Things Can Only Get Worse

Recall the theme song New Labour blasted out in 1997 as it savoured its election victory — Things Can Only Get Better? Well that seems to be the promise that Chancellor Alastair Darling offered in his grim annual Budget delievered today. While outlining the full depth of the economic crisis that still might have the UK having to go cap in hand to the IMF, Darling forecast that the British economy would revive next year with a rapid bounce-back, modest at first with a 1.25 percent growth rate and subsequently rising to 3.5 percent in 2011.

Trouble is, no one with any credibility is predicting such growth rates.

The Bank of England’s forecast for 2011 is 2.5 percent. In its latest World Economic Outlook, the IMF saw no growth for the UK on the horizon next year, arguing that the British economy would continue to shrink. The IMF and Darling are at odds also about the forecasts for this year. The Chancellor maintained that output would shrink by 3.5 per cent 2009 – more than doubling his previous forecast. But the world body believes that 2009 will be even harsher for the UK and is forecasting a slump of 4.1 percent.

Those percentage differences may look small but they will have tremendous consequences for how Britain fares in its attempts to borrow the money it needs to cope with the bank bail-outs and increasing government spending.

The markets reacted even before the Chancellor finished delivering the Budget. The price of British government bonds plunged as investors learned the government will be looking to raise 240 billion pounds this year, far more than expected. Most analysts thought the government would be looking for 180 billion pounds. The pound also fell in value on the currency markets.

And taxes…forget 45 percent for high earners. The Chancellor announced a top rate of 50 percent. Belgium looks cheaper, especially with better public health care!  

 

 

 

More on Taxes

You would have thought that Brown and Darling would have learnt a lesson about tax hikes. Back in early 2008, Britain’s Labour leaders had to back-track on some of their plans to “crackdown” on rich foreigners resident in the UK but not domiciled there for tax purposes. Inadvertently, he provided a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds (now about $45,000 but then $60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children were taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

In February 2008, I wrote this for the Cato Institute blog: “Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.”