Tag Archives: George Osborne

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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Insider View of Coalition Negotiations

On Tuesday I attended a fascinating seminar at Portcullis House on the nuts and bolts of the Coalition negotiations in May.  The speakers were Lib Dem David Laws and Tory MP Rob Wilson, both of whom are peddling their respective books on the subject*.  For me, it was a unique chance to get a perspective from people who were ‘in the thick of it’.

A  blow-by-blow account of the evening has been done by a Lib Dem blogger here and I wont try to better that.  I will just summarise my take-away points:

  • The Lib Dems were genuinely knocked backwards by their election showing.  Nothing in their private polling had led them to expect so few seats.  Before polls closed Danny Alexander (then Clegg’s chief-of-staff) was briefing his colleagues to expect 80-85 seats.  He was way out.
  • The Lib Dems were between a rock and a hard place.  Although many of their key players would have felt more comfortable in a ‘progressive coalition’ with Labour – the Parliamentary maths and Labour’s attitude made that a no-go.  At the same time if they couldn’t form a coalition with the Conservatives we would enter a period of unstable Government with another election in November.  They reasoned a) they would do worse and b) a short-lived impotent hung parliament would be very damaging to their long term aspiration for PR – a system which would lead to hung parliaments as the norm rather than the exception.
  • The Labour party machine seemed to have done literally no planning for the eventuality of a hung parliament.  Laws had the sense they were making it up as they went along – a sense that Wilson confirmed through his interviews with the key players on their team.
  • The Conservatives had done proper planning for the Hung Parliament scenario.   They were very quick to produce a document that conceded so much the Lib Dems had no choice but to take them seriously.   Laws’ view was that the Tories essentially came into discussions with a ‘cut-to-the-chase’ final position.   The only thing that was unacceptable in the first offer was on electoral reform  (the proposal being to simply to set up another Commission to look at the subject).  I pressed Laws on whether with hindsight – if the Tories showed they had wiggle room on Electoral reform, perhaps there was wiggle room on other areas had he pushed harder.  He didn’t think so.   I personally do wonder.  Wilson made the point that for many, if not most Tories the ‘key concessions’ – the no tax on first £10k and the pupil premium were not any wrench to concede – most would have loved those policies in their manifesto in the first place.
  • Laws and the Lib Dems struggled in the negotiations to figure out how to navigate so much so quickly whilst still staying within their internal party processes.  When Laws observed the Conservative Party was spared these constraints with the leader being an effective ‘absolute monarchy’ William Hague knowingly shot back that the check and balance was “our monarchy is qualified by frequent regicide”.
  • On the final day Brown had lost the plot so much he even offered the Lib Dems 50% of Cabinet seats.

It was a good event and the second time that I have heard Laws speak.  He does impress and seems a very good counter-balance to the more loony fringes in the Lib Dem party. It underlined for me the sadness that through his wrong-doing he excluded himself from Cabinet.   If you do the wrong thing for the right reasons, you still do the wrong thing.  His replacement is not half as able.  I noted yesterday that Cameron was asked if he wanted Laws back: “Yes, and soon” was the reply.   On reflection, I could live with that.

* Rob Wilson has released 5 Days to Power while David Laws book is 22 Days in May.

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Conference Day 2: The Child Benefit Anomaly

Every single cut is going to hurt someone.   And nobody likes the ones that hurt them.  I have a daughter and another child on the way.    At conference today we got the news that the Child Benefit of 80ish quid we get each month is going to be stopped.  We’re far from rich but as a top tax-band family we are certainly very comfortable – I couldn’t look anyone in the eye and say that we either need or deserve that money.  It’s one we’ll just take on the chin in good spirit.

I suspect I’ll be in the minority in my acceptance though.  The Government is living its promise to do the right thing rather than the popular thing – and I suspect that this will be wildly unpopular.

One genuine issue that people have been quick to highlight is that there is one group who this will impact more than others:   This is single income families who earn just over the threshold.  They lose the benefit whilst families with a double income of salaries just less than the upper threshold retain the benefit.   In the very worst case example a couple who both earn 43k and so have a family income of £86k will keep the benefit, the single income family earning a fraction more the £44k will lose the benefit.   This anomaly is manifestly not equitable.

