Press Releases

Coalition capital gains policy will reduce revenue by £2.48 billion

19 June 2010

According to the Adam Smith Institute this reduction in revenue is equivalent to over 30,000 public sector job losses.

In a new report the Adam Smith Institute calculates that tax revenues will fall by £2.48 billion if coalition tax policy of bringing capital gains tax rates in line with income tax rates becomes law. It points out that if the deficit is not to be widened further this reduction in revenue will be equal to 30,000 additional public sector job losses or equivalent cuts in the capital budget.

The report uses new evidence from Ireland, Sweden and Switzerland combined with existing analysis from America, Australia and Britain to identify more precisely the revenue consequences of CGT increases in the UK. It looks at both revenue losses from capital gains tax and from other taxes as a consequence of the economic damage caused by CGT rises.

Amongst the new evidence considered is the result of CGT rate changes in Ireland and Sweden. The 1997 Budget in Ireland halved the rate of capital gains tax from 40% to 20%. The then Minister for Finance, Charlie McCreevy, was heavily criticized on the grounds that this would reduce revenues. In fact revenues rose considerably, almost trebling and greatly exceeding official predictions.

The report draws together international evidence of CGT rises to show that for every 1% point increase in the CGT rates revenue will fall by 2%. This could involve a revenue loss of £880m.

The report also highlights the extent to which revenues from other taxes would be lower as a consequence of the negative effect on economic activity caused by CGT rises. Evidence from Switzerland shows that cantons which eliminated CGT had 3.1% higher growth over those that did not. Since a tax on capital reduces the amount of capital that can be formed and profitably used, the consequent lower levels of output, employment, and consumption would reduce a wide range of tax revenues. The report estimates that the effect on other tax revenues would be £1.6bn per annum.

Lastly the report addresses the fallacy that CGT rises are necessary to prevent ‘switching’ of income to lower taxed capital gains. Since only about 5% of gains come from assets held in the short-term and possibly affected by such switching, the revenue effects are negligible. Moreover, many countries with no capital gains tax such as Belgium and Hong Kong succeed in dealing with this issue.

In total the reductions in revenue that will result from the implementation of coalition capital gains policy will amount to £2.48 billion.

To put the consequences in perspective this will involve finding substantial additional cuts in public spending akin to over £30,000 public sector jobs or equivalent cuts in the capital budget.

Dr. Eamonn Butler, Director of the Adam Smith Institute, said:

“Media analysis suggests this policy has arisen as a result of a political arrangement rather than careful economic analysis. When we have a dangerously large deficit politicians must take especial care that fiscal policy measures are adopted on economic rather than political grounds. Otherwise the deficit will worsen as a result of lower growth and reduced revenues, the opposite of what is intended.”

270,000 public sector jobs must go

17 June 2010


• 30% of jobs in central government and its QUANGOs should be cut according to the Adam Smith Institute
• These cuts could save up to £60billion a year
• No job cuts are proposed for frontline public servants

A forthcoming report from free market think-tank the Adam Smith Institute will urge the government to reduce the number of people employed by central government departments and their QUANGOs by almost 30 percent over the next five years – which would mean reducing the number of public sector jobs by more than 270,000.

The plans, outlined in detail in the Institute’s forthcoming report ‘Towards Taxpayer Value’, could save almost £60bn a year, and help the Chancellor make significant headway towards his goal of eliminating the budget deficit by the end of the current parliament.

The report will not propose staffing cuts for front line public servants, such as teachers, nurses, doctors, police officers, or active armed forces personnel, but will argue for very radical reforms to the Ministry of Defence and the Department of Work & Pensions.

According to plans drawn up by Tim Ambler, Honorary Senior Research Fellow at the London Business School, the Ministry of Defence would be radically streamlined by returning procurement to the armed forces – a move that would make tens of thousands of civil servants redundant. In total, 100,000 jobs at the Ministry of Defence would be abolished over a five-year period.

The Department of Work & Pensions would be subject to more than 50,000 job cuts, as part of a complete overhaul of the welfare system, which would see job centres privatised and the benefits payment system radically simplified and integrated with the tax system.

The report’s lead author, Tim Ambler, commented:

“The goal of this research is not to cut jobs or spending. The point is to make Taxpayer Value absolutely central to public service provision. As things stand, the UK’s front line public services are held back by bureaucracy and fail to deliver bang for the buck. We need real change in the public sector, not least because Britain has the biggest budget deficit in the developed world.”

