More economic incompetence….this time in the tax credit system.  HM Customs and Excise looks odds on to miss its stated target of reducing fraud and error to 5% by 2011.

It has been revealed that mistakes had risen to 8.6%, (from 7.8), in 2007 – 08, which are the latest figures available.

This means that fraud and errors in the tax credit system cost £2 billion last year, which amounts to £1 in every £10 paid out.

This is the tax credit system Gordon Brown launched as Chancellor….he must be so proud.

The Iron Chancellor….paraded as the man who was the best Chancellor and Economist ever to hold office.  Sets up a Tripartite Banking System, with a new Body the FSA to regulate the banking industry, which subsequently preside over the worst banking crash in UK History and now we learn his efforts to reduce fraud and error in the tax credit system, has been another failure.

No.11….the lights are on but noone’s home!

Sam the Eagle and his Lookalike Brother Alastair!

Guess what. Doesn’t take an economic guru to predict that tax receipts will fall in a recession does it? 

That is what has happened.   Tax receipts have fallen by £32 billion the National Audit Office revealed.  This includes a £6.4 billion drop in VAT income following Alastair Darling’s decision to cut the rate to 15% last November.  (That has to go down as a howler of a policy.  A VAT cut that failed to stimulate demand, was lost mongst huge high street discounts on price….and now has lost the Government precious revenue.  That must be a definition of economic incompetence!).

This is the steepest decrease in tax receipts since the 1920′s and the Great Depression!

These figures show the Treasury overspent by £24 billion because of its rescue of the Banks.

The cupboards bare Alastair!

Second in our series of grassroots bloggers is Sue Doughty.  Sue has been an active contributor to the comments thread on both this site and TBB’s Facebook page.  She is incredibly sharp, perceptive and always has a valuable insight into latest issues.  It is therefore a real pleasure that she has provided this blogpiece today.  Thanks Sue. 

The world of work is fading away or changed by Sue Doughty
 
It used to be that people over 60 for women and 65 for men were not allowed to be employed. This was brought in to make way for school leavers to get jobs (because there had been a Labour government who had destroyed all the jobs as is their way) but before that people had the right to work for as long as they wanted to. Now we see people of pensionable age working to be able to eat and pay mortgages and school fees, tuition fees etc, while young people are finding avenues to employment blocked. What to do? It would be wrong to bring back the unemployment in older years because people are healthier now and their pensions and savings have gone.

There has to be a way of encouraging the creation of starter jobs.
 
At present unemployed young people with only ten GCSEs and 2 A levels have to settle for cleaning council buildings, flats and offices, care homes; or working shelf stacking or on the checkout in shops. But those shops will close as shopping trips make way for internet and phone shopping in the face of the flu epidemic.

Apprenticeships made way for Modern Apprenticeships, which were seen as not worth doing because you get pocket money pay and no qualifications to put in your CV. They were actually detrimental to your CV.

There are proper apprenticeships on offer now but few and far between. They are hard to find and getting to the assessment venue is a challenge of initiative and parents disposable income for transport – again in a trading estate with no usable, same day, public transport access.

So this government has again tilted the playing field in favour of the middle classes, that is to say those young people with caring parents, while penalising those families fiscally tooth and nail.

We need this country to be creating jobs in manufacturing. It is time the old Labour mantra that we don’t need to make things any more because we can import whatever we want went by the board. They said that we don’t need to have food production in these islands because it is cheaper to import but now we know they meant only from the EU. I note that coffee; tea, oranges, mangoes, springcrop potatoes, bananas, rice and many other basic foodstuffs do not come from within the EU but from the Commonwealth.

We are seeing an end to crop picking gangs advertising vacancies only in the language of the gangmaster and often only in the country of the gangmaster but the end is not complete and not good enough.

We need old people to be allowed to keep earning, and we need them to pass on their skills and ethics. We also need job vacancies to open up for this lost generation. We need to be able to compete with China. To achieve this a whole load of working regulations need to be weeded out of our statute book so that it is easier to employ people in this country.  

