Wednesday, 23 June 2010

Quick thoughts on the Emergency Budget

    
I'm back - missed me?

Just a quick post about yesterday's Emergency Budget. For me one measure in particular stands out and that is the allowance to exempt new businesses which start up outside of the South East of England, East of England and London areas from paying the first £5,000 of Class 1 employer NICs due in the first twelve months of employment - this will apply for each of the first 10 employees hired in the first year of business.

As this blog has long argued, for Wales to attract greater inward investment and grow its private sector it needs to provide a more favourable economic environment than England. As we are on the periphery of the UK with fairly poor transport links, companies need to be extra incentivised to set up so far from the economic and population centres of the UK and Europe. Currently, all regions of the UK have exactly the same rates of corporation and income tax, which are set centrally by Westminster. The only taxes which the Welsh Assembly Government has the power to adjust in order to differentiate the region from other parts of the UK are Council Tax and Business Rates. However despite Wales needing to provide that 'extra economic incentive' for businesses to set up in the Principality, the fact is that until recently Business Rates were actually higher in Wales than any other region of the UK. Since March they have been brought inline with Rates in England, but are still higher than Business Rates in Scotland where businesses enjoy an additional rate relief.

This provision by the Government to apply a  regionally differentiated National Insurance policy is truly groundbreaking and could be, as Dylan Jones-Evans says, the beginning of a Regional Tax Policy.

Personally I would like to see much more of this with the Assembly Government given much more powers to adjust the levels of both income and corporation tax in Wales so that we are able to compete with neighbouring regions in terms of tax - and thus make Wales a more attractive place for businesses. However, that said, Wales's problem is that it's Public Sector is simply too large to be sustained by the tax income from Wales alone at current rates. In reality, were WAG to be given more tax raising powers - at the cost of losing a portion or all of the current Barnett formula subsidy - tax rates would need to go up NOT down just to sustain Wales's current Public Sector, thus making Wales a far less attractive place to do business. This is one aspect of Plaid Cymru's policies which have always puzzled me - if they truly believe in eventual Welsh independence then surely it would be better for them to pursue a policy of gradually reducing the size of the State in Wales - i.e. creating a lean and mean public sector fully able of being supported by the tax take in Wales alone - so as to make any eventual devolution feasible without huge tax hikes. Instead Plaid seem content to grow the size of the Public Sector in Wales whilst at the same time complaining about the £300m shortfall in funding via the Barnett Formula - both policies which will ensure Wales is tied to England for a long time to come.
  
Anyway, no doubt we will be hearing a cacophony of complaints from Labour and Plaid WAG Ministers about the "unfairness" and "recklessness" of this budget. A good time therefore to remind ourselves why we are in so much debt. And, no, its not all down to bailing out the banks. Here are the amounts the Labour government borrowed every year since 2002:

  • 2002 - £19bn

  • 2003 - £34bn

  • 2004 - £36bn
  • 2005 - £41bn

  • 2006 - £30bn

  • 2007 - £33bn

  • 2008 - £61bn
  • 2009 - £142bn
Northern Rock crashed in 2007, by which time the Government had already borrowed £160bn - and all this during one of the longest periods of uninterrupted economic growth since the Second World War. Recklessness indeed.
 

19 comments:

The Great Councillini said...

An interesting posting, and one which raises all sorts of questions. Not least of these is: are our various governments simply spending their way into popularity and a false image that all has been well with the free-market economy? It certainly seems like it.

Hardly anyone in would advise a private investor to borrow money in order to invest it. Yet investment is always the rationale behind borrowing, which seems to yield the precise same result as if I borrowed to invest - I'd almost inevitably lose out!

I can't help thinking that, rather than patching the current system up, we'd be much better looking at alternative economic models.

stats man said...

To Druid - i.e. creating a lean and mean public sector fully able of being supported by the tax take in Wales alone - so as to make any eventual devolution feasible without huge tax hikes.

Are you suggesting a independent Wales is a good idea?

I do not agree - it has always been (Wales) part of Britain, geographically as well as politically.

And take Swansea, high public sector there partly due to the DVLA, which serves all of Britain.

Anyway welcome back.

The Druid of Anglesey said...

Stats man - I'm not suggesting Independence is a good idea, though I would in principle be in favour of more radical regionalism/localism. My point was in reference to the paradox in Plaid Cymru's policies.

stats man said...

Dear Druid - welsh independence - I was pulling your leg

Another point - let me state that public borrowing is not itself a bad thing - it is the level of borrowing that we need to concern yourself with.

There are those who say we need to invest in a downturn, and those who say we do not. In my mind it is a question of where the investment goes to, and what affect it would have on the recovery. The exemption from NIC for certain employers is public expenditure, a good one maybe, but still public borrowing?

The Druid of Anglesey said...

Stats Man - Public borrowing is not bad per se, but all borrowing needs to be eventually repaid WITH interest therefore if it can be avoided all the better. I agree that highly targeted investment during a downturn can be beneficial - but only when the Government has a surplus on which to draw. Otherwise the Government compounds its own debt problems whilst at the same time introducing the possibility of reducing the amount of capital available for banks to lend to private businesses.

stats man said...

It is at this point I must plead ignorance in terms of the economy as it has never a subject that I have any in depth knowledge of.

But however, it is a debate we should have, (the amount of money we have to pay for services) - I coined years ago that best value was a process to deliver quality services, which aspire to reflect the needs of the local communities, whilst making the most of limited resources available to the council.

