Exporting: Does Whitehall Know Best?

With Brexit looming, Theresa May was right to elevate international trade to Cabinet level. The government unit responsible, UKTI, accordingly transferred from BIS to the new department.  This was the opportunity to upgrade that much criticised unit to meet the new challenge.  Formed some 25 years ago from foreign minded members of the Bored of Trade and trade minded diplomats, with top management coming and going, it has not proved a success: British exports have been sluggish relative to, say, Germany and the Netherlands.  In the competitive world of governments supporting their exports, UKTI is the British Leyland.

Seasoned sales forecasters know one should provide a target or a date by which the target will be achieved, but never both together.  In 2010, UKTI accepted, along with a hike in its funding, George Osborne’s target of doubling exports to £1tn p.a. by 2020.  They had no clue, still less a plan or quantified stages, how to achieve that but the ever less likely target officially remains.

Of course some changes have been for the better; export and inward investment successes have been achieved but, taken overall, radical reformation is needed.  None of the top management seems to have any personal experience of creating exports. The organization is top heavy with too many staff in London and too few International Trade Advisers (ITAs) around the UK.  An average of 13 UKTI staff in each of the 100 overseas posts also seems excessive but quality is more important than quantity.  The structure in China is inappropriate and wasteful. There are too many centrally driven initiatives distracting junior staff from the main business of export (and inward investment) support and trade visits. 

The current UKTI CEO, Catherine Raines, is improving IT communications with a “customer” database and performance measures aligned with the Treasury target but we should not attribute all exports to UKTI; business plays a part in achieving them too. The key measure should be UKTI net added value, i.e. the value of exports, less the value of imports included and less the share of that which the exporters would have achieved without UKTI help.

Fundamentally, UKTI (and now presumably the new Department) has the wrong model for successful exporting.  The economics/digital analysis research model (what you know) favoured by UKTI is far less useful than networking personal contacts (whom you know) model supported by experience and academic research.

In general, the quality of help provided by UKTI to British business is patchy and depends on quality of ITAs and overseas posts.  It also depends on the extent of interference, initiatives and ceaseless change imposed by UKTI HQ.

Large numbers of new exporters can only come from the ranks of the SMEs yet UKTI HQ has little or no empathy with SMEs.  They are more comfortable with government relationships and large companies who should be able to look after themselves.  Advising SMEs in the UK (but not overseas) should be handed over to the British Chambers of Commerce who are umbilically connected with SMEs.  Overseas British Chambers should support, rather than compete with, UKTI and CBBC staff.

In short, the allocation of goals, responsibilities and resources within the new International Trade Department needs focus and realignment: government should only do what only government can do.

Caffe Nero doesn't pay corporation tax. Again.

The annual harrumphing of indignation about Caffe Nero's tax affairs has arrived. Yet again:

Furious MPs last night accused Caffe Nero of gaming the system after it emerged the company did not pay a penny of corporation tax yet again last year.

Despite making a profit of £25.5million, the British-based firm avoided a £5.1million tax bill after claiming its holding company made a £24million loss.

Company filings revealed the coffee chain racked up £257.6million in sales in the year ending May 31, 2016, up almost 7 per cent on the year before. The firm, which has 613 shops in the UK and Ireland, has not paid UK corporation tax since 2007 despite generating more than £1billion in sales over that period.

That other notorious tax dodger, Google, runs an interesting little free to use service and entering "cafe nero tax" into it returns, on that first page of results, some interesting stories. In the Mail, early March 2016. June 2015. And so on back to 2012 when all was revealed:

However, Rome Pikco did not pay any corporation tax, because of the interest it is paying due to its debt structure. The accounts say it is the first year Rome Pikco has made a pre-tax profit, on which corporation tax would become payable.

Rome Pikco was created as a holding vehicle in early 2007 after Mr Ford led a buy-out of Caffe Nero for £225m. It had previously been listed on the London Stock Exchange.

In each of the previous years – from May 2007 to May 2011 – Rome Pikco has made a pre-tax loss.

The accounts show that at the end of May, Rome Pikco had £375.7m of gross debt, including a £179.1m fixed rate loan from its parent company.

