G8: an unexpected mini-breakthrough on tax
If you dig deep enough into the G8 communiqué (I accept you might not want to do that), there are one or two surprises when it comes to the question of tax.
We knew this summit was going to be largely focused on tax evasion – that there would be provisions agreed by the eight member governments to clamp down on companies that use tax havens. We knew there would be lots of words about sharing information on who is and isn’t paying taxes.
What we didn’t expect was some genuine progress on the battle against tax avoidance – in other words those who drastically reduce the amount of tax they pay while remaining within the law. This is a more high-profile issue, given it is tax avoidance and profit-shifting which companies like Google and Starbucks have been accused of in recent months, and is usually the territory of the G20 and OECD.
However, somewhere at the bottom of the first page of the communiqué was the following sentence: “We will work to create a common template for multinationals to report to tax authorities where they make their profits and pay their taxes across the world.”
What this rather bland sentence promises is that in future companies like Google may have to provide more detail on where their profits are generated (through this “template” which the Treasury has been working on) – then, in turn, it will become harder for them (supposedly) to shift their profits to where they are really generated. The problem for forensic accountants and HM Revenue & Customs is that international companies’ accounts are opaque, declaring where sales (“turnover”) is generated, but not where actual profits are made. But it is profits, and not turnover, that are subject to corporation tax.
Insiders say they are confident that this extra pledge will increase the pressure on the OECD and the G20 (whose summit happens in September in St Petersburg) to clamp down on profit shifting in the coming months.
However, the problems are numerous: for one thing the G8 has merely issued a pledge today – it is quite feasible that it will allow it to fall by the wayside in the coming years. For another, it is likely to be relatively easy for businesses to manipulate their accounts to disguise where profits are genuinely made. Finally, shedding some light on companies’ tax affairs may well cause them to change their behaviour, but there is no guarantee of that – and no teeth to this agreement.
Moreover, it transpires that neither Germany or Russia wanted to sign up to some of the G8 pledges on tax evasion. Other countries remain less enthusiastic about the avoidance/evasion clampdown. Others remain sceptical about the UK’s motives – earlier this year Austria’s finance minister Maria Fekter said she laughed when she first heard George Osborne was focusing on tax.
“Great Britain has many money laundering centres and tax havens in its immediate legal remit – the Channel Islands Gibraltar, the Cayman Islands, Virgin Islands.
“These are all hot spots for tax evasion and money laundering.”
However, for the time being, Mr Osborne and the Prime Minister can indeed claim to have made some progress. But the international tax system was built over a century or more; reforming it will take a long time.
read moreHow foreign banks exacerbated Britain’s financial crisis
Globalisation is a good thing, right? That’s the underlying message of most economics textbooks – indeed the centuries-old theory of comparative advantage has it that because international markets allow countries to specialise in what they are expert in, in turn all countries around the world can grow faster.
However, there is evidence that, when it comes to finance, globalised markets can make the booms bigger and the busts even more painful. Why? Well there are a variety of reasons, but one, illustrated quite vividly in a new piece of Bank of England research, is that when a crisis arrives, foreign banks often withdraw their lending from their overseas branches. Moreover (and I hadn’t really appreciated this until I saw the chart above) in the recent crisis, foreign bank branches in the UK (which account for about a third of banking system assets) also increased their lending significantly ahead of the bust.
As the Bank’s working paper says: “the typical foreign branch exhibited high procyclicality in its lending to the UK private sector during the crisis. The median branch had higher growth in domestic lending pre-crisis — to nearly all sectors — and a sharper contraction in growth during the crisis than both foreign subsidiaries and UK-owned banks.”
In short, foreign branches seem to have been more attracted to the volatile sectors which suffered the most during the crisis, and were then quicker to reallocate their money back to their home nation.
There are a few lessons – one is that this reinforces the suspicion that it is far easier for bank employees to make injudicious investment decisions in a country somewhere far away from the bank’s headquarters (consider the German banks who invested so much in sub-prime). Another (and this is the rejoinder to the globalisation-is-good maxim) is that foreign lending can be very capricious when there are global financial crises. This is partly because it is easier to cut jobs (and lending) overseas; it is partly because of various regulatory constraints that are slapped down during financial crises which encourage banks to relocate their capital back home.