Today, we turn a new page on this blog, as we have our first guest blogger take the reins and give their views on the issue of the day.  This is a new feature and other bloggers are lined up.  I know many of you want to run your own blog site but don’t have the time to do it…hence posting articles gives you the same kind of thrill and exposure. Bloggers don’t have to share my views, (and yes, Socialists are lined up to post as well).  This site is about debate and discussion not smears and gossip!  Let me know if you want to gain exposure by emailing me at:  grassroots@trueblueblood.com 

John Laity shared some great insights last week into Afghanistan in the comments thread, which we turned into a main blog article, that John Redwood shared with his vast blog community.  So over to John for his first entry.  Sincere thanks John.

The FSA, Wheelie bins and Cowboy Builders…
 
Unlike some countries, England has no separate administrative or constitutional court exercising a broad jurisdiction, though it has two specialised courts, the restrictive practices court and the Employment Appeal Tribunal.
 
This means that the role of Regulators (Such as the FSA) is an “administrative process”, where a relevant Act of Parliament establishes independent sector-specific regulatory offices.
 
Administrative process is a way of handling multiple issues outside of the courts. For example, Town Planning offices and Local Authorities can make local decisions and handle the application of rules and regulations, without having to involve the Courts. They are empowered to do so under an Act of Parliament that grants them the powers they need to apply within a strict framework.
 
Where administrative process is applied there is (usually) clear routes for appeal against a decision and decisions are usually only over-turned should the rules of “Natural Justice” seem to be breached…I.E. Wrong doing of some kind!
 
As administrative process is empowered by an Act of Parliament, a regulator is answerable to a Minister for State, who (usually) will control funding for the Regulatory Office and be able to over-rule any decision made by the office.
 
It is under administrative process that Local Authorities can ask you to pay for rubbish collection or refuse your building project. It is under administrative process that local Trading standards can prosecute a cowboy builder for not finishing your building project. It is also under administrative process the that FSA can regulate the banking sector:
 
From the Commons Select Committee on Regulators, First Report:
 
“In May 1997, the government announced its intention to create the Financial Services Authority (FSA) as a single financial services regulator, independent of government, responsible for both financial services prudential regulation and the conduct of business regulation. The regulator’s duties and powers were set out in the Financial Services and Markets Act (FSMA) which came into force in 2001.
 
The FSA does not have a duty to promote competition in the industry nor to regulate prices since the regulated companies already operate in competitive markets. However, the regulator is required to meet its statutory objectives in ways consistent with facilitating and maintaining competition (internationally and domestically) and minimising adverse effects on competition from regulation.
 
August and September 2007 brought a liquidity crisis at Northern Rock, which ultimately led to the first run on a bank in Britain since 1866.

Inevitably, the Northern Rock crisis casts a new light, and indeed casts doubt, on the claims of financial regulators to prioritise effectively their supervisory activities, especially for such major financial institutions as Northern Rock. It also raises questions of the effectiveness of joint working between the FSA, HM Treasury and the Bank of England.” 
 
Obviously we all have concerns as to how the money markets went into la la land. But can it be blamed entirely on the FSA? Consider the statements made by the House of Commons Treasury Committee, Sixth Special Report of Session 2008–09:

“There is an existing formal statutory link between the FSA and the Bank of England at Deputy Governor level, in relation to the two institutions’ work on financial stability. In November 1997, the Treasury, the Bank of England and the FSA entered into a Memorandum of Understanding which created a framework for co-operation between the parties on Financial Stability. As part of that document, provision was made for the Deputy Governor (Financial Stability) to be a member of the FSA Board and for the Chairman of the FSA to sit on the Court of the Bank of England.”

So it can’t be avoided that the structure of the FSA and its relationship to the Bank of England isn’t working. Does that mean the FSA should go?

The problem for Regulators is that the administrative process they operate within restricts their operations on a day-to-day basis. To overcome this, the FSA operate under a system that uses principles-based regulation to try and keep pace with a fast moving sector.

Principle based regulation is a good idea to promote best practice and limit bureaucracy. However, it relies on the players in the market having a vested interest in making the market work well for all. Unfortunately, such regulation only works well when there is a real engagement by all concerned.

