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Monday, September 19, 2016

Creating dignity and respect

It’s reported that Angela Constance believes the Personal Independence Payment system – which replaces Disability Benefit - needs “radical reform”.

The basis for this appears to be that two thirds of claimants challenging awards are successful; something which the minister believes is not helping to treat them with dignity and respect.

There’s an element of double-think in this. PIPs were brought into being because there was a high-handed top-down approach being used by the DWP on the provision of benefits for the disabled and incapacitated. The PIP was to give more control over special support money to individuals, so that they could tailor best value from it. That, to us, was treating them with respect.

The change was introduced following a clamp down on a huge rise in incapacity benefits being paid as job seeker’s allowance was made less easy to obtain. That is, while PIPs were on offer, they were not going to be offered too easily. That, to us, treats taxpayers with respect.

Few people remember that when assessment of welfare for work began, thousands of benefits claimants simply did not turn up for their interviews. Shortly afterwards, unemployment figures began falling. There has to be a strong suspicion that many on welfare were not treating those who paid the taxes that supported them with respect.

In our land of free money trees, the battle over free lunches is always going to be noisy. It is made doubly so when politicians are able to use vague terms like dignity and respect in way that reflects a priority for vote purchasing over policy practicalities.

It's almost certain that what the Scottish Government means by offering dignity and respect is that they take back complete control over all welfare payments and design a system which serves their political interests with little respect for taxpayers.

The problem with PIPs is not that they are assessed carefully, but that they are not linked in any way to a system of contributions – where self-reliant individuals are allowed to judge the dignity and respect they are offering to those in need against the costs of their decency in giving. Instead, all welfare is offered through a vast monolithic tax pot replete with adverse and contradictory incentives for recipients, taxpayers and administrators alike. In short it is a mess.

The way to sort out PIPs is to expand them to become a guaranteed income entitlement for every individual, but held within a contributory system where the cost of accepting welfare is linked to the cost of thrift to support personal benefits.

It is worth mentioning that most European Union countries use some form of social insurance that follows this principle. Should the “single market” develop into a proper single market for services and Scotland somehow become a member on its own it is very likely that, in time, it will be obligated to allow an opt out from our monolithic system for individuals preferring to adopt the more sustainable social insurance model.


Wednesday, September 14, 2016

A good vision for our money spent on education

At last, a view from the Scottish Government that decisions should be localised to those in the know. John Swinney is to be commended for his clarity of vision for our education system.

Scotland suffers from far too many national monoliths, and taxpayers suffer from the producer interests in workforces and the bureaucracy who then capture the cost base of those entities and spend our taxes inefficiently.

How predictable that our local councils are not pleased to see their power and control seep away. Mr Swinney should reject their assertion that only a joined up one-stop-shop approach can serve all parents properly. Our councils are over-politicised and enjoy their complexity and sheer size through obesity in corporate costs and overheads – at great taxpayer expense. Every Scottish council function needs to become a fully audited cost and revenue centre, sharing overheads if it wants but having them allocated to its own audited budget.

The sop in Mr Swinney’s plan is his educational regions – collaboration bodies to share out power and control among the interferers; rather than leaving decisions to be taken between schools and parents. There’s lots of scope for spending our taxes on meetings there, and for a gradual mission creep by councils and the EIS back into the driving seat to dictate how schools are run. This should be resisted.

One of the great advantages of local council taxation is that it produces a bill for every household – usually the largest one they pay on a regular basis. That’s a good brake on the public sector presumption that our taxes are their money to do with what they wish. They aren’t, they are our money that we accept can be spent through them for collective gain.

If Mr Swinney can find a way to use that money more effectively and with tight focus on the task of taking a wee child and turning him or her into an astute individual with a mind full of learning, he will have done Scotland a huge service. We need them to build our future and pay off the appalling debt raised by our existing public sector monoliths.


Monday, September 05, 2016

How much is the public sector worth?

As we move into a new political season, we think it worth reminding taxpayers just how much our public sector has over-traded. The snapshot of GERS gave us all another view of the last year’s current account, but it is equally as important for us to look at the balance sheet.