Dr Eamonn Butler, the director of the Adam Smith Institute, added:

“These numbers sound radical, but it is worth remembering that more than a million new public sector jobs have been created since 1997. And as for political feasibility, the Conservatives actually proposed to abolish 235,000 bureaucratic jobs in their 2005 election manifesto. Now that the public finances are in such dire straits, this must be firmly back on the agenda.”

Government must cut public spending by 3% a year to eliminate deficit

11 June 2010 


· The Adam Smith Institute calls on the new government to reduce public spending by at least 3% a year in real terms to balance the budget by 2015

· Nearly £20billion of spending cuts each year for the next five years must be made

· No department should be exempt from cuts

In a new report released today, the Adam Smith Institute (ASI) has called on the government to implement £91billion of cuts by 2015 to eliminate the deficit. This equates to a reduction in public spending across all departments of 3% a year for the next five years.

According to the ASI, the government is right to move early to cut spending and reduce the deficit but Nigel Hawkins’ report The Party Is Over – A Blueprint for Fiscal Stability argues that the government must go further. It claims that no budget should be ring-fenced and says that even the Health budget should be subject to an annual reduction of 2% a year. Further cuts also need to be made in the current financial year if the deficit is to be eliminated within the course of this government.

According to the report, Secretaries of State should expect to lose their jobs if they are unable to deliver the necessary savings – such is the economic importance of bringing spending under control.

The figures within the report are based on the Treasury’s current growth forecast and exclude spending on debt interest payments, which the Institute claims can only be brought down over time by reducing the national debt. However if Monday sees these growth assumptions downgraded, further cuts will be needed to balance the books.

ASI Senior Fellow and City Economist Nigel Hawkins said:

“Some economists say we should delay reducing the deficit until the economy has recovered, but our view is that the financial risks of deferring public expenditure cuts – including a possible run on the pound – far outweigh the risks of depressing the economy. As the plight of Greece demonstrates, there is one compelling priority for the new Coalition Government – deficit reduction.”

Dr Eamonn Butler, the director of the Adam Smith Institute, added:

“Quite plainly some very large reductions in public expenditure are going to be necessary over the next five years – that is the unavoidable consequence of the last government’s fiscal incontinence. But the good news is that countries like Canada and Sweden have shown us how it can be done. We need to look beyond cuts, and actually think about far-reaching reform. The key is to fundamentally rethink the role of the state. What do we really need government to do? And what is the best way to do it? These are the questions the Comprehensive Spending Review must ask if our fiscal problems are to be solved in the long run.”

1. The £91billion of cuts are broken down as follows over the next five years:

2010 – 2011: £19.3 bn
2011 – 2012: £18.7bn
2012 – 2013: £17.9bn
2013 – 2014: £17.8bn
2014 – 2015: £17.1bn

The Government must be re-booted to deal with the deficit

08 June 2010

• The Adam Smith Institute claims we need to completely re-think government in order to solve long term fiscal problems
• Its report proposes the creation of a powerful, cross-departmental Secretary of State for Public Service Reform to lead structural changes
• It also suggests dramatically cutting the number of government departments, and reducing the size of the cabinet to 12

The coalition government is right to take the public debt seriously but must look beyond short-term cuts and re-examine the whole structure of government, according to Dr Eamonn Butler, director of the Adam Smith Institute.

His latest report, Re-booting the Government: how to deal with the deficit without cutting vital services, draws on successful efforts to eliminate budget deficits in Canada and Sweden, and argues that the government must focus on ‘reform’ rather than just ‘cuts’ if deficit reduction is going to be sustainable in the long run.

Re-booting government

Dr Butler’s report compares government to a computer that is overloaded and slowed down by unwanted files and unnecessary applications. The sensible approach is to save what needs to be saved, and then re-boot. In the case of government, we must work out what the state actually needs to do, and sweep away the rest – all those costly, politically driven initiatives that have been established over time and now clutter the budget.

The report goes on to argue that – like Canada in the 1990s – we need a powerful Secretary of State for Public Service Reform to lead a thorough review of the operations of government, working out which public services are valued and essential and which bring only marginal benefit, and oversee structural changes. This position should be regarded as one of the top jobs in politics, and failure has to be a career-breaker.

