Were Labour really that profligate in power?

When the Labour party won the 1997 general election, they inherited a Britain where schools and hospitals had suffered from decades of neglect and under investment. Not all of this was Thatcher’s fault. However the trashing of the economy, creating firstly the deepest recession and secondly the longest recession of the 20^th century alongside a public expenditure cuts policy certainly did not help. Apart from selling off state assets and spending the money on current expenditure rather than infrastructure investments, we may have emerged from Thatcher’s experiment with some benefits. We got rid of some old inefficient industries, freed the financial world from many constraints and moved on with a new confidence.

In the last years of John Major’s government a new idea was born, the Private Finance Initiative. The Conservatives were cautious but the new Labour government seized on PFI with enthusiasm. In accounting parlance, PFI is usually off balance sheet, according to GAAP (Generally accepted accounting principles). A huge advantage, as you do not have to admit to what you are spending, even to yourself.

A couple of years ago I had reason to spend a few days in my local hospital. The experience was so much better than I expected. The hospital, all shiny and new, showed what was possible under a well funded health service. At the time I thought it the best hospital in the world. The hospital was completely rebuilt on PFI funding, with a 30 year contract. The hospital valued at £312 million would be paid back at £50 million a year rising to £100 million by 2041. That’s a total repayment of £2,500 million. Maybe it was the best hospital in the world. It’s certainly one of the most expensive.

When the coalition took over in 2010 they immediately cancelled all PFI developments that had not been contractually committed, and froze other contracts in progress to await review. 

So, why did two governments take such a radically different view?

Consider the need to cut the deficit in 2010. In 2010 alone the taxpayer was committed to paying:

Year 12 of New District Hospital, Newark

Year 11 of New District Hospital, Swindon

Year 10 of Cumberland Infirmary, Carlisle

Year 9 of Russell Hall Acute Hospital, Dudley

Year 8 of Calderdale Royal Hospital

 Year 7 of New District Hospital, Coventry

Year 6 of Newbury & Thatcham Hospital

Year 5 of Central Manchester University Hospital

Year 4 of Derby City Hospital

Year 3 of St James University Hospital, Leeds

Year 2 of Wakefield & Pontefract Hospital

Year 1 of Penbury and Maidstone Hospital

Now you start to see the picture. Just when the banks had pillaged the economy and we needed to cut our expenditure, we were contractually committed to massive PFI payments. Only it’s much worse than my example of 12 projects as there are over 170 NHS PFI projects and over 700 PFI projects across all government departments. The biggest of these is PRIME and it is worth £9.5 billion. PRIME outsources all D of E offices, job centres and such. These PFI contracts are not just for new buildings but for maintenance of the whole property portfolio on a 20 year contract.

The amount being paid to private capital suppliers is rising each year, and will peak in 2029/30.

Between 2001 and 2008 536 PFI deals were signed off in the UK. These were valued at £61 billion. In Europe over the same period there were 215 PFI contracts valued at £37 billion. So the UK had almost twice the contracts in place than all the other EEC countries put together.

The Dutch government use PFI but with strict controls. Only 50% of a project can be funded this way and the maximum term is 4 years.

If we look at Labours 13 years in government, the deficit in 2007/8 before the crash was lower than in the last year of John Major’s government. At one point Labour even ran a budget surplus. Superficially it looks like only the banks imploding caused the deficit to spiral out of control. But given the impact on the economy in 2008, PFI is the inflexible yoke around our necks.

Still we have some nice new hospitals, some new schools etc. What a shame we cannot afford doctors, nurses, teachers........

Footnote: When the coalition dropped all new PFI contracts and where they could froze those already underway, they inadvertently killed the recovery that began under Labour and caused a further recession until 2012 when they relaxed austerity (while denying in public that they had moved away from plan A). Sometimes it really is that complicated. George Osborne is currently championing PF2. You can’t make this stuff up.

It’s difficult to find out about PFI projects in the UK. They are regarded as commercial in confidence and excluded from freedom of information. The Hong Kong government are less secretive.

http://www.eu.gov.hk/english/psi/psi_case/files/ppp_case_estate.pdf

http://www.eu.gov.hk/attachments/english/ppp_duty_visit_reports/United%20Kingdom%20Duty%20Visit%20Report.pdf

History of NHS

http://www.nhshistory.net/parlymoney.pdf

Open Democracy Report (a must read if you value our democracy)

https://www.opendemocracy.net/files/PFIreport.pdf

Like Kermit I have a problem being green?

