Economics

Neil Collins’ Notebook – A Budget with impact

BY Neil Collins   /  12 February 2021

Here’s an unexpected winner from the lockdown – Davos man. In a normal year, the sight of hand-wringing plutocrats telling us how we must make the world better, between bites of caviar, before departing in their helicopters, is sickening. Somehow, faces on Zoom fail to have the same impact, even if the script is pretty familiar. It serves to disguise the contrast between the winners who have seen their wealth burgeon last year and the masses who have just survived, and gives the lie to any thought that we are all in this together.

Next month the Chancellor must start the long, painful process of slowing the runaway train of the UK’s public finances. The biggest target for revenue by a country mile is the top 1 per cent, whose wealth has risen dramatically during the lockdown. The cries of woe are already starting: don’t damp entrepreneurial spirits, don’t scare off the mobile wealthy, don’t jeopardise the recovery with tax rises. Oh, and can we keep subsidising the housing market with other people’s money, to avoid the terrible prospect of prices actually going down?

Nobody likes paying taxes, but Rishi Sunak should aim to follow Lawson’s Law: make them low, simple and compulsory. Complexity makes taxes voluntary, while the wholesale replacement of equity (which bears corporation tax) with debt (which doesn’t) has baleful long-term consequences. Not only do the highly-geared private equity groups escape tax, but when the debt swamps the likes of Debenhams and Arcadia, throwing thousands out of work, the cost of rescuing them falls on the public purse.

To add insult to injury, those running private equity businesses use “carried interest” to pay capital gains tax rather than income tax on their, often life-changing, profits. There are examples of companies which have been improved by a period in private equity ownership, but more frequently the gains are made from financial engineering and sacrificing the long-term needs of the business. Changing the rules to make corporate taxation compulsory is long overdue.

Tim Bond at Odey Asset Management argues for a wealth tax. This is beguiling because, he says, a one-off 5 per cent charge would raise almost 8 per cent of GDP, enough to bridge a whole year’s Covid-driven deficit. He does not explain how it would work, and experience in other countries indicates that it wouldn’t. Even measuring wealth is hard, given the lack of enthusiasm of the victims. Most people’s idea of wealth is owning a decent house, while we tend to think any tax should only fall on those who are wealthier than we are.

The chancellor is besieged with demands for a radical reassessment of the way commercial property is taxed, and changes to rebalance physical and on-line shopping costs are desperately needed before the high street is completely destroyed by the Amazon revolution. As for domestic properties, the dream of a land tax looks as far away as ever, but the case for adding new bands to the top of council tax is simple and pretty well unanswerable.

The rules on pensions, both for contributions and payment in retirement, are almost incomprehensible, but most of the tax advantage goes to the well-paid. Replacing the current contribution rules with a 30 per cent tax credit regardless of income would particularly help basic-rate taxpayers.

If Dishi Rishi feels particularly brave, he could tackle inheritance tax by cutting the rate from 40 per cent to 10 per cent, while chopping down the entire forest of exemptions, allowances and discounts which have proved so lucrative for the avoidance trade. At present IHT is paid only by the middling wealthy, or the rich who trust their relatives less than they do the taxman. Cutting the rate to a tithe on death would reduce those entertaining court cases, but would almost certainly yield more than it does today. He could disguise its true effect by calling it a concession to the newly impoverished private equity kings.

This is a stopgap Budget, but an opportunity to signal radical changes ahead. It’s not the Budget for 2p on a pint, 5p on higher rate tax, or for further punishment for owners of non-electric cars. For the first time Mr Sunak will be delivering bad news. It’s his acid test, if you like.

A black day for common sense

There is a depressing inevitability about the synthetic outrage over the Woodhouse mine. This project, which would provide 500 much-needed jobs in west Cumbria, has enthusiastic local support and planning permission. But – shock! – it’s a coal mine! The usual suspects have ganged up to bully the council to reconsider, and the pressure is likely to be more than the Copeland councillors can bear, even if the government can resist overriding the locals.

The climate crusaders are refusing to see that the mine’s output will not be burnt in power stations, but is a vital component of steel-making. There are no commercially-proven alternatives, and the output of coking coal would displace imports, which bring their own carbon footprint with them. It is still possible that sense will prevail, but the attitude, from the Climate Change Committee downwards, seems to be: don’t give me the facts, I’ve already made up my mind.

They know what they’re doing!

“BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the coming energy transition while growing EBIDA and improving returns.” Morningstar’s summary analysis of BP’s new strategy.

“Sometimes I’ve believed as many as six impossible things before breakfast” – the Red Queen in Alice in Wonderland.


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