Reform roundtable seminar introduced by Ben Gummer MP, Member of Parliament for Ipswich, on Thursday 23 February.
By Dr Patrick Nolan
When we go to the shop we expect that the cashier will tell us exactly how much our bill will be and how different products contribute to this bill. In fact any shop that fails to provide this information would soon find lines of customers demanding greater transparency and threatening to take their money elsewhere. The relationship between a citizen and the government is clearly different to the relationship between a customer and a shopkeeper. Yet why shouldn’t the standards of transparency that we expect in everyday life apply to government?
As David Gauke MP has written, for many people the tax system is a mystery and so they are unlikely to engage with the system and ensure it works for them. If members of the public do not have even the most basic information on how taxes and spending affect them then the chances of informed and democratic debate are limited.
One idea proposed by Ben Gummer MP to help demystify taxes and spending is for the government to release personal tax statements. These statements would show individual taxpayers the tax they have paid, both in the year just gone and the one to come, and how this is broken down into the main items of government expenditure. On Thursday this week Reform held a lunch with Ben Gummer MP to discuss the idea of tax statements. This event was held under the Chatham House rule.
The idea of a personal tax statement has received a lot of support. The transparency created would help encourage valuable debate. As Philip Johnson has written in the Daily Telegraph: “if you were to discover, for instance, that £4,000 of the £10,000 you have paid in tax and NICs for the year went on welfare, it might put the argument over capping benefits into a different context.”
Yet increasing HMRC’s engagement with taxpayers could mean a change in direction. For years the focus has been on reducing “compliance costs” and moving to more automated systems. HMRC is developing a real time information system for assessing PAYE and this is being taken even further in the welfare system with the introduction of the Universal Credit. The goal has been to reduce engagement with taxpayers. Changing tack and increasing engagement may be the right thing to do – but this will have implications for tax administration.
Given technological changes it may be possible that the administrative implications are overstated. Yet tax statements face another challenge – complexity. One consequence of the UK’s complex tax system is that the effect of taxes and spending on families’ incomes is often not straightforward. How should tax statements treat indirect taxes like VAT and tobacco and alcohol excises? How should these statements treat variations in the consumption of public services (like the NHS)? And what about payments to the EU, employer’s National Insurance payments or company tax?
Tax statements do not need to answer all of these questions and, indeed, many problems could be solved by thinking carefully about the way in which data are provided (e.g., through letters or web based applications). A simple tax statement could make a contribution to debate and encourage people to seek out the answer to any further questions. This could change behaviour. At the very least this could encourage demand for tools and support to help taxpayers understand the tax system. This would not only change the role of HMRC, but help encourage HMRC, employers and other actors (like accounting and software companies) to work more closely together.
Reform roundtable seminar introduced by Dr Adam Posen, member of the Bank of England’s Monetary Policy Committee, on Thursday 29 March.
By Lauren Thorpe
Long-time students of central banks are often surprised at the degree of interest, and strength of feeling, that this topic currently generates. But this should be no surprise. Since the Bank of England started its Quantitative Easing (QE) programme in March 2009, it has pumped £325 billion into the UK economy. Any intervention on this scale will have major economic effects.
To provide an insight into thinking on QE and its likely economic effects, Reform held a round table seminar on Thursday 30 March with Dr Adam Posen, member of the Bank of England’s Monetary Policy Committee. This event was held under the Chatham House Rule. Some of the key points raised included:
- 1. Impact on pensions of QE. The National Association of Pension Funds (NAPF) recently published an estimate that the latest £50 billion asset purchase added £45 billion to the deficit of UK companies’ final salary pension schemes. The challenge is to assess whether any gain to the economy from QE exceeds these losses to pensions (there are no easy answers to this). To understand the full implications of QE it is also important to consider the counter-factual. What would the UK economy (and thus pensions) look like if QE had not have taken place?
- 2. Regulatory impact on pensions. There was concern that the effects of QE on pensions may have been increased by a lack of response from the regulator. Pension schemes report receiving inconsistent messages from the authorities, with pressure to transfer their investments into riskier assets while at the same time being encouraged to de-risk. Finding the right approach to regulation will become more important when the Bank of England needs to unwind its position and return gilts to the market.
- 3. Role of bank lending. An asset purchase programme should increase the amount of money in the economy and encourage bank lending. Yet there is a concern that banks have used much of the money to shore up their own balance sheets, rather than injecting cash into the real economy. This highlights two issues. First, is credit allocation by UK banks good enough? One view is that institutions in the US do a better job of this than our capital markets, given the larger reliance on bank lending in the UK and lower levels of competition in the sector. Second, QE should cause an increase in asset prices by allowing corporates to raise debt more cheaply, in turn generating wealth creation as consumption increases. While this has happened, evidence suggests that the impact is much smaller in the UK than in the US.
- 4. Circumventing the banking system. It has been suggested that the Bank of England could issue money closer to the market, by-passing the banks. In the US this can happen more readily given the existence of government backed organisations such as Fannie Mae and Freddie Mac. Yet there are two challenges to going in this direction. The first is scale – to match the tranches of QE already completed the Bank of England would need to buy a significant majority of the UK corporate bond market. The second is political. It would require “picking winners” which has well-known challenges.
These discussions aside, there is also a wider concern over the potential impact of QE on expectations. Will it increase moral hazard in markets? If QE is successful, are we likely to behave differently in the knowledge that the Bank of England can prop up the economy in this way? It is perhaps these dimensions of QE that will have the longest long-term effect.
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