Avoiding Tax and Panama

The big story at the moment surrounds Panama, which many folk may know best from Prison Break rather than its financial sector. A truly massive leak of confidential files from a law firm (terabytes, not just gigabytes…) is causing embarrassment and more for many leading global figures. UK Prime Minister David Cameron is fending off questions about his family’s involvement with the law firm via his father, while the Icelandic Prime Minister was more deeply embroiled and has already bitten the bullet. Links to Vladimir Putin do not appear to have caused quite so much shock and consternation

What exactly is going on, and why does it matter from a macroeconomic perspective? It must matter, since it pertains to billions of dollars. Economies have billions of dollars (or pounds, or euros) moving around within them, and hence that billions ended up in Panama rather than the places that the people mentioned above are located is of interest.

Towards the end of term we covered the Balance of Payments, which is the financial account of a country – what financial flows go in and out of a country. Clearly, it seems, considerable flows went out of the UK, Iceland, and Russia to Panama, and for what? Money is moved from one place to another usually for some purpose – for example an investment, or to pay for imported goods. The claim, however, is that much of these financial flows were “offshore” – moving of money primarily for the purpose of avoiding paying taxes.

In the case of Ian Cameron, the PM’s dad, their company Blairmore Holdings was based in Panama, it would seem, to avoid paying as much tax as would be paid in the UK. However, as the leaks appear to make clear, major decisions about the firm were still made in the UK (based on documented meetings of board members revealed in the leaks) – which apparently is the test of where a company is “located”. What this makes clear is the difficulty of regulation – definitions have to be made for things that are easy to think about, but harder to pin down the detail of – what is the definition of where a company is located? And once a definition is made in a country’s law, it will provoke those in that country to consider ways in which that law can be avoided. As a result, it’s likely that those involved will claim nothing illegal was done, regardless of the wider moral implications about doing right and wrong.

Economic activity, you’ll learn more as you study further in microeconomic topics, tends to need some level of regulation. However, that regulation need not be a panacea, and need not lead to unintended consequences. The rise of offshore tax havens came primarily in response to higher tax rates in major Western economies, particularly in the 1970s, and of course regulation is something that many in favour of the UK leaving the EU cite as a reason to leave. A very thoughtful friend of mine has noted the link between these two – the UK remains a place for lots of finance taking place onshore, and is so at least in part because of its position within the single market (single market = more customers = more revenues). If that attraction was lost, the UK may need to consider other ways to retain its position, which may include more favourable tax and regulatory arrangements for finance – yet financial markets are precisely the markets where the clamour for “more regulation” has been greatest since the financial crisis.

As with anything in macroeconomics, it’s complicated, but it’s well worth studying!

Brexit – The other side of the coin

The Brexit debate is cast always in terms of what affects us here in Britain, and often very narrowly in terms of actual monetary flows (which are relatively trivial and hence laughable as the Economist points out). But what about those elsewhere that it affects? Of course, our press scoffs at the Polish government complaining about the measures the UK proposes to cut benefits to recent arrivals in the UK, but what about the Brits abroad?

There are 800,000 Brits in Spain alone, and many more elsewhere who have enjoyed the EU’s freedom of movement of labour to work and live elsewhere, where they are most efficient (with efficiency defined liberally, but it must be the case that if you are happiest somewhere, you’ll work best there). Indeed it may even be that there are more Brits elsewhere than EU citizens in the UK. Memes abound about the Brits in Spain who never learn the local language, never engage with the local culture, and so on, all the things that immigrants in the UK are accused of, and so if the UK decides to treat our migrants with a much shorter shrift than we can in the EU, why would other countries behave any differently?

Those not in the UK but elsewhere in the EU cannot vote in the coming referendum either, if they’ve been out of the UK for 15 years (which many have). Has the Vote Leave campaign considered the impact of the return of these workers, thoroughly demotivated by being forced out of the places they chose to live? The return of many older folk from Spain, and their subsequent need for healthcare?

