The blind alley that is tax avoidance

In the last few days, HMRC reached a deal with Google who agreed to pay £130m in corporation tax to cover the last 10 years. George Osborne called announced this on Twitter, saying:

Many people think Google has been unfairly avoiding tax and so are less than happy with George Osborne’s celebratory tone. There have been questions in Parliament today about this deal. Labour have been making a lot of noise about it, and the story could run for a bit longer. The thing is though, this payment from Google is actually an over-payment. They paid all their taxes due under the law. I don’t think anyone is saying Google have broken the law, but they have gone to the limits of what the law allows. Criticisms of this deal focus both on Google and on HMRC’s treatment of Google, but I think both are unfounded. Google is paying all the tax it is required to (or even more) and HMRC is trying to maximise the revenue it collects within the law. If it has extracted this voluntary payment from Google, it’s actually not done too bad.

So is tax avoidance OK then? No it’s not OK. It’s not fair that ordinary people and businesses have to pay more than those who can afford to pay accountants to minimise their tax bills in inventive ways. We need to be clear though. If Google paid £2 billion extra in tax rather than £130m, what would this mean for public services? Could the government then afford to spend more? No, absolutely not. The government can afford to provide public services at any level (within the constraints of inflation) whether it receives tax payments from Google or not.

Should people be able to feel the tax system is fair though? Yes, I think that is a reasonable wish. The best way to achieve this though would be to change the tax laws though, not to try to shame amoral companies into paying more voluntarily. This is why I think the issue is a blind alley for Labour (as it was in the last Parliament). It can generate some headlines, but to make a difference, you need to come up with specific changes to the tax system that would make a real difference.

This is not about how much tax is received in total, it’s about who pays that which is collected and whether that distribution is perceived to be fair. While you link cuts to tax avoidance, you will always be on the wrong side of the argument, because if you accept the link between taxation and spending you are exposed to the retort “how are you going to pay for it?” if you suggest any new spending initiative. It’s not a good strategy.

OBR shows how austerity killed growth

The OBR published a short note last week showing the impact on growth from the fiscal decisions taken by the Coalition Government. This is not a revelation. The OBR has said before that austerity would have and has had a negative impact on growth, but the chart it produced with this note is quite striking. Here’s the chart.Screenshot 2015-10-27 at 6.13.47 PM

It shows that following the crash, Labour’s discretionary fiscal policy (that’s active changes to government spending and taxation) had a positive impact on growth of around 0.3% in 2008/9 and 2009/10. Labour enacted a fiscal stimulus, but not a very big one.

It’s what this chart shows about the period after the 2010 election though that’s most interesting. After assuming power in 2010, the Coalition embarked on it’s policy of austerity. When it was formed, the OBR actually thought austerity in the first year would have a bigger negative impact than it in fact did, but it still provided a drag on growth of about 1% in 2010/11. 2011/12 was actually the year when austerity really started to kick in. When the OBR made it’s first forecasts though, it thought austerity would have a negative impact on growth of around 0.6%. In actual fact though, it was more like 1%.

It’s fairly well known now that despite the rhetoric, George Osborne actually responded to terrible growth figures in 2011 and 2012 by easing up on austerity, and this can be seen clearly in the chart above. In 2012/13, the government’s discretionary fiscal policy had a very small negative impact on growth, turning to a very small positive impact in 2013/14.

In 2014/15 though, the year before the election (coincidentally I’m sure), George Osborne’s discretionary fiscal policy made a positive contribution to growth of over 0.3%, which is more than Labour’s stimulus provided after the crash. So growth is only at the level it is now because of the positive impact of fiscal policy, something that many Conservatives don’t want to hear.

We are to believe that more cuts are on the way as Osborne tries to achieve a surplus by 2019/20, but if he goes ahead with the cuts implied by his plans – tax credits being only one part of it – it seems likely this negative drag will continue. Coupled with prospects for growth in the rest of the world looking bleak, it seems unlikely that growth can persist alongside spending cuts. Something will have to give.