Streamlining Whitehall

Dr Butler also suggests that we re-think public administration, reducing the size of the Cabinet to 12, in order to improve the collegiate working of government and make the ministers more recognizable and accountable. His plans would also involve the number of ministerial departments being reduced to 11: the Cabinet Office, the Treasury, the Home Office, the Ministry of Justice, the Foreign Office, and the Ministry of Defence, plus departments for Health, Education, Welfare, Infrastructure, and Local Affairs. Other departments would be closed down.

Dr Butler added:

“It is clear from the Canadian experience that the government should not just take a cheese-slicer approach to spending. Rather, we need to re-think the structure of government itself. We need to balance the budget, but the best way to do that is not by thinking of the whole things as a 'cuts' exercise. Think of it as a reform exercise. Focus government on what it really needs to do: re-engage with the public, stop creating new programmes and quangos just because they capture a day's headlines. Rethink the whole thing. Then re-boot, and you find your government running much more efficiently and cost-effectively.”

Tax Freedom Day 2010 is May 30, but budget deficit means tough times ahead for UK taxpayers

28 May 2010

Tax Freedom Day 2010 will fall on May 30, according to the Adam Smith Institute (ASI), which has been calculating Britain’s Tax Freedom Day since 1991.

That means that for 149 days of the year – from January 1 to May 29 – every penny earned by UK residents will be taken to pay for government spending.

This year’s Tax Freedom Day comes three days later than in 2009, when Tax Freedom Day was May 27. The most significant driver of this change was the rise in VAT which came into force on January 1: this alone pushed Tax Freedom Day one-and-a-half days further into the year.

But what about the deficit?

Tax Freedom Day is only based on tax receipts, and takes no account of the government’s budget deficit. According to the ASI’s executive director, Tom Clougherty, this can be misleading:

‘Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers.’

According to the Institute’s research, if all the government’s 2010 expenditure was financed by taxes rather than by loans, Tax Freedom Day would not come until July 8 – some 38 days later.

That gap points to Britain’s worst fiscal position since 1976 – when Britain had to be bailed out by the IMF – and suggests that Britons will face savage tax rises unless public spending is urgently brought under control by the next government.

Which taxes are the biggest?

The biggest part of the UK tax burden is income tax, which Britons will have to work 41 days to pay in 2010. They will work another 27 days to pay National Insurance Contributions, and 21 to pay VAT. Thereafter, various excise duties account for 13 days, corporation tax for 12, and council tax and business rates for another 7 days each. Britons will work for 3 days to pay stamp duties, and 18 more days to pay a range of miscellaneous taxes. This includes inheritance tax, which takes 15 hours to pay.

What might have been?
According to the Institute’s research, things could have been radically different if public spending had been kept under control since 2000, the last time the government managed to balance their books.

In 2000-1, three years into the Labour administration, government spending was £367.1bn. For 2010-11, the government is forecasting a figure of £704bn: nearly twice as much. If it had grown in line with inflation since 2000, public spending would now be £440.8bn – £263.2bn less than current estimates. That saving would be enough to wipe out the £163.8bn deficit, abolish all National Insurance contributions, and get rid of inheritance tax.

Dr Eamonn Butler, the Institute’s founder, said:

‘It really is pretty galling to think about. After all, if someone offered you a choice between today’s public services, today’s taxes, and government debt that will take generations to pay off, or 2000’s public services, with no debt and a massive tax cut, which one would you go for? Gordon Brown shouldn’t just be remembered for his irresponsibility, but also for a decade of squandered opportunities.’

Capital Gains Tax increase will yield less revenue

22 May 2010
 

  • The Adam Smith Institute claims the proposed increase in Capital Gains Tax will not bring expected extra revenue
  • In US and Australia increase in capital gains tax led to less revenue
  • Negative effect of CGT will be even sharper in UK

The increase in Capital Gains Tax proposed by the coalition government will not bring in the estimated extra revenue to the Treasury, according to a new paper from the Adam Smith Institute (ASI). Instead it will diminish funds coming in and widen the deficit rather than narrowing it.

The ASI's research looks at the experience of other countries, notably the United States and Australia, and shows that increases in the rates of capital gains taxes there have led to reductions in revenue. Conversely, it has been decreases in the tax that have led to rises in revenue.

The effect will be even sharper in the UK, claim the Institute. Unlike income tax, capital gains tax can be voluntary - people can decide when to cash in their gains and may postpone this. As the proposed increases are widely seen as temporary and are likely to be lowered later, many people will leave their assets to await a more benign tax rate. The normal annual flow will diminish, leading to a sharp drop in revenues, and reinforcing the experience of other countries.

