Tax Research UK

FT Alphaville » Darling to use revenues to cut debt.

Alistair Darling plans to use a revenue windfall to trim projected UK borrowing by £5bn to £10bn in next week’s Budget, making debt reduction a priority as he tries to put public finances on a sounder footing.

[O]fficial data on Thursday showed that receipts had not fallen as much as the chancellor feared in December. Public spending is on course to end the year close to target, meaning that the government will be in the red by about £170bn.

That’s a sop to the market that may be politically necessary for the moment, and highly timely.

But to think that deficit cutting is the priority is a massivce mistake.

Employment is the priority. The deficit wiull look after itself when people are in work as Keynes said.

And as for the EU’s demand the deficit be 3% of GDP - that’s just bankers being *ankers. This is a wholly arbitrary rule of complete inconsequence made in different circumstances that they want to enforce to increase unemployment, suppress wages, increase the divides in society and to undermne democracy.

So they should be ignored - along with their friends in the rating agencies.

Keep spending, I say.

Richard Murphy Economics

Unemployment is down.

The evidence that spending out of recession works is unambiguous and clear.

So why are people will talking about cuts when it is growth that will repay the debts – growth that the private sector cannot and will not generate?

It’s time to agree Compass and the Green New Deal got this right.

Richard Murphy Economics

One of the arguments some have used against Robin Hood Taxes is that they reduce liquidity. A leading critic has, for example has been the Lib Dem former City trader Giles Wilkes.

Liquidity is defined as the existence of a market of such size that no one transaction can influence price.

The idea that such markets are good is based on the extraordinarily flawed logic of perfect competition inherent in standard micro-economic theory – a theory that requires assumptions to made that mean it has no relationship of any sort with the real world. It follows in my opinion that the idea that liquidity per se is good is also, similarly flawed.

Last night Lord Turner of the UK’s Financial Services Authority made a speech on the future of banking. As is his now accustomed way it was controversial. As the Guardian has noted he appeared to suggest capital controls might be of benefit – something with which I agree. He explicitly suggested the costs of some form of bank borrowing should be increased by requiring that banks hold more capital in relation to their lending to some portfolios.

But he also, and I think wisely, returned to his theme of ‘socially useless’ activity by banks – admittedly clarifying on the way that he thought ‘socially’ in this case equated with ‘economically’ saying:

There are no easy answers … but some combination of new macro-prudential tools is likely to be required." He added: "A crucial starting point … is to recognise that different categories of credit perform different economic functions, and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted.

As the Guardian also notes:

In his lecture, he asked whether the increased trading activity in the financial sector in the last 30 years had delivered economic value by reducing transaction costs and making markets more liquid. Admitting that he did not know, he said: "We certainly need to have the debate rather than accepting as given the dominant argument of the last 30 years, which has asserted that increased liquidity, supported by increased position-taking, is axiomatically beneficial."

This requires no interpretation. He is saying that it is not clear that liquidity per sae is beneficial.

Quite so.

It’s time those who claim such things prove their case. Rhetorical assertion based on flawed assumptions is not proof – it is flawed rhetoric.

And so far the evidence is that market growth to sustain liquidity has benefitted no one bar bankers – as I argued in Taxing Banks.

These people have to engage with the argument now if they want to prove their case. And that includes an assessment of the incidence of the costs their activities impose on society, an issue of much greater importance than that of the incidence of the taxes that we propose to curtail them – which I have argued falls on banks and bankers.

Richard Murphy Banking, Economics

FT.com / Columnists / John Kay - Think before you tear up an unwritten contract.

John Kay destroys the ideas behind shareholder value in one column. As he notes:

In my own work, I used the term architecture to describe competitive advantages derived from structures of implicit contracts with suppliers, employees and customers. Marks and Spencer exemplified the use of such relational contracts.

I had barely formulated this thesis, however, when the company began to put strain on these relationships, in the interests of shareholder value. If the success of M & S demonstrated the power of relational contracting, the company’s decline illustrated a process that swept across business – and above all the financial sector – from the 1980s. The substitution of transaction-oriented dealings for relationship contracting added to profitability in the short run; but in the long run it eroded relationships that had been the underlying source of much of that profitability.

But the whole is better than this part.

Highly recommended.

Richard Murphy Economics

Tyngewick Gawcott: Success in Doctoral Studies.