A Tale of Two U-Turns

Today was a day of U-turns. One for the Tories, one for Labour. For the Tories, David Cameron decided to pull out of bidding for a Saudi prisons contract, over concerns for human rights and the death penalty in Saudi Arabia. The wily Michael Gove appears to have leaked the story of a Cabinet row in a (successful it seems) bid to paint himself in the best possible light, but others may wonder if Jeremy Corbyn’s public calls for the contract to be pulled also had something to do with it. Whatever the truth, Cameron’s decision seems to be popular as U-turns go.

For Labours part, Shadow Chancellor John McDonnell made a significant U-turn of his own. This one has gone down like a lead balloon within his own party, even though it’s a very good about turn for him to make. Two weeks ago he appeared to commit Labour to voting for George Osborne’s Fiscal Charter; a ridiculous document which would commit future governments (in theory, but not in practice) to run fiscal surpluses in ill-defined ‘good times’. McDonnell appears to have signed up to it to try to allay concerns about Labour’s ‘fiscal discipline’. He has now changed his mind and should be applauded for doing so, although it will be embarrassing for him for a few days and has caused serious ructions in the Labour Party. Veteran MP Mike Gapes (who it seems has been having a lot of fun today) summed this feeling up succinctly today Tweeting:

It’s no secret that many (most) Labour MPs actively despise McDonnell, so it should be no surprise that they look to pounce on any perceived errors in judgement. The important thing though is that he has now made the right decision on the Fiscal Compact and now has a chance to make a coherent case against austerity. They should probably now try to get as many ‘experts’ as they can onto the airwaves to trash the Fiscal Compact. That shouldn’t be too hard.

Labour chooses to play on away team’s turf for next five years

The Labour Party Conference starts tomorrow and on its eve, Labour’s Shadow Chancellor John McDonnell gave an interview to the Guardian in which he committed Labour to signing up to George Osborne’s “Fiscal Charter”, which commits the government to running a surplus by 2019-2020 and beyond in ‘normal times’. In effect, the fiscal charter is meaningless because governments don’t have total control over either their spending or the amount of tax they collect, so the government’s budget balance is largely dependent on factors outside its control. That said, it was a ‘clever trick’ designed by George Osborne to trap Labour. I guess they were supposed to reject it on the perfectly reasonable grounds that it’s economically illiterate, after which Osborne and co. could paint Labour as ‘fiscally irresponsible’.

McDonnell’s decision then is a tactical one. One would hope he realises the fiscal compact is nonsense, but he has decided for whatever reason to go along with the charade. In doing so he is like a sports captain who agrees that his team will play all their games away from home. It doesn’t mean you won’t win the league, but it does make your task a lot more difficult. McDonnell is clear that committing to ‘live within our means’ does not mean a continuation of austerity for the poor, but rather a shift of the burden onto those on higher incomes.

Playing on the away team’s turf in this context means you must cost every policy along the lines of “We will pay for x by raising tax on y or cutting spending on z”. You also need to get organisations like the Institute of Fiscal Studies to mark your homework and say “yes the sums add up”. If your plans include raising taxes on the rich, there will be no shortage of people queuing up to tell you apocalyptic consequences will follow as a mass exodus of ‘wealth creators’ ensues. Labour should be ready for this. They’ll also be attacked along the lines of their plans not being believable. “You can’t trust Labour” etc etc.

The alternative for Corbyn’s Labour would have been to bring the Tories onto their home turf. They started to do that, even getting the term “Corbynomics” coined. Some of the ideas within Corbynomics – PQE in particular – took a look of flak and they now seem to have backed away from them somewhat. To me though, they had sparked quite a bit of interest in academia and they could have used that as a launch pad to start to talk about the economy in new and much more interesting ways. It would still have been tough, but it would have been in keeping with Corbyn’s “new politics” vibe.

So now they are playing on the Tories home turf instead of their own, can they still win? It’s not impossible, but it makes anything they propose open to the same old attacks. If I had to guess, I would think Corbyn and co. realise they will face the constant threat of a coup from now and for the next five years, so are trying to head that off by appeasing some in the party. There’s an idea that what you say in opposition and then what you do when in power don’t have to bear too much similarity to each other – Osborne is keenly aware of this – but whether McDonnell’s tactics are wise here, I’m not so sure.

