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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Think piece: What does AV mean for fiscal policy?

Written by James Paton | Tuesday 19 April 2011

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Many claims are made about the impact of voting systems on government fiscal policies, but what does the international evidence say? In this think piece, James Paton assesses the impact of coalition government and systems of proportional representation on government fiscal policies in five different countries, and discusses the implication of his findings for the US.

Perhaps the strongest argument for FPTP is that the likelihood of forming a single party government is much higher than under proportional representation (PR). Single party overall majority governments are widely seen as being more stable than coalitions. As a single party has a majority within the legislature, a government should be able to push the legislative agenda through. The thinking goes that this should keep faith with credit markets due to the lower chance of the government collapsing, and tighter fiscal policy as the bargaining process involved in coalition formation leads to higher taxes and higher government spending. (In order to buy the support of the various interest groups the negotiating parties rely on.) This has been an area that has not been discussed in detail during the debate around Britain’s possibility of changing the electoral system.

In this think piece, I will examine whether PR is more likely to produce coalitions, and if so, whether coalition governments produce more fiscally profligate governments, in terms of fiscal policy. This will be kept within the years of 1987-2007 before the financial crisis. I will examine five western parliamentary democracies that have systems based on PR to see whether there is evidence suggesting that fiscal policy is looser than in the UK: Greece, Ireland, The Netherlands, New Zealand and Germany.

This of course is not an absolute science as there are a myriad of variables that affect fiscal policy. However the evidence that I explore shows a mixed picture from around the world. From it I will consider what PR could mean for the UK. [Whole piece]

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Loop the loop subsidies

Written by James Paton | Saturday 02 April 2011

airbusThe fight between Boeing and Airbus has taken another loop-the-loop moment. Accusing each other receiving subsides from government, they have taken each other to battlefield of the World Trade Organization (WTO) in dismay of having an ‘unfair’ advantage in the air.

As a fan of the free market, I do not like government intervention. Market competition forces firms to experiment with ways to produce goods and services in the most efficient way. Interfering with this process leads to market inefficiencies and causes competition to decline. Government subsides are on this list of do-nots.

Boeing has received at least $5.3 billion in subsidies from Washington, which has been declared illegal by the World Trade Organization. In one of the most complex cases ever to face the WTO, it was been disclosed that some of the subsidy that Boeing received was for research and development from NASA.

Before this, the US complained to the WTO that Airbus took subsidies from the EU and it had unfair advantage. The EU believe that Boeing has received even more illegal subsides from 1989-2006, totaling $19.1 billion.

This latest dispute has been on running for over six years but I think that there are a number of double standards from both sides of the flight war. The US complained that the EU was helping out Airbus and at the same time the US was helping Boeing. The EU has then counter-complained and we are at the stage of the dispute of where both parties have been found to have broken trading rules.

Both governments need to step back and let the firms compete without help at all. Competition between them should be fair in the sense of governments not handing taxpayers money to them. Though it does not like for the foreseeable future that the Boeing vs. Airbus subsidy war is going to end, the losers are the taxpayers in both the US and the EU whose money is being poured down the drain for the sake of their governments’ sense of pride.

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Britain needs a balanced budget law

Written by James Paton | Tuesday 29 March 2011

scalesThe government spends money like there is no tomorrow – mainly because it is not their money but ours. This is most clearly seen in the enormous deficit run over the last few years. What could we do to avoid these budget deficits in future? In democracies that have written constitutions, balanced budget amendments have been proposed and have succeeded. This could work well in Britain.

In 2009, the German constitution was amended to stop the federal and state governments from running budget deficits. The plan in Germany has been set over an eleven-year period. From 2016, governments won’t be able to run a deficit of more than 0.35% of GDP and from 2020 a deficit won’t be allowed to run at all. In America, 49 states have some form of a balanced budget provision (the exception is Vermont). In Oregon, the law forbids a state surplus of more than 2% of GDP. If there is one, anything above this threshold is refunded to taxpayers. The Federal government does not have a cap on its spending at all, but there have been various balanced budget proposed. This has been brought to Congress within the 1991-1992, 2001-2002 and 2005-2006 sessions. These have failed due to the difficulty to pass amendments, which needs a two-thirds majority in both houses in Congress and three-quarters of states ratifying it.

The UK, like the US Federal Government does not have a balanced budget amendment. Parliament can pass a law without a supermajority as an act of parliament, only needing a simple majority. If there was a balanced budget bill, it will need to be like the German amendment. It will need to phase out deficits over a period of time and by the end of the time allocated, the Chancellor cannot spend more than he gets in, just like a normal household budget.

Obviously, Parliament can repeal a law just as easily as it can enact it – but experience has shown that this can be quite difficult for governments. At the very least, the law would be a roadblock to deficit spending. By passing a law banning deficits, we may see our government finances being put into place.

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The rise and rise of stamp duty

Written by James Paton | Friday 18 March 2011

housesThe Telegraph says that the number of people paying stamp duty on houses worth over £250,000 has risen from 5 per cent to 26 per cent over the past decade. As all of us have seen, the rapidly booming housing market that characterised the last decade has pushed a staggering 4.25 million houses into the bottom bracket of stamp duty, a 385% increase.

In addition to this, the average stamp duty bill has risen by from £838 to £1,793. Now they want to impose a new bracket of 5% on homes over £1 million. This is going to drive away those who are wishing to place their capital in the UK and reduce investment in the longer term. The report suggested that "these findings will underline calls for a root and branch reform of the controversial tax, replacing the slab system with a much fairer tiered model."

Obviously the easiest solution would be to increase the thresholds in line with rises in house prices. However would any government change the brackets? Seeing house prices rise by 140%, the devious mandarins of Whitehall may see an opportunity. The market is doing their work for them; increasing the tax revenues automatically without discretional and dictatorial policy from the corridors of power.

The best way of dealing with this problem is by eliminating the problem altogether – abolishing the tax altogether. Stamp duty would be back in the buyer’s pocket, available to save or spend in the private sector. It could be spent on a new sofa, TV or even on a night out celebrating the purchase of a new home – whatever they choose, it’s a more efficient use than if the government spends it.

In a stagnant property market, abolishing the tax across the board would lead to an incentive for people to buy now rather than waiting. That £1793 is better off in the hands of individuals to spend in the wider economy – not spendthrift government officials.

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