2010 June » Tax Research UK

Have no doubt about it – the private sector is going to be battered by ConDem cuts – and the result will be recession

Jun 272010

George Osborne’s belief is that if the state sector is scaled back the private sector will rush to fill the vacuum. That’s why he’s willing to impose massive and destructive cuts on the wellbeing of ordinary people in this country.

He’s wrong to think this. There are three reasons for saying so. First, as the FT reports:

The dangers facing companies that supply the UK public sector were highlighted on Friday when Connaught issued a profit warning that wiped out almost a third of the social housing maintenance group’s market capitalisation.

The FTSE 250 company became the first big state contractor to warn that the looming spending cuts in the wake of George Osborne’s emergency Budget would materially hit earnings this year and next.

Have no doubt, these companies will not be alone.

Second, there is no reason why the private sector could not take up the slack now. Again, as the FT has reported, admittedly with regard to US companies but with the scenario being replicated here in the UK:

US companies are signalling a desire to buy back their own shares at the highest rate in months as record levels of cash pile up on balance sheets.

So far in 2010 there have been 343 new authorisations for $178bn in buy-backs, according to Bank of America Merrill Lynch. If carried out, and projected over a full year, it would be the highest volume since 2007, or $898bn. Last year, there were only $128bn-worth of buy-backs. Other US companies announcing $1bn-plus buy-backs in June were CVS Caremark, Viacom and Monsanto.

This situation of companies being very heavily cash rich right now is common: it’s happening here in the UK too. Again as the FT reports (same link) there is an excuse:

Companies so far in 2010 have been cautiously exercising their right to buy shares. They are keen to maintain a large cushion, as rating agencies are closely watching cash balances as credit markets tighten.

So the rating agencies which stop government borrowings are now also the people stopping companies spending to make up the gap! The madness of the impact of these wholly inadequate organisations continues.

But there is a third reason why the private sector will not be filling the gap. It’s not just that the government is not spending, and they’re the biggest single customer for the private sector. Nor is it just that household well being is collapsing – although it is. The real reason is much more important and never stated: the simple, fact is that there’s nothing the private sector can sell to people that can make up for the loss of the state services they really want right now.

People want schools.

people want law and order.

People want well maintained roads.

People want social services.

People want the safety net the state provides.

People want fair pensions – not ones that decline in value.

People want to know they won’t be financially devastated by sickness.

And they’re being denied these things. In the face of that reality they’re not going to go out and buy new goods or indeed new services. There are only so many televisions they need. So many phones. So many clothes. And so on. But they don’t want them, as much as the security the state supplies.

So they won’t substitute reduced state spending with more private spending. They’ll hoard cash – just as companies are – because it is vital for them that they build up their own reserves to cover the risks that the state has until now insured them against. The consequence of that is obvious. We will have a profound and deep recession , if not depression.

All of that for reason of dogma: a wholly false belief that the private sector is crowding out the private sector when people actually want what the state is providing more, I suspect, than any private sector alternative. And one other illusion – the one that creating “sound money” of constant value is worth this pain. It isn’t. Planned inflation has to be part of the solution too. It is the only historically proven way to wash bad debt out of an economy. Which is why we need it at 4 to 5% now.

These dogmatic illusions – by the Conservatives and as much by Orange Book Lib Dems will cost us dear. We will pay an enormous price for them. One day they will too.

Don’t forget the spending cuts! The real impact of Budget 2010

ConDems, Economics 3 Responses »

Jun 272010

There’s stunning analysis from the TUC and UNISON in a report by Tim Horton and Howard reed out today with the above title.

As they say:

This report reveals the true impact on households of last week’s budget.

To date, assessments of budget’s impact, and how fair or unfair it might be, have centred on the impact of the tax and benefit changes announced, while ignoring the impact of spending cuts.

Using a new model of how public spending is allocated across households in the UK, this report estimates the distributional impact of the spending cuts announced in the budget. Then, by combining this with government data on the impact of the budget’s tax and benefit changes, the report calculates the budget’s overall impact.

