VAT are you talking about?

Cameron and Clegg get it wrong on VAT.

Nick Clegg today joined David Cameron in attacking the VAT cut as "a waste of money" (DC said something similar yesterday).

It hardly takes a single-celled organism to realise that a cut in VAT results in HMRC receiving less income - the Government does not pay for a sales tax cut through general taxation.

Therefore NC and DC are essentially arguing that consumers are wasting the money they are not giving to the goverment (presumably by saving it), and that government would spend it better if only consumers weren't able to keep it.

Most bizarre.

The grass is always Green

Damian Green's arrest reflects badly on all political parties and their politicians. It also raises questions about the common law offence of misconduct in public office.

Apparently arresting a publicly elected legislator is a sign of a "Stalinesque" state. I would suggest shooting them more so. Let's make no mistake, the arrest of Damian Green - the Conservative's Shadow immigration spokesperson - is a grave affair. But not for the party political reasons we're likely to hear much of over the coming days.

The real issue surrounds the common law offence of "misconduct in public office". The offence was introduced post-Hamilton following a recommendation by the Nolan Committee on standards in public life, and has been used in the past to prosecute, for instance, police officers who have sex whilst on duty.

Let's be clear: Damian Green is not accused of misconduct in public office. He is accused of "aiding and abetting misconduct in public office" - i.e. helping someone else commit an alleged offence.

That individual is the unnamed civil servant who appears to have been passing information about the Home Office to Damian Green, which Green subsequently passed to the press. It is unclear to me what the "aiding and abetting" could have consisted of, if not the act of supplying that information to the press.

It is perhaps a bit rich for Damian Green to have criticised the Government earlier in the year over leaked documents, especially if he actively solicited those documents from a helpful insider.

But that isn't justification for arrest. Misconduct in public office is proven on the basis that an act "amounts to an abuse of the public's trust in the office holder" (amongst other things).

Does passing confidential documentation which the government of the day are witholding from the public amount to an abuse of the public's trust in that office holder?

On one hand, I can see the arguments which suggest it is - someone who more often acts against their employer, than for them is a liability. Nonetheless, the public should expect that information is not deliberately withheld from them by the politicians they elect.

I expect the Conservative party will make some ridiculous statement about erosion of civil liberties in the wake of this arrest. No doubt they will call for resignations. Perhaps Labour will too. Nonetheless, the fact that it has happened, and on Labour's watch, makes this a rather sorry affair for the Government.

The real question, however, is whether the misconduct in public office offence is being appropriately used. On the evidence of this arrest, I suspect not. And there are other ridiculous examples - such as affairs by politicians being investigated under that offence.

It appears to me that, when it comes to misconduct in public office, the letter, rather than the spirit of the law is being applied all too often.

Woolworthless

The news that Woolworths has entered administration is hardly a surprise; the chain had ceased to be relevant in today's crowded high street.

I remember visiting Woolworths as a child and being struck by just how much tat can be crammed into one store at any one time. Its strength in days of yore became its achilles heel in the modern world: variety of product lines.

Woolworths is the retail equivalent of a 'jack-off-all-trades, master-of-none'. Schizophrenic in the extreme. It sold everything at once and - as we've found out today - not much at all. Competitors in all of its chosen markets - DVDs, books, clothes, homeware etc - typically did it better, if not cheaper.

It is all too easy to get sentimental about brand names. Yet if a business is not a going concern, then what can be done? Times change. The high street moves on.

The likely job losses so soon to Christmas are the real shame in all of this. For all the rubbish it sold, Woolworths employed a massive number of people - 25,000 according to reports. Let's hope as many of those can be saved as possible. Or that those who lose their jobs - as seems inevitable for many - manage to find new employment soon.

VAT was all the fuss about?

Conservatives and their supporters bemoan a cut in VAT. Why?

It is a rather perverse state of affairs when Labour, not the Conservatives, champion tax cuts (albeit temporary ones). Of the policies in today's pick 'n' mix PBR which seemed to incur the greatest ire of those on the right - judged by blog reaction, and the collective animal noises of those on the opposition benches - was the cut in the rate of VAT from 17.5% to 15%.

The principle argument in opposition to the VAT cut is simply that it will not work: a 2.5 percentage point cut in a sales tax is hardly likely to spur consumer spending enough to stave off a sharp recession; business won't pass on the cuts, but boost profits (or at least revenue) instead; the costs to business to factor in the changes will dwarf the benefits of making the cut etc.

This all misses the point. And the Conservatives are missing a trick.

Economically, the policy makes sense - sales tax is regressive and provides a channel through which consumer spending will be directly stimulated (assuming cuts are passed on to consumers), rather than tax rebates which are typically used to save or pay off debt (just look at the US experience from earlier this year - and they are now proposing another fiscal stimulus 25 times our own). Even if business does not pass the cut on to consumers in full, it won't hurt their profit margins in the current climate (and hence their ability to continue employing staff who can themselves continue to spend).

Plus the argument often levelled at the measure - that a change in price from 99p to 97p won't be enough to modify consumer expenditure - ignores the cumulative effect of a VAT cut. The PBR itself suggests that the measure will cost the taxpayer £8.6bn next year - not inconsiderate for a marginal cut in VAT. Cumulatively, the measure may save the average household between £250 and £500 a year. Again not inconsiderate, and more likely to be spent than tax rebates.

