The real story from the Panama Papers: tax havens are already imploding

Somerset Maugham once famously described Monaco as “a sunny place for shady people”. But the truth is that Monaco, along with most of the old, traditional tax havens, is no longer quite as shady. If you really want to hide money, no questions asked, the likelihood these days is you’ll end up somewhere like Panama.

The explanation tells you much about the state of the global tax havens business, a business which is under greater threat than ever before. To understand why, have a look at the enormous cache of documents leaked to the Sueddeutsche Zeitung (and analysed by members of the ICIJ) from Panamanian firm Mossack Fonseca.

For me, the most interesting nugget so far isn’t anything about any of the politicians and oligarchs concerned. It isn’t the proximity of Russian president Vladimir Putin to millions – possibly billions – of mysterious dollars. Nor is it the complexity of the companies these wealthy individuals use to hide their money, or the lengths to which they will go to scurry it away in different countries.

For the fact is that while it is truly fascinating to get this behind-the-scenes glimpse of how this shady branch of the offshore world works, the truth is we knew pretty much all of the above already.

The interesting story is the one told by this chart:

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Mossack Fonseca has been dramatically shutting down companies over the past five or six years. Remember that if you want to hide money away you will usually have to set up a shell company in which to put it. At its peak in 2005, MF was setting up 12,287 companies a year and deactivating 6,339. Last year it set up just 4,341 and deactivated 8,864. Since 2009 the number of companies being deactivated has dramatically outpaced the number being created.

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This is only one piece of evidence for a much broader phenomenon: the sharp, dramatic decline in the use of tax havens for shady purposes.

While we’re at it, there’s a real danger here of tarring everyone with the wrong brush. There are plenty of legitimate uses for offshore jurisdictions, both for individuals and for businesses. You might be a company with intellectual property which is really international and should not be rooted in any specific country, you could be a worker who gets their salary in one country and mostly lives in another, you could be worried about the financial stability, or the threat of a government coup, in the country you’re working, and so want to keep the money elsewhere. Though the offshore world is used by people avoiding and evading tax, and sometimes hiding money gotten through ill-gotten gains, that is not its purpose.

But the key point is that either way, there have been a whole range of measures introduced over the past five years or so which have, gradually, clamped down on tax havens, which help explain the decline in those charts. There are measures being pushed through the G20, there are rules being imposed by the OECD and, most of all (since in international treaties nothing much matters unless the US is involved), there is the FATCA regime imposed by Washington. Through a whole variety of levers – largely clamping down on secrecy over ownership and over sources of money – the ability of tax havens to shelter money altogether from tax authorities has been dramatically diminished.

Most offshore regimes have been pretty diligent in imposing these new rules, including Switzerland, the Channel Islands and even, to a lesser extent, British overseas territories such as the British Virgin Islands. The upshot is that it has become far, far more difficult to hide away money. Witness the FIFA scandal, witness the Petrobras scandal in Brazil, witness the Malaysian development fund scandal. The common factor is that money which might hitherto have remained hidden in Swiss bank accounts has now been upturned and exposed. Anyone wanting hide money away offshore will still, at some point, want to get their hands on that money, and that normally means channelling it back through UK or US banks, and here, too, banks have been forced to impose yet more checks on who owns the money and the companies.

However, when you talk to people in the offshore industry, they will tell you that there are still one or two countries which are resistant, which are doing everything they can not to impose these regulations. At the top of that list is Panama – though the interesting thing to note from today’s leaks is that even there, activity is starting to dry up.

Steeling ourselves for trouble

Here’s a nugget that goes at least some of the way towards explaining the current woes of the British steel industry: in the past two years alone China has produced more steel than the total cumulative output of the UK since the industrial revolution.

Or consider this: at today’s rate of production, it would take 68 years for Britain to generate the steel China churns out of its mills in a single year.

Take a moment to digest these facts, because you simply cannot understand the pressures faced by the British, or for that matter every country’s steel industry without considering China.

Steel is, of course the critical ingredient in modern manufacturing and construction. If you are making something – anything – the chances you will need steel to make it with, whether that’s a car, a rail line, a can of food or a skyscraper.

And to start with, China was a positive story for Britain’s steel industry. As it expanded over recent decades it initially didn’t produce enough steel of its own to satisfy its seemingly limitless domestic appetite for steel – from Chinese construction to Chinese cities desperate to expand, to Chinese manufacturers pumping out goods around the world.  It became an important destination for UK exports.

