By Tim Montgomerie
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Matt Sinclair of the TaxPayers' Alliance liked the populist measures - #Crosbynomics according to Matthew d'Ancona - but worried about the Budget's complexity:
"Unfortunately, the great limitation of this budget was that it relied far too much on complicated targeted reliefs instead of tax cuts across the board. Simpler, strategic tax reforms that reduce the overall burden would be fairer and do more to produce the stronger economy Britain needs."
David Skelton of Policy Exchange also welcomed what he called the "Boddingtons Budget," citing the end of the beer duty escalator and another freeze in petrol duty. He worried, however, that more could have been done on housebuilding:
“Although measures to help first time buyers are welcome, the UK is still on track to preside over the lowest level of housebuilding since the 1920s. More radical planning reforms combined with the introduction of measures such as self-build should be introduced to get Britain building.”
Professor Philip Booth of the IEA is concerned that the Chancellor's housing measures have actually learnt little from recent economic history:
"The decision to provide further Treasury guarantees for mortgages is leading the government to get involved in exactly the sort of reckless behaviour that led to the failure of major banks in 2007-2008. Any attempts to provide support for the housing market whilst not liberalising the planning system will simply lead to higher house prices and rents.”
On behalf of the CPS, Ewen Stewart commented:
“The most significant announcement today was the proposed changes to the Bank of England’s inflation targeting remit. Whilst lip service was paid to maintaining the 2% inflation target, it’s clear Mark Carney will be given significant rope to engage in even more expansionary monetary policy. So far QE, despite being larger as a proportion of GDP than that undertaken in the US, has failed to generate growth. A further loosening risks embedding inflation and sterling weakness.”
Also from CPS Kathy Gyngell echoed my concerns from earlier today about the anti-family dimension to the Budget:
“This budget is worse than nothing for the stay at home mother (the single earner couple family). Already grossly penalised in the tax and benefits system for the instinctive and reasonable choice to care for their infants at home, now this couple are meant to subsidise rich working women’s nannies.”
The Adam Smith Institute lists its good, back and ugly conclusions here.
A few think tank reactions to the Autumn Statement...
Mark Littlewood, Director General at the Institute of Economic Affairs, focused on the big picture and the fact that Britain is becoming a high debt nation: "The Chancellor has basically stuck to his spending plans, but not to his deficit plans. Low growth and weak tax revenues demanded that he made greater reductions in spending today. His plan is now to add around £6,000 to the national debt for every man, woman and child in the UK between 2013 and 2018. By the end of this Parliament this will mean the UK’s national debt is close to £65,000 per household. It’s clear the government is still failing to take the necessary action to restore economic credibility. It’s all very well acknowledging the need to get public spending under control, but it requires substantial reform. Limiting benefit rises to 1%, scrapping the planned fuel duty increase, devolving power over teacher pay to schools and cutting corporation tax are steps in the right direction. But they are tiny, tinkering measures – not radical reforms."
Sam Bowman of the Adam Smith Institute was even more depressed at the Chancellor's lack of boldness on spending and public service reform: "Deeper cuts to public spending are clearly needed to cut the deficit, but these are not possible without a fundamental shift away from socialistic monoliths like the NHS. The only way real cuts to expenditure can be made is by shifting to more efficient, market-based models of social insurance for healthcare and welfare. The claim that we can make substantial savings by ‘trimming waste’ is a lie – and we’re fast learning what a dangerous one it has been.”
Graeme Leach, speaking for the Institute of Directors, was more positive: "Graeme Leach, Chief Economist at the Institute of Directors, said: “This was a tricky job, well done by George Osborne. Faced with a weaker outlook for GDP growth, the Chancellor needed to raise business confidence whilst at the same time keeping the deficit on a downward path. And he largely succeeded, particularly with the surprise reduction in Corporation Tax. Ideally, we would have wished for further and faster deficit reduction but political reality always made this unlikely. Our key concern is that the OBR’s growth forecasts will yet again prove too optimistic, with the result that the deficit in the out years will be much higher than forecast. Business confidence will be boosted by the corporation tax cut.”While welcoming many of the Chancellor's measures Jonathan Isaby of the TaxPayers' Alliance expressed concern at the increasing number of people paying the 40p tax band: "The Chancellor has sent out entirely the wrong message to those earning, or hoping to earn, the increasingly modest wage where almost half of your income starts to be taken in Income Tax and National Insurance. Hundreds of thousands of new people are being ensnared by a punitive rate of tax."
Christian Guy of the Centre for Social Justice regretted that - yet again - the Chancellor had failed to introduce a tax allowance for married couples: “The Government said it would introduce a transferable tax allowance for married couples, it is disappointing that this pledge has still to be fulfilled as it is shown that it would have a positive impact on the incomes of the poorest working households. It would also play a part in tackling the perverse incentives which currently persuade many people on low incomes to reject couple formation and the stability of marriage.”
By Matthew Barrett
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Following George Osborne's Mansion House speech, and announcement of new bank lending programmes, several think-tanks and campaign groups have reacted to the news.
