An excellent piece by Ian Morley in the Financial Times presents a devastating critique of Alistair Darling and Gordon Brown. It's worth reading the article in full, but here are the main challenges to the Government:
1. Causing great damage by raising taxes on small businesses and entrepreneurs when a more targeted measure on private equity chiefs would have been far easier.
When it comes to the government's tax changes, the law of unintended consequences starts to become apparent. It will not be the Russian billionaires, private equity or hedge fund managers that suffer but many of the high-quality and technically skilled non-domiciles from the US and Europe who have up until now been attracted to working and living in London. They have created that dynamism that has helped London overtake New York as the major international financial centre.
The greatest and most immoral impact will hit the small business entrepreneur, the real innocent victim. It would have been easier to focus the tax measures on a handful of private equity people - perhaps by differential tax on the gains they make on their clients' risk capital as opposed to their own - rather than to have increased by 80 per cent the tax on hundreds of thousands of small entrepreneurs that are the life blood of the true economy.
2. Raising taxes on private equity at the precise time when the market was turning.
The current, ill-thought-through demands for greater transparency and controls on private equity and hedge funds, proposals to tax the supposedly rich "non-domiciled" residents and plans for an 80 per cent increase in the effective capital gains tax charge on selling long-term business assets ... are all occurring precisely at that inflection point when the market would have adequately dealt with managers' egos and profits by deflating one and denting the other.
Government intervention now is, therefore, unnecessary. In hindsight, this will be seen not just as bad timing but throwing out the baby, the bath water and the bathtub as well.
3. Removing regulatory control of banks from the Bank of England.
The seeds of this mess were planted 10 years ago in what, at the time, was seen as a master stroke of financial management. The Bank of England was given freedom over interest rates in exchange for giving up direct control of the banks, which was then handed on to the Financial Services Authority. It meant that the chancellor could thereafter blame the bank if it got interest rates wrong yet take credit for giving it independence if they got it right, the ultimate politician's win-win scenario.
The problem with this split responsibility, made more complicated by the ever-encroaching power of the Treasury, was that the FSA is in fact a regulator, not a market player and, unlike the Bank of England, has no real experience of daily involvement in the markets. It was, therefore, not surprising that as soon as the first major banking crisis came, the collapse of Northern Rock, a case study of collateral damage, the FSA got caught out by not having its pulse on the market.
4. Northern Rock.
Outside Scotland, the north-east based Northern Rock is the only serious financial institution in the heartland of Labour. That may be affecting the government's handling of the situation. There was no way the City banks and money markets could be seen to destroy the mortgage lender while private equity managers picked over its bones.
These charges make a serious case for the Government to answer. Taxpayers will not forget the matter quickly. For the future, it's clear that alleviating the burden of tax as soon as possible is essential to getting the economy back on its feet.