These are all undoubtedly short-term hits, but there’s little reason to believe that by making immigration harder, the longer term hit will be any less. Those coming to this country to work are overwhelmingly young people, fiscal contributors. The UK birth rate is not high enough that there will be enough British young adults in the coming years to support an ageing British population.

And students elsewhere may find it harder to remain elsewhere in Europe, and future generations of young people will be deprived the opportunity current young adults have to spend time studying abroad. The list goes on. Folk from other countries make personal gains from coming to live and work in the UK, just as Brits make personal gains from living and working elsewhere in the EU.

What’s wrong with populist policies?

Last year Jeremy Corbyn overwhelmingly won the Labour Party’s leadership contest here in the UK, on what is widely regarded as a “populist” platform – a range of policies that are popular amongst those on the left of the political spectrum. These include the renationalisation of utilities and other industries like the railways, and a more pacifistic approach to national defence. Corbyn also had the advantage of not being the “establishment” candidate, the one tainted with previous government, and the one perceived to be a “typical politician”.

This year the next President of the United States of America will be determined in a November election, and as current incumbent Barack Obama has served his two terms, both Democrats and Republicans are currently determining who will be their nominated candidate for the November election.

Last night, both of the non-establishment candidates won handsome victories in New Hampshire, one of the many contests around the US that contribute towards determine who is nominated by each party. For the Democrats, Bernie Sanders won apparently by a 20 percentage point margin – a huge win. For the Republicans, the controversial Donald Trump won, again by a large margin.

What does this mean? The common thinking is that as both candidates are more populist, and appealing to non-standard political audiences (Sanders, aged 74, is massively popular amongst younger voters, something that happened for Corbyn here), that the likelihood is of more populist policies in the future.

What are populist policies? Very simply, they are ideas that are popular amongst a substantial proportion of the population. As such, can this really be a bad thing? Populist policies are often disparaged by mainstream, or “establishment” politicians, because although they may be popular, they are probably quite unrealistic in their nature. Those “tainted” by government likely know the kinds of compromises that need to be made in order for policies to be practical and workable, and the kinds of interest groups and power factions that impact eventual policy outcomes in the political decision-making.

Perhaps as a result such “establishment” politicians tend towards promoting what they view as more work-able policies, which are less popular due to appearing watered down. This maybe explains why many people felt at the last General Election here in the UK that there wasn’t very much between the two major parties.

Hence if populism simply means some candidates proposing popular policies, with others arguing against them, this can hardly, in itself, be a bad thing? Debate about policies is surely important, as is a wider engagement in the political process, since the outcomes of elections do matter so much to many of us. Jeremy Corbyn has ploughed a lonely furrow in recent months arguing in favour of refugees displaced around the Middle East and Europe, even visiting the camps in Calais and Dunkirk – and being mocked in the press and by other politicians, including the Prime Minister, for doing so.

There is an additional element, however. Even if Trump and Sanders become the party candidates in November, only one will win, and even if they win, there is the likelihood they could not enact all the populist policies they wish because of the role Congress plays in decisionmaking in the US – current president Obama has repeatedly be blocked in attempts to take action by a Congress dominated by Republicans. The Labour Party in the UK is widely expected to perform miserably at the next General Election, meaning that for all the time spent developing interesting policy debate, there may really be little actual impact on policies, which will be conceived by and put into place by Labour’s opponents, the Conservative Party.

The big question, as it is often put, is whether politicians should follow their “principles” given that those principles risk making them “unelectable”. If unelectable, then the policies in question will never be put into practice, it is argued, and hence to a large extent any ensuing debate is pointless.

Regardless, these are interesting times when it comes to political events, and given that so much of politics is policies, and so many policies are economic in nature, there’s never been a better time to be studying economics!

The UK-EU Deal

Today we have found out what all the renegotiation was about: the possibility that the UK might be able to put a stop temporarily to in-work benefits being paid to EU nationals working in the UK (assuming other EU countries are happy with this happening in any particular situation).