It may also be a sign that some foreign banks (I’m thinking, quite feasibly those from the eurozone) had significantly weaker capital positions at the start of the crisis, and so were simply in a more vulnerable state when things started to deteriorate.
Either way, it helps explain why economies which were highly-reliant on finance for economic growth have suffered so much in the past five years.
Austerity in a picture
Striking chart from the IFS’s report today showing that the scale of austerity (in terms of cuts to spending on public services) is more prolonged and cumulatively greater during this period than ever before since World War Two. And note that there are likely to be further years of cuts after the most recent years that haven’t yet been penned in by the Government.
read moreThe financial nitroglycerine buried under the Bank of England
Monetary base in various countries/economic areas since onset of crisis. Source: Bank of England
For me, this remains one of the most important, and least appreciated, charts of the financial crisis.
It measures the so-called “monetary base” in these different economies: the amount of notes, coins and money kept in banks’ reserves at the central bank. In short this is the most potent and liquid kind of money there is – that is theoretically only a step away from being spent.
As you can see, the monetary base has increased in Britain by a factor of five since 2007. That’s unprecedented, and is a direct consequence of the £375bn in quantitative easing that has been carried out by the Bank of England. It underlines how enormous was the slug of money this involves (if, like me, you find it hard to get your head around the sheer scale of £375bn, check out this post).
To put it into perspective, the keystone of Japan’s much-lauded “radical” new economic policy is for the Bank of Japan to double the monetary base in the country. But a brief glance at the chart above shows that even that will still be dwarfed by what the Bank of England has done.*
There are three disturbing takeaways here: 1) that despite all this stimulus the UK economy is still more than 2% smaller than it was at the start of the crisis. What is responsible for the blockage? The banking system? The international economy, which still refuses to rebalance and suck in UK exports? 2) That despite this enormous, unprecedented expenditure by the central bank few out there in the real world appreciate the sheer scale of this policy, which has already had a distinctly perverse impact on wealth levels across the country.
Third and finally, the Bank of England is sitting on a bed of nitroglycerine. At some point there is a chance this money will indeed start to be spent, which could imply a big inflationary risk in the future. Plenty of food for thought for the incoming Bank of England Governor, Mark Carney.
* This applies to the pre-crisis period as well. Between 1997 and the early part of the crisis Japan increased its montary base by a factor of 1.7, meaning it still wouldn’t compete with the Bank of England’s moves.
read moreSun
Anyone expecting intense techno from the very beginning is likely to be disappointed. This one is disco from the word go, with three of my favourite ever 70s and 80s tracks alongside each other. Nile Rodgers first off, doing what he does best with his remix of Lost in Music. It’s the same guitar strums now at the top of the charts with Daft Punk’s Get Lucky. Then Idris Muhammad (he was first and foremost a jazz drummer, you know?) and Dennis Parker (first and foremost a porn actor) with his brilliant Like an Eagle.
After that (and via a great edit of Paul Simon) it gets a touch more modern. I tried out many of these songs at a recent set and, for the most part, they went down very well. Particularly a new track from Kolsch called Zig. I think it could stand a good chance of being the song of the summer. It certainly is for me anyway.
Full tracklist is below. Enjoy. Hope it’s not another six months until my next one.
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Tracklist:
Lost In Music (Special 1984 Nile Rodgers Remix) – Sister Sledge
Could Heaven Ever Be Like This (Leftside Wobble Edit) – Idris Muhammad
Like An Eagle (Todd Terje Mix) – Dennis Parker
You Can Call Me Al (Flight Facilities Edit) – Paul Simon
Zig – Kölsch
Lanzarote – Lindstrøm & Todd Terje
Feels Real (Extended Dance Version) – Shit Robot
Last Dance (Ewan Pearson Remix) – Fairmont
You (Finnebassen Remix) – Sascha Braemer
Hardbody – Scuba
Flutes (Sasha Remix) – Hot Chip
I See Lights (Karmon Remix) – Jimmy & Fred
Claire – Clarian & Guy Gerber
Voyeur – James Blake
Another Earth – Tale of Us
Compurhythm (Dixon 4/4 Treatment) – Ian Pooley
Muwekma – Marcus Worgull & Frank Wiedemann
Sun – Koreless
Hausch (Original Mix) – Andhim