Britain is are still deep in the winter of austerity – and Brexit is only making it worse

We are still deep in the winter of austerity. The latest Green Budget from the Institute for Fiscal Studies makes that icily clear. Philip Hammond may have dropped George Osborne’s economically reckless target of eradicating the deficit in its entirety by 2019-20, but he didn’t reverse any of the spending cuts baked in by his predecessor in the wake of the last election. The freeze on welfare payments will bite all the harder as inflation spikes due to the plunge in the pound since the Brexit vote.

Departmental spending budgets are also set to carry on falling. Taxes overall are on the up too, despite the Conservatives’ “tax lock” on income tax and VAT, mainly thanks to a plethora of stealth tax rises such as hikes in the levy on dividend payments and insurance contracts.

The IFS calculates that there will be around £60bn worth of austerity by 2019-20. Of this £12bn (20 per cent) will be raised from cuts to welfare. Some £16bn (25 per cent) will come from tax rises. But almost all the rest – by far the biggest chunk of austerity – will come from slashing spending by Whitehall departments.

By the end of the Parliament the budgets of departments such as justice, business, culture and the environment will be an astonishing 40 per cent lower than they were in 2010, when the programme of cuts began. And even then the pain will not be over. If the Budget, due to be delivered on 8 March, is to be finally brought into balance during the next Parliament the IFS estimates this will require another £34bn of austerity.

Needless to say, none of this is good news. The welfare cuts will pummel the incomes of some of the most financially vulnerable households in the country, and almost certainly push up inequality in the process.

Cuts on this scale to Whitehall departments are inevitably going to erode the quality of public services; some will probably be stretched beyond breaking point. Stealth tax increases will inevitably be passed on to households, squeezing disposable income.

What is going on? Why are on earth are we still knee-deep in austerity almost 10 years after the financial crisis hit? There are two main answers.

The first is that the UK population is ageing. This, naturally, means that the pensions bill is automatically increasing every year. But the situation is exacerbated by the fact that pensions – easily the biggest element of the welfare budget – have been protected in real terms by the Government since 2010.

The ageing population has also put great pressure on the National Health Service since older people tend to consume more health care. NHS spending, the biggest tranche of departmental spending, has also been protected in real terms since 2010 by ministers (although as the chaos in hospitals reminds us, spending is still falling badly short of rising demand). Protected pensions means welfare cuts have been pushed on to working age benefit recipients. And the protected NHS means most other government departments have had to shoulder the lion’s share of the cuts.

A bird’s-eye view of the public finances shows that taxes are rising as a share of GDP to their highest level since the late 1980s (37 per cent). Yet public spending is set to fall to only its lowest share of GDP since 2003-04 (38 per cent). The latter statistic has prompted some on the right to scoff at the whole concept of austerity. 

“Was public spending really so inadequate in 2004?” they ask. But this is, intentionally or not, badly misleading. The reason for the discrepancy between the bird’s eye view and the pain on the ground is that we’re being forced to spend more on an older population, which is squeezing down the resources available for just about everything else.

The second main reason we are still in a world of austerity is that the size of the economy is so much smaller than we thought it would be seven years ago. Productivity growth – output per hour – has stalled since the financial crisis, which inevitably translates into weaker GDP growth and a lower tax take.

We still do not understand why productivity has stalled and it’s a phenomenon that can be seen across the Western world. But in Britain’s case, it’s pretty clear that George Osborne’s severe cuts to government infrastructure spending between 2010 and 2012 did unnecessary damage to growth. Now we have Brexit to contend with.

By diminishing Britain’s long-term potential productivity growth (an outcome the vast majority of economists expect) leaving the European Union will only make this problem worse. The national economic pie will be smaller and a larger share of it will be eaten by older Britons – the majority of whom, incidentally, voted for and delivered the Brexit vote. They may have “taken back control”, but the bill will largely be picked up by the young.

#austerity #Brexit #PhilipHammond

Republicans are doing the right thing on tax reform, albeit accidently

“The greatest treason”, suggested TS Eliot in Murder in the Cathedral, is to “do the right deed for the wrong reason”. That feels like a description of the corporate tax reform plan being pushed by Republicans in the US Congress, as they hope to win the backing of the freshly-installed President Donald Trump. For the plan’s main Republican sponsor, Kevin Brady, the objective seems to be kicking the ass of the rest of the world.

Brady wants to create a system “that doesn’t favour foreign products over American products” and has described the reform as a way of levelling the playing field for US exporters who are, he claims, currently being subject to outrageous discrimination through the Value Added Tax systems of foreign countries, including Britain.

Talk about the “wrong reasons”. The idea that there is foreign discrimination against American exporters through VAT – something also believed by Trump’s economic advisers – is nonsense. This charge is based on a fundamental misunderstanding of how a VAT works. Furthermore, there is also zero reason to expect this particular corporate tax reform to give American firms any kind of lasting advantage when it comes to exports.

Indeed, we find ourselves in the paradoxical situation where a reform being presented by deluded rightwing American politicians as a way of sticking it to cheating foreigners actually represents the world’s best chance for lancing the boil of rampant tax evasion by multinational companies.

It is the right thing being pushed for the wrong reasons. To understand why, we need to look at the plan in more detail.

The Republican plan would replace the US corporation tax, an annual levy on a firm’s reported profits, with a new levy on a company’s domestic cash flow. It means taxing a company’s domestic sales at a certain rate, probably 20 per cent, after it has subtracted its domestic costs such as workers’ wages and the amount the firm has spent on investment in new factories and equipment.

The objective would be to tax a company’s economic activity in America, which means that it would be able to reduce its tax bill by the value of its exports, while imports would be part of its taxable liability via a “border adjustment tax”. That probably sounds mind-numbingly complicated, but the principle is actually quite simple: it means taxing the firm’s value-adding and substantive economic activity in the country where that activity actually takes place. This is most people’s idea of what a tax on corporate income is supposed to do.

