Thursday, 17 March 2016

The 2016 Budget; Things Other Than The Sugar Tax...

There is much to like, and much to deplore.

The steady cuts to personal income taxation continue the trend under this Government of moving the tax burden from income to consumption. The continued cuts to corporation tax are welcome, and whatever idiot journalists say are virtually cost-free to the exchequer, as money not paid out in corporation tax mostly ends up in wages (to be taxed more highly) or investment (which everyone says we don't have enough of). Companies don't pay tax, people do, so corporation tax is a fiction and always has been. Did I mention we don't have enough investment? Capital gains tax has been cut. Because taxing capital is silly. And the ISA allowance has been raised for the same reason.

Now the only people who pay capital gains taxes are people with large lump sums outside ISAs. These are people who're so rich they can afford to save more than £15,240 a year, and those who inherited money. So big ISA allowances are moderately progressive.

So far, so good. But there are further disincentives to selling property: namely the increase in stamp duty for buy to let landlords. And there are further tax privileges for the first home in the form of the 'help to buy' ISA into which the Government bungs some taxpayers money to help first time buyers "get on the housing ladder".

The UK's insane system of property taxation of encourages home-hoarding, and entrenches the perverse idea in the British public's mind that your house is an investment, not just something to live in. In most of the world, rent and purchase are more-or-less interchangeable. But in the UK, the disincentives to sell are behind much of the continual ratchet up of house prices. The problem isn't that there aren't enough houses - everyone has a roof over their heads after all. The problem is that the UK housing market is insufficiently assortive: people can't afford the RIGHT housing in the right place and must therefore pay through the nose.

We need to scrap stamp duty on property entirely, and increase the taxation of property values giving empty-nesters an incentive to sell that property on to someone who might value its space higher. Unfortunately council tax, which needs re-banding, is a political third rail.

Families cannot afford family homes, because family homes are being held onto by people whose families have long-since flown the nest. So families are being brought up in rabbit hutches, because Granny has no incentive to downsize. Indeed she has an incentive to rattle around in the big house until she dies, when that house will be once more privileged in the inheritance tax system. She will then pass it on to her children, whose own children will have already flown the nest too, and so the cycle continues.

Meanwhile, the assault on Buy-to-let landlords means the supply of rental homes will dry up too. The "housing crisis" will be made a little worse by this budget.

If a family wants a family house, either Daddy has to be very, very well paid, Granny has to die young, or be very, very generous. And the Tories have a massive blind-spot about people's houses. Thatcher's dream of a "property-owning democracy" casts a long shadow, and measures to facilitate this, are now actually behind the sheer unaffordability of property for the average worker, while working against increasing the supply of reasonably priced rental homes.

One thing I will say for the Chancellor, the Sugar tax has done its job. It's a pissy, regressive, fabian authoritarian little bit of nanny state spite. If you think taxing sugary drinks is about obesity, I've a bridge to sell you. It's a bone thrown to the Daily Mail authoritarians, gets a noisy and oddly influential mockney prat with a fat tongue to support the Government and because everyone's talking about it, It's an effective dead cat, flung on the table to distract from controversial cuts to benefits, income taxes and corporate taxes, which are mostly going unnoticed; as is the "miss" of fiscal targets.

Ah yes, the targets. The worst thing about political journalism is the absurd weight that is put on Office of Budget Responsibility fiscal forecasts. If there's one thing less interesting than the deficit, it's an official guess as to what the deficit might be in 5 years. Then, armed with this utterly fictional state of the finances 5 years out, journalists hyperventilate about whether the Chancellor has "hit" or "missed" his target to balance the books by the end of the parliament, and go on, and on about how much he "has to spend" or "has to find" in the future. So the chancellor puts measures in that may or may not come to to be superseded in future budgets, just to "hit" a "target" that only really still exists in the minds of journalists.

Labour excoriate the chancellor for "missing his own target", while opposing anything that might bring the books into balance. The deficit is falling, perhaps not as fast as many would like, but debt to GDP isn't rising all that much, and may soon start to fall. Thus the deficit is under control, to the satisfaction of international creditors, and there's no risk of a run on Sterling. So the target to balance the books, and get the debt burden down is a noble one, it's also pretty low on a sensible chancellors list of priorities right now. The rabbit he's hoping to pull out in the next few years is a big increase in productivity which will finally close the "output gap" bring down the deficit and raise people's living standards, and cover the "living wage" without increasing unemployment, all in one go.

I don't think there's an awful lot the chancellor can do to increase productivity, though cuts to corporate taxation will help a little. We're still dragging ourselves out of the mother of all balance-sheet recessions, which means investment is low, productivity growth is low, nominal wages aren't rising fast enough, and the economy sits on a permanent risk of deflation.

Personally I think the Chancellor's threading the needle between "stimulus" and Japan-style debt mountain pretty well in what remains an extremely cash-constrained fiscal situation. But let's encourage him to deal with the perverse incentives in property taxation that have long poisoned the British economy, before bleating about fictional forecasts or whining about a silly nanny state sugar tax. The fixation people have on stuff that really doesn't matter is beyond me.