From the Commons Select Committee on Regulators, First Report:

“We recognise the dissatisfaction of many Independent Financial Advisers (IFAs) with the work of the FSA. We welcome moves by the FSA to improve relations with the large number of smaller firms that it regulates. The FSA must continue to cultivate these relationships.”

My Grandfather once told me that “a man can be valued by his principles”. Now I am older, I think also means “Some people’s principles can be bought”…
We all now face increased taxation until we die, because of the failure of the money markets and the principles that regulated them. This the not the fault of the FSA, it is simply the fact that the administrative process wasn’t up to the job of regulating a unique market…A process enacted by Parliament…

Scrap it, rename it, consume it within the Bank of England…It doesn’t really matter. What matters is what powers we enact to prevent future erosion’s of our principles and also the flexibility of the processes to accommodate market change.

The Conservatives have grasped this issue by the thorns and have a strategy for change. If we do nothing we may recover from the recession, only to face the same issues of failed principles in the future.

John Laity

I have to say I am becoming increasingly impressed by George Osborne.  He is showing some very strong signs of leadership of late and speaking common sense to the British People.

Full credit to George who today revealed a ‘White Paper’ that must be seen as the most detailed policy statement of an Opposition Treasury Spokesman in history!

There is a great deal of common sense in the document. For example, who can disagree with a policy that ensures that banks will be legally forced to tell it’s customers details of all charges raised on overdrafts, loans, mortgages and credit cards?

Who can disagree with a new Consumer Protection Agency whereby customers will be able to use a third party website to tell them if the products on offer are suitable?

Critically Osborne has finally outlined a clear relationship whereby the Bank of England will be given the remit of overseeing the banking sector, whilst the FSA will be scrapped.   This is a sound move in abolishing the tripartite system that Brown set up and gives power back to the Bank of England.  The Tripartite system badly failed our country and is a big reason why the banking sector folded like a pack of cards.  Osborne described the system, which shares responsibility between the Treasury, the FSA and the Bank, as “a policy failure of historic proportions”.  He added that: ”We must never repeat the mistakes of the last decade, in which we built an illusion of growth on the biggest mountain of debt ever seen in an advanced economy. A fragile return to stability in the banking system must not be used as an excuse to reflate the debt bubble with just a few tweaks here and there’.

Take a look at George here leading the charge, (courtesy of Sky News)

Keep up the great work George…….

‘Raising Tax is great incentivisation to entrepreneurs in a recession’ says Darling!

Much was made when Alastair Darling and Labour did a complete u-turn on it’s manifesto commitment not to raise the upper rate of tax, but this they did and introduced the 50p rate for those earning £150,000 pa.  This was a real sop to Socialist Labour and hitting the rich….or ‘squeezing the pips until they squeaked’!  Darling & Brown claimed that the extra revenue yielded would help to repay debt and thus help the recession effort…..but will they be proved right?

They are right that we need to repay debt, as we have argued many times before.  But spending levels continue to rise, like a cancer spreading through the veins of a defenceless old ravaged body.  The level of unemployment is soaring towards 3 million and attaining heights higher than what a junkie reaches on a heroin fuelled binge!  Unemployment is on the same trajectory as the space shuttle taking off from Cape Canaveral, the number of jobs available dives faster than a trident armed submarine….whilst benefit claimants drain the state further of key resources, (many through no fault of their own, victims of criminal economic mismanagement).

Sites like TrueBlueBlood have been highly outspoken about cutting tax on the entrepreneurial in society, not raising tax, (as Government Red Book figures show tax receipts rise on cutting tax).   Who is most likely to be the engine driving us out of recession?  The entrepreneurial in society or an unemployment benefits claimant?  This is by no means demeaning to the unemployed.  But a reality that those who have the money to take risks, take on more credit, invest in their businesses, will be the ones that create new jobs and help start bringing confidence back into the economy.  With confidence comes spending, hence off we go into a strong and healthy recovery. 

As predicted, those on high salaries are now actively looking at how to avoid paying this tax….such to the point that the Government may earn LESS revenue due to the higher paid seeking ways to minimise and avoid tax.

Today it was reported that leading firms are working with London’s finest accountancy firms on tax avoidance.  How? 