In addition, the firm’s debts include bank loans of almost £100m, a mezzanine loan – part debt, part equity – of £50m and £49m of “payment in kind” (PIK) notes. These are issued by the company, usually to shareholders, and usually carry a high rate of interest.

In the accounts, the company confirms that as a result of the reduction in interest rates on shareholder loans – thought to include the PIK notes – a £62.6m credit was transferred to the May 2012 profit and loss account.

Due to the amount of debt, Rome Pikco spent £37.9m in interest and financing costs.

The current owners of the company bought it with debt. There is interest to pay upon that debt. And corporation tax is a tax upon profits. The reason Caffe Nero does not pay corporation tax is because it does not make a taxable profit.

This information is readily available, seems simple enough to us and has been that easily available for half a decade now. But this simplicity seems to escape those MPs who actually make the laws on such subjects.

Don't we deserve to be ruled by people rather better than this? Rather better informed at least?

The TUC laments that the workers' wages have fallen

The TUC tells us that wages have fallen in recent years:

Workers in the UK saw their wages fall by 1% a year in the period following the financial crisis, putting the country in 103rd place in a global ranking of pay growth compiled by the TUC.

The trade union umbrella body said wages rose in many parts of the world between 2008 and 2015, but average pay in the UK fell once the impact of inflation was taken into account.

Well, yes, no one's very happy about it but that is what happens in a recession. It's also nothing at all to do with the financial crisis - however much that might have led to the recession.

For what is really going on in a recession is that wages are ahead of productivity. It therefore doesn't make sense for people to employ workers - the value of their output is less than the cost of employing them. This is true whatever the cause of the recession. And the solution is entirely obvious, wages must fall relative to the value of the output. That is, a fall in real wages.

Again, no one likes this but it is the solution. We can do it by lowering nominal wages but as Keynes rightly pointed out people don't like this. The internal devaluation of Greece is a harsh, harsh, thing. We can also do it by a bit of inflation, nominal wages are static or even rise, real wages fall and we're less grumpy about it because we are prey to the money illusion.

But it is still true that the solution for labour being too expensive to employ is for labour to become less expensive.

And we even have managed to construct a labour system which does this with minimal pain. Back at the start of the troubles there were predictions that unemployment would rise to 4 or even 5 million. Mass unemployment being another way in which real wages get screwed down. This didn't happen - and it didn't happen because we now have a labour system flexible enough that real wages, when necessary and unfortunately, can and will fall without imposing that sort of pain.

Contrary to the bleating here from the TUC this past decade has been a massive triumph of the British system as it is. We've managed to build a system where the outcome of the largest recession in near a century is a mild decline in real wages rather than mass unemployment. This is what success looks like.

The ASI's Budget 2017 Wishlist

ASI Executive Director Sam Bowman said:

Britain’s property market is completely broken, and the tax system is part of the reason why. There are three big problems that need to be addressed:

1) Replace business rates and council tax with a land value tax that funds local government directly. Rates and council tax are taxes on property values, so they penalise businesses and homeowners who invest in their buildings, and in most parts of the country they charge massively more for commercial use than for residential use. What’s more, even though these taxes mostly end up being paid for by landlords in the form of lowered rents it doesn’t feel that way to businesses, who fiercely resist the revaluations that are necessary to make the tax fair. We should replace business rates and council tax with a tax levied on the landowners directly for the value of the land, not the buildings on top, and commit to frequent revaluations that avoid large changes like the ones that many businesses are now facing. Ultimately we should aim to eliminate the distinction between residential and commercial use, though this would take time to avoid large rises in residential property taxes.

2) Scrap stamp duty land tax altogether. Stamp duty is probably the worst tax we have, and raises comparatively little money for the Exchequer compared to the damage it causes. For many people stamp duty is the largest tax bill they’re ever faced with, and it gums up the housing market by giving people a big disincentive to moving house – keeping older people stuck in large homes that younger families need, and preventing people looking for work from moving to more prosperous parts of the country.