If that sounds a little underwhelming, it is probably because it is, which must be both good and bad.

Good, since there is no dramatic altering of the right of free movement of labour within the EU, as was hoped by some in the Conservative Party. As we’ve just covered in unemployment in our lectures, labour mobility is a good thing. Yes, it does lead to more uncertainty for us since there’s a larger pool of labour potentially for any job we do, but equally it gives both us, and firms, great opportunities to move into new jobs that are better suited to us, and better suited to firms. Workers aren’t restricted simply on the basis of a passport within the EU from taking their ideal job, and equally, firms aren’t stopped from recruiting the ideal worker for the post they’ve advertised because the ideal worker doesn’t have the right (European) passport.

Bad, since those hoping for big reforms in order to vote to remain may well be unhappy with this rather weak deal. Those seeking the UK’s exit claim that the UK gets little back from the EU, and simply gets told what to do. Rules and regulations we just have to accept are made in Brussels, not Westminster. This outcome, which reflects on Cameron’s inability to get what members in his party would ideally have hoped for (ability to stop inward migration unilaterally, plus other grabs back of national sovereignty). As I’ve written before on this blog, and mentioned in lecture, such issues regarding sovereignty clash with the reality of a common market – we can’t be involved in a common market without a common regulatory structure determined by some central regulatory body.

On balance, will it leave the UK any closer to the exit door? This is obviously impossible to say; even opinion polls can only give so much insight.

Will it even matter? Clara Sanderlind makes the point here that since most EU migrants working in the UK don’t claim in-work (or out of work) benefits, the deal will make no difference whatsoever to actual flows of migrants.

This week in lectures we’re covering trade and globalisation, topics which have so many obvious applications into the current UK relationship with the EU. See you later in the week!

Inflation is still Deflation

united-kingdom-inflation-cpiThis morning the latest inflation numbers have been released: -0.1%. That is, deflation. The Consumer Price Index, what the Bank of England uses to measure inflation, has barely changed since February – see above. To give some context, the Bank of England’s inflation forecasts since February have all suggested inflation would have risen back up to around 0.5% by now, yet persistently inflation is around zero.

Why does this matter? It matters on a number of levels; to mention a few:

  • Inflation is seen as a barometer of how well the economy is doing. Strong demand across the economy, given a fairly fixed supply, would yield inflation, and hence this suggests the economy is far from capacity (where supply would be fairly fixed).
  • Inflation is what the Bank of England must set its monetary policy to influence. The target is 2% with a 1% band either side, and hence inflation is below target. In this situation, the Bank might be expected to try and generate a bit of inflation to push back towards its target, yet interest rates, the tool the Bank uses, are already at their (effective) lower bound of 0.5%. It certainly doesn’t suggest the Bank is about to raise interest rates, another fear some have.
  • Inflation is the norm. Deflation has not been; I noted the one historical deflationary UK episode a few weeks ago. Japan has found itself fixed in zero/negative inflation territory for a long time now – it’s not the norm, and at least as far as Japan, and possibly increasingly the UK, are finding, it’s unexpectedly persistent too.

We’ll spend time looking at inflation next term…

Events Today: Conversations and Kerslake

 

Reminders: Lunchtime, 1-2pm in HumSS 125 is the latest Economics Conversation, where today we’ll be discussing the upcoming Financial Settlement and Autumn Statement by the UK Government. These are both statements likely to be all the more interesting in light of recent events surrounding tax credits and the government’s fiscal charter.

Also, at 4pm today in Palmer 104 we have Lord Kerslake, former Head of the Civil Service, speaking at our Policy in Practice seminar. This is an event open to all, and a really great opportunity to hear more about how government works, particularly when it comes to the role economics plays (or doesn’t) in the policy-making process.

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Two Thought Provoking Articles

In and amongst the madness of a given work day, interesting things to flash before you. Here’s two I came across today.