Strategies to avoid the tax include bringing forward payment dates for bonuses or dividends to pre-empt the introduction of the tax in April next year or deferring payments until after the general election.

Ingeniously some companies are planning to bypass the top rate tax by paying 3 years’ worth of salaries and bonuses to top employees this year.  Employees would then loan the salaries and bonuses  back for a pre-arranged rate of interest over 3 years.

The brain drain of talent abroad has even commenced….Guy Hands, the entrepreneur and city financier who runs Terra Firma Capital Partners, has already quit Britain.

The Iron Chancellor benefited from the previous Conservative Government’s economic management and boom conditions.  Over the past 12 years New Labour have frittered away a golden inheritance….and Brown & Darling have been found out and seen to be the economic criminals they surely will be seen in history as. 

‘Committing Economic Suicide’

If you read nothing else on this blog, read the following KEY IMF REPORT FINDINGS bullet points for the truth into this recession.  It blows the lid on Brown and Darling’s falsehoods.

The IMF has just published its latest report into the health of the UK economy.  It tells a lot more than what Chancellor Darling & PM Brown would want to.  For those that are happy to read the whole massive report, take a look here.  http://tiny.cc/O5fsu

In a nutshell, I have pulled out some of the key paragraphs for your review.  Before we come to them, for the quicker blog readers, this is what we learn…in a few bullets:

IMF KEY FINDINGS

-           A key phrase in this document for me is this:  ‘Imbalances and balance sheet strains had emerged even before the recent global shocks triggered a sharp decline in economic activity’.  ie we were heading into recession BEFORE the Global shocks took place.

-           Household indebtedness will constrain the pace of recovery.  In the run-up to the crisis household debt increased to 175 percent of disposable income—one of the highest levels among advanced countries

-           GDP will fall by around 4.5% this year

-           Public debt projected to double in 5 years

-           Our Financial system may not yet be repaired so that banks are ready to lend again!

-           WE HAVE TO CUT SPENDING.  ‘Implementing an ambitious fiscal consolidation plan will be essential. The focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget’

-           House prices have dropped by more than 20 percent from their peak and commercial real estate prices are down by 40 percent.

-           Little consumer confidence due to constrained credit and unemployment.  This limiting recovery           

-           The monthly growth of both secured and unsecured household credit has fallen almost to zero.

-           The cut in VAT rate has failed in its aim, (coupled with the larger personal allowances). ‘Nonetheless, the size of the discretionary stimulus and its impact on debt levels is small’

-           Government debt was already too high pre the recession.  ‘The structural fiscal position was already weak at the onset of the crisis—government expenditure as a share of GDP has increased substantially in the last decade, while some of the revenue strength financing the increase has proved to be unsustainable’

-           The IMF cannot make any judgement on the effects of Quantative easing.  Is it working?  Has it had any effect?  Who knows?  The IMF don’t!

-           Sure you would love to know the cost of the bailouts - broken down. Total: £904bn or 63% of GDP. A few highlights:

Northern Rock — £14.6bn.
Bradford & Bingley — £24bn
Kaupthing Singer & Friedlaender — £3.3bn
Landsbanki — £4.5bn
Heritable — £500m
Dunfermline — £1.6bn
All bank recapitalisation — £78.1bn
Credit Guarantee Scheme — £250bn
Working Capital Scheme — £11.5bn
Asset-Backed Securities Guarantee Scheme — £50bn
Asset Protection Scheme — £466bn

TOTAL TAXPAYER EXPOSURE: £904bn or 63% of GDP.

IMF Key Paragraphs in more depth

Looking ahead, the economic recovery is expected to be subdued and gradual as banks and households go through a difficult balance sheet adjustment. With the economic downturn heightening the risk of further large credit losses, banks have tightened the supply of credit. The high level of household indebtedness is also likely to constrain the pace of economic recovery. GDP is projected to fall by about 4¼ percent this year, with quarterly growth picking up gradually through 2010. The speed and strength of the recovery, however, remain highly uncertain, given the unprecedented nature of the crisis and the importance of confidence effects.