For all the heat over GERS, there is very little light on the wider situation that our government has found itself in with respect to its finances – shared as they are at present with the UK as a whole.

It seems to us important for Scottish taxpayers who are now paying 2.8 billion pounds annually on debt interest (4.1 percent of all spending) that the collateral that backs these loans exists. There was a slight frisson of excitement in the City two weeks ago when a tranche of debt refinancing using UK gilts actually failed on the first auction. We should not underestimate the economic damage that a government, faced with a refusal to fund its debt needs, could do if it had to raise interest rates substantially in order to fund its activities. For Scotland, with less taxation capacity to pay such interest, outcomes could be extremely serious.

Governments fund their activities in an particular way. They split their spending into Annually Managed Expenditure and Departmental Expenditure. The first involves costs on spending promises made that cannot be broken; things like pensions, welfare benefits, and other programmes that are considered to be entitlements and will be spent come what may. The second element involves discretionary spending by government departments choosing to spend on initiatives that can be cut, adjusted or increased by the government of the day. The present Scottish Government’s Departmental Expenditure Limits are £30.4 billion – less than half of the total £68 billion budget. It is worth noting that the £12.6 billion shortfall on the current budget balance is 42 percent of this figure.

There is a reality here; should a new economic shock hit Scotland, and the government of the day wish to stick with its plans on annually managed spending entitlements, the discretionary portion of its budget is going to be shocked more than twice as hard if it has to take up the shortfall. That is essentially what George Osborne had to do over the past five years – chopping lumps out of government departments’ discretionary budgets to pay for other entitlements. While described as “austerity” such budget cutting is highly skewed away from the funding that most of the howling anti-austerity brigade consider to be important. GERS tells us that the cash budget for state pensions have gone up by £272 million and of Work and Pension social security cash spending has risen £59 million.

UK Public sector debt, as reported to the EU – what is called Maaastricht debt - is more than £1.6 trillion. A recent publication by the Office of National Statistics suggested that the market value of UK debt – what are called “general government unconsolidated total financial liabilities” – is £2.134 billion with a negative net worth of the public sector of £1,620. What these negatives consist of are the unfunded public sector pensions schemes, PFI legacy schemes, network rail and nuclear decommissioning among other mistakes made by public policy makers.

However much politicians try to spin these figures, the situation is pretty dire, not just in the UK, but all over the developed world – even the USA has set a path towards a trillion pound deficit with its present spending plans.

And for Scotland? Well, a smaller country digs a smaller hole, and if that hole is less deep in proportion (it isn’t) to other countries then it would be easier to get out of. So, again, when we start a new season of state spending promises, with new welfare powers becoming the responsibility of the Scottish Government from today, we would urge that offering more spending promises that result in yet higher debt is foolhardy. It is quite likely that Scotland along with other nations is in fact technically bankrupt. Should anything go badly agley in the next decade, it is relying only on its authority to tax us to hell and beyond, probably through inflation, to save itself from disaster. You have been warned.


Wednesday, August 31, 2016

Gaming the corporate tax system

There’s a lot of tut-tutting going on over the proposed fine of £11billion that the EU wants to impose on Apple Corporation.

Legal beavers are going to make a fortune chewing over this for some years to come. But if you look at the realities, governments have fallen into a huge hole of their own making.

Corporation tax is a stupid tax. Yes, stupid. It pretends to be a just imposition on companies so that they “pay their fair share”. But share of what? Purportedly “the money they are making” – imputed profits. The problem is that this money is not just lying about in a bank account somewhere. Companies manage their cash flow as efficiently as they can and nearly all of them struggle to retain it; free cash is pre-allocated for supply purchases and new capital investments, including additional staff.

When you tax companies, you tax their cash flow. Employer’s NIC, VAT and other levies all cut deep into cash flow – and they bankrupt more companies each year than anything else. So, when you add a tax on net margins on top, companies react by cutting staff, raising prices, slowing investment or lowering the dividends that our pensioners live on. Corporate taxes are enormously destructive.

