The Public Accounts Committee has a new report on HMRC out this morning. It should have been entitled ‘Why did Ed Troup get a gong?' because it makes for uncomfortable reading for HMRC bosses, questioning their commitment to raising tax, eliminating fraud and to using resources effectively. Call it competence, if you like.
I was amused by paras 5 to 9 though, from which I select the following highlights:
HMRC told us that, to help increase international tax transparency, there have been a number of developments in improving access to information about beneficial ownership and interests.
In July 2017, HMRC created a registry of beneficial ownership of trusts, with information about both UK and non-UK trusts.
In addition, Companies House maintains a register of people with significant control which identifies beneficial owners with more than 25% of shares or voting rights in UK companies.
Overseas Crown dependencies and overseas territories maintain registers of beneficial ownership of companies which are accessible to HMRC.
Other initiatives, such as country-by-country reporting and automatic exchange of information, which are key components of the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) Action Plan will, by increasing global tax transparency, also help address some of the systemic issues highlighted in the leaked papers.
In relation to large corporations, HMRC expects the Diverted Profits Tax, which raised £280 million in 2016âˆ'17, to be a ‘game changer' and lead to higher Corporation Tax revenue. HMRC also expects a change in multinational companies' behaviour as a result of the introduction of country-by-country reporting which will increase the transparency of the amount of tax they pay.
Why am I amused? Because every single one of those changes has got its direct or indirect (in the case of the diverted profits tax) origin in the tax justice movement. Candidly, you can find them all in here, from 2005.
To put it another way, the initiatives that are helping close the tax gap all started in civil society and not in HMRC.
So let me ask the obvious question, which is why isn't civil society represented on HMRC's Board?
And come to that, why do they talk to the part that initiated all this thinking so rarely?
And for the record, I am not seeking appointment, but there are several who could be usefully considered, in my opinion.
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Richard you wrote “the initiatives that are helping close the tax gap all started in civil society and not in HMRC”. This just underlines the fact that all the ideas that propel game changing reform originate in grass root movements led by courageous people such as yourself and your colleagues.
I think you’ll be waiting a long time.
I don’t think a reluctance to put yourself forwards is helpful here. Why shouldn’t you be seeking appointment? Who could carry out this role better than you?
John Christensen?
Don’t think he has experience running a large/complex organisation, which is what the Board does.
Only the States of Jersey
You over rate what is required
I suspect you don’t know
Hello Richard,
Unrelated, but just a friendly reminder on the MMT question you invited me to send earlier in the week. The one about the significance of the overnight rate for commercial bank mortgage rates, please.
Regards
Because of family ill health nothing much is happening here right now
A change in the overnight rate has a flow-on effect in competitive financial markets.
There is a temporal hierarchy of interest rates. At the bottom of the heirarchy is the “bank rate
which is the interest rate that the BoE charges commercial banks for a 1day loan.
In the UK, a change in the bank rate directly influences “the overnight rate” which is the rate that commercial bank’s charge each other for one-day lending. Generally, usually the “bank rate” and “overnight rate” are pretty close if not identical.
It should however be noted that in the UK (unlike other some countries) the bank rate is the nation’s official rate but the overnight rate is the more important rate for monetary policy purposes. It is the rate that the BoE is “targetting” – and it isn’t determined, as many imagine, by simply changing the bank rate, but rather, through supply. The central bank’s ability to pursue a target for the overnight rate stems from its control over the supply of funds which banks use to settle transactions among themselves.
If a central bank such as the BoE supplies more exchange settlement funds than the commercial banks wish to hold, the banks will try to shed funds by lending more in the short-term money market, resulting in a tendency for the overnight rate to fall. Conversely, if the central Bank supplies less than banks wish to hold, they will respond by trying to borrow more in the money market to build up their holdings of exchange settlement funds; in the process, they will bid up the short-term rate at which banks lend to each other. This change in demand from the banks will also affect other short-term rates in the market.
In the UK the rate that banks charge one another on 3 month loans is known as the LIBOR (London Interbank Offered Rate) and it is an important indicator rate. As the LIBOR rises, short-to-medium term interest rates across the market are affected by the shifts in demand. Actually, a sort of paradox of cause-and-effect also occurs with the fact that a lot of variable rate instruments are pegged to the LIBOR. If medium-term interest rates (>3months but < 2yrs) were to rise, the relative attractiveness of long-term rates would be enhanced and rise with additional demand. And so on etc. all the way through to home mortage rates.