Notwithstanding recent signs of stabilization, underlying vulnerabilities in the UK are sizeable.The financial crisis has brought about a dramatic deterioration in public finances. Public debt, although starting from a relatively low level, is projected to double in five years. The sharp increase in government borrowing and contingent liabilities, together with continued financial sector fragility, are significant vulnerabilities. In these circumstances, a severe shock has the potential to disrupt domestic and external stability. This highlights the importance of credible and consistent policies to truncate downside risks and strengthen market confidence. The main policy priorities remain, first, resolving the problems in the financial sector to buttress stability and promote normalization of credit supply, and second, setting monetary and fiscal policies consistent with a firm commitment to the existing policy anchors of price stability and fiscal sustainability.

 Repairing the financial system is essential for achieving a sustained recovery. The authorities’ policy interventions have averted a systemic breakdown in the financial sector. But the financial system may not yet be repaired to level where banks are ready to increase lending sufficiently to underpin a strong recovery. Although major banks are expected to remain above minimum regulatory capital requirements, recession-related credit losses will lead to an erosion of capital buffers. At the same time, it is doubtful that increased capital market funding can compensate for shortfalls in bank lending. It will therefore be important for the authorities to continue to:

• • Seek further strengthening of banks’ capital positions by encouraging banks to take advantage of improving market conditions to augment their capital base and, if necessary, providing further public capital support.
• • Promote options to preserve capital cushions and improve capital structures, for example by restraining dividend payouts not supported by profits and converting preference shares to common shares.
• • Develop contingency plans in the event that further shocks threaten the stability of financial institutions.
• • Support credit supply through targeted and appropriately designed intervention in dysfunctional credit markets.

More fundamentally, the success of the current policy package hinges on continued trust in the sustainability of the fiscal position. A strong commitment to reverse the sharp deterioration of public finances within a reasonable timeframe is crucial. Therefore, once the economic recovery is established, implementing an ambitious fiscal consolidation plan will be essential. The focus should be on putting public debt on a firmly downward path faster than envisaged in the 2009 Budget. The credibility of such plans would be enhanced by clarifying early the specific measures needed to achieve the adjustment, including in the context of the next Comprehensive Spending Review. The emphasis in current plans to weigh the adjustment toward expenditure reduction is appropriate in light of international experience that expenditure-based consolidations are more durable. Long-term sustainability would also be helped by implementing structural reforms to address the rising costs associated with demographic change. Building a broad public consensus on the need for sizeable fiscal adjustment will be essential in meeting fiscal challenges.

Imbalances and balance sheet strains had emerged even before the recent global shocks triggered a sharp decline in economic activity. These included overheating in property markets, low domestic saving rates, high current account deficits, large external liabilities, rising (albeit still low) public debt, and significant increases in the leverage of financial sector and household balance sheets.

Household balance sheets are also highly leveraged.  In the run-up to the crisis household debt increased to 175 percent of disposable income—one of the highest levels among advanced countries . The rise in debt was matched by an increase in the value of housing, pension funds, and other financial assets held by households. However, the sharp fall of asset prices since the beginning of the crisis has eroded the value of household portfolios. Net household wealth in the UK is estimated to have declined by about 15 percent in 2008, and may fall further in 2009.

House prices have dropped by more than 20 percent from their peak and commercial real estate prices are down by 40 percent.  So far, prices have been falling much faster than in the previous major real estate price correction during the early 1990s.  Mortgage arrears and bank repossessions of properties have increased, although they are still relatively low as a share of existing mortgages. The foreclosure rate in 2008 was only 0.35 percent, compared to 4¼ percent in the United States. Delinquency rates on non-conforming mortgage-backed securities of the newer vintages are going up, but are still not far above the rates on older vintages (and are much lower than the delinquency rates on US subprime mortgages). Despite some recent positive news, forward-looking indicators such as mortgage approvals and the sales-to-stock ratio suggest that the housing price adjustment is yet to be completed.

Consumer spending has weakened on falling wealth, rising unemployment, and tighter credit constraints.   Employment is declining, and the unemployment rate reached 7.2 percent in the three months to April 2009. The rise in uncertainty about future income and employment prospects and the fall in household wealth are weighing on consumer confidence. Simultaneously, credit constraints have become more binding: recent credit conditions surveys show significant tightening of credit standards for both secured and unsecured household lending. As a result, the household saving rate has been rising—from very low levels— since early 2008.