That said, people who are getting on some very high horses about this need to take a step back and reflect – this same anomaly has existed for years (including the entire 13 years of Labour rule) in that marginal rates already led to the same unfairness via income tax.  In the exact same examples above the couple with the single income has already been walloped at 40% for every extra pound they bring in, while the double income couple have only been banged for 25%.   I make the point to give context rather than as a justification.  Two wrongs don’t make a right – and obviously this new anomaly adds insult to injury for those people.

The anomaly aside (and by very definition any anomaly is an exception to the norm) George Osborne has still done the right thing.  He was between a rock and a hard place – to correct the anomaly and move to a solution that took total house-hold income/means-testing into the equation would have added an administration nightmare  – more forms, more IT systems, more opportunities for fraud all of which would eat away at the savings to be made – and the savings after all are the whole point of the move.   The solution adopted is pragmatic rather than perfect.  It can be very easily be implemented with existing tax data.  Those people with double incomes  just below the threshold should think of themselves as accidental winners rather than single income families just above it thinking of themselves as targeted losers.  The principle that high income earners do not require welfare support from the state is sound.

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The Brutal Budget?

Well, I’ve just watched George Osborne come of age.  The ‘light-weight’, ‘inexperienced’, ‘young’ Chancellor gave an assured performance that will do wonders for his poor reputation.  It should also dispel some of the prejudice that still exists about the modern Conservative Party.

The spin that had been dripping out from Whitehall over the last few weeks could be summarised in one sentence: “This is going to Hurt”.  The facts about the economic situation were not in question –

  • For every three pounds we currently receive in tax receipts we are spending four on public services (i.e we have a significant structural deficit).
  • The National Debt is already £22,400 per head.

The nation could not go on spending like drunken sailors on shore-leave.  You cannot tackle the debt until you tackle the structural deficit.  You can only tackle the structural deficit in one of two ways – raise taxes or cut public spending.  The trouble for George Osborne is that neither is a popular thing for a Government to do.  But in some ways the choice was made for him, as he put it, “We are over-spending – We are not under-taxed”.  So with an impossible juggling trick demanded what is my gut reaction to what he has done today?

Well he had some pleasant surprises that may confuse those who cannot see the Tories as anything other than the ‘nasty party’:

  • The increase in the tax-fee allowance was inspired and will benefit those on the lowest pay.  I fully acknowledge that this was a Lib Dem policy but it is a credit to our Coalition that we really have cherry picked the best thinking from both Parties.  880,000 of the poorest working people taken out of tax.  Wonderful.
  • The raise in Capital Gains Tax will mean that the wealthiest in our society cannot be accused of not shouldering their share of the burden.  Those who thought the Tories were all about protecting the rich ahead of helping the economy have been proved wrong.
  • His surrender of forecasting powers to the Office for Budget Responsibility is absolutely the right thing to do for the country – but removes a key ability for him to ‘play politics’.  The best thing Brown ever did as Chancellor was give up the power to play politics with interest rates – Osborne takes this to the logical next step.
  • The acknowledgement that the banks brought about the financial crisis and the new measures to tax riskier aspects of their behaviour will be in tune with popular feeling and was the right thing to do.
  • Restoring the link between state pensions and earnings.
  • As a small-business owner I was delighted with the measures he put in place to give us a fighting chance of getting through the recession.
  • No cuts in capital expenditure.  A grown up lesson learned from the last time the Conservatives were in power in the early 1990s.

The headline will of course be about the rise in VAT.  For all the above the pain had to come and this is where the punch landed.  A tax on consumption does encourage individual prudence, but it also risks lowering consumer spending to the point that both retail and manufacturing are hurt.  The leap of faith (no doubt supported by economic modelling) must be that the proportional pain caused by the 2.5% rise is counterbalanced by the good to the economy from the reduction in structural deficit.  We need to monitor this closely and make sure the economic modelling is correct – if it backfires we shouldn’t shy away from course-correcting quickly.

Obviously, much of the pain is also going to be felt by the Civil Service when the departmental cuts have to be worked through and Councils as they struggle to work within the constraints brought about by a council tax freeze.  The challenge for both Civil Service and Councils will be to deliver those reductions with the same equity and tone that the Chancellor managed today – and crucially without hitting the public perception of service delivery.  Ultimately, for right or wrong, it will be that upon which the Coalition is judged.

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Why George Osborne is an Optimist – and Why He Needs to Be

at Birmingham Uni

The knives are well and truly out for George Osborne.  The Observer reports that Labour are going to target him as the shadow teams ‘weakest link’.  The polling data (referenced in the Observer article) confirms that the public are averse to him – and I’ll add to the evidence with a less scientific straw-poll of my own ‘vote undecided’ mates all of whom see him as a liability.   To pick out the key words from their objections to him he apparently lacks ‘experience’, ‘credibility’ and ‘gravitas’.