Monday, 7 March 2016

I don't buy Any of the Arguments for Brexit

If you listen to Brexiteers, the EU is holding us back from trading with the world. The only thing stopping the UK having free trade with everyone is the EU. Upon leaving the EU, we'd lose none of the trade advantages with the EU (on which more later), nor the 50-odd trade agreements we've currently got with EU membership, and everyone who doesn't already have an agreement with the EU would be clamouring for a trade agreement with the UK. Let's think about it for a second, and does it seem remotely plausible? 

Now, Pete North argues that out of the EU, the UK would sit in the WTO and have more influence than as part of the EU. No-one (with the possible exception of Lord Owen) who's actually been there agrees with this view, which even if true, isn't the slam-dunk he thinks it is. The EU is influential as the world's largest market, and the UK is influential in the EU. There *may* be advantages to leaving the EU in our ability to negotiate trade agreements, but you need to be wildly optimistic to imagine the short-run disruption wouldn't be greater than the benefits of extra trade agreements.

The short-run effects of Brexit will be a recession, probably costing 2% of GDP or so. Not disastrous. But I don't believe the mechanisms by which faster growth can be achieved will work over the longer term. Simply because there's little that does, bar free trade, something Brexit risks impeding at least as much as we'd gain with trade agreements elsewhere. Because of the single market the UK economy is 10% or so larger than it probably would have been absent EU membership. If you do the maths, that's a tiny, tiny increase in annual growth over 40-odd years, but such is the power of compounded returns. The UK would need to work very hard to maintain trade advantages with allies to whom brexit would represent two fingers, and take advantages elsewhere. It is possible Brexit could benefit the UK in trade terms. But it's moot, and there is certainly a risk brexit could damage the UK's trade.

"The EU needs the UK's  market more than the UK needs the EU". This is just mercantilist fallacy. Even accepting the silly idea exports, not imports, are the purpose of trade, the EU takes 45% of UK exports. The UK takes 10% of EU exports. Who is more important to whom?

"We're shackled to a corpse"? Well the UK has been the best performing advanced G20 economy for some time, during which the Eurozone has lurched from crisis to crisis. It doesn't seem to have held us back, any more than any other major trading partner being in trouble would have done. In 1972, the UK was the sick man of Europe. It isn't now. It's simply not credible to argue the EU has held us back in any significant way, and nor is it credible to argue on this basis, "the real risk is staying".

"Immigrants, waaaa!" Most of Britain's migrants come from outside the EU, and under most Brexit scenarios in which the UK retains access to the Single Market, we'd accept free movement. Like the Norwegians. So I don't think #Brexit would have much effect on immigration, unless it caused an economic catastrophe.

The UK is impotent in the EU because "We lose more votes in the Council of Ministers than any other nation"? The second "least influential" country by this measure is....

....is....

....is....

Germany.

In any case, the UK is in the winning majority 87% of the time. But these lost votes are a measure of assertiveness, not supplication. France, like the UK did under Blair, votes for stuff with which it disagrees, in order to preserve consensus. It's France, not the UK running up the white flag in Qualified Majority Voting. France disagrees with the EU on free trade, and has to suck it up, mainly because the UK and Germany won the argument long ago.

Does anyone still buy the "£[insert made-up number] billion we send to Brussels" argument? Most of which, if we want access to the single market, we would have to pay most of our current contribution anyway. Most of the gains from leaving will have to be spent subsidising British farmers.

"It's NATO not the EU that has kept the peace in Europe". Of course NATO was the shield, but the EU helped win the peace. Enlargement (another British win against the French who feared rightly it would prevent "ever closer union") pulled former Warsaw pact countries firmly into the Western orbit, and made them richer and free. Brexit will at best, change nothing bar a slight reduction in contributions, at risk of antagonising allies, and emboldening our principle adversary, at a time when the west needs to present a united front to prevent WW3. The carrot of potential EU membership has been used to improve the behaviour of Governments for many years. Watch, as the carrot got snatched away, Governments in places like Ankara and Kiev backslide on democracy, corruption and human rights. To imagine the EU had no role in the successful transition to democracy in Poland, the Balitc states, and central Europe is ridiculous.

"The EU is open in its plans for a Superstate".... and this has been a dream of the more starry-eyed official and Europolitician since its inception, but this has been resisted by... all its nation-state members. The Eurozone may yet become a superstate, if the Germans can be persuaded to allow fiscal transfers to Greece. I'm not holding my breath. As for the UK, we can leave at any time, if the dastardly plot to take over the British army becomes any more than a pipe-dream of a few Brussels eurocrats. An EU superstate, even one which the UK is not a part of, would be harmful to British interests. Staying in, we can continue to prevent it happening.