But that is besides the point. The Conservatives shouldn't oppose the measure on the basis that it may not work. They should embrace the measure as a cut in an unnecessary and unfair tax (surely a desirable aim for the Conservatives?). Moreover, cuts in VAT are consumer friendly - particularly to those on lower incomes. All parties should commit to maintaining VAT at the lowest possible level under EU VAT area rules - the 15% should remain beyond the end of 2009.

If the Conservatives did so, DC and GO can claim to be both tax-cutting and friendly to the poorest in Britain in one fell swoop. The opposition to VAT may serve a short-term political objective, but it will make it difficult for the Conservatives to emphasies any tax-friendly credentials in future.

PS It was interesting to note the reaction over the weekend to the interview with Kenneth Clark in the Times:

"We can expect to see a lot of Ken Clarke over the next few days; the Tories know that he is still on of their most convincing voices on the economy. His interview in the Times today is helpful to the Tory cause. But it is worth noting that he breaks with the leadership in endorsing the idea of a stimulus package albeit one of a very different stripe from the one Brown and Darling are said to be planning, Clarke favours a temporary reduction in VAT to 15 percent." (emphasis added)

James Forsyth, Spectator Coffee House Blog, 22nd November 2008

Oops.

Offside

Is it fair that football clubs owing millions of pounds to HMRC can write most of it off by going into administration, without necessarily incurring commensurate league penalties?

I ask the question because the Donal MacIntyre programme have done a special on the unpaid tax bill of clubs who have recently entered administration - some £28m by their calculations (which is in a statistical error as far as government is concerned, but that seems moot).

As a Leeds United fan my views are shaped by experience rather than strict logic. I agree that it seems unfair that, as Alan Sugar put it, "Leeds spent millions and millions of pounds, go bust and the following Saturday start again".

But should clubs who go into administration be thrown out of the football league, instead of incurring a points penalty as at present?

I don't know what purpose that would serve, except to get get one over on long-standing rivals. Leeds United were relegated twice in just a few years, sold their stadium and lease it back, now languish in League One, and have had to assemble an entirely new team mainly through reliance on free transfers and youth players. 

Hardly "starting again". Going bust was in no way the best thing that happened at Elland Road, except that financial security now seems to be a principle aim of the club. The couple of years of Champions League action were evidently not worth the price Leeds have subsequently paid.

That an increasing number of clubs enter administration implies a symptom of a deeper problem, probably the increasing inequality in revenue between clubs in the Premier League and those in lower leagues.

To be successful today, clubs have to spend. And to be really successful, clubs have to spend a lot. Premier League TV deals have increased the pressure on all clubs in terms of cost of players, and wages. As a result, costs have risen far faster than gate receipts for many clubs. But without spending, teams cannot guarantee footballing success which potentially increases revenues.

That footballing debts are honoured at 100% when a football team goes bust whereas non-footballing debts are not is anomalous. But the wider rules of administration - that clubs coming out of administration pay less than 100% of the debt owed - should not be changed just for football clubs.

Kicking clubs when they are down in the way Sugar suggests doesn't help address wider failings in football league management. The Football League should put appropriate measures in place to ensure that clubs do not put themselves into financially precarious positions. 

One suggestion may be to apply points penalties to clubs whose wage bill exceeds a certain ratio of revenue. Whatever, more can and should be done to ensure clubs do not go into administration, instead of applying additional and harsher penalties when they do.

The PBR and VAT

Speculation is mounting of a deferred increase in VAT to pay for a borrowing splurge. That could be politically indefensible from a Labour chancellor. 

The Spectator's Coffee House blog today picks up a blog post by Robert Peston about Monday's Pre Budget Report, in which Peston predicts:

So which taxes will rise?

Well my prediction is VAT.

For the sake of transparency I should say that I don't know that there will be a VAT rise.

But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.

And it's one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save.

To use the economic cliche of the moment, it would give us all quite a "nudge" to spend now, before the swingeing increase in VAT would kick in.

Sales taxes are regressive taxes - those on lower incomes tend to spend a higher proportion of their income on goods and services, and so spend more on VAT as a proportion of their income than those on higher incomes.

Necessary goods - food, energy, transport, children's clothes - are either zero-rated or reduced-rate VAT items, which admittedly accounts for some of the more significant expenditure by households. But zero- and reduced-rate VAT levels recognise the regressive nature of ad-valorem taxation.

Which is why it is puzzling a deferred rise in VAT might feature in a Labour budget. Ultimately, those on lower incomes will pay a higher proportion of their income in sales taxes in order to fund a stimulus for all today. This seems peverse to me.

If anything, the Chancellor should cut VAT to the lowest permissible rate under the European VAT area, which is 15%, as part of the stimulus to encourage greater expenditure. Exactly how he would pay for it is quite another question...

UPDATE: I've just discovered an interview with former Chancellor Ken Clarke in this morning's Times in which he advocates a temporary cut in VAT to 15%. I hadn't read the article before making my post, but the reasons Ken Clarke makes his suggestion are essentially the same as mine - a reduction on taxation on expenditure is more likely to stimulate spending, than tax rebates (which are more likely to be saved...).

Blame Game

At last, some sense from the Economist on the reaction to Baby P and the Brand-Ross affair...