However, gradually the country has built its own steel industry – and what an industry. Since 1980 China has gone from producing 5% of the world’s steel to making more than half of it – just over 800m tonnes.

Now, with Chinese demand tailing off in the face of their own economic slowdown, that steel needs somewhere to go, and where it’s going is everywhere. The Chinese are accused of “dumping” that excess steel on global markets, selling it for less than it costs to make. As a result, the steel price has collapsed in recent years, wiping out margins for UK steel manufacturers and contributing to the industry’s recent problems. Making matters worse is the fact that thanks to EU emission rules, UK steelmakers face what they describe as punitive energy costs.

For an industry which cannot compete on price (even if some of the UK’s steel products are of a higher quality than many other producers) the inevitable result is closure.

Based on the above you might feel rather depressed about the industry’s prospects. However, there are at least some chinks of light (albeit rather faint). The most important is that China is starting to cut back its production. Last year Chinese steel output fell for the first time in a quarter of a century. Indeed, hopes that this reversal could continue have pushed the steel price higher in recent months, helping to repair margins. The EU is also pushing ahead with anti-dumping measures, increasing tariffs on steel imports from China although, say critics, nowhere near enough to offset the impact of China’s influx.

So there is still hope for UK steel. Over the past half century the industry has become a kind of economic football, nationalised by Labour in 1949, privatised by the Conservatives in 1952, nationalised by Labour in 1967, privatised by the Conservatives in 1987. So what happens next is anyone’s guess – though one would presume the Tories would be reluctant to do what Labour have done repeatedly and plough on with a nationalisation, temporary or otherwise. But it will be a tough decision.

A few decades ago the world’s steel market was comfortably dominated by one giant which produced about double what the US, the next biggest contender, did. That giant was the Soviet Union; after the Berlin Wall fell, so did its steel output, leaving more room for everyone else to compete. Remember that the economic backdrop is unpredictable – nowhere more so than for steel.

Bank of England warns on Brexit/says Brexit manageable [delete as applicable]


There was a wee flurry of excitement in Westminster shortly after 11am this morning when the Bank of England released the statement from its latest Financial Policy Committee. Some people campaigning for the Remain camp saw the following passage and declared that it constituted a new warning about the risks of Brexit:


I confess that when I first read the paragraph I assumed that this was pretty much in line with what Mark Carney said at the Treasury Select Committee earlier this month: that Brexit was a big risk for the financial system, and could push up funding costs.

Indeed, at the underground briefing I attended alongside a bunch of other financial reporters this morning, we peppered the Bank experts with questions about Brexit and were given the firm impression that their position hadn’t changed at all.

So I re-read the statement. It is certainly the case that, in that paragraph above, the Bank is a little more explicit and succinct about the impact of Brexit. At the Treasury Select Committee, Carney talked about “challenges in bank funding and an adjustment in credit spreads for UK‑focused corporates”. This time the Bank said Brexit would “affect the cost and availability of financing for a broad range of UK borrowers”. Is that more or less the same thing in different language? Perhaps, perhaps not.

Either way, there was also another interesting Brexit-related nugget in the Bank’s statement (though really the bigger story was about buy-to-let) a couple of paragraphs lower down:


To translate: the Bank has looked at its 2014 stress tests to give it a kind of analogy to the kinds of things that could happen in the event of Brexit. And found that the financial system, while stressed, should survive just fine. In fact, it found it would survive that even more comfortably than it thought when it first carried out the test.

Now, one should note the provisos: the 2014 stress tests were not designed to simulate Brexit, even if there are some similarities. And the survival of the financial system is not the same thing as saying everyone would be OK.

Nonetheless, it is a reminder to those who seize on statements from the Bank of England or other organisations to promote project fear: beware the small print. It’s clear that the Bank believes Brexit would cause deep disturbances in the UK economy. However, it’s also clear that it believes those disturbances would not be totally crippling.


The unexpected victims of the coming buy-to-let crunch

For me, the most striking thing I learnt from the Bank of England today wasn’t that the buy-to-let market is looking a little bubbly. I wasn’t surprised that BTL accounts for such a large and growing chunk of mortgage lending, as per this chart:


Nor was it particularly unexpected to learn that the market is now operating at close to its pre-crisis peak levels:


Or that it is expected, based on the current plans of the lenders in the market, to exceed those levels comfortably in the coming years:


No: for me, there were two surprising aspects from today’s Bank of England report on the buy-to-let sector. The first is that so little is known about it in the first place: in order to get to grips with what’s going on in buy-to-let, the Bank had to rely on Council of Mortgage Lenders data and do its own survey work to find out lenders’ practices. Among their findings was this chart, showing that five of the 20 lenders it surveyed did not test how borrowers would cope if interest rates hit 5.5% (a pretty standard test in the world of mortgages).