The Institute also disputes the suggestion that when capital gains tax levels are below those of income tax, people will switch from one to the other to escape taxation. It quotes figures from several countries, which suggests that this does not happen in practice.

The government should not impose an across-the-board increase in Capital Gains Tax, but should instead distinguish between short-term speculative gains and long-term asset appreciation. Without that distinction, the proposed tax increase will do serious harm to the economy. Madsen Pirie, president of the Adam Smith Institute, says:

"In intending to tax the rich, politicians, without understanding the effects of their actions, are proposing measures which will decrease the Treasury's tax take and make the deficit even worse This is hardly qualifies as sensible economic policy."

 

Banking reform vital, but levies aren’t the answer

Thursday 8 April 2010

According to a new briefing from the Adam Smith Institute (ASI), proposals to introduce a new ‘bank levy’ would do little to correct the problems in the banking sector, and act as a distraction from other, more pressing reforms.

The briefing also expresses skepticism that governments would ring-fence the proceeds of such a levy for future crises, suggesting that they would soon become just another tax to finance current expenditure.

Indeed, it has already been reported that Alistair Darling favours national discretion to use the proceeds of a proposed EU-wide levy as the government sees fit, rather than reserving funds for the future.

According to Miles Saltiel, the author of the ASI’s briefing and a City financial expert, imposing such a levy is also likely to prevent banks from rebuilding their reserves – a key economic priority, in his opinion – as well as holding up lending.

Saltiel, who is a senior fellow of the Institute, also dismisses the ill-thought out populism behind ideas such as the ‘Tobin tax’, punitive regulation of hedge funds, and swingeing tax increases on bankers.

Instead he argues that policymakers should focus on six key issues:

(1) The government should abolish future expectations of “too big to fail” and encourage competition by breaking up the nationalized banks. The Williams & Glynn Bank, ABN-AMBRO and NatWest should all be filleted out of RBS, while HBOS and TBS should be split out of Lloyds.

(2) The government should also ensure that failed banks can be run down in an orderly way, by requiring so-called ‘living wills’.

(3) The UK should campaign for derivative contracts to be moved onto regulated exchanges, rather than being traded over-the-counter. As well as reducing counter-party risk, this would be good business for the City of London.

(4) The British government should take the lead in advocating tougher international capital and liquidity ratios. They should also press for stricter rules on what counts as capital.

(5) The UK should restrict how much its banks trade on their own account in capital markets by requiring higher capital reserves to be held against such activity.

(6) Legislation should require honest accounting and transparency. Governments – whose off-balance-sheet obligations dwarf those of the private sector – must not be exempt from such rules.

Tom Clougherty, the executive director of the ASI, added:

“Banking reform is one of the most pressing policy challenges facing the UK, but too often our politicians resort to crude populism rather than grappling with the real issues. This needs to change – having a more stable, more competitive banking sector is vital to our future economic well-being.”

ENDS

The Lesson of a Levy on Banks is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. A PDF can be downloaded free of charge at www.adamsmith.org/files/a-levy-on-banks.pdf

Honest Politician Of The Year Award

April Fool's Day 2010

A Westminster think-tank has had to scrap its annual Honest Politician Of The Year Award because no qualifying candidates could be found.

The influential Adam Smith Institute, which organises the annual Award, said that it had considered a number of promising nominees, but found insufficient evidence to prove their honesty to the Award jury.

Anthony Steen MP was nominated for his frank view that people were “jealous” of his Balmoral-type second home. However, the jury ruled this untruthful because Balmoral lacks a taxpayer-funded duck house.

Nicholas Winterton MP also reached the shortlist for so truthfully expressing his opinion of standard-class travellers as “a totally different type of people.” But he was disqualified for falsely claiming that his views had been “misrepresented”.

Next year the Adam Smith Institute will give its award instead to the Corrupt Politician Of The Year. “This should give us many more candidates, said Institute director Dr Eamonn Butler. “Indeed, I can think of 646 already.”

“Corrupt politicians are actually the most honest. They have to do what they are bribed to do in order to stay in business. So when bought, they stay bought.”

Another problem for the Awards is that the trophy, depicting a golden hand in a back pocket, and sponsored by Lord Mandelson’s mortgage broker, has been lost. Stephen Byers held it in recognition of his sincere contempt for Railtrack shareholders, but somehow managed to leave it in a cab for hire. Geoff Hoon and Patricia Hewitt have been hired to ask questions, for the usual consultancy fee.

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