I’m getting closer to the green party, except that I believe in nuclear power. I’m definitely sympathetic to the green agenda, except I don’t like windmills. But I’m definitely a green, although I find many of them a bit.... well green.

I don’t like simple answers, magic bullets. I believe in the markets ability to drive change. Capitalism is a great mechanism to drive innovation. There are a number of reasons why this is not happening now. The main one is a total failure of the market to price what Galbraith called “neighbourhood costs”. To be more precise, a failure to fully price carbon. In effect that’s free market economics speak for you suffering from my pollution. I'm not charged for generating the pollution, your charged through environmental damage and the health issues that arise.

Politicians are not the right people to decide what solutions to back. Subsidies for wind power will only work if wind power is the right answer and all the other answers are wrong. Politicians are not the right people to decide which technology to support. Politicians do have a role to play. They have to kick start a new industrial revolution and ensure that the natural ability of our capitalist system to exploit new ideas is allowed to compete against the powerful interests of the fossil fuel lobby.

“Government policy can create viable new markets, boost private investment and innovation, and stimulate the economy without requiring large public expenditure” (Dimitri Zenghelis, 2011).

Retired climate scientist James Hansen has argued for a rather elegant solution:

It requires an honesty from our politicians that I’m not convinced they are capable of. Basically get rid of all energy subsidies and taxes. Then tax pollution and undesirable “neighbourhood costs” heavily, very heavily. Wind power has to compete once the playing field has been levelled. The price of fossil fuels will rise significantly and the world will be encouraged to wean itself off this previously underpriced energy source.

But here is the true beauty of this pollution tax. Every 3 months the government divides the tax take from the carbon tax by the full population and sends each of us a cheque. So the government does not get the benefit of the extra taxes but we are encouraged to be fuel efficient.

Two examples. A fuel inefficient person pays heavily, and gets a little back. A fuel efficient person pays less because they use less dirty energy and gets the same share of tax back as the first person.  And here is the surprise – it works, British Columbia have such a system running now and its so popular that opposition to it is political suicide. Latest news is the Boston asked private consultants to recommend an effective way of cutting carbon pollutants blamed for accelerating climate change. They proposed a multi million dollar carbon tax.

Read more about this in James Hansen’s book “Storms of my grandchildren”. In the UK I would include children in the cashback, but held in a trust which could be used to pay university fees. There may also be an issue with fuel duty making an existing contribution to the exchequar. However a lot of the fuel tax we currently pay is returned to the fossil fuel industry in the form of subsidies.

This elegant solution won’t work if the politicians keep the tax. In needs to be returned to us as a quarterly dividend.

A significant issue is the right wing free market hatred of any interference in markets. These right wingers think that everyone has a right to pollute and the government has no right to interfere. This is not a free market, it is rigged in favour of fossil fuel. Consider the tax breaks that Osborne is giving to the fracking industry. This is a UK taxpayer subsidy to oil. But according to the right wing pundits, the government has not got a right to try to control a dysfunctional market. In the future the failure to accurately price carbon pollution will be regarded as the greatest market folly of our time.

Thanks George – do 24% of my taxes really go to scroungers?

I’ve just been picking through the personal tax statement as sent out to 24 million tax payers. With any new system there will be teething problems of course, but it seems that most of these are not technical issues, more political decisions or lies as I prefer to call them.

This tax bill is an example. It only shows income tax and misses out VAT, fuel duty, council tax, etc. It was politically important that welfare was the biggest figure, so welfare was redefined to ensure this. Notice the big orange bit, designed to stand out.

The welfare figure comes from total spending on “social protection” less state pensions.  That’s about 24% of total government spending, or £168 billion in 2013/14. Some of the pundits have investigated. 

Of the £168 billion only about 1.6% is unemployment benefit, that’s less than £3 billion.  £28 billion is spent on long term care for children, the elderly, the sick and the disabled.  Well I think we need that.

£20 billion is spent on “other pensions”. These include public sector workers like soldiers, police, teachers, politicians & nurses. Why are pensions included in welfare. Well this is seven times more than unemployment benefit inflating the orange blob nicely. Well now we know who the scroungers are, or at least who our coalition government think the scroungers are. 

Should the £28 billion spent on pension related benefits pension credits (a means tested top up for those over reliant on state pension) be included here? Surely its better to put this in the state pensions total? I expect that George Osborne’s new pensioner bonds paying 4% for a 3 year term will be added to this welfare total in future. 