"The UK would gain influence if we left" The EU is one of the Major clubs of the west. The UK is the only country in all of them: NATO, 5-Eyes and the EU. We are the hinge on which the alliance of democracies turns, a vital cog linking the USA, Europe and the Commonwealth. If you don't think that position brings influence and advantages then I've a bridge to sell you.

Brexit will diminish both the EU, which loses a major commercial, diplomatic and military power, and the UK, which loses its position at the pivot of western alliances. It's difficult to see much in the way of benefits from leaving, and much in the way of risk.



Wednesday, 2 March 2016

The Madness Stalking Democracy will Pass.

"Has there been a general election, Mr Blackadder" asked Mrs Miggins, unaware, until Edmund points it out, as neither she nor Baldrick have a vote. "Hardly seems fair to me" she says.
"Of course it's not fair -- and a damn good thing too. Give the like of Baldrick the vote and we'll be back to cavorting druids, death by stoning, and dung for dinner"
And that, in a nutshell is the problem with democracy. You simply cannot allow the enthusiasms of the noisier, politically enthused bit of the population to be indulged. The young prats currently cavorting after Jeremy Corbyn and Bernie Sanders seem blissfully unaware of the misery that socialism wrought even within their parents' lifetimes. Nativist chauvinism, a yearning for the "strong leader", the admiration of Vladimir Putin by the likes of Nigel Farage, Donald Trump or Marianne Le Pen: we've seen this before too.

This is why "elites", in most of the world limit the choice available to electors to people within the bounds of reasonable discourse. It is possible to expand the bounds of reasonable discourse over time, to move the centre of politics around which that "overton window" opens. Clement Atlee did, Margaret Thatcher did. But what is happening right now, in response to a decade of stagnating living standards, is different.

One way of looking at it is a revolt of the left behind. That is behind the rise of UKIP, Le Front National and Donald Trump. After a hollowing out of the traditional working class, as the most able have moved on and up, and after generations of assortative mating, the shallow end of the British gene pool face competition from far more able and energetic immigrants and they don't like it one bit. If you listen to a 'KIPper, you'll hear that they're "fed up" about "not being listened to" by the "metropolitan elite". Cameron offered these bloody people their referendum. They now hate him even more. This mood cannot be pandered to, because the policy solutions they demand don't work. If your response to a few years of stagnant wages and a Polish couple moving in next door is to try to elect Nigel Farage, then you don't deserve to be listened to. You deserve to be told to shut up and do your homework again. These people have captured the Republican party in the USA, and the party will not elect a president until the "elites" get control back.

And on the left, the highly educated marxists who once would have been guaranteed solid middle-class status as teachers, lecturers and officials, are now competing with self-employed tradesmen who often earn far more, for housing and schools. People, once solidly middle-class find themselves outcompeted by people they regard as inferior, and they don't like it. The erosion of the status of the Nomenklatura vs. "trade" offends their sensibilities, and panders to an old snobbery against grubby money-making. The old socialism espoused by Corbyn plays to these prejudices, offering status at public expense. Thankfully most people going to University ignore the student politics of the hard-left, and seek a qualification to enable them to compete. And in competing they make themselves, and society richer. These student trots who never grew up are creatures of ridicule. They have however completely captured the Labour party, which is finished as an electoral force for at least a decade.

Morons, it seems favour either full socialism, or some form of fascism, because these ideas simple, easy to understand and wrong. It's time for those of us who understand the world to stop imagining the grunting ignoramuses or starry-eyed ideologues have a point at all. They deserve ridicule. Point at the Corbynista or the 'KIPper and laugh for having been taken in by nonsense.

Meanwhile, in the middle you have the broad mass of people doing OK. Unemployment is low. Most people are getting small annual pay rises. Price rises are low, and for capital goods, prices are falling. However people like nominal rises more than they like real rises. And the low-inflation, low interest rate reality means even as people's real wages, even after housing costs (outside London and the south east anyway) are rising strongly. A lack of nominal increases makes people grumpier than they should be. There is sympathy for Farage and Corbyn shaking things up. Thankfully, the broad mass of the basically OK middle are sensible, and when push comes to shove, see the status-quo is far from intolerable. And those doing basically OK are far greater in number than the UKIPish left-behind and the Socialist-minded Corbynista class.Traditional politicians such as Cameron, who can reach out to this broad middle while keeping the coalitions of which their party is made together, will still win elections.

Assuming the Tory Party holds together after the referendum, and doesn't go EuroBonkers, they will need to find another politician who can reach out to the broad centre. If they can, Labour, entirely captured by voter-repellent lunatics, will offer no resistance to another decade in power. Over the pond, Trump will attract a little more than a third of the vote. Everyone else will hold their nose and vote for Hilary Clinton however crap a candidate she may be. And in the rest of the Democratic world, people will flirt with lunatic populists along these lines, but will mostly vote for a steady-as-she-goes mainstream candidates.

Democracy - keeps testing these bad ideas, but mostly seems to work. This madness will pass.



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