Now the rub, governments know this. They know it because their tax authorities tell them that working out what net margins might be is really really difficult. Why? Because companies are not like people, they are made up of hugely complex bundles of contracts between suppliers, service providers, specialist licence holders and others; as a result they are all different with different ways, speeds and methods of earning margins through time. There can be no “level playing field” because companies do not play on the same field.

Sadly, governments are stupid enough to think that they can treat them as if they do. A number of things then happen.

First, corporate taxes become complicated – look up Tullows Guide to UK corporate tax, it’s more than 4500 pages long and no-one, not even the best tax specialists, understand it all.

Second, because tax authorities have to run complex rules that deal with complex companies, they resort to agreements – just to get somewhere with their revenue collection. HMRC’s Large Business Directorate struggles away trying to make sense of complicated rules. In essence, HMRC and large corporates share an approach where each tries to game the system for best outcomes. Often, players have worked on both sides, so the game is ostensibly objective, but in reality a cabal-like negotiation that makes a mockery of any idea that our tax system is equitable. It’s all hugely wasteful and enormously unproductive, allowing top professionals to make shedloads in fees.

Third, because of this complexity, smaller companies doing well are given another mountain to climb as they try to generate the cash to grow. And there is a nasty bit here, because they are smaller and they cannot access the specialist help the big players can, the taxman finds it easier to flex their muscles with them. HMRC gets very aggressive with smaller companies that they know they can browbeat into submission on the basis that they know more than them.

And who loses from all this? Ordinary hard-working taxpayers and many others who are not working and so do not pay tax. Governments that tax money out of corporate cash flows are taking money from our future because they make it less worthwhile to take risks, to invest in a future, to work with others to enlarge our contractual relationships.

In Scotland, where 95 percent of our companies are small this destruction by the state is of huge importance. Just look what happened when Ireland cut its corporate taxes – they created a Celtic Tiger. That’s because small concerns grow faster when they are let free. Remember that Apple is only 40 years old; it has grown from nothing to having over 2 million employees today. Stuff happens when governments get out of the way and do not tax enterprise. In Scotland, we need a lot more stuff to happen – and fast.


Wednesday, August 24, 2016

The means to live beyond yesterday

We have some sympathy with the view that snapshots about yesterday like GERS are not hugely illuminating.

However, they do beg an important question; precisely how can Scotland stop living beyond its means tomorrow, independent or not? The trend of change in the annual GERS reports, even discounting oil, is not good.

In answering that question, the Scottish Government is perennially quiet – and is likely to remain so in its ignorance of supply side incentives. It nods at the fine sound of a “jobs and growth” agenda, but offers nothing but state corporatism, eagerly adopted by Scotland’s many state corporatists. The ideas of our nation, across all parties, appear to be caught in a time warp somewhere around 1975; Keynesianism rules – despite being bunk.

The evidence that any growth and jobs will emerge from central planning of economic development is not just thin on the ground – it’s zero. That there is such a vacuum on how to create jobs and growth is a shame, because the GERS deficit may appear to be appalling but in an economy the size of Scotland a mere one percent additional growth would soon make a good dent in it. A few years of constrained spending and five percent growth would get rid of it.

Is that such a hard task to achieve? Not really if the right low tax pro-entrepreneurial climate were found through policy decisions. We have the skills and the resources, the world is awash with capital desperate to find a home, the only problem is that perceptions and expectations about Scottish Government policy are entirely focussed on how much more of our money they might spend, and what they might do through taxation to obtain it.

Those perceptions are important, because they tell us something else. If a perennial over-spend goes on, and a perennial subsidisation from elsewhere also continues seemingly ad infinitum, the Scottish “brand” becomes more and more tarnished. Brands also carry perceptions and expectations, but good ones; our grandfathers who built a powerful industrial Scotland traded heavily on Scots’ honesty, hard work, thrift and creative enterprise. How sad if tomorrow’s Scotland is seen instead simply to be quaint with a need for subsidy.