The second surprise was the Bank’s finding that two-thirds of buy-to-let lenders are lower rate taxpayers, in other words they earn less than £42k a year. In other words, if you were assuming that the typical BTL landlord was a relatively wealthy investor with a bit of extra cash to splash, you’re wrong.

This raises the question: who will be hardest hit if banks start to clamp down on bank lending, making buy to let mortgages that bit more expensive. The answer is not better-off investors, who have more capacity to pay off a chunk of their loans, making them less expensive, but less well-off lower-rate taxpayers, who have less equity and capital to absorb the blow.

In other words, the consequence of what is widely seen as a middle-class tax could well be most painful for the least well off.

How to fill the PIP hole?

Now what?

The Government has signalled an embarrassing (not to mention expensive) u-turn, reversing its cuts to Personal Independence Payments – the disability benefit scheme. Leaving aside the enormous political questions for the time being, how on earth will it afford it?

We have been told today that we won’t get the answer from the Chancellor until his Autumn Statement in the winter, but we can do a bit of back of an envelope arithmetic to work out his options.

The PIP cuts were due to save the Government a projected £1.3bn by 2019/20 (£4.3bn over the course of the next five years, but when you’re looking at fiscal projections it generally makes most sense to focus on a given year).


So the question is what could the Chancellor do to make up the £1.3bn hole in his books? A quick look at the scorecard in in the latest Budget (page 87 onwards in this pdf of the Red Book)

  1. Cut DEL further

Option one, the easiest to plug into your books, if not to impose, would be to impose further cuts on government departments. They are already due to take a £3.5bn cut in 2019/20. Perhaps you could increase that to £4.8bn. Raises: £1.3bn


Pros: easy to plug into the scorecard, most voters still believe government is too fat.

Cons: Would be difficult to impose earlier than 2019/20 and the PIP cuts are due to kick in sooner, so wouldn’t entirely fill the hole.

  1. Cancel some of the Budget 2016 giveaways

After all, the Budget contained some generous gifts for (richer) taxpayers. Reversing some of them could not just fill the fiscal hole but might underline the Government’s one nation credentials. For instance:

a) Ditch the increases in small business rates relief. Raises: £1.42bn

After all, while these may look like tax breaks for small businesses, in reality most of the benefits accrue to the landowners who own the shops and premises on which business rates are paid.

b) Can the CGT cut from 28% to 20% (cost: £670m) and the increase in the higher rate tax threshold to £45k (cost: £565m). Total raised: £1.24bnimg_0524


These two tax cuts were seen as primarily benefiting wealthier taxpayers. Reversing them would at least bespeak an attempt to tackle inequality

c) Cancel the freeze in fuel duty (cost: £445m) and raise duty by a further 3% (raises: £795m). Total raised: £1.24bn


Given petrol prices are still so low, and that the cost of driving is lower than it has been for two decades, and that most environmental groups think fuel duty should be higher, this move might be less painful than it seems at first. Then again, fellow Tory MPs would be livid, which is inconvenient ahead of the referendum. But less so in the autumn when the referendum has been and gone.

  1. Do nothing

This might seem like the least likely option, but might also be the smartest. For the fact is that even if the Chancellor is still determined to meet his silly surplus rule (the one that stipulates he has to generate more taxes than he spends by 2019/20), he still has £10.4bn of leeway. That, after all, is the size of the surplus he’s planning to bring in that year. So subtracting the savings from the PIP cuts from that would still leave Mr Osborne with a £9.1bn surplus, which is quite enough to meet the rule. Anyway, most economists would argue that the rule shouldn’t be guiding policy anyway.

Of course, Mr Osborne would face breaking his other rule, the welfare cap, and his debt rule (which says the national debt needs to fall every year), but he’s already broken them already, so who cares if he continues to break them for a few more years. And while he would also probably fail to make the much-vaunted £12bn of welfare cuts promised at the election, this promise looks increasingly like less of a vote-winner and more of a liability.

PS On the broader question of fairness, and whether the government’s Budgets have had enough of it, this blog from the IFS is worth reading. And on the basis that they haven’t yet made their charts interactive, here is the distributional impact of the coalition government’s policies:

And here is the impact of the current and planned policies imposed by the majority Conservative government: