14 December 2011
An Adam Smith Institute report released today (Wednesday) claims that the failings of the International Financial Reporting Standards (IFRS) allows banks to overstate their profits by recognising years of often very uncertain future income as current profit. As well as having the potential to deceive investors and lead to misallocations of capital, this overstatement of profits benefits company executives whose performance is typically measured and rewarded on this basis. Recent developments in accounting rules have encouraged, rather than tried to prevent this. In addition, the latest developments of the Basel international rules specifying banks capital and liquidity minima only exacerbate the problem.
Though standardised accounting standards effect many sectors, any unintended consequences they throw up are especially problematic for banks, since such failures are magnified by banks taking exposure to each other. Moreover, in the case of banks attracting state bailouts, real transparency is clearly needed to protect the taxpayer.
The Adam Smith Institute report is structured around six shortcomings in the rules governing bank profit and capital reporting, which must be addressed:
With much of the activity in the banking sector aimed at nothing more than exploiting these accounting rules, the report suggests the introduction Steve Baker MP’s bill to bring about simple legislation to reveal the extent of mark-to-market and mark-to-model banking activity.
Author Gordon Kerr adds: “Accurate accounting is at the root of the legal and scrutiny framework; without accurate accounts basic laws are incapable of enforcement. As this report shows, banks have been using loopholes in these rules to inflate their accounts and create illusory profits, which pay for bonuses and short-term gains for their shareholders, but give a very misleading view of their real financial health.
"The accounting regulation system needs radical reform so that banks are not encouraged by the rules and regulations to invest in risky assets to make themselves seem more profitable than they really are. Honest balance sheets are the cornerstone of a healthy financial system – right now, we don't have the transparency we desperately need to avoid a repeat of 2008.”
12 December 2011
The report ‘Renewable Energy: Vision or Mirage’, released today (MONDAY) by the Adam Smith Institute and Scientific Alliance, reveals that the government’s focus on renewable energy sources is misguided. The UK’s plans for renewables are unrealistic, and these technologies cannot provide the secure energy supply the country needs. Present policies will lead to an energy crisis by the middle of this decade. The key points from the report are detailed below:
Wind turbines are not the solution
It is difficult not to conclude that the official enthusiasm for renewables has more to do with the power of the green lobby than economics and energy security. Martin Livermore, joint author of the report, adds:
“For too long, we have been told that heavy investment in uneconomic renewable energy was not only necessary but would provide a secure future electricity supply. The facts actually show that current renewables technologies are incapable of making a major contribution to energy security and – despite claims to the contrary – have only limited potential to reduce carbon dioxide emissions.”
“Consumers have a right to expect government to place high priority on a secure, affordable energy supply. It seems that ministers have not yet realised the need to invest in more nuclear and gas generating capacity if the electorate is not to be badly let down.”
4 November 2011
In a report released today (Friday) the Adam Smith Institute warns that an EU-wide Financial Transaction Tax would cripple the British economy. Its research reveals that, based on European Commission impact assessments, an FTT would cost the UK economy £25.5bn, and hit EU member state economies by £185bn in the long term.(1) This figure is likely to be even higher once Britain’s disproportionate share of financial trading in the EU is factored in. The tax would also lead to increased market volatility, reduced market liquidity, higher unemployment, greater tax avoidance and reduced tax revenues.
The impact on derivatives trading will be particularly damaging to the UK. The City of London currently accounts for 74.4% of interest rate derivatives turnover within the EU (its next biggest rival is France with just 11.7%). An EC impact assessment projected that the FTT would lead to a decline in derivatives trading activity by up to 90%. Therefore a Financial Transaction Tax would nearly eliminate derivatives trading in the UK. This would hit tax revenue and other parts of the City by preventing traders from hedging against real-world risks. As a result of this, ordinary consumers would find it harder to find fixed rate mortgages.
Advocates of an FTT argue that it will reduce volatility, but the ASI report shows there is no clear, consistent evidence that the tax would reduce volatility. However, empirical studies do show a positive relationship between increasing transaction costs and higher levels of volatility. This increase in volatility with rising transaction costs would be accompanied by significant declines in turnover, stock prices and a migration of trading activity.
An introduction of a Financial Transaction Tax would also lead to a reduction in the market volume of transactions. This would shrink the tax base considerably, off-setting the apparent revenue gained from an FTT. It would also lead to a decline in investment, which combined with the elimination of derivatives trading, would lead to job losses and an exodus of companies from the City. Our financial services sector is the UK’s flagship national industry and employs over 1.9million people (6% of the UK total) and as such must be protected from such an economically damaging tax.
Commenting on the report, Sam Bowman, Head of Research at the Adam Smith Institute, adds:
“This report reveals the huge damage that a Financial Transaction Tax would cause to the UK. It would wipe out London’s derivatives sector, destroying jobs and driving other traders overseas. By destroying a critical part of Britain’s most lucrative industry, an EU Financial Transaction Tax would be killing the goose that lays the golden eggs.
“The EU is proposing this tax to distract from the real culprits for Europe’s troubles – spendthrift governments who cannot balance their books. Using markets as a scapegoat might buy Eurozone leaders some political credibility, but it would ruin the City of London.”
(1). The figure of £25.5bn comes from applying EU impact assessment to UK GDP 2010 figures
26 October 2011
In a report released today, the Adam Smith Institute exposes the weaknesses in arguments for High Speed 2 and argues that the case for the project is fundamentally flawed. The research reveals the huge cost of HS2 to the taxpayer, and suggests that many of the uptake projections are overoptimistic. Looking at HS1 (London to the Channel Tunnel) and international examples, it is clear HS2 will not make enough revenue to cover operational and construction costs and will bring very few tangible benefits.
The cost to the taxpayer
Demand and profit predictions
Commenting on the report ‘High Speed Fail’, Sam Bowman, Head of Research at the Adam Smith Institute, adds:
“The case for High Speed 2 is based on wildly unrealistic projections. It will probably end up making a loss, and will mean a lot more borrowing for the government in the mean time. There are no significant benefits to HS2: it will cost a lot of money and achieve virtually nothing.
“Governments are spectacularly bad at predicting the future – taxpayers should not be forced to pay for a project with no significant benefits. To spend at least £17 billion and up to £50 billion on a train network for which there is no demand is wasteful enough; to do so at a time of austerity is obscene.
“The HS2 project has itself become a runaway freight train. If the government is serious about getting tough on wasteful spending, it will hit the brakes on HS2.”
12 October 2011
New research released today (WEDNESDAY) by the Adam Smith Institute (ASI) calls on the government to scrap the 50p tax, reduce other tax rates, and reform current immigration policies to attract more highly skilled migrants to the UK.
At present, the UK has the 4th highest number of highly skilled immigrants in the OECD, but also has the highest emigration levels in the OECD, accounting for almost 20% of all OECD migrants. With an ageing population the government must focus on policy changes designed to keep highly skilled workers in the UK, while also attracting highly skilled migrants. Unless it can do this, the UK faces economic stagnation and a pensions crisis.
ASI author Alexander Ulrich, a Danish analyst and consultant at the Danish Confederation of Business, highlights ONS statistics that show that the proportion of people not working, and thus dependent on those employed, will increase by 75% in the next 40 years. The problem of an ageing population is made worse by the fact that the UK only takes in slightly more highly qualified workers than it loses. Almost 10% of Britons live abroad and these high emigration rates constitute a problem to the UK economy. Government solutions must therefore be focused on making the UK attractive to both native and migrant workers who produce more than they consume.
The report, Taxing talent: how Britain can attract and retain the world’s best workers, draws on established academic studies of migration and identifies the overall tax burden as a crucial factor influencing highly skilled migrants’ choice of where to emigrate to. In order to attract and retain the most productive workers, the government must abolish the 50p tax rate and reduce taxes across the board. International competition over highly skilled workers is becoming increasingly intense and to remain competitive the UK must offer an attractive tax regime. The report adds that if the tax burden remains high the UK may experience a ‘brain drain’ in the future.
Concerns about migrants’ abuse of the welfare system could be addressed by the introduction of an ‘open borders, closed public accounts’ system for migrants over whatever level the government deems necessary. This would require immigrants to use private insurers for healthcare and other large welfare state expenditures for the first few years of working in the UK before becoming eligible for full benefits. Such a system would address current concerns without the possible negative economic consequences of the government’s current migration cap.
Sam Bowman, Head of Research at the ASI, adds: “People are the ultimate resource, and Britain should be the world leader in attracting and retaining talent. We should be trying to adapt to migration, not restrict it. That means flexible public services and policies that attract the very best people the world has to offer.
“Of the things that highly-skilled migrants consider when deciding where to move, the tax burden is the only one the government can influence. If Britain is to keep its competitive edge, it needs to cultivate policies that attract the best workers from around the world and keep more Britons at home. That means cutting income taxes – not just the 50p rate, but the 40p and 20p rates as well.”