In summary, the report finds that:

‚Ä¢ Excluding benefit cuts, the budget committed to £34 billion of spending cuts by 2012-13.

‚Ä¢ The impact of these cuts will be deeply regressive. All households are hit considerably, but the poorest households are hit the hardest.

‚Ä¢ Assuming these cuts fall evenly across non-ringfenced departments, the average annual cut in public spending on the poorest tenth of households is £1,344, equivalent to 20.5% of their household income, whereas the average annual cut in public spending on the richest tenth of households is £1,135, equivalent to just 1.6% of their household income.

‚Ä¢ When the impact of these spending cuts is combined with the Government’s own analysis of the impact of the budget’s tax and benefit changes – in order to generate a picture of the budget’s overall impact – the result is, once again, deeply regressive. In particular, the magnitude of the impact of spending cuts on households dwarfs the impact of the tax and benefit changes.

‚Ä¢ Overall, the combined average annual loss in income and services for the poorest tenth of households is £1,514, equivalent to 21.7% of their household income. For the richest tenth of households, the annual loss in income and services is £2,685, equivalent to just 3.6% of their household income.

These results are illustrated in the graph below.

As the authors have said on Left Foot Forward:

The Government had previously claimed that the impact of the budget is “fair” and “progressive” on the basis of the distributional impact of the budget’s tax and benefit changes alone – in particular, making a great play of one graph in the Budget report (Chart A2, p.67), showing the impact of tax and benefit changes by 2012-13 (these are the red bars in the graph above).

But this completely ignores the impact of cuts in public spending on households. What really counts for fairness is not how families are affected by tax and benefit changes in isolation, but how they are affected by the whole package – spending cuts included. And, as TUC General Secretary Brendan Barber, commenting on our analysis in today’s Observer, puts it, when you consider the impact of spending cuts too, it “destroys” any claim that the budget was progressive.

While it is likely there would have been significant spending cuts whoever had been in government, this analysis of the impact of spending cuts raises real questions about the coalition government’s decision to rely much more heavily on spending cuts for reducing the deficit than other parties had planned to. Far from being ‚Äòunavoidable’, this was a discretionary decision – and one that has clearly hit low-income households much harder than they otherwise would have been.

Full marks to all involved for a great piece of work and for moving the debate onwards.

The myth that this budget was fair is shattered for good.

The challenge for the Left now is to suggest how this issue can be solved. I do, of course, start with taxation – which by itself could prevent the need for any cuts.

School starting age to be raised to 11?

ConDems, Economics Comments Off

Jun 262010

The sheer impossibility of the ConDems delivering the cuts they have promised becomes more apparent by the day. Take this from the FT:

Cutting funding for schools and services remains one of the most charged political issues in the spending review. Axing a quarter of this department’s budget would be equivalent to cutting all funding to primary schools and Sure Start centres.

In other words, to achieve this goal is equivalent to increasing the school starting age to 11. That’s ludicrous.

But even more absurd is he idea that the teachers and teaching assistants who lose their jobs will have to then sit on the dole watching the children of this country go uneducated when there is nothing at all – I stress no reason whatsoever – why hey should not enjoy the education they deserve.

The case for tax, not cuts, and then only when unemployment is falling, grows by the day.

This will end in tears very soon

ConDems 7 Responses »

Jun 252010

Nice line from a commentator on Question Time:

“When Vince Cable is to the right of Peter Hitchen then the Liberal democrats really are finished.”

I think he’s right.

Vince had a torrid time and looked profoundly uncomfortable. Most of the programme he could not lift his eyes from the table in front of him.

And tonight we learn that his successor as Lib Dem deputy leader is planning to challenge the budget plan to increase VAT.

This is all going to end in tears very soon.

What next after this travesty of a budget?

Economics, Ethics 18 Responses »

Jun 242010

The election has been, and gone. I am aware many already regret their decision on how to vote.