Firms entered the crisis with relatively strong balance sheets, but vulnerabilities are increasing.  The rise in non-financial corporate debt over the last decade has been moderate, and firms have held substantial liquid financial assets. However, the profit outlook has deteriorated as demand continues to contract and credit conditions remain tight. Business investment has declined steadily over the last year, and surveys suggest that both demand for and supply of credit to corporations have contracted. Default rates have started to rise, although from a low base. The steep fall in commercial property prices has reduced further the net worth of corporations.  

Over the past year, adverse feedback loops developed between deteriorating financial conditions and a weakening economy.  Banks, constrained by tight capital positions and a difficult funding environment, reduced lending to the private sector. As house prices kept falling, the value of pensions and other financial assets declined, and job security became elusive, consumers retrenched their spending. The decline in consumption, in turn, reduced business profits and depressed investment, leading to further falls in employment and income. Demand for credit also weakened as households and businesses tried to repair their balance sheets. The actual and prospective rise in defaults and bankruptcies has weakened further the balance sheets of banks and their ability and willingness to restart lending.  

As a result, credit flows have stagnated and lending rate spreads remain high.  The monthly growth of both secured and unsecured household credit has fallen almost to zero. A pick up in the issuance of bonds by the corporate sector in recent months has not been sufficient to offset the net decline in business credit from banks. Indeed, the reduction in credit growth is steeper than in previous recessions. At the same time, lending spreads remain wide, reflecting a perception of high credit risks and increased capital costs. Corporate bond spreads over government bonds also remain elevated.   

The financial crisis and the recession have led to a sharp deterioration of public finances.  Revenue in the UK is sensitive not only to the economic cycle, but also to asset prices and the level of financial sector activity. The synchronized downturn of the economic and asset price cycles led to a rapid decline in income and corporation taxes, VAT, and asset price-related revenues. The headline deficit in 2008/09 was 6½ percent of GDP and deficits of about 13 percent of GDP are projected for 2009 and 2010. Discretionary fiscal stimulus of 2 percent of GDP is being implemented. The main components of the stimulus package are a temporary reduction of the VAT rate, larger personal income tax allowances and pension transfers, and advancing of planned capital expenditure. Nonetheless, the size of the discretionary stimulus and its impact on debt levels is small compared with the effect of automatic stabilizers and the loss of asset pricerelated revenue.  

Public debt is rising fast.   The structural fiscal position was already weak at the onset of the crisis—government expenditure as a share of GDP has increased substantially in the last decade, while some of the revenue strength financing the increase has proved to be unsustainable. Sizable fiscal deficits were recorded even as the cycle reached its peak. The post-crisis increase in net borrowing is projected to result in a doubling of gross general government debt over the next 5 years to about 99 percent of GDP. At the same time, contingent liabilities of the government from financial sector interventions have increased sharply. Gross resources committed to financial sector support measures so far have exceeded 60 percent of GDP, although the net cost to taxpayers is likely to be much smaller.

However, it is yet too early to judge the effectiveness of QE.  In principle, the significant liquidity injection should induce investors to rebalance their portfolios, thus lifting asset valuations, generating positive wealth effects, and facilitating new issuance. Targeted purchases of private assets can complement these effects by directly reducing excessive risk premia and reviving market activity. The initial evidence has been moderately encouraging as gilt yields have remained low since the launch of QE, despite the countervailing effect of large new government debt issuance. Meanwhile, spreads on commercial paper and corporate bonds have narrowed, amid a broader recovery of asset prices. It remains to be seen, however, whether these effects will be sufficiently strong and lasting to generate the desired rise in aggregate demand. This uncertainty strengthens the case for further diversifying the BoE’s asset purchases, especially by targeting private credit markets that are currently dysfunctional but deemed to be viable in the long run. The BoE noted that efforts in this direction were underway but that setting up appropriate facilities took time. In mid-June, it announced its intention to start buying certain types of asset-backed commercial paper.

Grim Reading……