3) Give housing benefit recipients and council home occupants control over their lives. Housing benefit is a huge problem because it effectively forces recipients to spend large amounts of money on housing that might be better spent on food, clothes, heating or other necessities if they could move to a cheaper home and keep the difference. We need to de-hypothecate housing benefit from housing and turn it into a simple cash payment, hopefully freeing up some more valuable housing stock and giving people more control over the priorities in their own lives. Similarly, social housing should be sold off with the proceeds used to pay for more generous cash payments and targeted tax cuts for people at the bottom of society.

ASI Head of Projects Sam Dumitriu said:

The overall tax system is flawed in a similar way, riddled with exemptions and distortions that mean it imposes a much large economic burden than necessary for the amount raised.

1) Scrap complicated, irrational and wasteful VAT exemptions. Use the money to help people on low incomes by lowering the Universal Credit taper rate and cutting National Insurance Contributions. VAT Exemptions and zero ratings are designed to make essential goods affordable for people on low incomes, but they frequently defy logic and perversely reward the rich. Defining essentials and luxuries is a fool's errand and has lead to lengthy court battles about cakes and biscuits. When they work as designed they're woefully inefficient. Take kids clothes: zero-rating gives a single parent buying a £5 pair of school shoes a £1 tax cut, while those with more money than sense get a £40 tax cut on £200 Dolce and Gabbana kids shoes. Defining essentials and luxuries is a fool's errand, like the case where McVities produced a giant Jaffa Cake to prove that they were cakes, not biscuits, and indeed zero-rated.

Better to scrap them altogether. That'd raise over £30bn, we could use that money to fund a big cut in the Universal Credit taper rate (63 to 50) so that work always pays and cut taxes that hit the poorest hardest like National Insurance.

2) Abolish Corporation Tax and replace it with a Border-Adjusted Business Cashflow Tax to boost investment, growth and wages, and eliminate tax avoidance. If Britain is to thrive outside the European Union, we should aim to have the most investment-friendly tax code in the world. Our relatively low Corporate Tax rate has helped draw in investment from McDonald's, Facebook and Snapchat. But we can go further. Corporation tax deters investment, lowers wages and is frustratingly easy to avoid. Let's follow the lead of Republicans in the US and move to border-adjusted business cash flow tax that only levies taxes on sales made to the UK.

There’s three parts to this. First, it would tax all sales made in the UK just like VAT. Second, it would have an unlimited exemption for capital investment guaranteeing that future consumption wouldn’t be hit. Third, it would fully exempt all wages from tax making it progressive (counteracting Employer NICs that fall heaviest on low and middle earners).

3) Ditch complex green taxes, wasteful subsidises for renewables and costly environmental regulations. Replace them with a simple carbon price and use the extra revenue to raise the National Insurance threshold to £11,500 and cut contribution rates. Britain tries to tackle climate change with a myriad of green taxes, numerous subsidies for renewable energy and a thicket of regulations. This amounts to central government trying (and in many cases failing) to pick winners. This imposes large costs on consumers and creates an uncertain climate for business investment.

There's a better way. Impose a simple, uniform, revenue-neutral carbon tax and let free enterprise, not big government, find the best solution to reducing carbon emissions. We should use the extra revenue raised to cut the taxes that hit the poor hardest. Lifting millions out of National Insurance Contributions and cutting rates.

We told you so...

When Sadiq Khan proposed that Uber drivers should undergo formal English tests, we derided them as unneccessary arguing that they had little to do with protecting the public, and everything to do with protecting the wages of black cab drivers.

It turns out that (as usual) we were right. The Sunday Times reports:

"Minicab drivers are being asked to write or answer questions about life on Mars, the aurora borealis and snowboarding to prove they have a good enough grasp of the English language...

Alan Skelly, a 55-year-old Uber driver for the past three years who left school at 15 without qualifications, said he had been left feeling embarrassed after being asked to read a series of paragraphs about the aurora borealis and to answer questions about the passages during his test. “A lot of people are going to struggle with this,” said Skelly, who has also worked for 20 years as a freelance chauffeur driving passengers including Zara Tindall. “Just the words aurora borealis are going to catch out a lot of people.”"