What’s the best electoral strategy for Labour?

I thought this might be a good topic for discussion. To me, there are three possible strategies Labour could adopt in an attempt to win the next election:

  1. Try and say as little as possible, but make noises about credibility and stability with a healthy dose of fiscal responsibility, to ‘win trust’, then if and when you win, implement your programme without much regard to what you said before.
  2. Lay out a long shopping list of policies you and your supporters want to see implemented and make you case for them to the electorate over the course of the Parliament.
  3. Offer new ideas, but try and sell them in the language of your opponents.

It seems to me 1 has been done rather successfully by George Osborne and the Tories at the last election. They made rather vague promises, then when they one, promptly nicked some of Labour’s manifesto and whacked a couple of million people with previously unmentioned tax credit cuts. The ABC (Anyone but Corbyn) candidates also seem to want to be as vague as possible, using words like aspiration and compassion without ever explaining what that means. They also drop in the word ‘radical’ every now and again as if to try and convince us they have big plans should they win.

Strategy 2 seems to be being adopted by the Corbyn campaign. It has been incredibly successful in firing up the left and looks likely to take him over the line to become Labour leader. Can this same strategy continue to work after the leadership election though.

Strategy 3 would involve taking concepts like ‘fiscal responsibility’, ‘personal responsibility’ and ‘something for nothing culture’ and reframing them to fit the vision you want to present. I think Corbyn has weakly tried this already on the deficit, but rather unsuccessfully.

What do you think? Which strategy is best, or is there another strategy that could work?

First Conservative Budget in 19 years declares war on poorest and the young

The most eye-catching announcement in today’s Budget perhaps was the one about the “National Living Wage”, set to be introduced for over 25s next April at £7.20 per hour. This falls below the actual living wage of course, said to be £7.85 an hour outside London, but Osborne announced his intention to raise it to £9ph by 2020, which assuming the OBR’s inflation forecasts are right would actually see wages rise (outside London) to above the living wage by 2020. Iain Duncan Smith in particular seemed delighted:

With this announcement Osborne also managed to make Labour leadership hopeful Liz Kendall look a bit daft after she announced last week that she would look for ways to get businesses to voluntarily pay the living wage.

What Osborne didn’t say of course, was that the lowest paid won’t actually be any better off (for the most part) as they will lose their entitlement to tax credits at a similar rate to the increase in the minimum wage. Even so, it seems to me better to have employers pay more and have the government pay out less in tax credits.

At the same time though, these changes don’t apply to those under 25 who still have to make do with a minimum wage at a much lower level.

It was Osborne’s announcements on changes to the social security system that are most controversial, and I would say cruel. He is practically ending benefits for young people, making poor students take on even more loans and worst of all cutting by £30 a week the amount new claiments of sickness benefit ESA (WRAG) are entitled to. He’s also freezing working-age benefits for 4 years. They are already at below subsistence levels. To me it sends a clear message about what people like George Osborne think about the poorest.

It’s a very 19th Century attitude to the poor. George Monbiot spelled out this attitude rather well in a recent column, but in summary, here are some of the underlying assumptions that form the basis of the proposed changes:

  • Those who are declared unfit for work will quickly turn into malingerers if they are given too much. Many are outright faking their conditions when they could get a job.
  • If you are unemployed, you must not be trying very hard to get a job
  • If you are young, you are basically lazy and unproductive and will do nothing useful unless forced.
  • Young people all have strong family bonds which they can draw on for support in hard times.
  • The only reason the low paid and poor have children is in order to claim more ‘welfare’. They must be stopped.

If these things are true, there won’t be much hardship suffered as a result of the new changes. People will just pull themselves together and find work. Those that don’t, obviously deserve only contempt. If they in fact turn out to be utter bullshit though…

Osborne’s ‘clever’ games should come back to bite him in the end

In a sane world, the news today that George Osborne’s wishes to enshrine in law a new ‘fiscal framework’ to ensure future governments only borrow in ‘exceptional circumstances’ would be greeted by laughter followed by the Chancellor’s immediate resignation for economic illiteracy.