The Institute of Economic Affairs' Editorial Director, Prof Philip Booth said:
"The government has got itself into a terrible muddle over this crucial policy area. On the one hand, it is imposing huge liquidity and capital requirements on banks to reduce the potential cost to the taxpayer of bank failure. The FSA is also increasingly regulating financial product markets to reduce the flow of funds to borrowers. On the other hand, the government is bringing in a series of schemes to subsidise and guarantee lending through the same commercial banks whose lending is being restricted. Emergency measures to deal with liquidity crises are one thing. However, with regard to the fundamental policy issue, the left hand of the Treasury does not seem to know what the right hand is doing."
Graeme Leach, Chief Economist at the Institute of Directors, said:
"Facing a bombardment from the euro zone the Chancellor and Governor are calling up the reserves. Defensive measures need to be put in place and they’re making sure everyone knows they’ve done it. The extended liquidity and funding for lending schemes are welcome, but limited. The liquidity scheme will need to be massively expanded if break-up and contagion spread across the euro zone. The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing. But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."
By Matthew Barrett
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In a new report - After PFI - released yesterday by the Centre for Policy Studies, Jesse Norman MP has advocated the abolition of PFI, and its replacement with a new model of public sector procurement. Norman, the MP for Hereford and South Herefordshire, sits on the Treasury Select Committee, and set up the PFI Rebate Campaign in 2010, which led Tim Montgomerie to label him "the £1.5bn backbencher", after the expected public savings from the campaign.
After PFI shows that PFI has been one of the costliest experiments in public policy-making, causing more than £200 billion of public debt - the equivalent of £8,000 for every household in the country.
Amongst the detailed recommendations in the report are:
Tim Knox, Director of the Centre for Policy Studies, comments:
“The extraordinary cost and opacity of PFI under New Labour must never be allowed to happen again. Over £200 billion of new infrastructure is needed over the next decade. We cannot afford to get it so wrong again.”
The full paper can be downloaded here.
Patrick Nolan is the Chief Economist at the pro-market think tank Reform. Its report, “Reformers not spenders,” is available here.
In a foreword to Reform’s alternative Budget in June 2010 Paul Martin, the former Canadian Prime Minister and Minister of Finance, argued that Canada’s successful fiscal consolidation in the 1990s was based on clear fiscal targets and a position that these targets would be achieved “come hell or high water.” In a report released today Reform highlights that when it comes to fiscal consolidation the current UK government is, in comparison, wobbly.
When faced with difficult circumstances the Chancellor’s response has been to shift the goal posts. Rather than eliminating the structural deficit by 2014-15 (the target set in the 2010 Budget), last year’s Autumn Statement said this would happen by 2016-17. Rather than public sector net debt of 69.4 per cent of GDP by 2014-15, debt is expected to be 78.0 per cent. Rather than spending 40.9 per cent of GDP by 2014-15, spending will be 42.2 per cent.
This means that claims that the Coalition is meeting or beating its fiscal targets must be taken with a pinch of salt. Net government debt is still expected to increase by £471 billion over the next 5 years. Far from being out of the danger zone the public finances remain fragile. People who argue that the Coalition should ease up on its spending plans or introduce tax cuts do not grasp the fiscal position. There really is no money left and no scope for giveaways in next week’s budget.
Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies. You can follow him on Twitter here.
The only certainty that seemed to stem from the financial crisis was that the UK banking system had to undergo a process of posthumous but very necessary regulatory reform. What was not clear from the start was what the cost of such regulation would be. Now that we are seeing that this necessary but costly process has begun to impact on the long term return on equity of banks in general, it becomes clear that money invested in the crisis era may be hard to recover for a good while yet.
The cost of de-risking RBS, both in terms of its balance sheet (selling riskier business) and its regulatory capital (raising a larger buffer) has eaten into perceived future earnings and ‘book value’ – both of which drive the share price. UKFI has already made the point to HMT that the cost of a "safer" regulatory environment for banking (which may well save us money in the long run) has been to wipe value off the asset it owns - that same asset which prior to 2008 was the natural beneficiary of the lightest touch regulatory regime. Even George Osborne has begun to talk about the ‘social value’ of RBS, perhaps aware that obtaining a huge windfall to fund tax cuts in the build-up to a 2015 election now looks pie-in-the-sky.
However, RBS and Lloyds continue to suffer from further headwinds as many investors struggle to decide whether these are commercial enterprises or, in effect, government ministries. The size of the balance sheet in RBS in particular and the ruinous systemic effect that any misstep might have on the UK economy, make this an even more pressing issue. For instance, if Hester and the current management team were to walk due to political pressure, the credit market’s loss of confidence in the ability to contain the risks could be catastrophic. As such, the real questions for the taxpayer are not “what did I invest?” and “when will I get my money back?”, but rather, “are my chances of recovering my money better if the banks are back in private hands?” and “how dangerous is it to leave these companies in public hands?” With the shares in both banks far below the government’s “in-price” it becomes hard to see how all these questions can be answered simultaneously.
By Tim Montgomerie
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Pasted below are some reactions of centre right thinkers to the Chancellor's statement on banking reform.
