Just a few days now until the UK budget on the 20th March. Certainly a big day for the Chancellor given triple dip fears, loss of that topflight credit rating, and falling tax receipts putting the deficit reduction plan at risk.
The UK PM has put ‘trade, tax, and transparency’, at the top of the agenda for the G8 so he will want to go Lough Erne with some plans of his own and I expect some of these themes to feature in the budget.
In turn, this will likely drive three areas of focus:-
1. Promotion of measures that encourage and incentivise inward investment and overseas trade, including by SMEs
2. Introduction of further initiatives that crack down on tax evasion and abusive tax avoidance
3. Championing of greater transparency of governments, corporates, and individuals leading to more open tax policies and disclosure.
These are worthy aims and if pursued, not just by the G8, but the G20, they would no doubt improve economic prosperity and protect government tax bases when public revenues are under pressure.
My worry though is this may not happen.
Trade promotion needs investment in overseas activity (costly), and a reduction in red tape, making it easier to promote overseas and to export. The current deficit reduction plan leaves little room for investment in these areas, although the focus on trade has already seen progress.
20 new diplomatic posts and 300 extra overseas personnel focused on trade are helping. Exports to the BRICs are up around 25% since 2007, but the new growth markets only account for around 6% of the total. Bigger than Ireland now, but still small beer in the overall scheme of things. To make real traction will take time and investment on a scale that is perhaps not fully recognised.
The significant focus on tax is not surprising given the dire state of public finances, but to place a greater emphasis on tax collection than on trade does seem to be more about being seen to do something.
The current crop of policy makers do not seem to share Churchill’s view on tax as a tool of growth: “We contend that for a nation to try to tax itself into
prosperity is like a man standing in a bucket and trying to lift himself up by the handle."
Whilst tax evaders should be pursued vigorously, tax evasion initiatives have shown relatively modest returns.
Tax planning and tax avoidance are now in the dock, but other than a few symbolic scalps, with appeals to ‘wake up and smell the coffee’, little has been done, nor can it be without G20 backing.
Putting business in the firing line for claiming legitimate allowances, offsetting interest payments, or charging for IP, will only create a climate of uncertainty that will deter investment. Ironic given the Coalition have feted Amazon as a shining example of inward investment with thousands of jobs recently created in the UK. http://jsy.fi/16unMaB
I think we will also see more on the OECD base erosion and profit shifting work: http://jsy.fi/ZKstYx which I commented on recently here: http://jsy.fi/gcinthestocks
Despite all of the above, expect announcements on tax avoidance crackdowns, updates on the Swiss and Liechtenstein recovery proceeds, and more investment into HMRC.
On rates, expect headline grabbing moves on corporation tax (possibly down to 20%) and on the £10,000 personal income allowance.
Look too for annual investment allowance incentives to encourage more new investment and job creation
Which brings me to Transparency. The global standard has been transfer of information relevant to the tax affairs of the individual or entity on request. Sponsored by the OECD in the late 90’s and picking up traction post the 2009 London G20, the focus is now on effectiveness with an extensive peer review process underway.
The US and UK have decided to pursue unilateral information exchange developments of their own. US FATCA is tipped to be widely adopted, although it remains to be seen if China signs up, and if they do not, it seems unlikely that Singapore and Hong Kong will comply.
Recently the subject has stirred up opposition in Russia and a constitutional challenge may now be mounted in Canada following an open letter to the authorities by Peter Hogg, a constitutional expert, indicating that the agreement will violate Canada’s charter of rights and freedoms. http://jsy.fi/12SWw6L
Independently the UK pursued agreements with Switzerland and Liechtenstein intended to accelerate discovery of unpaid tax. A variety of estimates on proceeds from £1.5bn to £5bn over 5 years have been cited.
Whilst a reasonable return on the resources invested this is still less than 1% of annual tax receipts for the UK. Not the answer to the UK’s public finance challenges but a handy supplement.
Why is all of this relevant to the Channel Islands and Jersey in particular?
We are constitutionally and culturally British. Our cart is comfortably hitched to the City of London, and our mutual success depends on constructive collaboration. What is less well-known is that some 80% of Jersey’s business comes from markets outside the UK, but because of our positive and symbiotic relationship with the City, this international business brings significant benefits to the UK money markets, stock exchanges and wider financial machinery.
We have a keen interest in a successful Britain, which is why we support UK overseas trade promotion and organisations like CityUK and the Lord Mayor.
£1 in £50 of UK banking liquidity and £1 in £20 of long term money used to fund SMEs and mortgages comes from Jersey. Not from British savings crossing the channel and round tripping back to London, but from harvesting international capital from across the world, two thirds of which is denominated in non-sterling currencies.
The transparency drive is seeing pressure from the UK to encourage others to enter into FATCA style agreements and champion these as the global standard. This may result in the British overseas centres signing up, but is unlikely to go much further.
The risks for the UK are considerable if this signalling of an increasing intrusiveness is not matched elsewhere.
Does this really matter to Jersey? We have had all crimes legislation in Jersey since 1999 making tax evasion a crime and a reportable offence. With more suspicious transaction reports filed every month than the City of London, it is very unlikely that we would have much by way of undisclosed business as a consequence.
Provided an agreement goes no further than the UK tax system demands of its own residents, we would not see this as having too much impact, other than the cost of absorbing this reporting regime, principally for the benefit of the UK.
Any Rabbits out of the hat?
The PM and Chancellor have indicated they are not for turning to use the famous lady’s phrase.
My guess is that Mark Carney and the BoE approach to monetary policy may be the big story. An inflation target is sensible at all times but especially at times of high growth. Out with the curse of stagflation, it is a bit less relevant in a recessionary environment.
Could the first salvo in a plan for growth begin with a growth target for the BoE?
Whatever the outcome we hope for a successful UK, reset on the path to growth and recovery, with the City leading the charge.
We’ll see on Wednesday!