Unfortunately, we do not live in a sane world. We live in a world where the idea that a governments finances are comparable to a households finances is a zombie that just won’t die. Many people – including many who should know better – will nod sagely at this news and think it’s a great idea.

This latest wheeze from Osborne is clearly designed to expose Labour’s perceived weakness on the economy (as if they could get any weaker). Faced with this, what should Labour do?

Their immediate reaction appears to brand it a ‘political stunt’, which is exactly what they’ve said every other time Osborne has tried one of these tricks. Labour haven’t said whether they will support this measure or not, but I think they should congratulate the Chancellor on his excellent idea and support it wholeheartedly. Then, when the mythical surplus proves illusory, they can batter Osborne with his own words. And if they ever do get back into power, they can just pretend they are sticking to the rule while doing the opposite. That’s pretty much what the Coalition did for 5 years, but hey, that’s just politics right?

There are a lot of reasons why Osborne’s surplus is not attainable for more than a year or two as Ann Pettifor sets out pretty clearly here:

“…

no matter how determined he may be, the Chancellor cannot eliminate the deficit – the balance between government income and expenditure.

While you and I can cut our overdrafts by cutting our spending, or by increasing our income – the all-mighty Chancellor cannot do the same. The public sector deficit is not dependent on his actions, or the government’s policies. It is dependent on economic activity in the economy as a whole. If the economic ‘cake’ (that is employment) shrinks, the government deficit will rise. As the ‘cake’ expands, the government deficit will fall.”

And for a longer explanation of the damaging effects of austerity, I can recommend todays Billy Blog.

What does Cameron’s reshuffle tell us?

We learnt more details about Cameron’s ministerial team today, and his choice of personnel exposes Tory thinking in certain key policy areas. The holders of the three key jobs are unchanged with Osborne, May and Hammond remaining in post at the Treasury, Home Office and Foreign Office respectively. Jeremy Hunt remains at Health demonstrating that acting disgracefully whilst in office need not harm your career.

Surprisingly maybe to some, Iain Duncan Smith kept his job at the DWP. I would have thought the thinking there is that people already hate Duncan Smith, so why ruin someone else’s career when they can let him force through an extra £12bn in welfare cuts? Given the track record of IDS, it seems unlikely to end in anything but disaster.

Being in favour with George Osborne seems to be good for your career. Key allies Sajid Javed, Amber Rudd and Matthew Hancock all got promotions. Hancock in particular is someone with no obvious talents who was slavishly loyal throughout the last Parliament, never shy of going on TV to defend the indefensible. He seems to have got his reward.

Other appointments include John Whittingdale – a man who doesn’t think the BBC should exist – appointed as culture secretary, and Michael Gove at Justice (who surely can’t be any worse than Chris Grayling). Boris Johnson – for no good reason that I can discern – gets a seat at political cabinet whilst he tries to combine the full time job of being an MP with the full time job of being Mayor of London.

Finally, Priti Patel – one of the most free market Tories – is given the job of Employment Minister. Expect lots of talk of ‘personal responsibility’ and not much support for those out of work.

There is a remarkable stability to Cameron’s Cabinet. Most of the top jobs are still with the same people as the last Parliament. There were favours given to key allies, and the appointment of a pro-Murdoch, anti-BBC Culture Secretary speaks volumes, while we must still watch this space for the inevitable downfall of IDS at Work and Pensions.

2015 Budget Bullshit

I might be a bit jaded at the moment, but I don’t have anything interesting or insightful to say about today’s Budget, so instead I’d though I’d just make some snarky comments instead.

I hate the language of politicians. They dumb down, make false equivalencies, and use slogans that just don’t make any sense. George Osborne (or whoever writes his speeches) is no exception. Here are some bullshit phrases he used today that particularly annoyed me.

1. “Today, I report on a Britain that is growing, creating jobs and paying its way.”

Line one. Bad start. “Paying its way” doesn’t really mean anything in the context of a nation state does it?

2. “Britain is walking tall again.”

I’ve already seen this line parroted by assorted Tories several times. Please stop.

3. “Today we make that critical choice: we choose the future.”

