As Scotland votes no, we demand change to the Barnett Formula
Sep 2014 19
  • Scots receive over £1,600 per person more in public spending
  • Lord Barnett, the former minister who devised the formula, called it a “terrible mistake” and “national embarrassment”
  • TPA also calls for a change to Scottish MPs’ voting rights in Westminster

After the No vote on Scottish independence, the TaxPayers’ Alliance (TPA) is calling on Westminster politicians to urgently address the substantial constitutional and financial issues thrown up by the referendum result.
As the polls tightened towards the day of the vote, the leaders of the three main parliamentary parties in London promised to protect the Barnett Formula, which since the 1970s has been used to allocate British taxpayers’ cash between England, Scotland, Wales, and Northern Ireland.

However, there is a substantial public spending gap that exists between England and the three home nations with devolved powers – with even Lord Barnett himself, who designed the formula, calling it a “terrible mistake” and “national embarrassment”.

In 2012-13, public spending per head in each of the home nations was:

  • £10,876 in Northern Ireland
  • £10,152 in Scotland
  • £9,709 in Wales
  • £8,529 in England

In an era of devolved government, such spending gaps have become increasingly difficult to justify. Should higher public spending in some home nations be subsidised from taxpayers elsewhere? Why shouldn’t those areas pay for their own promises through higher local taxes?

The Barnett Formula cannot possibly survive. Little more than a crude back-of-the-envelope rule for splitting annual increases in public spending, back in 1978 it was a short-term expedient. It was never designed to last for thirty years and to bear the public scrutiny and resentment it now engenders.

Reform is essential – but politicians have promised to maintain unequal shares.

Jonathan Isaby, Chief Executive of the TaxPayers’ Alliance, said:

“The people of Scotland have spoken, but in their last-ditch attempt to save the Union politicians have also saved the unfair Barnett Formula. It is outdated and has spectacularly failed to address the extremely inequitable situation of taxpayers from one home nation heavily subsidising others. English taxpayers want an end to subsidising Scotland and the Scottish Government wants financial control devolved to Holyrood, so now is the ideal time to abolish the Barnett Formula entirely.

“Furthermore, as even more power is set to be handed to the Scottish Parliament, the time has come to end the anomaly of Scottish MPs voting on policy for other parts of the UK where Westminster MPs have no such say North of the border. English votes for English laws is the only fair way to proceed.”

In 2008, TaxPayers’ Alliance Research Fellow, Mike Denham, authored Unequal Shares, a paper examining the Barnett Formula and public spending across the UK. You can read it in full here.

COMMENT: Slapping a new tax on supermarkets won’t help small businesses or shoppers
Jul 2014 30

Dia Chakravarty wrote for the Conservative Home website this morning, slamming the proposals to implement a new tax on supermarkets.

Twenty councils, led by Derby City, are calling for the right to impose a tax on large supermarkets, supposedly to be reinvested in the community and help small businesses. Retail outlets with a rateable value of over £500,000 would have to pay an extra business levy of up to 8.5 per cent.

Click here to read the full article

Revealed: Local Authority liabilities hit £180bn
Jun 2014 26

Shocking new research conducted by our team over recent months demonstrates that Britain’s local authorities have long-term liabilities of more than £180bn, saddling future generations with today’s debt burden.

We found that local authorities in the UK had more than £180 billion in long-term liabilities on 31 March 2013, an increase of 8 per cent on the year before. Worryingly, this is almost seven times the amount raised in Council Tax in that year, meaning that those revenues are being used to service debt interest, rather than paying for essential frontline services.

On the positive side, some 214 councils decreased their long-term borrowing between 2012 and 2013, but some 105 councils increased their borrowing. 62 local authorities had long-term liabilities greater than or equal to their long-term assets. This is a real worry; it’s hard to see how those liabilities, often in the form of pensions, are going to be paid without increasing the amount that local authorities borrow. That means more of your council tax being spent on servicing debt interest rather than crucial frontline services.

Unless local councils take a hard look at their finances, and are honest about what they can afford, too many of our children and grandchildren are going to be left with a substantial bill. There is also a desperate need to wage a war on waste; with these huge liabilities to pay, councils can’t continue to fritter taxpayers’ money away. As if we didn’t need reminding, our debt clock offers some sobering numbers on the national debt – it’s terrifying to think that local councils are digging themselves into a £180bn hole as well.

