ASI Budget wishlist: Tax credit cuts must be offset by tax cuts for the working poor

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@adamsmith.org | 07476 915072.

In advance of the Budget next Wednesday, the Adam Smith Institute has outlined four announcements it would like to hear from the Chancellor:

Raise the employee National Insurance Contributions threshold

National Insurance Contributions kick in at £8,060 per year, or after just 24 hours worked per week on the National Minimum Wage. Raising the Income Tax personal allowance will do less to help the poorest workers than raising the NIC threshold, and raising the threshold will help to make work pay, particularly if the government goes ahead with its cuts to tax credits.

According to CentreForum, the cost of raising the NICs threshold to £10,000/year would be £8.8bn per annum.

Scrap the triple-lock and freeze the state pension

The pensions triple-lock means that the state pension will rise by at least 2.5% this year even though prices are not rising at all. This is unsustainable in the long-run and wasteful in the short-run. As long as cuts are being made across the board, pensioners should at least have their income frozen in real terms. Doing this would save over £2bn per annum.

Build more houses to cut housing benefit

Housing benefit spending is only so high because the cost of housing in general is so high. Building new homes of any kind will reduce the general level of housing costs, both for buyers and renters, and the government could allow this simply by rolling the Green Belt back around England’s cities.

The size of the reduction to the £25bn Housing Benefit bill would be dependent on the number of new homes built, but the government should aim to reduce the Housing Benefit bill by at least 20% over the course of this parliament, netting savings of £5bn per annum.

Revalue council tax and business rates and aim to merge them

Business rates have not been revalued since 2010 and council tax has not been revalued since it was first introduced in 1993. This means that tenants in places that are poorer than they were in 1993 and 2010 are paying relatively more than tenants in places that are richer than they were then. As well as being unfair, this is inefficient, and hurts the North in particular, with businesses there paying rates far higher than their property deserves.

As with the old Stamp Duty slab system, the council tax band system is out of date and should be replaced with a fluid penny in the pound system like rates. For both, revaluations should be done on an annual basis, revenue-neutrally. The two systems should eventually be merged at the same rate, so that the tax system does not distort where businesses and houses are located. If Zoopla can value property prices on a rolling basis, so can HM Government.

Deputy Director of the Adam Smith Institute Sam Bowman said:

There is a big danger that the cuts in next week’s Budget will be dictated more by what is good politics than what is good policy. In-work benefits are being cut without any offsetting cuts in taxes for the working poor while pensions will rise well above inflation, at a significant cost to the public purse.

The measures we have outlined would still reduce the deficit but do so in a more equitable way, so that the cuts do not fall disproportionately on the working poor.

Notes to Editors:

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@adamsmith.org | 07476 915072.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

‘Bank stress tests are inadequate’ – author of ASI report “No Stress” writes letter to the Independent

Author of Adam Smith Institute report “No Stress: The flaws of the Bank of England’s stress testing programme” Professor Kevin Dowd has written a letter to the Independent: 

 

Bank stress tests are inadequate

 

James Moore’s article (18 June) on “No Stress”, my Adam Smith Institute Report on the Bank of England’s stress tests, dismisses its conclusions without any attempt to grasp its analysis.

 

Moore claims that the stress tests weren’t perfect, but the best the Bank of England could do; however, the analysis of the report shows that the BoE can, and should, be running safer tests. No one scenario can provide comfort that the system is sound.

 

Furthermore, the tests are based on an absurdly low safety standard, and if one stress-tests the tests against respectable standards all the banks would fail. They also lack credibility because the Bank can only allow the banking system to “pass”: anything else would imply that its own past policies have failed.

 

Moore might be satisfied with the results of the tests, but the rest of us should remain sceptical. Stress tests operate like a radar that is worse than useless because it cannot see the main hazards. We wouldn’t dream of sending out a ship or plane reliant on an unreliable radar. We shouldn’t do that with our banking system either.

 

Professor Kevin Dowd
London SW1

Read the letter here.

ASI report, “No Stress: the flaws in the Bank of England’s stress testing programme”, examines the Bank of England’s stress testing programme and challenges the Bank’s conclusion that the UK banking system has sufficient capital to withstand a new downturn and suggests that the UK banking system is actually very weak.

The report argues that the stress tests are fatally flawed because they use a very low ‘pass’ standard, a 4.5 percent minimum ratio of capital to risk-weighted assets. This minimum is well below those coming through under Basel III. Had the Bank carried out a test using these latter minima, the banking system would have failed the test.

Has Greek government been own worst enemy during negotiations? Sam Bowman argues NO in City AM

Deputy Director of the Adam Smith Institute Sam Bowman argues that Greece has been treated unfairly during debt negotiations in the City AM Debate Forum.

Greece has been badly mistreated by the rest of the EU. The structural reforms demanded by the Troika are desirable, though difficult in the current economic climate, but Greece has already cut state spending by 20 per cent and cut state employment by 30 per cent.

Greece has been running a primary surplus since 2013, and most of the €240bn in bailout money lent to the country was intended to service existing debt. Irresponsible borrowers, which Greece undoubtedly was, need irresponsible lenders too. At the onset of the crisis, European banks owned nearly $54bn of Greek government debt, and a Greek default would have damaged many of them. These were bailouts for Europe’s banks, not just for Greece.

The Eurozone’s refusal to restructure Greece’s debt, perhaps indexing it to nominal GDP as Greece’s finance minister has suggested, is therefore highly unreasonable. Greece has been at fault, but so have many other players in this sorry saga.

Read the full article here.