19 August 2011
In response to the fall in public sector net borrowing figures
Sam Bowman, Head of Research at the Adam Smith Institute, says:
“Unfortunately, the drop in public sector net borrowing is due to the government taking money out of the economy through the bank levy. As a double-dip recession looms, taxes and levies will make the UK's economic position even more precarious than it is.
“The government should go for growth by cutting taxes and close its deficit by cutting spending. Taxes may make things look better for the government in the short term, but will hurt growth in the long term. We can't afford not to cut spending faster and deeper than the government has planned. The Chancellor should know better than to take money out of the economy through taxes at a time like this.”
18 August 2011
New research released today (Thursday) by the Adam Smith Institute (ASI) shows that the introduction of a Tobin Tax in the UK, as argued for by the ‘Robin Hood Tax Campaign’, would be disastrous for the financial services industry. If the Tobin Tax is introduced in the UK or across Europe (as proposed by the EC), it will be all too easy for financial services to relocate their activities to jurisdictions with lower taxes and less regulatory burdens.
The Robin Hood Tax campaign has argued that £20billion can be removed from the UK financial sector without causing significant disruption through a proportional tax on currency conversions. This is a reckless and ill-informed claim that ignores evidence to the contrary.
The ASI report, ‘The Tobin tax: Reason or treason?’, looks at Sweden, the only country to have previously introduced a ‘pure’ Tobin tax of 0.5%(1). It was a disaster, raising only one thirtieth of the proceeds predicted by its proponents and being scrapped within five years. In an attempt to avoid the tax, 60% of the 11 most actively traded Swedish shares migrated to London and over 50% of Swedish equities had moved to London by 1990.
Many proponents of the Tobin Tax argue that the tax would increase market stability. However there is no consistent, empirically convincing evidence to support this claim. The UK’s experience with stamp duty suggests the opposite is true, whilst in both equity and foreign exchange markets, a large number of empirical studies reveal a clear relationship of higher transaction costs being linked to higher levels of volatility.
In reality the Tobin Tax would lead to significant decline in turnover, stock prices and a migration of trading activity. This would lead to job losses in a sector employing over 1 million people in the UK. London is currently the world’s leading centre for foreign exchange, with twice as many US dollars being traded on the UK foreign exchange market than in the US itself. It’s enviable status as a financial centre would be devastated if a politically motivated but economically flawed Tobin Tax was introduced.
Sam Bowman, Head of Research, adds: “When something seems too good to be true, it usually is. The “Robin Hood Tax” is as vague as it is economically illiterate, and would cripple Britain’s financial sector, which is already on the ropes. We can’t tax our way out of this economic depression.
“Brussels wants a fiscal union to save the euro. A Europe-wide Tobin tax would bind Britain into the first real EU-wide tax and be a massive step towards a fiscal union. When Sweden tried a Tobin tax it was a colossal failure – why does anybody pretend this time would be different?”
 A tax of 0.5% was placed on the purchase of all equity securities (and stock options) in Sweden in 1984. They also implemented a 0.003% tax levied on 5year bonds. Despite this tax being considered low at 0.003%, trading volumes dropped by 85% alone in first week after implementation. Futures trading fell by 98%, and the options market was virtually non-existent.
Notes to editors
11 August 2011
In response to Osborne’s statement on the Eurozone and UK’s recovery.
Dr Eamonn Butler, Director of the Adam Smith Institute, says:
On greater fiscal integration in the Eurozone
“Greater fiscal integration in the Eurozone may be the only way to keep the Euro together. But few people in Europe, apart from its leaders, actually want to be part of a tax and welfare union. It would be better to let the weaker economies leave the Euro. Unfortunately the Euro is a political project rather than an economic one. But you cannot defy economic reality forever. It is bound to split, and Britain should be trying to make sure that happens in a measured way rather than as another crisis. And we should be urging that European governments need to do much more to balance their books and get out of debt – which is the whole reason why markets have ceased to trust governments and central bankers.”
On this autumn’s growth agenda
“The Chancellor's promise of further action on the growth agenda this autumn is now vital. He should start by lowering company taxes and national insurance, both of which make firms hesitate to take on workers. The 50p tax rate should be abolished, because it simply drives investment abroad. And most regulation on the smallest firms should be scrapped entirely.
“Claims that the UK recovery have been 'choked off' by public spending cuts are plain daft. The public sector is the least productive part of the economy – indeed, its productivity has been falling. If we are to get out of our debt hole, we must lift the burdens on the private sector, which is our only hope of economic growth.”