Tim Ambler, Senior Fellow at the Adam Smith Institute, says:
“The Chancellor may be rushing out his 80 page response to the Vickers report to get the Business Secretary off his back rather than because of any real urgency. Implementation is not until 2019. Most of the detail is left unclear and consultations will continue. But it is a pity that he has nailed his colours to the mast when most independent expert commentary has shown that the Vickers commission proposals will be bad overall for Britain, especially for SMEs, and bad for the international competitiveness of our bankers. The government cannot claim that competition on the High Street would flow from the Vickers report as it barely discussed the matter. The target was to ensure the Treasury would not have to pick up the tab for failures by freezing the banking sector and making it even less competitive. But what banking in the UK really needs is more, not less, competition. It wasn't investment banks that caused the banking crisis, but the supposedly 'safe' retail banks such as Northern Rock and HBOS. Ring-fencing is simply the wrong solution to the wrong problem."
Prof. Philip Booth, Editorial Director at the Institute of Economic Affairs, said:
“There is a clear lack of decisiveness about how to approach the problem of banking regulation from the government. On the one hand, welcome action has been taken to ensure that depositors are treated preferentially in the event of a bank failure and to ensure that banks can be wound up in an orderly fashion. On the other hand, the government wants banks to hold much more capital to ensure that they very, very rarely fail. Discouraging failure so strongly also militates against the government's other objective of promoting a dynamic market with healthy competition from new entrants because it prevents the established banks from failing and exiting the market. The ring fencing of EEA deposit business is a clumsy mechanism that would not have made any difference to the banking crash of 2008. A more imaginative approach would have been to give the Bank of England a primary legal responsibility to ensure that banks could be wound up safely in the event of failure and also to give the Bank of England the power to impose structural change if and only if it was necessary to do so.”
By Joseph Willits
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The Institute of Economic Affairs (IEA) has issued a warning to the Government, suggesting they maintain current plans to reduce the deficit, and resist any temptation to follow a 'Plan B'. Research published by the IEA draws on evidence from other Western governments' stimulus packages which have failed to resolve their sovereign debt crises. The report, a transcript of Professor Robert Barro's Annual Hayek Memorial Lecture at the IEA, has five key findings:
is Britain's ranking in the World Economic Forum's tax competitiveness league table. We were 4th in the world at the end of the Major years.
former Tory Chancellors have said that the 50p tax rate should be abolished; Lord Lawson has called it "very dangerous, very unwise, very foolish" to keep 50p tax band. Lord Lamont has described it as "uncompetitive".
is the highest tax rate in Germany. It's 43% in Italy. 41% in Ireland. 40% in France. 35% in America and just 27% in Spain. The Institute for Fiscal Studies has concluded that 40% may be the ideal top tax rate if you want to maximise revenue.
Despite all this, only 27%
of all voters think the 50p tax rate should be abolished.
think it should be kept.
think the 50p tax rate should be abolished if it doesn't bring in any extra revenue.
while, regardless of its revenue-raising effect, 42%
think the 50p tax rate should be kept in all circumstances.
The latest evidence is the 50p tax might have reduced revenue by
is the year in which George Osborne will look at all of the evidence on what the 50p tax has done and decide whether or not it should be cut.
is the position abolition of the 50p tax rate gets on the 'tax cut wish list' voted on by Tory members. Lower petrol prices is the tax cut most desired by the Conservative grassroots. A higher threshold for 40p taxpayers is more desirable.
top income taxpayers will pay £14.2bn in income tax this year. That's nearly as much as the £14.9bn contributed by the 13.93m people earning up to £20,000 a year. Allister Heath has also noted that "the top one per cent of taxpayers (roughly speaking, those on £150k and above) will pay a record 27.7% of the total income tax take in 2011-12, according to HMRC (they earned 12.6% of total income, down from 13.4% five years ago). This has increased from 26.6% the previous year, 21.3% in 1999-2000, 14% in 1986-87 and 11% in 1981-2."
think taxes on the wealthiest people in the country should be increased but a larger proportion - 42% - think taxes on the wealthiest should be left unchanged.
If you are going to tax the wealthy, 56%
of all Conservative voters support a mansion tax with just 38% opposing.
Most of the opinion polling in this blog came from YouGov's latest poll for The Sunday Times.
Sam Bowman is Head of Research at the Adam Smith Institute.
Nobody likes to shoot the messenger more than a politician. As Europe’s economies disintegrate, markets are often blamed for creating “volatility”, and are a convenient scapegoat for political failures. The EU-wide Tobin tax announced this week by Angela Merkel and Nicolas Sarkozy is intended to reduce such “market volatility”. As our new paper on the Tobin tax argues, it may have the opposite effect. And, if introduced in Britain, it could cripple Britain’s financial sector.
The report – The Tobin Tax: Reason or Treason? (pdf) – argues that the Tobin tax is an immature idea that has not worked in the past, would not raise revenues, would hurt the UK’s financial sector and could actually increase market volatility. The report looks at the economic case for the Tobin tax, and the only example of a “pure” Tobin tax being implemented in a developed country – Sweden, in the 1980s. In both cases, the arguments for such a tax are shown to be deeply flawed.