This is as true then (1998) as it is now, we should have an honest debate about our future services and associated costs i.e How we deliver affordable and reasonable pensions for the future is one we should not avoid.

Welsh Ramblings said...

"However, that said, Wales's problem is that it's Public Sector is simply too large to be sustained by the tax income from Wales alone at current rates."

That's true enough. It might not be true if Wales had control over all of its own resources. In fact i'd wager it almost certainly wouldn't be true if that became the case.

The UK- an independent state- also cannot afford to cover its public sector from tax income.

I'd be interested to know whether New Labour's borrowing between 97-07 was any bigger than comparable economies in Western Europe.

The Great Councillini said...

"it has always been (Wales) part of Britain, geographically as well as politically."

Hmmm, that's not quite right, is it?

Whilst some might want to claim a great united Britain, the reality is a very Disunited Kingdom. Talk to anyone in London about Anglesey, you'll be lucky to get anyone that knows where it is. This is part of our problem: it doesn't feature in anyone's political, geographic or business imagination. Not even the Assembly seems to think much of anywhere north of the valleys.

stats man said...

There was a time when there was no England or Wales - Alfred the Great is said to be the first King of England just over a thousand years ago. Before that the rulers where all immigrants - the romans, saxons, pics etc - we are really all European, why we do not acknowledge this I am not sure ?

Chameleon said...

I'm always slightly baffled as to why an independent Wales is considered so unacceptable by some people. When you look at what economic benefits the last several hundred years of English rule from London have brought Wales - that's nothing, btw - then it's difficult to see how we could make things any worse by running our own affairs. A Welsh Parliament with some radical economic policies would be very interesting.

Di En Ey said...

"we are really all European, why we do not acknowledge this I am not sure ?"

Very wise words. The answer? Lord knows - a complex issue. I'm trying to highlight this kind of thing in my project to examine the geographical origins of the Anglesey bone setters, said to start with a 1743 shipwreck survivor subsequently named Evan Thomas.

You can read about it on this basic but developing web site:

www.angleseybonesetters.co.uk

stats man said...

I think we all owe a great debt of gratitude to this family, especially Dr Hugh Owen Thomas (who is known the farther of modern orthopaedic surgery in Britain). When he died at an early age of 59 there was much grief in Liverpool.

And considering how it began, it begs one to think what we would have made of it today?

The Druid of Anglesey said...

Ramblings

"It might not be true if Wales had control over all of its own resources. In fact i'd wager it almost certainly wouldn't be true if that became the case."

- I often hear this and I'm afraid that it sounds too much like wishful thinking. Is there a single country in Western Europe - or even further afield - which is able to rely on its non-oil or gas related natural resources in order to balance the Government's books? No, thought not.

"I'd be interested to know whether New Labour's borrowing between 97-07 was any bigger than comparable economies in Western Europe."

- Why would that make any difference? The Government is not forced to borrow money - it is a choice. Whether other countries borrowed more or less is completely irrelevant.

The Great Councillini said...

"Is there a single country in Western Europe - or even further afield - which is able to rely on its non-oil or gas related natural resources in order to balance the Government's books? No, thought not."


Yes, there are plenty of countries that rely on mineral resources alone. But that misses an important point: all the things that these economies rely upon are finite in nature; most are already on the way out. What will countries rely upon then? It's not an academic question, it's a very real one, and I think tends to point to the dead-end nature of the free market system and the aim for perpetual growth; it's clearly a flawed system.

stats man said...

I agree with the Great Councillini, we in the developed world are the lucky once, for us this is our golden age, things may improve slightly again, but not by much. As the natural resources we rely on for much of what we do diminish the tension between states will increase.

In the meantime billions of people live in fear and hunger, exploited daily they are sold a dream they cannot achieve, because not everyone can be relatively wealthy or comfortable like us.

The Great Councillini said...

"not everyone can be relatively wealthy or comfortable like us."

Indeed. We take from everyone and give little back.

Few would want to even think about it, let alone do it, but I suspect that people could live with an awful lot less and actually experience greater happiness; this is the teaching of all the great world religious leaders.

Y cochyn sais said...

can i refer you back to my comment of about a month ago - re indepedence for Anglesey
Wlesh independence is a strange concept to me - as pointed out in this post but i have to question - i dont have the figures but can wales actually support it's self - i think there is a great paralell between this in Wales and the British economy as a whole
I read somewhere that only 2% of the population is involved in agriculture - so why is it my straw polls still tell me everyone sees wales as a farming nation?
I was listening to BBC Radio the other day heard two points of interest -
1) by a civil servant that worked for the tax office who was pointing out how much tax is written off by her office - her point was that the revenue not being collected is substantial
2) the second point was made by a gent who basically squeezed it in at the end - his statement was that the top 100 earners in UK has increased their income by half the national debt in the last 12 months - i wont expand on this but i am sure the point is obvious

Anonymous said...

Emergency Budget.

It doesn't matter what we think, we can all agree that over the years we have WASTED our reources, our collective scource of Wealth has nearly all dried up, Scotland is defending it's right to hold on to this Wealth, by defending and protecting it from the wasters in London, let's hope they are not too late, Scotland has seen with their own eyes, the way this wealth has been squandered, now we are all having to pay the price for the wasteful greedy years.

Anonymous said...

Increase the pension age to 70 that will stop the spongers.