The budget has been and gone – and as is now readily apparent, the richest in our community will lose just 0.6% of their income a year as a result, and the poorest 2.6% plus untold cost in other, as yet uncalculated, benefits lost. Many more will be regretting they way they voted soon.

And what is to come? At last 4 million unemployed. With that a housing slump,negative equity, a possible banking crisis, business failures as customers vanish, and a rapid decent into chaos for public services as they struggle to meet demand with demoralised, underpaid and hopelessly overstretched staff.

With that will come political chaos. The ConDem coalition will not survive these strains. Some will join the Tories – Clegg among them. But it won’t be long before the first Lib Dem MP will cross the floor of the House and more will follow. The chance of a five year term is very, very low indeed. No government has ever delivered more than two years of cuts in spending in UK history. This government plans to do it continually. It is a recipe for its own failing – and of disaster for the rest of us.

And what of Labour? I wish I had confidence in the leadership candidates. The bets – Jon Crudsas – is not standing. Of the rest I have to choose Ed Miliband. His brother has not got over New Labour – and it is dead. Balls is unelectable. Burnham, is an “also ran”. Ed Miliband has some green credentials, displayed some real ability in Copenhagen last year in a massively difficult environment, and has shown willing to move on.

That is what is needed now. That is what I plan to make the focus here now. Of course there will be current issues to highlight. And there are big campaigning issues to take forward – the need to challenge secrecy jurisdictions, the need for country-by-country reporting, the necessity of tax reform – including the need for a General Anti-avoidance Provision and a review of the domicile rules – both of which are in the plans for this government at Lib Dem request, informed in the past by my work. The need to tackle poverty remains paramount.

But there’s something more top take on now. There’s the need for a new narrative for reform. The Left needs this now. The old mantras don’t work. And there are new targets to tackle. These include renewed emphasis on the tax gap and what causes it, and how better taxes could really transform our economic and social prospects. Ain that process new issues need to be taken on: limited liability and what it means in practice is one. The administration of companies by the state another.

In all of this there is a pressing need: the need for an alternative to the dire scenario the ConDems are building. The need in short for a scenario of hope.

That’s what next. As the UK economy faces the biggest crisis it may have ever known over the coming years this is what progressive thinkers need to concentrate on – creating an alternative to the prescription of the failed economics of the neoliberal marketeers.

The battle over a General Anti-Avoidance Principle begins

Tax avoidance 4 Responses »

Jun 242010

The battle lines to come on the review on a General Anti-Avoidance Principle are becoming apparent. And the misinformation is beginning.

On the BBC Saffery Champness, accountants, say:

Contained within [the Budget] are plenty of indications that the coalition will continue looking for more sources of tax.

It is going to consult on bringing in what is known as a general anti-avoidance rule.

This sounds like a very widely worded rule which will give HM Revenue & Customs (HMRC) the power to stop tax avoidance ploys, at their entire discretion.

Taxpayers and advisers will have to wait to see the detail, but it will probably give HMRC the power to stop apparently legal tax dodges without having to get any specific laws changed first.

But that’s tax simplification and the provision of certainty all at the same time. Isn’t that what taxpayers have always demanded? Apparently not. As Accountancy Age reports:

The government has remained committed to its promise to set up an independent board of tax simplification, but questions have been raised about how it will work in practice. Advisers have already warned “simplification” could see reliefs withdrawn. Now the Lib-Cons have gone a step further in publishing “Tax Policy Making: a new approach”, alongside Budget papers, which reinforce previous warnings about a general anti-avoidance rule (GAAR).

These sweeping laws seek to catch the maximum amount of people in thetax net through a principles-based strategy, but the scattergun approach has been criticised by advisers.

“It just removes all certainty in a plan floated as tax simplification in terms of what gets caught,” said Cathy Corns, tax partner at Mercer & Hole.

Corns also voiced concerns about law-abiding taxpayers being caught in the net because of the broad nature of the rules. “They are saying ‚Äòno one can escape tax’,” Corns added.