Among the key findings of the research are:

  • Local authorities in the UK had more £180 billion long-term liabilities on March 31 2013 – an increase of 8 per cent on the year before
  • This is almost 7 times the amount raised in Council Tax in 2012-13
  • Some 62 local authorities have long-term liabilities equal to or more than the value of their long-term assets, including Birmingham City Council and Liverpool City Council.
  • The long-term liabilities add up to £2,828 per person in the UK
  • 38 councils had long-term liabilities of more than £4,000 per resident, 11 more than £5,000 and 4 had over £6,000 of liabilities per resident
  • Birmingham City Council, the largest local authority in the country, had the biggest long-term liabilities at almost £6 billion. On a per resident basis, these numbers are still amongst the highest in the country
  • Scottish councils have by far the biggest liabilities relative to their size, with average long-term liabilities of almost £4,200 per resident
  • Much of the long-term liabilities are related to the partially funded Local Government Pension Scheme, but 40 per cent take the form of long-term borrowing. This borrowing is mostly from the Public Works Loan Board (PWLB) and market lenders such as commercial banks.

Full data for each local authority across the UK can be found here.

Why slightly better news on public finances isn’t nearly good enough
Jun 2014 20

Public finances data released this morning shows continued but slow improvement in the state of government accounts. Net borrowing in 2013-14 was just £107 billion, down from the £107.8 billion estimated in March for Budget 2014, the £111.2 billion in December last year for the Autumn Statement and also the £119.8 billion estimated in March last year for Budget 2013.

This £12.8 billion improvement, however, is put in perspective when contrasted with the June 2010 projection of £60.1 billion. Last March the Government thought the finances would be £59.7 billion worse than it expected them to be when they took over in 2010. Now we know they are only £46.9 billion worse than expected. An improvement but still very bad.

And all this borrowing has added up. At the end of April 2010, just before the May election, net debt excluding financial interventions stood at £834 billion. By the end of last month it had risen by an enormous £451 billion and now stands at a staggering £1,285 billion. See how our debt clock shows it rising every second!

We are still struggling under the weight of a ridiculously complex tax system that takes too much from our pockets, diverting our cash from the things we want to the things that politicians and bureaucrats want. These taxes gum up our housing markets, destroy jobs, lower our wages and kill off investment. Yes, the economy is growing again. But we should have been growing long ago and productivity and wage growth still disappoints.

Business projects are still not going ahead because tax makes the difference between profitability and loss. Personal taxes still act as a barrier between taking a job and not, especially for many who might be contemplating low paid work. And beyond that unnecessary complexity makes it all much worse than it needs to be. So tax reform is a necessary component of restoring incentives and therefore growth and prosperity we need.

And while we need to cut taxes, we also need to shrink the deficit harder and faster. That can only mean one thing. Politicians must join our War on Waste, root out unnecessary spending and put a stop to it.

£170 a week for a shoebox? Don’t shoot the messenger!
Jun 2014 04

A tiny room in Islington crammed with a kitchenette, dining table, wardrobe and double bed has hit the headlines due to its advertised rent of £170 per week. The alarmingly cramped appearance of the room combined with the high rent has been described as “sickeningly small” by Huffington Post and “depressing” by Time Out.

rightmove ad


Perhaps inevitably, it has led to people saying that the landlord should be ashamed and that the politicians should ban people from being able to let out properties that they think are too small.


One Guardian writer has even called for “the Thatcherite model” of private renting to be banned. Just like that.


Sadly, these commentators completely miss the fundamental point underlying what the sky high rents are telling us. The high price is a signal, it tells us that there is too little space relative to how much space is wanted. It does two things: it tells people to reduce the amount of space they use and it tells people to increase the amount of space available. Instead of addressing the problem (inadequate supply) they’re shooting the messenger (high prices).

The problem is that planning is getting in the way of the supply signal. Property owners know they can make lots of money by building more and bigger homes in places like this, where people really want to live. But the planning system stops them. That means all the pressure to match supply and demand is left to the demand side. Prices just rise until the number of people who are prepared to pay enough is whittled down to match the number of available homes.

Making it more expensive by tightening up regulations won’t help matters. We need to do precisely the opposite. We need to remove and relax planning restrictions to allow more building in the places where people actually want to live. That means rethinking both the greenbelt and restrictions on how tall buildings are allowed to be as well as scrapping some of the building and environmental rules that increase the cost of construction. The only alternative is ever higher prices and ever more ridiculous property ads.

Dos and don’ts from Down Under
May 2014 15

Joe Hockey, the Treasurer of Australia (the equivalent of our Chancellor of the Exchequer) delivered his first budget yesterday with speedy deficit reduction the clear priority. Australia’s public finances are in far better shape than Britain’s. We have entered the fifth year of George Osborne’s fiscal consolidation and are still on course to borrow £96 billion this year. It’s the first time in 5 years the borrowing number can be written down using fewer than 12 digits.