If that chain of cause and effect seems tenuous it may assist you to know that central banks such as the BoE do not rely solely on the overnight rate relationship among the banks. To maintain monetary policy they also engage in Open Market Operatations (OMO's) – the buying and selling of bonds and other treasuries which in turn influences the demand for different instruments and helps them to keep interest rates on target (that's a rough but quick explanation).
So, basically, that's it. There was never any meaningful short answer. Oh, and that bit about the 'bank rate' not being the official rate in some other countries – they mostly cite the targeted overnight rate as their official rate and they call it other things such as the "cash rate", "federal funds rate" etc.
And the LIBOR Scandal? That involved some big banksters manipulating the LIBOR – not as an end in itself – but mostly to cheat the borrowers with instruments that are pegged to the LIBOR.
You now have everything you need to research this on your own.
Thank you
I regret my blog related time availability is pretty low at the moment
Thanks Marco,
The question I posed to Richard the other day follows.
With respect, it’s still unclear. Why should LIBOR be a peg for commercial rates in the MMT world?
“Banks getting a certain rate for their reserves on the overnight market, as determined by the central bank, would appear to be relevant for the rate they can get on their reserves and their reserves only.
What I can’t find in the MMT literature is how this relates to loans to the public. If the latter is supposed to be double-entry book keeping and determined independently of reference to these same reserves, why is the overnight rate of broader significance? What is it’s role in market rates for mortgages? What is stopping banks in a supposedly competitive market reducing mortgage rates below that set by the central bank?”
Much obliged,
If John Dorge or anyone else asks again just link them to this post.
Thanks
John Dorge,
First of all apologies for my 2.20pm reply to Richard. If it seems confusing that is because I hadn’t seen or noticed the presence of your 12.42 comment when I wrote it.
In response:
1. No one said anything about reserves and you’ve needlessly gone a bit off topic in referring to them. So I will stick to the original question.
2. The flow-on effect between short, medium and long term borrowing options was clearly explained. These options are not isolated or segregated from each other. For some borrowers a change in the interest rate for one option makes the others more or less attractive. As demand for the other options shifts so too will the relevant interest rates. This is analogous to the way that prices adjust among substitutes in goods markets. There’s no need to explain that further.
3. You also missed my paragraph about the central banks’ “open market operations”, or the significance of that paragraph.
4. Your question, though understandable in some ways, is looking down the wrong end of the telescope. The purpose of conducting monetary policy through interest rate targetting is not to change the supply of money in the economy as a whole but the DEMAND for money and liquid assets ( http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4 ) .
To understand MMT it is better to first be aware of conventional theory so that useful comparisons can be made. As one common textbook explains it, the purpose of interest rate targeting is to influence “‘the portfolio choices of individuals, institutions and firms”.
(Blanchard, O & Sheen, J 2009, Macroeconomics, 3rd edn, Pearson, London).
Those portfolio choices may include a risk-and-return based preferences for investing in shares, houses, commercial property or more liquid options like commercial paper (look it up) bonds or bank term-deposits.
The central banks’ direct influence on the overnight rate and its open market operations in gilts and other treasuries influences the demand for liquid assets and the rate that investors receive for them. That in turn will affect the rates that apply to most forms of financing and lending (including those that apply to ill-liquid assets).
No bank is going to arbitrarily change mortgage rates without regard for the rates that apply to everything else.
The central banks manipulate the interest rate in the knowledge that the commercial banks will meet all forthcoming loan demand at that the new adjusted rate (s). The BoE does not restrict commercial bank lending, it influences interest rates.
By the way, there are some rules that apply to banks (liquidity requirements, capital requirements etc.) but I’m just sticking to the original question.
Enough said.
Apologies
I am not moderating as often as I do usually
@ Richard
Would love to read your thoughts on the following discussion with Ben Broadbent – Deputy Governor of BoE, if you have time.
http://www.bbc.co.uk/programmes/b09kq1cg
All the best,
David
Sorry
Right now time is in very short supply