Why am I as a taxpayer paying for this party political propaganda? If we are being softened up for more cuts, then what about cutting MP’s pensions first?

Side issue – I started my working career behind the counter in an Unemployment Benefit Office. At the time Job Centres were just being rolled out. The argument was to get away from the demeaning benefit environment which reinforces feelings of failure and shame by putting an emphasis on new jobs, new starts for people and training opportunities. For the state, the unemployment safety net was a natural part of labour market flexibility. As old industries died, workers should be encouraged to seek new skills and new opportunities. The welfare state added a necessary liquidity to the labour market. Okay about 30 – 40% of claimants were hardcore unemployed who knew all the tricks and exploited them for a quiet if not particularly rewarding life. But most people were not scroungers and the welfare state could help support them when they were down, and reintegrate them into a fulfilling economically active workforce. The coalition government strategy of bullying those in need has no impact on the 30-40% who have thick skins and are used to an impoverished lifestyle. It’s the 60%, decent people who are temporary victims of economic renewal and feel the shame of unemployment who suffer from the coalition’s vindictive streak. 

More:

www.ifs.org.uk/publications/7424

http://www.politics.co.uk/blogs/2014/11/04/osborne-s-tax-statements-are-publicly-funded-tory-propaganda

http://www.welfareweekly.com/osborne-accused-using-new-tax-statements-political-propaganda/

https://fullfact.org/economy/calculating_tax_summary-36103

 http://www.taxresearch.org.uk/Blog/2014/11/04/the-personal-tax-statement-george-osborne-doesnt-want-you-to-see/

What is your marginal rate of tax?

The marginal rate is the rate you pay on the next pound you earn. Mine is 20%. I bet yours is higher!

If you are employed and earning below the higher tax threshold, then you are paying around 32%. The difference is employees NI contributions. As a pensioner I do not pay NI.

So, if you are economically productive, you get clobbered by an effective rate of 32%, while I, an economic liability pay 20%. So much for a government that wants to make work pay.

I did hear that the George Osborne wanted to merge income tax and NI but was concerned that it was political suicide. I got a bit worried about its impact on my own finances, so I started to think about it.

National Insurance used to be a low fixed rate. It was easy for politicians of whatever persuasion to increase without the making the headlines that an income tax increase would make. So NI became a percentage, then two rates, then a bigger percentage with a cap, then a bigger cap. Higher rate tax payers pay NI at a reduced rate of 2% making their effective rate of direct tax 42%.  Its the tax that grows. Why? Well it’s hard to avoid so it is a reliable tax with a low political downside. It is not the growing welfare state that has increased the NI rate, that is a smokescreen.

One of the other issues with NI is that it relates to unemployment benefits, and is tied to other schemes in Europe and the commonwealth that allows benefits to be paid across Europe and wider. Whether you believe they exist of not it is used to restrict welfare migrants. Didn’t contribute – can’t claim. This may be a good reason to keep it.

There is a solution. Put income tax up to 25% and 45% and reduce NI from around 12% to 4 or 5%. The exact figures should be budget neutral, but for lower rate taxpayers, those who have suffered the biggest drop in living standards, it would reduce effective tax by 2% or more. That would reduce poverty, and have a Keynsian boost to the economy at no cost to the exchequer.

I am the first to admit that the figures need checking. My back of the hand estimates seem reasonable but I do not have the resources to trawl through government statistics to prove this. Trying to decipher government tax statistics is only for those who do not value their sanity. (Too late!) I would like to see our politicians grasp this nettle. Income tax has a broader tax base than NI, so the rate can be lowered.

I do feel like a chicken voting for Christmas. I won’t be popular with pensioners, but why do we get away with a lower effective rate of tax than young people struggling to raise families. Ultimately if you do not earn, you do not pay.

I do worry that we get rid of NI and I would end up paying 32% tax with the rest of you. Sometimes you just have to trust politicians to do the right thing.

We are told that the age growth in the population is one of the main reasons for the crisis in the NHS budget. Well wealthy pensioners should help pay for it.

I’ve just remembered that pensioners are a well organised and effective lobby group. Well workers paying 32%, get organised and fight for a more honest tax system.