This year, the UK government will borrow the equivalent of 5.5 per cent of GDP compared to 1.6 per cent in Australia. Even in 2009-10, at the height of the global financial crisis, the Australian government only needed to borrow 4.2 per cent of GDP.

We won’t actually start paying back our enormous debts until the 9th year of Osborne’s plan, and many of his future savings are as yet unspecified. Hockey’s plan will see debts being paid back in four years and there’s a lot less to pay.

Public Sector Net Debt in the UK will hit £1.36 trillion this year, 77 per cent of GDP. Australian Government general government sector net debt is $226 billion (£126 billion) – little more than the UK borrowed in 2011-12 alone.

The fiscal consolidation in Australia will be achieved through a mixture of some ugly, controversial tax hikes and some sensible savings.

Major tax measures:

  • Temporary Budget Repair LevyThis horribly named income tax increase will apply an extra per cent charge on individual’s taxable income over $180,000 (£99,614). The Government says this will last for three years, but many supposedly temporary taxes become permanent.
  • Fuel excise indexation – Fuel tax will be increased twice a year in line with inflation. Remarkably, fuel excise has been frozen at 38.1 cents a litre for 13 years. The government has pledged to ensure that the amount spend on roads is greater than the net revenue from the tax hike.
  • Company Tax – commitment to cut by 1.5 per cent from 1st July 2015.

Major Savings

  • Foreign AidSavings of $7.6 over 5 years by freezing “Official Development Assistance” at 2013-14 levels until 2016-17 when it will grow in line with inflation.
  • 16,500 bureaucrats axed
  • Retirement age to increase to 70 by 2035
  • Smaller governmentTelecommunications Universal Service Management Agency to be abolished and functions transferred to a department saving $350m a year
  • Higher EducationChanging of repayment thresholds and indexation for loans to save $3.1 billion over next four years.
  • Health – Medicare Benefits Schedule Rebates reduced saving $1 billion+ a year. Instead, patients will have to make a direct contribution to the service they use.
  • BenefitsFreeze eligibility thresholds for non- pension benefits for 3 years saving $1.5 billion

But despite the generally good numbers, the Australian government has decided that having run five deficits in a row, something needs to change. Their fiscal responsibility is commendable, but some of the methods leave a lot to be desired.

The “Temporary Budget Repair Levy” is a blatant breach of Tony Abbott’s promise of “tax cuts without new taxes” in opposition. There’s no justification for tax hikes with the public finances as they are and growth forecast at 3 per cent this year and 4.75 per cent next year.

Only time will tell how much these broken promises undermine Abbott’s credibility.

Politicians don’t pick winners. They should leave AstraZeneca’s decision to its shareholders
May 2014 09
American Pfizer wants to buy British AstraZeneca so it can shut down research and development operations in Britain to increase the combined entity’s profits, which will then be sent to America. Moreover, their plan to domicile the firm in the UK is only for tax reasons”, which could evaporate when another big economy offers a more attractive tax environment. Therefore the Government should step in to protect Britain’s pharmaceutical industry and all the highly paid and prestigious jobs it generates here. That’s the argument being made by Labour’s Shadow Business Secretary Chuka Umunna, among others.


But would we be better off if politicians took a more active role in deciding mergers? There are good general reasons to oppose greater political involvement in business decisions like this. Free economies tend to perform better than ones where politicians and bureaucrats try to influence or control business. Why are politicians better placed to decide whether the owners of two companies should pool their assets into a single company? If a merger would create value for shareholders by eliminating duplicated spending, is it the proper role of government to block the merger to ensure that the shareholders must carry on duplicating their spending in separate firms? Would changing the law to add research and development to the list of national interests which governments can rely on to block takeovers discourage future investment in Britain, if investors know that they might not be able to sell their investments to non-UK buyers, or if they worry that still other restrictions might be imposed in future, after they’ve handed over their money?


There are also reasons specific to the Pfizer bid for AstraZeneca, too. People are right to be suspicious of Pfizer’s promises on carrying out research in the UK. They will only keep to their promises if they make commercial sense, otherwise they will find a way to get out of them. But that is actually why we should be relaxed about it. The reason companies carry out research and development in Britain isn’t because they want to waste shareholders’ funds to prop up some idea of British national interest. They do it because Britain is home to a large number of scientists able to do the work and because our favourable legal, tax, regulatory and academic environments make Britain a great, and profitable, place to do R&D. Part of the attractiveness of investing in Britain is precisely the ability to sell your investment later on without too much fear of politicians scuppering things.