We don’t want that, we want a Scotland that holds its head high across the world as a powerhouse of industriousness. To get there, we need the state to think again about its role and that of its taxpayers. Taxpayers can help the collective state achieve objectives, but only if it leaves them free to generate the wealth to pay for them.

Government here is the problem, not the solution; most taxpayers know how to live within their means; it’s time our state did as well – and firmly stated its aim to do so as quickly as possible.


Wednesday, August 10, 2016

Spending tomorrow’s taxes

Today, yet again, Scottish taxpayers are seeing their cash allocated to ideas that politicians think might stimulate the economy.

Not surprisingly, we are talking here about things like hospital expansion, roads, bridges and the like; construction and capital spending done to a strategic central plan. Initial funding comes from an underspend last year, future funding comes from who knows where including the thought that post-Brexit there might be EU Structural Funds available.

It won’t work.

As we have pointed out before, lead times in infrastructure are long, funding moves towards larger players, many not based in Scotland, spending goes not to the many, but the few, and mostly to pay for financing on equipment, imported materials and imported specialist labour. We will not rebuild Scotland this way.

Isn’t it appalling that all our politicians can offer is to “protect jobs”, not create new jobs or whole new industries, but to support what has been and is struggling? Squandering pork to corporates in construction and quangos of the state is no way to build a wealthy nation.

In this Keynesian process the state builds something else; a liability payable in the taxes of future generations for servicing these new fast-tracked “investments”. Has anyone in the Scottish Government a clue as to the whole life costs of these new structures they propose. Last time we asked, the answer was a flat no, they had not been considered. Anyone for more debt?

These moves are said to help to “build confidence”. Really? Creating an un-costed future liability, accrued from production that will be done at an undefined time in the future, funded initially with £100 million of small beer spare savings adding 1.66 percent to existing projects, and later by money-tree funds of unknown likelihood. Jings … tak’ aboot fechin the larrie.

Taxpayers should shout out loud that two years down the line for some sort of unlikely stimulus is of zero interest or credibility. The Scottish Government now has new powers; they could offer a cut in Land and Building Tax, a cut in Income Tax and a few cuts in daft spending, with a promise of more to come, and we’d have a real and growing stimulus from tomorrow.


Monday, August 08, 2016

No White Knight will save us from Wonderland economics

"It seems very pretty, but it's rather hard to understand". Alice’s words from Through the Looking Glass about the nonsense poem Jaberwocky seem to capture the confusions of the nation. Our leaders gyre, galumph and chortle with frabjous energy.

Much is put down to the consequences of Brexit, but this is salving of the wrong wound.

Milton Friedman would be aghast at the notion that monetary policy can somehow stimulate the economy. Not because interest rates are already at rock bottom, but because monetarists have never claimed that such dangerous footling could. Bizarrely, contrary to much of the commentariat’s claims that we have seen a major response, even in announcing his intent the Governor of the Bank said his powers are limited and that fiscal measures are also vital.

On the other side of the looking glass we have the Tweedledum and Tweedledee posturings of the Corbynites and Sturgeonites. Their fiscalism adheres to an amalgum of Mad Hatter sweetmeats that went stale around forty years ago; national investment banks, wage and price controls, and nationalisation of industrial sectors. The Queen and King of Hearts laud it big time among a phalanx of supporters in a mad world of fantasy economics.

Let’s get real. Social democracies of the state-sponsored corporatist kind who pretend that more spending and more borrowing is public investment that will improve lives have had their day. The bureaucratic managerialists who purport to “run the economy” don’t. They create unemployment and stagnation – and within the oh-so-old-school EU vast armies of permanently non-employed under 30’s. That’s dangerous.

Employment and growth come from those who get to their workbench at six in the morning; who build networks of discovery about how to turn ideas into revenue; who negotiate, cajole and persuade others to become like-minds sharing mission goals; who manage the cash from sales cannily, balancing tomorrow and today in a never-ending re-appraisal of what happened yesterday.

Ah yes, yesterday, today and tomorrow. As the Queen of Hearts said, “The rule is, jam tomorrow and jam yesterday—but never jam to-day”. That, sadly, appears to be where Big Government takes us. “There is no more money” has an addendum; any money at any time can only come from yesterday, today and tomorrow. In fiscal language, those three time periods offer financing from savings, taxes and borrowing; the state has gobbled all of them through its voracious appetite for more and more tax, and now we have no jam today.