Too good not to note:

At a recent research forum the following success index for PhD studies was proposed:

PhD Success Formula

S= (HW + 3M + NR/4)xC/A
___________________
(1 + FM + FB/10 + S)

Where: HW= Hours worked on thesis

M = meetings with supervisor

NR = number of references

C= Average number of cups of tea/coffee per day +1

A=Average units of alcohol per day + 1

FM = ln(Number of family members)

FB= Number of Facebook friends

S= Number of Sports teams supported + 4 x Number of sports played regularly.

While this is clearly an early attempt at a descriptive index related to probability of success it indicates the need for further research to improve the functional form and parameterisation. One commentator has already suggested that comsumption of illegal drugs should be added into the measurement of A, for example.

Thanks Mike.

Now I know where I went wrong.

Richard Murphy Economics

The Wealth Bulletin has reported:

Research has found huge discrepancies in the amounts declared by offshore centres

The amount of undeclared money languishing in offshore financial centres has always been difficult to quantify: the very nature of it being undeclared makes it hard to trace. But work by economists at the International Monetary Fund has shed new light on the cash involved, confirming it runs into trillions of dollars.

Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centres in Europe, illustrated the extent of the problem. He said: “Luxembourg is one of the few offshore centres that disclose detailed statistics on assets and liabilities held in the financial sector, which makes it invaluable to understand cross-border money flows.”

The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg Government on portfolio investment liabilities for the country – the mirror image of the asset information held by the IMF – there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion – $1 trillion (€726bn) more than the assets reported.

Milesi-Ferretti said: “This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund.” China, Taiwan and many of the oil-exporting countries do not participate in the IMF’s survey.

The IMF found a similar discrepancy in the Cayman Islands data, whereby the $2.2 trillion in equity liabilities reported by the country, a British overseas territory, at the end of 2007 – the latest figures available – bears little resemblance to the $750bn of portfolio assets reported to the international organisation.

Taken together, the data for the two offshore centres alone shows at least $2 trillion remains unaccountable for. And the fact that many undeclared funds in offshore accounts are held in cash deposits, not in portfolio investments, means the sum is likely to be much higher.

Switzerland – the biggest offshore financial centre – has only a small discrepancy between what it reports as portfolio liabilities and what it reported to the fund as assets, but the Government admits to having at least $600bn in undeclared accounts.

I admit I can’t resist the temptation to say that some of us have been saying this for a long time. The Tax Justice Network published my research on this in 2005, suggesting there were £11.5 trillion of assets offshore. Time and again this has been attacked by organisations that should have known better and by academics with a right wing axe to grind. But now, like so much else I and others have argued, it is being validated. And the issue itself, once dismissed as inconsequential is now being considered seriously:

Although the IMF is concerned about the undeclared assets held in offshore centres from a tax perspective, it is particularly concerned about how this money affects cross-border financial interaction and contributes to shocks in the global economy such as the recent credit crisis.

Milesi-Ferretti said: “The Cayman Islands were the largest foreign holder of private-label US mortgage-backed securities on the eve of the financial crisis. More information on the ultimate holders of these securities could clearly provide valuable insights on the transmission of the ‘sub-prime shock’ and the financial crisis more generally.”

The IMF believes the sum of the external assets and liabilities of what it calls small international financial centres – which includes all the offshore centres except Switzerland – is $18 trillion.

Well, in that case apologies are in order – as ever, we were too cautious in our estimates.

The figure is higher than those of big investing countries such as France, Germany or Japan and is a multiple of those of other large economies such as China.

Milesi-Ferretti said: “What is even more striking is that this number is likely to be an underestimation given the data problems with offshore financial centres.”

That is an especially timely admission: I am in Washington to discuss this data issue with the IMF later this week. I’,m now looking forward to constructive dialogue, debate and a programme for action.

Richard Murphy Economics, IMF, Secrecy jurisdictions, Tax Havens, Tax Justice Network

The wisdom of recycling trade surpluses | George Irvin | Comment is free | guardian.co.uk .

George Irvin argues we should look to Keynes for a way to rebalance the world economy - by forcing surplus countries to spend money in deficit countries.

Well worth reading.

Richard Murphy Economics

Letters: Frail economy needs another stimulus | Politics | The Guardian .

I was one of 82 who submitted the following letter to the Guardian today:

The Conservative party’s calls for immediate cuts to the economy have been met by a growing chorus of criticism, warning that this risks sending the economy back into recession (Report, 8 March). The government was right to stimulate the economy with a variety of measures last year and so offset some of the worst effects of the recession. Yet, as some of the world’s leading economists have pointed out, the fragile nature of the recovery means that fiscal stimulus is still required. However, according to the IMF, Britain is one of only two G20 countries not currently planning any such fiscal stimulus in 2010.