This is a classic example of pointless red tape. Someone who has worked as driver for over 20 years now risks losing his minicab license. Of course, as I pointed out back in September for The Times, these £180 tests are completely unnecessary.

"Uber already has an excellent system for weeding out bad drivers. If my driver can’t understand basic instructions, I’ll give him a 1-star rating. Under Uber’s strict rules, just a few 1-star ratings lead to a driver getting kicked out. Try complaining about a sloppy cabbie and see how far it gets you."

Sadiq of course should show some common sense and scrap these pointless tests.

But let's look on the bright side. Over the years special interest groups have successfully lobbied for all number of ridicoulous rules and regulations, think how much richer we could be if we made the effort to ditch them.

The Welcome and Long Overdue Death of the Cult of the NHS

For most of the last seventy years the sacredness of the National Health Service has been an untouchable article of faith in British politics. Expressing even the slightest scepticism towards publicly provided healthcare has been framed, and may well have been, as career suicide and a guarantee of pariah status.

The otherwise radical Thatcher administrations shied away from any major tampering with the health service, and had to go out of their way to pretend that they had not even considered the possibility of serious reform. Opposing the current model of the NHS has long been treated as something to be ‘exposed’. And, much needed reforms under successive administrations has been consistently attacked as ‘stealth privatisation’ that undermines the ‘ethos’ of the NHS, with scant regard to what the reforms actually are.

It could be the case that the NHS was the ‘envy of the world’ (it isn’t and never was) that provides the best value for money of any healthcare service (it doesn’t and never did) and the highest quality of service (it doesn’t and never has). Even so, the quasi-religious status of the NHS developed would be unjustified, absurd, and dangerous. Cult-like deference and loyalty to any institution is problematic. Reasoned criticism and debate are shut out and dogmatism replaces evidence in defending it.

The state of the healthcare debate in this country is testament to the absurd pedastel the NHS has been placed on, as is illustrated by the hysterical cries of ‘privatisation’ induced by any reforms, no matter how minor or cosmetic. That universal healthcare can be delivered without a monolithic bureaucracy is apparently specialist knowledge. The debate has been skewed into the holy calling of defending ‘OUR-NHSTM’ on the one-hand and ‘selling it to Richard Branson and leaving poor people to die’ on the other.

This orthodoxy appears, however, to be being slowly eroded. In spite of Labour having run a campaign that was literally based on claiming that Conservative health policy would kill babies, the Tories managed to win the first government by-election victory since 1982 in a seat that Labour have held since the 1930s.  Whilst other factors were in play, it remains notable that the classic Labour trump card failed to work, in spite of a looming hospital closure in the constituency.

Given the wide recognition that the NHS faces unprecedented challenges in the face of an ageing population, not to mention declining public satisfaction with the service, the perception of the NHS being untouchable and sacred may be starting to crack. Hopefully this will be the catalyst for greater support for at least considering alternatives and not simply demanding that unlimited money be thrown at the problem indefinitely.

We must help those sick with cancer

A statement of the obvious from Macmillan:

Lynda Thomas, charity chief executive said: “It is heart-breaking that people in their 40s and 50s with cancer might have to go cap in hand to their parents to ask for money simply to keep a roof over their head or put food on the table. The cost of cancer is leaving people embarrassed, ashamed and dependent.

“Borrowing money could cause tension amongst families at a time when people need support more than ever. While Macmillan is here for anyone facing money worries, we also need the Government, healthcare professionals and the banking and insurance sector to play their part to ease this burden.”

Social insurance is one of those luxury goods. No, not a luxury in the vernacular sense, but something which we spend a greater portion of our incomes upon as we generally get richer. Another way to say the same thing is that such insurance is higher up Maslow's Pyramid of desires.

Thus we have a health care system which treats all and sundry who fall prey to any of the diseases which can attack us. We have our queries about whether the precise method of organisation is the best one to utilise or not but the general principle, that a rich nation should treat what ails is not disputed by us.

The same is true of the wider treatment of those who get losing tickets in life's lottery. Those unfortunate enough to get cancer in middle age should not be living under bridges for the manner in which God played dice with their lives. So, sure, a system of support, why not? 