What thoroughly good news it will be in that case.

You can see why the profession hate it.

More welfare cuts to come

ConDems, Ethics 1 Response »

Jun 242010

Only a day after announcing savage welfare cuts Osborne was back to announce more. As the FT notes:

George Osborne has heralded a fresh onslaught on Britain’s £200bn welfare bill, in an attempt to prevent his deficit reduction plan inflicting serious damage on the underlying economy.

Amid warnings that Mr Osborne’s Budget implied spending cuts of up to one-third on areas such as transport, energy, universities and business support, the chancellor said that new welfare cuts would take some of the strain.

Ministers warn that they may have to tear up some untargeted welfare promises – such as the £4bn spent on subsidising bus travel, winter fuel and television licences for older people – even though they are enshrined in the coalition agreement.

One minister said that such a move was “almost certain” if the government was to avoid ripping Britain’s economic fabric in an autumn of cuts.

The chancellor told the BBC that he could soften the impact of departmental spending cuts if “over the coming couple of months we can find further savings in the welfare budget”.

The hatred of the poor at the heart of the ConDem programme is now apparent, even to the Institute for Fiscal Studies. The Guardian reports:

The Institute for Fiscal Studies said the chancellor and Nick Clegg could only assert that the better off were the big losers from the austerity move by including reforms announced by Labour, such as the changes to pension contributions.

In other words, the Osborne budget favoured the rich – as was apparent to anyone who listened to it.

It’s the shape of things to come. The ConDems plan increasing inequality in the UK – which was also Thatcher’s legacy.

Illicit Financial Flows and the Recession

Secrecy jurisdictions, Tax Havens Comments Off

Jun 242010

Around the world governments are announcing massive cuts in government spending. The consequence is inevitable: programs that politicians and civil servants once thought essential will be subject to new scrutiny. In many cases those programs will be scaled back, or even cut altogether. Nowhere is this more likely than amongst new programs, where there is no established pattern of spending and no certain proof of delivery of benefit as yet.

Many of the programs initiated over the last few years to tackle tax haven secrecy jurisdiction abuse fall into this last category. Will commitments to negotiating new information exchange agreements, to promoting new standards of governance, to implementing new anti-money laundering objectives and to (more importantly) actively monitoring their implementation on the ground survive this process of cuts? Likewise, will commitments to help developing countries develop the tax systems they need to raise their own revenues avoid cuts that are likely to impact on all development spending?

I do not know the answer to these questions, but I can guess the outcome. None of these programs have strong domestic political appeal, if I’m honest. They’re technical and essential, but are behind the scenes activity. It makes them exceptionally vulnerable to anyone wielding an axe over spending.

In that case the recession and its aftermath, and the chosen policy of cuts that so many governments (unnecessarily, in my opinion) are adopting to tackle it, could represent the biggest threat to progress in tackling illicit financial flows yet encountered.

It’s obvious to informed commentators that we cannot afford to stand back from tackling this issue now when it can contribute to much of the revenue needed to solve the problem of government deficits that plague so many governments. But will those with short term zeal for short term cuts see it that way? If they do not then the current round of cuts in public spending sweeping across Europe and beyond will be the best gift to the abusers of tax havens / secrecy jurisdictions that they’ve had for a long time.

And that is very worrying indeed.

Cross posted from the Task Force on Financial Integrity and Economic Development blog

The budget is likely to create 1.6 million job losses, or more

Budget 9 Responses »

Jun 232010

I am intrigued by the debate on public sector employees. I took part in a phone in on BBC Radio Scotland his morning and you’d think these people are the devil incarnate based on some comments. I confess I and the others in the Accident and Emergency unit of my local hospital did not think so at 11.30pm last night when those present seemed to be rushed off their feet (and before you ask, no, my son has not, thankfully, broken his thumb – bit it is mightily bruised, the moral being don’t play hockey at Cubs). So I decided to have a quick look (no more) at what they do. I used UK government statistics created by public employees to find the answers, and then wondered whether I’ll be able to do so in the future when all the cuts have taken place?