What is peculiar, and concerning, is that those who create new money at their workbenches, driving their vans and lorries, or staring at screens and coding machines know this. Free lunches are not part of their world, and the interminable vote-buying with our money by politicians is so transparent that it is inducing many to turn away from social engagement and, worse, turn inwards to protect themselves and their family's future; the very opposite of the social cohesion our politicians intended to create as they gleefully spent our money.

Less spending, lower tax, higher growth, more jobs. Anything else is just Wonderland economics.


Monday, August 01, 2016

Should we let politicians tax us for energy?

There is nothing like politics to make a mash-up of coherent decision making. Mrs May’s decision to “review” Hinkley Point is the outcome of around twenty years of havering.

We are told that this decision is about how we might keep our lights on in our homes, but it is much more than that. It’s about how we feed power at economic prices to our basic food and chemical industries, especially the processing industries that operate day and night to feed, clothe and house us. The knock on effects of expensive energy are felt by every family across the UK. Expensive energy taxes us all.

Does this make Hinkley Point a no-brainer and a gift to every consumer? No, the issue is bigger than that. Hinkley Point is a testament to the UK’s loss of industrial confidence; to the wrapping up of all economic development in a labyrinth of politics created largely by central planning and the tendency of politicians to meddle and introduce price controls in energy markets.

These price controls are ostensibly introduced to offer relief to hard-pressed consumers struggling to meet energy costs, but actually what they do in the longer term is curtail investment and distort realities in demand and supply – at taxing cost to all of us. It would be much better if we always paid realistic prices for domestic energy, and prices were liberalised such that generators knew what investments to make for us to be ready twenty years down the line. Instead we perennially underfund energy production, relying on the state to bring in investment through tortuous contractual arrangements that are perennially unstable and use our taxes unwisely.

One other reality is that the UK used to be a world leader in nuclear power, but after three generations of design we effectively gave up. We could not make the transition from early type developmental reactors to more economic repeating designs.

Where does Scotland come into this? We have a government dedicated to renewable power generation through wind; where large quantities of German and Danish investment paid for by renewable taxes is bringing costs down, but the basic physics of the technology is essentially a hopeless dead-end with servicing costs increasing suspiciously. And from the point of view of making us more knowledgeable about how to create energy, it has been said that for the UK wind power lets us dig the holes and make the tea.

For Scotland, still a producer of specialists steels and high value engineering components, as well as being a nation well-versed in large construction projects, a home developed nuclear industry on behalf of the UK and export elsewhere is worthy of serious consideration. There are some interesting module reactor designs on paper that could be developed in half the time of Hinkley Point; a twenty year programme could introduce a whole new line of work for our nation with enormously profitable and global value. It would also offer an across-the-board tax cut to every business and family in the country.

It is worth repeating two things; that nuclear energy does not produce carbon dioxide and that the number of deaths in the nuclear industry due to radio-nuclides or radiation is so small as to be unmeasurable. Anyone for a Scottish Nuclear Energy Forum to grab this advantage?


Wednesday, July 27, 2016

A fund, localism and best use of our taxes

For all the power seeking stage-strutting that has been going on, it is easy to forget that life continues pretty much as normal. For some that means a daily struggle for cash to live on.

The Scottish Welfare Fund is Scotland’s home-grown fund to help those in real need at times of crisis. It helps people buy daily essentials, including heating. It’s grown from nothing to nearly £100 million in just over two years, with more than 200,000 households benefitting.

There are two interesting aspects about this fund; first, it’s a fund and, second, it’s delivered by local councils. As a fund, taxpayers can see the bill and know that it is not a hidden unlimited entitlement; while local councils are just that, local and in touch with the things that are hurting in their communities.