Many have objected that US firms that import heavily will be placed at a major tax disadvantage. Yet this impact would be entirely offset by a rise in value of the US dollar, which would follow the implementation of the reform, and which would increase the purchasing power of importers proportionately. And for all Brady’s rhetoric and the protectionist-sounding border tax, the effect of the reform would actually be neutral on America’s terms of trade with the rest of the world.

But the great advantage of this reform is that it would eliminate the incentive for multinational firms to dodge their US corporate taxes through accounting tricks, such as registering profits at subsidiaries abroad and relocating their corporate headquarters to tax havens. No matter where they based their headquarters, multinationals would be liable for a hefty US tax bill if they sold plenty of products and services in America.

And if America, the world’s largest economy, were to institute this reform, there would be a powerful incentive for other countries – including Britain – to implement a similar reform. Everyone who complains about multinationals making massive local sales but paying negligible local corporation tax – everyone from Theresa May to UK Uncut – should be hoping that Congress adopts this legislation, and that our own Parliament emulates it.

There are, it is true, potential transitional snags. Some believe that the unilateral reform of US corporation tax in this way would open America to a potential legal challenge for breaking the rules of the World Trade Organisation. The impact on income inequality is unclear, although there is no compelling reason to believe that it would be any more socially regressive than the existing corporation tax.

This reform would certainly present some risks, some potentially hazardous financial side effects. Yet there are also risks in trying, in vain, to patch up the current loophole-ridden “source-based” corporate tax system, which Mike Devereux, the UK tax expert whose proposals have heavily influenced the Republican plan, and who first proposed the reform back in 2001, describes as “fundamentally broken”. There are political risks in failing to respond effectively to widespread and justified public anger over flagrant multinational tax dodging by the likes of Apple, Google and Amazon.

Back to the paradox. Republicans care little about the iniquities of tax havens. They want firms to pay more in corporation tax in the same way that Donald Trump wants judges in Washington to influence immigration policy. And they seem terribly confused about the reform they are championing and about what it would entail, not least the progressive outcomes. Yet, for all that, what they have ended up pushing is the right thing, not just for the US but the world. Treason or not, we should wish them good speed on this one.”

#sourcebased #residencebased #taxation #borderadjustment #MikeDevereux #Republicans #corporationtax

The idiot economics of Donald Trump’s ‘Muslim ban’ will ultimately hit his own peo

A moral disgrace. An act of wanton cruelty. A legal outrage. An unconstitutional power grab. A work of gross administrative incompetence. A self-inflicted security wound. But economic idiocy too?

It seems almost otiose to mention money in the context of Trump’s arbitrary executive order barring Syrian refugees from America, capping the overall refugee intake for 2017 at 50,000 and stopping all entry to nationals from seven countries from the Muslim world.

But it’s true. Trump’s order not only defiles America’s founding principles, sullies its global reputation and gives comfort to autocrats the world over, but it will, in all likelihood, ultimately lead to the diminishment of the vigour of the world’s dominant economy too.

One doesn’t need to look far in America for examples of refugees and their families who have made a stunning contribution to the country’s prosperity. Steve Jobs, the founder of Apple, was the son of a man who fled violence in Syria. Sergey Brin, the Google co-founder, was a refugee from the Soviet Union.

Donald Trump announces a ban on refugees and all visitors from Muslim-majority countries

But the economic case for being open to refugees does not merely rest on a handful of entrepreneurial superstars. The idea that these people seeking sanctuary in other states represent an endless burden on taxpayers – something we’ve heard so often in Europe in recent years – is nonsense.

Data from Europe shows that, over time, the employment rate of refugees rises from 25 per cent to more than 60 per cent. In Sweden asylum seekers have shown a bigger increase in employment rates than any other migrant group.

Trump’s apologists stress that the ban is only temporary. Others point out that America in the Obama years only admitted an average of 70,000 refugees a year. It’s certainly true that America has not been pulling its weight when it comes to responding to the global refugee emergency.

But this is really to miss the point.

The economic damage from Trump’s order goes far wider than its direct impact. The bulk of the harm is in the message it sends. The barely disguised discrimination against Muslims tells 1.6 billion followers of that faith that “America does not want you”. 

And the fact that those who had been granted green cards (permanent residence) were initially included in the ban will have sent a chill through any non-American citizen worker, regardless of nationality or religion. The message here is: you can no longer rely on the US government to respect your status, to treat you fairly.Their incentive to stay – or the incentive for others with skills and talents to come to America – has taken a terrible blow.

Many informed observers suspect this anti-immigrant signal is the real goal. And listening to the views of Steve Bannon, Trump’s “chief strategist” and reportedly the driving force behind the executive order, this seems all too plausible. 

Bannon has ranted in the past about US engineering schools being “full of people from South Asia and East Asia” and objected to the number of Asian Silicon Valley chief executives. “Twenty per cent of this country is immigrants. Is that not the beating heart of this problem?” he once asked.

This is no finessing this. What we have here from the mouth of Trump’s right hand man is the raw voice of nativist bigotry.

It is also the voice of economic folly. America is a country settled by immigrants and whose spectacular economic success is built upon successive waves of mass immigration from people from all over the world of all faiths and ethnic backgrounds. It has prospered enormously on the back of immigrants’ inventive talents and hard work.

This noxious executive order is likely to be just the beginning. It sets the ugly and profoundly un-American tone. The longer Trump and Bannon control immigration policy in the US, the greater the damage that we can expect to be inflicted on the most productive national economy the planet has ever seen.

#DonaldTrump #immigration #Muslimban