It is maddening there is any doubt in the electorate’s mind  who is the safer pair of hands for the economy.  The economy should be an ‘Open Goal’ for the Tories but somehow they seem intent on blasting over-the-bar from close range.  Osborne is finally realising that he’s got to turn this public perception around.  There is no room on the front bench for someone who wants to be a back room strategist – if he wants one of the ‘Great Offices of State’ he has to get out there  and land his message in the minds of the public.    Is he really up to the task?

I like to judge politicians in the flesh so on Friday I went along to the University of Birmingham to listen to him deliver a speech there.   He spoke with only hand scribbled notes, not quite a sharp as Cameron who can manage these things without any reference material, but certainly better than most current politicians who wouldn’t dare step up to a lectern without a fully typed speech and/or autocue.

He spoke of three central themes the Tories wish to land:

  • That they have a credible plan for the deficit.  He delved into some of the detail making clear that it is the structural deficit he has to target and that we are in the bonkers position that the State is still spending £4 for every £3 it receives.  That we need to make the cuts ‘not on the backs of the poorest in society’.  He hinted any tax cuts would come from NI before he aimed at the 50% tax band – and indeed the NI cut seems to have been made official policy this morning.  He was more open about where he would cut income than where he would cut expenditure and I know that annoys people.  They do have to add this detail to the public domain soon.
  • That there are plans to ‘get business’ going again.    He gave some detail on the help to be given to small businesses.  As the owner of a small business myself there is real gold in these proposals.
  • To create a more balanced economy.  Again, he delved into a little detail on how Tory policies on education reform, welfare-to-work, energy policy and broadband infrastructure would pull together to achieve that end.

All the content of the speech was fine – he certainly pushed all the right buttons for me.   If there was a problem it wasn’t the content – it was the delivery.

It is hard to put your finger on what is ‘wrong’ with the delivery.    Some people are blessed with a presence , voice and stature that commands an audience to cling to every word .  They could frankly read out the dry text of a European Directive and keep an audience fully engaged.   George Osborne is not one of those people.  Politics should not be like that, it harms our democracy that it is.  To make the leap from manager to leader you need this X-factor.   I guess the point of the phrase ‘X-factor’ is that the ‘X’ is impossible to define.  Whatever it is: he hasn’t got it.

I guess the plan was always that he could cling onto Cameron’s coat tails to get the job then the missing ‘experience’, ‘credibility’ and ‘gravitas’ would grow by default as he made the job his own.  The calculation must have been that whilst he isn’t an electoral asset he wouldn’t be a liability and would be good at the job.  That ‘wouldn’t be a liability’ part of the assumption is now being tested.

We did get a five minute glimpse that it is within him on certain themes to strike the right chord.  In response to a question about the possibility of a double –dip recession he suddenly went a bit off-piste and talked about his personal optimism for Britain.

His point was that despite the global woe when you look at the global business cycle, and you look at the surge of economic activity in India, Brazil, Turkey, Russia, China and so on, as the manufacturing and service base they have created over the last few years settles down (which has been to a certain extent at our expense) so their new middle-class begins to embed middle-class spending habits.  When we look at the industries Britain still excels at – pharma, aerospace engineering, media, financial services, prestige brands, tourism etc – these are all things that this new global middle-class will push their new found wealth into.   We are poised to be big benefactors of that shift.  With the right policies to support our economy whilst the global cycle swings to this next stage – there can and should be great hope for the UK.

As he warmed to his optimistic theme he relaxed, his shoulders visibly dropped an inch, he smiled, his hands moved – there was passion there.  He had a compelling, well articulated narrative which he believed in.  In response the audience sat up straighter, leaned forward, listened closely – they were with him – they were engaged.  The moment ended as quickly as it had started when he then fielded a question about his role in managing both fiscal and monetary policy.  The spell was broken.

Cameron isn’t going to change horses this close to the finish line.   Osborne is the man and he has to drag himself out of this rut where he is being cast as a liability.  He needs to find something else on top of the depressing detail of what needs to be done to get us out of the economic hole – if you’re asking people for pain now, you have to have them believe that there will be less pain tomorrow.  The optimistic message is key – he should develop it and shout it from the rooftops.

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