Even if Pfizer does at some point close some or all of the research and development operations it takes over, it will have done so because it will have decided that they are not commercially viable, either because the units become less viable on their own merits or because of duplication due to the merger. If it happens because circumstances change, we shouldn’t expect AstraZeneca to be any more sentimental about the units than Pfizer would be. But if it happens because of duplication, then those scientists will be freed up to research something else with other employers. Some of them we won’t have heard of now, some of them might even create their own businesses.


It’s this messy, real-life process of stripping out duplication and waste to increase profits that means, over the long term, products become better and cheaper while wages rise. It might not look neat and tidy to politicians who think in terms of national identity with one eye on votes instead of efficiency with an eye on profit, but we’d be mad to let them interfere.


Instead of worrying that Britain has such a poor environment in which to carry out research and development that we should stop shareholders merging with foreign companies in case they close down operations here, politicians should be thinking about how to ensure our legal, education and regulatory systems are as effective as possible while cutting tax to make sure companies want to do business here. That doesn’t mean meddling in business on spurious ‘national interest’ grounds. It means reforming education, keeping regulation light and minimising the tax burden.
Unfunded pension liabilites are £1.7 trillion. It’s time the Government admitted it
Mar 2014 26

Teachers are on strike today. One of the reasons is their anger over pension entitlements becoming less generous after reforms become effective in April 2015. These reforms don’t much affect the rights to pensions they’ve built up already. The changes are primarily about what additional pension rights they’ll be entitled to thereafter.

But there’s a huge problem with the cost of these pensions. As the unions fight for more generous terms and the Government decides how much of the next generation’s money it is prepared to promise them, they aren’t recognising the true scale of how much those promises will cost.

The Government has not put a single penny aside to pay for them and it’s also in denial about just how big those commitments are. Across the public sector, it says that unfunded pension schemes have liabilities worth £1.1 trillion. The problem is that this number is calculated using an artificial measure of the how to value what payments in the future are worth in today’s money.

Instead of using market ‘discount rates’ to account for how money set aside to pay for future commitments should grow, the Government invents its own number and this number makes the size of the liabilities seem a lot smaller than they really are. The TaxPayers’ Alliance asked finance and pensions expert Neil Record to estimate the difference between the real and official size. He found that the Government is downplaying the value of its promises by a colossal £610 billion.

Difference between offical and TPA pensions estimates

The real value of these commitments is not the £1.1 trillion the Government claims. It’s £1.7 trillion, a figure which has swelled by £1 trillion since 2003-04. In other words, it’s been getting bigger by £100 billion every year, on average. And that’s on top of the £1.2 trillion in the official National Debt.

Pensions liabilities and official net debt

Private sector pension schemes aren’t allowed to invent their own discount rates to make their liabilities seem rosier. The Government shouldn’t be allowed to, either. It’s time they were a little more honest about how much public sector pension promises will cost taxpayers.

New £20bn OBR black hole means Chancellor Osborne must declare War on Waste
Mar 2014 07

Office for Budget Responsibility economic models replicated by the Financial Times have revealed a new £20 billion black hole in the public finances. The news comes on top of the repeated deterioration in deficit forecasts since 2010 and means that the public sector would potentially continue living beyond its means until 2020.

Page 15

Our War on Waste spending factbook highlighted the deterioration of deficit forecasts for 2014-15 in the graph shown above (click here to share it on Facebook, and here for Twitter). It’s clear that while the economy seems to be recovering, particularly with respect to private sector employment figures, the public finances are still a mess and tough decisions have to be made on spending.

This isn’t necessary only to close our still huge deficit but also to allow room for the tax cuts the country needs to sharpen economic incentives, boost growth and ease the financial burden on taxpayers. Mr Osborne should look again at spending when he delivers his budget in two weeks. It’s time he declared a War on Waste.

Stamp Duty, unemployment and a glimmer of hope for the Autumn Statement
Oct 2013 25

Could Stamp Duty be contributing to unemployment rates? That was the question posed by the Head of Residential Research, Adam Challis, of property group Jones Lang LaSalle in response to a presentation at Chatham House by Professor Andrew Oswald of Warwick University about the correlation he found between levels of owner-occupancy and unemployment.

These are substantial sums of money… Stamp Duty must add substantial levels of immobility and immobility is associated with higher levels of unemployment. Nobody has looked at the effects of that on unemployment.

Oswald’s contention is that owner-occupancy causes higher levels of unemployment in the general population. While he does not claim there is proof that higher levels of unemployment are caused by owner-occupancy levels, he does provide evidence that they are correlated and he suggests three reasons which might explain why more owner-occupancy does cause higher unemployment.