1) Selling Britain by the Yuan On the provocative side, but well worth thinking about. When borrowing costs are so low, why is the UK involving China in the financing of various parts of its public infrastructure? There must be an awkward question here for a Prime Minister who has described the Leader of the Opposition as a threat to the security of this nation…

2) Making the old even better off at the expense of the young is morally bankrupt Written by a Conservative (before I’m accused of bias), and makes a series of important points about the direction current government policy is moving, and the impacts it has on different generations.

“Living within means”

Last night, the Fiscal Charter, blogged about yesterday and the day before, passed in Parliament. Aside from the politics of Labour’s stance on it, the essence of this charter is that governments must run budget surpluses (so tax receipts must be higher than government spending) in the economic “good times” (defined as real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis).

This is far from the first set of fiscal rules devised by a government or governments; Gordon Brown famously had his golden rule of only borrowing to invest over “the cycle” – so balance the current budget (spending on current consumption like on benefits), but allow borrowing for public infrastructure projects, while the eurozone has the Stability and Growth Pact, which limits deficits and debt levels of eurozone members. Brown’s rule was never enshrined in law, of course, but this need not make a particularly large difference since it’s not at all clear how any deviation from the fiscal charter would be punished, should it happen.

However, the main thing I want to write about this morning is a message we often hear, namely that Britain must “live within its means”. It is simply another way of implying that governments have to be like households, but yesterday I talked about why, outside the eurozone and provided a government can borrow in its own currency, that’s not a useful comparison.

One’s own means include its credibility as a debtor; are we expected to repay debts we incur? Because the vast majority of households in the UK take on gigantic mortgages at some point in their lives, many multiples of the size of their income, but do so on the basis that they will be able to pay off that large loan over a long period of time: they are credit-worthy. If a government can print its own money and borrow in that currency, then it is creditworthy – it will be able to pay back, even if the resulting money is worth less due to inflation.

Hence living within one’s means need not mean running a surplus and never borrowing, just as it doesn’t mean that for a household. More next term…

Fiscal Charter: Vote today

Yesterday I blogged on the Fiscal Charter the Chancellor, George Osborne, is proposing. Today it goes to vote in Parliament, and Osborne is calling on Labour voters to defy their leader and vote for the charter. Again, that’s politics, but what about the economics of it?

Is supporting the charter good economically, or is opposing it? To avoid being political we need to avoid the kinds of responses politicians might make; for example:

Mr Osborne said Labour’s U-turn “confirmed they want to go on borrowing forever – loading debts onto our children that they can never hope to repay”.

As mentioned yesterday, British governments have managed to run surpluses in just 83 of the last 315 years, suggesting they aren’t very good at doing so. And despite running so many deficits, the UK national debt (crudely: cumulated deficits) is far from large by international, or historical standards.

This is, in part, because government borrowing and spending is different from individual borrowing and spending in a way that the simple comparison of government to household, which politicians often make, doesn’t reflect: The UK government prints its own money and legislates that we must all accept that money as “legal tender”.

I can’t print my own money and keep spending when I want more things, but the UK government can. Now, of course, if the UK government does too much of that, we may get high levels of inflation and economic instability. Much of monetary policy is attempting to restrain the government from doing that, one way or another. But because the government can always print money, it can always repay its debts, and hence it can borrow at lower interest rates than the rest of us.

Hence large scale public projects (upgrading our telecommunications or transport networks, for example) can be financed much more cheaply via government and public investment than they would be in the private sector.

The fiscal charter rules out any such public investment projects by requiring that in “good economic times” the government run a surplus. It is, of course, a fine line. Nobody wants a fiscally irresponsible government in place prepared to “go on borrowing forever – loading debts onto our children they can never hope to repay”. But if instead we want a government that borrows to invest in public infrastructure that makes our country a better, more efficient, more pleasant place to be, then our children will certainly be able to repay those debts with interest because of the extra economic growth they have produced.

We’ll learn a lot more about fiscal and monetary policy towards the end of the Spring term. In the meantime, you can look up chapters 13 and 14 in the course textbook.