In that sense, the Fund meets an important criterion for efficient social welfare; that it is based on a limited contribution, overseen locally; albeit provided by a national collective. Is it any great surprise that we are told it has underspent by £1.5 million this year? One other good element of its design is that underspends can be rolled over for future years. It tells us that someone is interested in stewarding our tax money.

This fund supports individuals like those cited by Mhairi Black in her maiden speech in the House of Commons; struggling folk hit for six by a sudden change in circumstances that brings them to their knees. For many hard-working taxpayers this is exactly what welfare should be about, rather than lifelong destructive support creating a way of life reliant on regular entitlements. That the Scottish Government has had to find the money for 200,000 households tells us a lot about the failures of the grand design of the nationalised welfare system.

Localised and contribution based welfare should be the goal of the Scottish Government in its struggle to obtain more control over how social support funds are spent. We think Scottish taxpayers would be better served if there were more devolution of social support provision to Scotland, and then to its localities. It would pull up short those who see the £1.5million underspend on welfare as a bad thing, rather than prudent management of taxpayer funds. And of course at national level it would put a clamp on vote-buying largesse - there's nothing like there being no more money to clamp down on stupid politicised point-scoring taking over from compassion and decency in social support provision.

We think local councils also have a much better idea of the connection between money given out and local trade and jobs. If every penny spent on welfare in Scotland was spent locally and was taken from businesses and individuals locally, the connection between the jobs that higher taxation destroys and the jobs that lower taxation can create would be a lot more visible than today. It would also make the welfare system competitive between providers, the best way to induce efficient use of our money.


Tuesday, July 19, 2016

Aspirational tyranny

Can you imagine what “the impact of a strategic decision on inequality” might mean in practice?

Think about this.

Imagine a public authority wants to put in a new cycle route as part of its climate change strategy. This might change the way some people go to work; for some it may get faster, for others it may get slower. It might take some money away from the local bus company who might reduce their service, making it more difficult for some to get to work. It may intrude on the physical space on the local streets, creating traffic bottlenecks and making trade deliveries more complex. It might increase the risk that some children will get injured going to school, but others may be safer. It may make it easier for some to get to the local factory in one industrial estate, but might change access for articulated lorries to another. For some town centre professionals and shoppers it might reduce local parking, making the local dentist practice and three local retailers less able to employ juniors. On balance, it could save about half a ton of CO2 a week, which might then be added back by traffic diverting to easier and longer routes.

The reality – that any attempt to enforce policy design such as “to reduce the inequalities of outcome which result from socio-economic disadvantage” (the required legal provision) is doomed to be inadequate, complex and contradictory with wildly differing effects on the economics of advantage and disadvantage.

Note that in the above very small example, it is not just that the planners making the decision do not have the knowledge to make such an assessment, it’s that they cannot possibly know the effect of their decisions; knowledge about the future is simply not available to them.

It gets worse.

Any authority with a capacity to tax us, or the capacity to use our tax money, takes decisions with an element of coercion based on their power – very often that of a monopolist. The streetscape example above is a change proposed by a local authority with such a monopoly. The way of assuaging such decisions is to allow localised democratic consultation and refusal.

Mrs May is right to say such legislation is “ridiculous”. And it is more than “simplistic”; it’s downright tyrannical if followed through.

We all know that public authorities, particularly quangos, hate their ideas to be turned down by the electorate; they will fight tooth and nail to keep to their chosen path, planners have long-term battle plans to construct their desired outcomes and they are paid to do battle unlike ordinary taxpaying citizens who purportedly direct the ideas of their civil servants through the political process. We should not kid ourselves that in the Big Government state our politicians can protect us. They too have also become bureaucratic managerialists – corralled into ineptitude by party prejudice and unable to act on proper principle.

The outcome of this legislation is likely to be another huge overhead on the struggling public sector, another burden on taxpayers, and an even larger loss of the liberty of Scots taxpayers to design their own future as the public sector soaks up more of our incomes. In the process of enhancing Scotland’s economic impoverishment it will also reinforce precisely the inequalities it aims to reduce. It is the less well-off who always suffer from central planning.


'Government is the great fiction through which everybody endeavours to live at the expense of everybody else.'
Frederic Bastiat