First, owner-occupiers are less likely to move when they get a new job and this results in more commuting which in turn leads to higher commuting costs and congestion for others. This, he says, might deter some people from taking a job and so add to the unemployment rate. Secondly, owner-occupancy leads to reduced mobility which in turn means less knowledge flow through interaction. This, he says, might reduce everyone’s productivity and therefore could increase unemployment. Finally, owner-occupiers are more likely to object to new businesses opening near them and other planning matters. So higher levels of owner-occupancy lead to greater levels of resistance in the planning system which, they say, could be reducing the speed at which businesses are created and expanded, leading to higher levels of unemployment.

It’s an interesting theory. And if it’s true, and if labour immobility is the cause of higher unemployment, then there’s a good case to say that as well as all the problems it causes in the housing market, Stamp Duty might also be causing higher unemployment, too. Which is why it is interesting that Exchequer Secretary to the Treasury David Gauke told a Conservative party conference fringe meeting held by the Institute of Fiscal Studies and the Chartered Institute of Taxation that the problems caused by the ‘slab’ rate structure of the charge are ones that the Government “should seek to address“.

Does that mean we might hear some good news in the Autumn Statement in less than six weeks time? Let’s hope so. But if you know of anyone who hasn’t already signed up to, please ask them to add their names to the campaign. It automatically sends a message to your MP for you, adding a little extra pressure for reform and cuts to this truly awful tax! We need all the help we can get.

IEA report shows the shocking cost of tax on the poorest
Oct 2013 14

Households in the the poorest fifth of income distribution spend £1,165 a year on VAT and £1,286 on ‘lifestyle taxes’, according to new research from the Institute of Economic Affairs. The amount taken from the poorest fifth of households in lifestyle taxes represents 11 per cent of their disposable income.

But these averages mask the harsher reality for those who do gamble, drink, smoke and drive as they include those who do none of those things. Between 15 and 17 per cent of the average income of smoker in the bottom fifth is taken in tax on their tobacco. Between two and four per cent of average income is taken from drinkers in that same fifth of the population. And eight per cent of the income of a typical low-income driver is taken in motoring taxes.

That all adds up. People in the bottom fifth of the income distribution who drink moderately, smoke and drive a car will find the Chancellor confiscates almost 40 per cent of their disposable household income through VAT and lifestyle taxes.

The Coalition have taken some good steps towards taking less money from those who don’t have enough to pay for the basics but as ever the story is mixed.

They have raised the tax free personal allowance for Income Tax very quickly so that it will be £10,000 next year. But it still too low and National Insurance still kicks in at around £7,500 a year. They have promised to freeze Beer Duty and Fuel Duty for the rest of the Parliament, but duty on other alcohol will carry on rising Fuel Duty is still too high. And they have cut Corporation Tax, which economic analysis shows is largely paid for by workers in lower wages, from 28 to 21 per cent. But it is still too high and they have not cut employer’s National Insurance, the jobs tax, which remains at 13.8 per cent.

A wide variety of taxes are making life difficult for everyone, and especially for the poor. Whether it’s taxes like Fuel Duty, VAT or alcohol taxes which impoverish people by making the things they need more expensive, or whether it’s taxes like Income Tax, National Insurance or Corporation Tax which mean they end up taking home less of their own money, all of them play a destructive role in the lives of the people the Government is supposed to be helping.

We urgently need lower taxes both to relieve people’s budgets and to encourage enterprise to get the economy back on track. That means cutting back the size of our still far too bloated public sector to a level we can afford.

COMMENT: Energy price fixing and tax hikes would quickly see economic reality bite
Sep 2013 25

Writing in City A.M., Matthew Sinclair argues Labour’s policy announcements on Corporation Tax and energy prices would be economically damaging for Britain.

ED MILIBAND made two big new pledges in his speech yesterday: lower business rates for small businesses, paid for by higher corporation tax on larger firms; and a freeze in energy prices for 20 months from the date of the next election. Economic reality would quickly bite for any government that tried to introduce either policy.

There is nothing wrong with cutting business rates. Lower rates would be a relief for many – particularly small firms and retailers. They often effectively pay half as much again on top of rent. But higher corporation tax rates for larger firms would not raise government revenue, except maybe in the short term. Just as firms in competitive markets cannot increase profits by charging higher prices, governments cannot just hike taxes and expect more revenue in return. Higher corporation tax will drive away investment and mean fewer jobs, lower wages and – in short order – less revenue for the state.

Click here to read the full article

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