As we enter a new decade, the controversy in the UK surrounding government finances and bankers’ bonuses looks set to continue making headlines. The bankers’ bonus issue is just too useful a political diversion to lay down easily, given the election campaign is already under way.
It may be, too, that political expediency in locating and then naming and shaming ‘blame’ candidates for the worst public finance position since the Second World War may yet tempt UK politicians to revisit the diversions of the last 12 months.
Political Pressure
Early signs are that the rhetoric will be directed at stirring up public anger against bankers and the wealthy. This igniting of social tensions for political purposes is a worrying development. It seems the election could be a bitter and acrimonious affair.
What is remarkable about this turn of events is the chorus of cheerleading for measures such as the bonus tax. Even elements within the Bank of England happily signal their willingness to wave off major international institutions providing employment for hundreds of thousands, and making a significant contribution to tax receipts.
It seems that Mr. Darling is betting on the traders and investment bankers remaining, despite the uncertainty generated by the bonus tax measure. Many will wait to see the outcome of the election, watching to see if the bonus legislation is enacted.
Moving East
However, some are already leaving, with Hong Kong proving to be increasingly attractive to the banking and investment community. Hong Kong offers low taxes, a pro-business government, effective regulation, high GDP per capita and a highly skilled, multi-cultural workforce, together with good employment and career prospects – compelling and attractive features which until recently would have aptly described London as a financial centre.
While the recently-announced move to Hong Kong of HSBC group chief executive Michael Geoghegan is sure to be tied in to that bank’s Asian and emerging markets strategy, the increasingly hostile environment for banks in the City of London ensured there were no obstacles in the way of his decision to leave, along with a significant proportion of his strategy team.
Press reports suggest they may not be alone in considering a move, with Goldman Sachs and Tullett Prebon among others already reportedly assessing what elements of their operations can be removed from London.
If the rhetoric is stripped away, what is the real position? Are banks solely responsible for the economic crisis? What was the state of public finances in the UK pre crisis? And how much tax do rich people really pay?
The UK Public Finances
The following table sets out the levels of net debt incurred by the UK in the four years running up to the crisis in cash terms and as a percentage of GDP.
2003/2004 2004/2005 2005/2006 2006/2007
Net
Debt £381.5bn £422.1bn £461.6bn £497.9bn
% GDP 32.1% 34% 35.3% 36%
GDP £1.118trn £1.184trn £1.233 trn £1.303trn
Source: Debt Management Office HM Treasury and Office of National Statistics
It can be seen, then, that while GDP was rising on the back of a favourable economic environment , government spending was already rising at a much faster rate, increasing by more than 30% in cash terms in the four years preceding the financial crisis.
Despite high economic activity, the UK was spending more on public services than it was receiving in revenue, and funding the gap through increased borrowing. In fact, despite high economic prosperity, there are very few periods since the current Labour Government was elected in 1997 when the annual budget was not in deficit.
The state has grown so much that it now employs one in five of the working population, with the NHS employing one in twenty, making it the world’s third largest employer.
Soon the state in the UK will consume more than half of national income and the annual borrowing deficit will exceed £178bn. Meanwhile, national debt is heading towards £1trn fast.
While there is an impact on public finances from the crisis, and the UK government should be given credit for its intervention measures, this does not on its own account for the very significant rise in the net debt position.
Of course the slowdown in the wider economy has had an impact, but public finances were predicated on high assumed levels of uninterrupted growth, and were in no shape to cope with a downturn of any kind.
A recent report by the Institute for Fiscal Studies (IFS) identifies trends in public finances over the last decade and concludes: “The gradual increase in TME (Total Managed Expenditure) as a share of national income between April 2000 and April 2006 took place during relatively strong economic conditions. So this increase reflects a structural increase in public spending, i.e., an increase in the amount of public spending over and above the ‘natural’ variability that occurs over economic cycles.
“Similar to the early 1980s and early 1990s, the recession of the late 2000s is projected to cause an increase in social benefits spending and TME as a share of national income from April 2008. TME is forecast to peak at 48% in 2010 –11, a level not seen since 1982–83.”
Government policies in the US and UK designed to maintain consumer spending through artificially low interest rates, together with the global payments imbalances, were the major drivers of asset bubbles and over indebtedness.
Cheap money drove excess, individual and corporate, but the price of money is determined by governments and central banks, not by commercial organisations.
A slowdown was inevitable in the face of sustained above-trend growth, fuelled by debt, and when it came the slowdown had government finances in trouble pretty quickly.
How much tax do people really pay?
The fact that people have wealth at all is being stigmatised in the populist media, with investment and tax planning conflated with avoidance and evasion. There is a general feeling being propagated that ‘rich’ people get away with paying too little tax, and the ‘poor’ man has to take the strain.
So what is the reality?
A look at who actually pays the tax reveals a rather different picture.
The figures show clearly that the top 10% by income pay more than half of all income tax – income tax being the largest single source of government revenue, representing almost 30% of annual tax take, according to the IFS.
The poorest income group pays just 0.6% of all income tax, and the lower 50% by income pay just 11%.
What of the non-doms
But what of the non-dom debate and the idea that special concessions are allowing a portion of significantly wealthy people not to pay any tax?
The government’s own consultation in 2007 estimated that non-domiciled individuals resident in the UK paid about £4bn in tax and contributed £12bn to GDP. Others have put the figures at around £6.7bn and £16bn respectively.
With approximately 114,000 non domiciles, and taking the mid-point of estimates, the average tax paid by each non domicile is approximately £47,000.
Even the Treasury estimate of £4bn means that more tax is collected from non-doms than from inheritance tax or beer or wine duties. Another urban myth exploded.
Diversity and tolerance are qualities which have been part of the fabric of British society for generations. It would be a great shame if they are undermined by short term expediency, not to mention the damage to Britain’s long term interests.
Britain has been a magnet for international talent since the Big Bang in 1986, with much of the prosperity built over the last thirty years created through an attractive mix of low taxes, a business friendly environment, and a welcoming approach.
It is business and entrepreneurs who create wealth, not governments. Overburden them, and you destroy your wealth creating activity and prosperity for all including those most vulnerable in society.
If all of this is allowed to unravel, it will not be the rich at the end of the day who will suffer. They will simply move and take their wealth with them.
The real loser will be the man in the street, without a job, or the socially vulnerable, with many fewer wealth creators to provide either employment or a safety net.
Having addressed the Rich Man and Poor Man in this column, I will return to the Beggar Man and the Thief in my next one. In the meantime, I will conclude with a quote from Mahatma Gandhi, one of the great champions of multi-plural society and tolerance:
“The Roots of Violence: wealth without work, pleasure without conscience, knowledge without character, commerce without morality, science without humanity, worship without sacrifice, politics without principles.”
Geoff Cook is chief executive of Jersey Finance.