A programme of government investment would not only stimulate the wider economy in the short term, but would increase long-term growth, thereby lowering the debt levels through a higher tax take. To this end, we encourage the chancellor to use the forthcoming budget to announce a second fiscal stimulus – especially in housing and transport, where investment has fallen most, and with a focus on developing a low-carbon economy – which would both help to secure economic recovery and create much needed jobs.

Colin Burgon MP

and 81 others

The need is obvious.

Will Alistair Darling respond?

Richard Murphy Economics

irishtimes.com - Top Irish businessman rails at ‘intertwining with politics’ - Sat, Mar 06, 2010.

Fascinating opinion from the Irish Times on Saturday:

ONE OF Ireland’s most successful businessmen, Niall Fitzgerald, has told The Irish Times he did not feel that he could have pursued a business career in Ireland without compromising his personal principles.

Mr Fitzgerald left Ireland in 1970 and went on to become chairman and chief executive of the giant conglomerate Unilever and chairman of the global media agency Reuters.

In an interview published today, Mr Fitzgerald suggests that “many people in domestic Irish business succeeded because they were intertwined with politics” and that “unless I was prepared to engage more directly with politicians . . . and at some point be ready to compromise on my own principles, that that would restrict my abilities to develop a business career in Ireland”.

Mr Fitzgerald is critical of what he calls the “claustrophobia” of Irish business. He says “that very intimacy, the knowledge that you can take one small envelope and write all the names that matter on the back of it” militated against independent jjudgment and high ethical standards, contributing to the current crisis in the Irish economy.

Recalling a dinner last summer with friends who had served on the boards of Irish banks, Mr Fitzgerald (himself a director of Bank of Ireland during the 1990s) says he posed a question: Were they aware of the risks that were being taken and thus “complicit with the recklessness”? Or were they unaware of what was going on and thus failing to discharge their responsibilities as directors? The question, he says, prompted a “very ferocious conversation”.

Mr Fitzgerald is also critical of the argument that banks must continue to pay very high salaries to retain senior managers. “You mean, these terribly valuable people who either didn’t understand the risks they were running or understood them and continued anyway without thought for the consequences? You know what? I could do without those valuable people.”

He also criticises high-level business people and bankers who are going into exile in tax havens such as Switzerland. He is, he says, “deeply sad” that some seem obsessed with “how you avoid at almost any cost to yourself and your family being a supportive member of the wider society in which you live”.

Mr Fitzgerald expresses concerns about the ability of those in positions of power to take responsibility for what has happened. “If the leaders of a society are not prepared to hold themselves accountable or there are not the institutions which are sufficiently independent to hold them accountable, then I think you have a very serious problem on your hands.”

Apologies to the Irish Times for quoting this at length - but the opinions expressed are important, relevant and ask pertinent questions of both business and politicians.

Cleaning up the act is an essential part of reform now.

Without that change cannot happen in Ireland or anywhere else.

Richard Murphy Economics, Ethics, Ireland

George Osborne leaves us guessing | Paul Sagar | Comment is free | guardian.co.uk .

Paul Sagar writes:

Tory plans and predilections are predominantly for state-slashing. This runs the risk of severe unemployment increases and devastating frontline service cuts that would hit middle- and low-income households hardest. That nobody on the Labour front benches apparently possesses the political flair to hang the Conservatives by their own policies was a frustration shared by many at Monday’s discussion.

But there is also the fact of the “phantom recession” to consider. For unless you are unemployed – or a close family member is – this downturn probably hasn’t hit you yet. Your mortgage is likely to be low, prices in the shops are affordable, and services are the same as in 2007. Consequently, many voters are asking: why cut at all?

Yet cuts will have to come, and when they do ordinary individuals and families will be hit hard. The backlash will be felt by whichever party is in power, raising the thorny question of whether election victory in 2010 is a poisoned chalice. In light of narrowing polls, Labour supporters should perhaps be careful what they wish for: look what happened to the Tories after they won in 1992.

And I agree, in part.

But a Labour / Lib Dem coalition dedicated to real parliamentary reform, careful management of state spending (which means ignoring the Orange Book fringe of the Lib Dems) and a willingness to embrace new investment spending could deliver real change.

Richard Murphy Economics, Election Election