Obviously been watching Trainspotting again. I suppose he thinks Labour would say “We chose not to choose the future; we chose something else.” He goes a mental for the next few lines doing the full PF Project track.

4. “Real Household Disposable Income per capita.”

Osborne wants to say that living standards are higher than they were 5 years ago. You would bloody well hope so, but the only way he can say this is to define living standards using the tortuous formulation above.

5. “We will also use this opportunity to lock in the historically low interest rates for the long term.

I can tell the House that we will increase the number of long-dated gilts that we sell.”

Maybe someone smarter than me can tell me why this is a good idea. If you can borrow short term at real rates close to zero, why would you borrow at higher rates over a longer period?

6. “Lower inflation means lower interest charges on government gilts.”

This sounds like bullshit. Perhaps someone could confirm?

7. “We’d be spending money we didn’t really have.”

The UK government never “doesn’t have money”. What is he talking about?

8. “The hard work and sacrifice of the British people has paid off.”

Well done British people!

9. “The sun is starting to shine – and we are fixing the roof.”

My old favourite, an analogy that has no relevance here.

10. “So the OBR report today that debt as a share of GDP falls from 80.4% in 2014-15; to 80.2% in the year 2015-16.”

I’d like to see the sums on this one. I reckon there’s some serious creative accounting going on (not that it matters in the slightest).

That’s only half the speech covered. I could go one, but I’ve kind of lost the will. There was a load of stuff about “rewarding savers”, which is generally a terrible idea for capitalist economies which rely on spending not saving, particularly when the government plans to continue to tighten it’s belt. We can’t all do so at the same time! Any way, a lot to hate in Osborne’s speech. 50 more days or so and it will all be over.

Things that definitely are George Osborne’s job

The Guardian have a story up today headlined “George Osborne says HSBC tax evasion prosecutions not his job”. This comes in the face of ongoing revelations about HSBC’s Swiss operation and anger over reports that to date only 1 out of 1,100 individuals for which there is evidence of tax evasion have been prosecuted. George is technically quite right. Evidence of criminal activity should be gathered by bodies like HMRC and the Financial Conduct Authority, and decisions about whether to pursue prosecutions taken together with the Crown Prosecution Service. This does not let Mr Osborne of the hook however. There are a number of things that definitely are his job (or the job of others in government) that he should be doing in relation to this issue. Here are a couple:

1. Make a clear statement and back it up by announcing that the tax authorities will have all the resources they need to pursue cases (however complex) if they are in the public interest. This is not happening however. I’ve seen it quoted on several places that while the DWP employs over 3,000 people to investigate benefit fraud estimated at £1.2bn, HMRC employs only 300 people to investigating tax abuse totaling several orders higher than benefit fraud (if someone can find an official source for these stats, please let me know). This suggests the Government’s priorities may not be quite focused in the right direction.

2. The Government are responsible for appointing financial regulators, and the message sent out to banks and others flows from that. If the Government appoints regulators who want to stamp out abuses (and who have the resources to do so), then it would restore confidence in the system. This also does not seem to be the case. The CEO of City regulator the Financial Conduct Authority recently told a committee of MPs that he was unaware of any specific claims about misconduct at HSBC until the last few weeks. Isn’t it his job to know, particularly when by all accounts it was pretty common knowledge what they were up to? He also said:

“He said the FCA had not been handed details of the latest HSBC scandal by HM Revenue and Customs (HMRC).

‘I am not aware of a direct channel of information on this particular case,’ said Mr Wheatley, adding that he did not know whether HMRC had any obligation to do so.”

To which ex bank regulator Bill Black incredulously wrote:

“To review the bidding, Wheatley says he doesn’t know anything beyond what he read in the newspapers, has no “channel” (as in English “channel”?), to the UK tax authorities even though any banking regulator has to work closely with the tax authorities, and doesn’t know whether his agency and the UK tax authorities even have a system of informing each other of vital information about bank frauds.”

Quite. So come on George. While prosecuting tax evasion may not be your job, appointing experts up to the job, who are properly resourced with the teeth to impose harsh penalties for wrongdoing most definitely is!