So, first things first, at end 2009 how many public sector employees are there? The answer is:

Place of employment	Number employed, total
Central government	2,619,000
Local government	2,921,000
Total government	5,540,000
Total public corporations	558,000
Total public sector	6,098,000
Of which the civil service represent	532,000

The total number employed in the UK is about 28.8 million right now. So roughly one in 4.8 people employed works for the government.

That does not tell us what they do. They work in the following activities:

Type of work	Number employed, total
Construction	51,000
HM Forces	198,000
Police and related civilians	297,000
Public administration	1,208,000
Education	1,418,000
NHS	1,621,000
Other health and social work	385,000
Other public sector	919,000
Total	6,097,000

Note the “other” category includes 230,000 bankers employed by Northern Rock and other such similar failed entities. In other rods, these 900,000 people work in entities outside the area normally considered to be government activity.

Dealing with the civil service – who make up a little under half of admin staff, the allocation is as follows:

I do not have a similar split for local government (although many will work on education and social services which are by far the biggest devolved local authority responsibilities, plus planning, highways, refuse and other such issues), but this data really shows there are actually only about 5.2 million people working in what might be considered the state and I can explain what up to 4.5 million of them do.

It’s an important question of how much those people cost to employ. Over a sample of this size we can use national averages and according to the Office for National Statistics median full time earnings in the public sector were £539 per week. The full time equivalent of the employee numbers noted above (total government) is 4,450,000. So the direct cost of employing them is £125 billion. Add NIC at, say 7.1% on average and pension costs at 18.6% (these being based on HMRC’s own accounts) and the cost is a little over £157 billion. The estimate is of course just that i.e. an estimate, but it is based on reasonable, referenced, assumptions.

The NHS is ring fenced from cuts according to the government. All other departments face cuts of 25% in spending. This is how they spend now, which might be considered the baseline:

We know the NHS will not be cut and we know benefits are only being cut by £11.5 billion. Debt interest will also be paid too. In effect that means of the base noted of £697 billion some £360 billion will only be affected by cuts of £11.5 billion.

That means the remaining £337 billion must bear the remaining cuts. They will be around £55bn a year having allowed for tax increases and benefit cuts already noted. Now 30% or so of salary costs are in the ring fence – that’s about £46 billion, leaving £111 billion in the areas to be cut. So one pound in three in the areas to be cut is salary cost and they have to lose £1 in £6 of spend to meet target. Curiously, that is less than the £1 in £4 the Treasury says: more must be ringfenced than I think in “other items”.

The simple question then is “can this be done without massive job cuts?”

The answer has, straightforwardly, to be no. Either those jobs go in government departments or candidly they go in suppliers to government departments, now we know that the amount to be cut from benefits has been determined. There is no other choice.

If the pain is split i.e. cuts are split half internal job cuts and half from payments to suppliers and making the generous assumption that all who lose will be full time then the total internal cuts must cost £27 billion, which at the pay rate noted (with on costs) amounts to 767,000 full time employees. That’s a number very close to the estimate of the Chartered Institute for Personnel and Development.

So what of the private sector? Pay is lower there at £465 a week. Assuming the same quite high on costs of employment as the state sector – which is generous as most private sector employees do not have pensions – then cuts of £27 bn would flow through to 889,000 job losses.

That means 1,656,000 job losses. Except these are full time equivalents. If the number was extrapolated to allow for this to allow for part time job losses then the numbers would increase to 2,061,000.

I admit I’m reluctant to do that for two reasons. Some losing such jobs would not register as unemployed. Some would have another part time job. And profits in the private sector may anyway absorb some of the cuts. But, the evidence seems clear yet again that these cuts will produce job losses of more than 1,500,000 – and maybe a figure much higher than that.

Which is really worrying.

And no one is saying it.