Addendum: Just been reading the 2020Tax Commissions's Final Report. (http://2020tax.org/2020tc.pdf).
It makes my rant look mild, very mild. They add employers NI into the marginal rate and get a lower income marginal tax rate of over 40%. They argue for a single distributed income tax of 30% to replace income tax, employees NI and employers NI. Its a bit right wing for me based on a huge cut in the top rate of income tax, but then they are sponsored by the Institute of Directors. Does the sponsor invalidate the arguement? I'm still reading it (146 pages) but some quotes show their bias to big business. "Tobacco duties have been justified on the externalities that are mostly either dubious or actually private costs." DUBIOUS? or PRIVATE COSTS! These people are dangerous.

We are all tax avoiders now!

The coalition have reduced expenditure, but we are still running a huge deficit. Why?

Well tax receipts are down, way down. Some pundits say that our tax system has collapsed. Consider in the first coalition budget in 2010 George Osborne took Labours planned increase in employers NI and moved it to employees NI raising the effective rate from 11% to 12% for basic rate taxpayers. VAT also went up from Labours reduced 15% rate to 20%. That did not result is a collapse in direct taxation, but it did hit the economy hard. A steady recovery in early 2010 became a continuing recession. Check the figures, the GDP figures for the last financial quarter of the Labour government and first 2 quarters of the coalition actually match our current last 3 quarters growth. But in between, austerity killed the recovery.  

However George Osborne also started a reduction in corporation tax rates from 28% to 21%. The logic for this was the Laffer curve. Economist Arthur Laffer postulated that as no tax would be raised at zero and 100% tax rates, then there must be a point at which the rate / tax income curve folds back on itself. In effect a rate at which any increase results is less tax being paid because the high rate depresses economic activity. As George would put it, reducing rates would actually increase the tax take by reducing avoidance and increasing economic growth. The problem is that no one has ever been able to prove where the “non zero maximum” is. And so we enter the world of wishful thinking where our prejudices begin to dictate our perceptions of the truth.

What has happened in practice is that our corporation tax receipts have fallen significantly even while profits have risen.  Large businesses still avoid tax through legal means such as routing copyright fees through tax havens. 

What about income tax?  That raises some 40% of our total government income. Nick Clegg’s input to economic policy was to promise a £10,000 tax free allowance for everyone.  George trumped this by adding an inflationary increase to the allowance. The problem is that wages have not risen with inflation but fallen (adjusted by the rate of inflation) by some 7% on average over the last 6 years. So income tax is down on estimates. 

Side issue here – The 40% tax rate comes in earlier than in 2009/10 as this was lowered and then frozen in the early part of the coalitions life. The right wing press kept quiet – imagine if Red Ed had done this. David Cameron recently announced to a captive party conference that his party if elected will raise the higher tax threshold to £50,000. Which is where the higher tax band would have been had he not reduced it, but applied inflationary rises instead.

Back to the rant – reducing the money in peoples pocket has resulted in prolonging the recession. This is pretty basic economics. This has lead to a much lower income tax take than predicted in 2010.  

There is a third factor in our collapsing tax revenue. George Osborne talks that talk but he has added some tax avoidance loopholes himself. Tax avoidance has not been reduced as targeted but has most likely increased. There is an expected tax take calculated at a macro level on aggregate incomes. The estimated tax gap is the difference between actual and theoretical tax.  This has increased through every year of the coalition government and is currently around £34 billion.

Remember Jimmy Carr’s tax scam, and David Cameron’s ire. Well lets remind ourselves that our PM's father was a successful tax accountant helping the right people to control their tax exposure.  Ian Cameron ran a network of offshore funds in tax havens including Panama and Geneva. Perhaps Jimmy Carr’s fault was that he was simply the wrong class to be allowed to exploit our tax laws.

The overall impact of these three factors is a tax shortfall of £50 billion in tax revenue against the coalition's estimates for the current year made in 2010. 

In a past life in banking, one of my bosses warned that by repeatedly advertising savings rates, we were educating our customers to check the market and move their savings. The customers who stayed with a firm they had a relationship with were being encouraged to think differently. Well we have been educated to think about our tax.

At this point I have to admit minimising my own tax bill by letting my wife invest our savings, taking advantage of the new £15,000 annual limit on cash ISA’s and I also arranged a recent IFA bill to be paid through my pension saving £150 in income tax.

As the headline says, we are all tax avoiders now.

More at:

http://www.telegraph.co.uk//finance/11168941/Why-are-we-still-failing-to-reduce-the-deficit.html

http://www.taxresearch.org.uk/Blog/2014/12/17/there-may-be-trouble-ahead/

www.theguardian.com/politics/2012/apr/20/cameron-family-tax-havens