Terry White, from Nottinghamshire, was 56 when he was diagnosed with non-Hodgkin lymphoma. He said: “Life before cancer had been comfortable. I’d worked hard and saved hard but six months into an eight-month chemo regime our savings had dwindled to nothing and our finances had spiralled out of control.

“I had to claim benefits for the first time in my life, with the threat of our home being repossessed hanging over us. 

And of course we do have such a system. So, back to sleep everyone, we've already got a welfare state.

An amazingly popular government policy - clearly, this must cease immediately

It's the conclusion here which doesn't seem right to us:

The budget for free schools doubled in the first five years of the programme and almost £10 billion will be spent on them by 2021, a critical report has revealed.

Tory MPs and head teachers suggested it was time for the scheme — established by Michael Gove — to be curbed so that schools could not be set up to cater solely for parental choice in areas where extra places were not needed.

The report, by the National Audit Office, said the programme had been much larger in scale and cost than the Department for Education planned. Its publication comes at a time when many school buildings are crumbling and heads face real-terms cuts in budgets.

It does smack very much of people really shouldn't be allowed to either decide upon nor enjoy government, doesn't it? 

Our own view is that if free schools manage to entirely eat the state school sector plus the associated budget then that's rather the point of them, isn't it? That the consumers of government services get to decide quite how government services are going to be delivered to them? 

Sure, the teachers unions and various other hangers on are going to be enraged but that's also part of the point, isn't it? 

Potential Laffer Curve incident spotted in the wild

That the Laffer Curve exists is a mathematical certainty. The difficult question is where is the point that tax revenue starts to fall as rates rise, where would lower rates produce more revenue? 

What complicates this is that each and every tax, in each and every different economic set up, will have a different rate at which this is true. For example, the EU's own investigation into the financial transactions tax showed that a rate of 0.01% on trades would be revenue losing. We would rather assume that an income tax, or VAT, rate of 0.01% could be raised quite substantially before it became revenue losing.

We do also have examples of where lower rates have led to higher collections. Russia did away with the Soviet era income tax system and replaced it with a 13% flat tax upon incomes - collections rose substantially. NY raised cigarette taxes so much that revenue fell. And now we have an interesting potential addition to the list:

George Osborne’s controversial tax raid on Britain’s most expensive homes has triggered a dramatic slump in stamp duty revenues.

Sales of properties worth more than £1.5million fell by almost 40 per cent last year, according to analysis of Land Registry figures provided to the Daily Mail.

This has caused the total amount of stamp duty collected by the Treasury to fall by around £440million, from £1.079billion to a possible £635.7million.

We would not insist, at this stage, that this is a pure Laffer effect. Rather more research would be needed for that. But it's most certainly a possible incident of the Curve striking back.

At which point could we just register our lack of surprise? That it would be George Osborne among Conservative Chancellors who would hit that Laffer Curve peak going the wrong way?

Of course the Bank of England will not predict the next crisis

The Bank of England treats us all to a statement of the obvious here:

Bank of England: Our economic forecasts will always be wrong

The Bank of England will "probably not forecast the next financial crisis" as economic forecasting can never be completely accurate, top officials have warned.

The Bank has poured resources into economic forecasting since the financial crisis when its predictions were utterly wrong.

There are three entirely independent reasons why that next crisis - and there will be one - won't be predicted. The first is as the Bank says, economic models of the economy aren't all that good. It's a complex, chaotic, system and we don't model those well and further, as Hayek pointed out, we're never going to be able to assemble the information to even know in detail what has happened, let alone what is or will.

This is why planning an economy does not work.

The second is that efficient markets hypothesis. Markets process extant information efficiently (do note that's all the theory says, it's nothing to do with trying to assert that markets are always the efficient method of doing something) and thus move only when new information arrives. We cannot predict new information, that's the very reason that it is in fact new information.

The third is much more basic in its logic. Imagine that we do manage to, through the fog of misinformation, note that something which is likely to be problematic is about to happen. Thus we act to stop it being a problem, don't we? In which case there is no crisis as we've been able to predict it.

The BoE is quite right that they won't predict the next crisis but that's a comment about the nature of the beast, not some failing of the BoE.