we start the recovery then the short-term unpopularity will dwindle and we have a fighting chance of re-election in 2015.  Dither and spread the pain over the whole five years and even if the objective of shoring up the economy is met it will just gift the country back to Labour to mess up again.

Labour will blame the Coalition for the pain. They’ll say: “They’re in Government.  We’re not.  It is their choices, it is their fault”  This is a bit like blaming a doctor for making you ill with chemo rather than the fags you only gave up six months earlier.  Nevertheless, while the pain is there the public will buy their argument.  The Coalition needs to see its program through and see it through quickly.

The lessons are there in History.  Those who remember the 1981 budget may spot certain parallels with today.  For the whole period between of 80 and 82  it was inconceivable that the Conservatives would be returned to power.  Nerve was held.  The budget worked.  Britain, after the pain, prospered.   Thatcher would have won even without the Falklands.   But we must also learn from that period.  Nobody would want to see the likes of the Brixton or Toxteth riots again.  That’s why it is so crucial that we don’t just deliver on the miserable austerity side of the program –  but also on the social side – IDS has made his case well for welfare reform – he needs to be allowed to now get on and deliver .  This is the year to get moving.   It’s also critical that we strike the right balance in the way we police inevitable protests.  Get that wrong and the Government could doom itself.

So on that dour note, I say again:  Happy New Year.  Put the armour on, 2011 is going to Hurt.

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Does the Irish bailout teach the UK anything about austerity measures?

Ireland has bowed to the inevitable and accepted the necessity of a bailout.   There will be a lot written about the causes and blame for the sorry state of affairs.  Take your pick:  Reckless bank lending, reckless corporate and individual borrowing, reckless State spending, reckless lack of regulation, etc.   Folk will write very studious books on these events.  The headline conclusions will be the same old broad themes they have been after every financial crisis in history.  Initially people will earnestly take on board these lessons and kick off the new economic cycle.  The age old truth that the ‘collective memory’ is shorter than the ‘economic cycle’ will then slowly kick-in.   As time passes people will forget the lessons and again rationalise that the laws of economics ‘are different now’.  The whole thing will rise and collapse again – probably more than once or twice in our lifetimes.   It was ever thus.

Back in the here-and-now there are political points being scored as the Irish brown stuff hits the whirly thing.   An argument gaining currency amongst leftist commentators is that the Irish humiliation shows that austerity measures (read government cuts) do not work.  There is one example here.   This needs to be taken head-on.

At first pass there does sound a clear logic to their argument.  Ireland hit breaking point first so went first with austerity measures .  The measures manifestly haven’t done the job given the need for this bail-out.  Therefore, ‘logically’, austerity measures do not work.   Therefore, ‘logically’, they would have been better to keep pumping more state money around the economy to avoid this final meltdown.  Therefore, ‘logically’, the UK must take note and course correct.

It is a compelling narrative.  It is also dangerous.  If you  stop and think about it this argument  is no more or less a ‘logical’  as saying “A man was in a hole, he stopped digging, he found he was still in a hole, therefore he should have kept digging”.

We cannot let their spin distract us from the fundamental issue:  the nation was spending four pounds for every three that it brought in.   We have an unsustainable debt and government spending polices were making it worse.  You don’t solve a problem and delaying the inevitable for longer.  When you have a bubble – sadly you have to let it burst.  Pouring more soap into it doesn’t let it down gently – it just makes for a bigger bang when it comes.

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