The European Union: A Benefit or a Hindrance?

The European Union: A Benefit or a Hindrance?
Anne E Thompson


      In society, people have different economic roles. Some work for the government (nurses, teachers) and provide a service. Some work in the private sector (this just means ‘not government worker’ – sounds more complicated than it needs to!) In the private sector, some people provide a service (coffee shop worker, plumber) and some increase the stock of assets of the community. In other words, some people add something (farmer grows grain, factory makes cars.)

If we look at that last group, they increase the stock of assets in various ways. Some reap from nature (miners, farmers). Some create/make things (factory workers, writers of computer software). Some bring in wealth from other countries (tourist industry). Lets call these three groups “the core industries”. Remember, they are adding to what a country has.

In the long term, the prosperity of a country depends on these core industries. The people who provide services are important ( I am particularly fond of Costa coffee) but they just move money in circles. It is the core industries who actually add to what a country owns.

We have just had a general election. The politicians spent a lot of time discussing how they planned to move money around, to spread the wealth between rich people and poorer people. There was very little said about actually helping those core industries (the industries who actually add to how much is owned.)

Now, I am really enjoying watching Bear Gryll’s series The Island. I sit and shout at my television, giving them all lots of advice. The two groups spend a lot of time discussing who spends too long sunbathing, how much water they can all drink every day. However, none of them will survive unless someone actually collects the water or finds some food. In other words, they need some core industry.

We live today in a globally connected world. Within that world, the UK needs some core industries, something that it is really good at. We do not, compared to places like Australia, have great mining resources. We do not manufacture as well as the Germans. Our computer industry is not as advanced as the US. We do not farm on the scale of Brazil.

So what does the UK have? We are the world’s trusted market place. We have a sensible legal system, a stable government, a city that is geared up to helping the world do business. And we are good at it. The Chinese, the Russians, the Indians, they all trust the UK. This is the place where they trust they will be treated fairly, they want to conduct their business here. English has become the international language of business.

Now, if you talk to a German, they know that keeping Volkswagon, Mercedes, BMW, Porsche, Audi strong is important. They know that these are their core industries. If they go down, their economy will be in trouble. In the UK, most people do not seem to realise that our lawyers, insurers, bankers, traders, accountants (the people who operate that global market place) are our best core industry. The money they take from the rest of the world ripples down to the rest of us.

If we want to remain as the world’s market place (and remember, we don’t really have anything else that’s as good at increasing our country’s wealth) then we need to stay connected to the rest of world. We need as few barriers as possible.

In the last twenty years, the European Union has been a huge part of that market place for the UK. People from around the world use the UK as a gateway to trade with Europe.

It is clear, even to me, that the European Union is far from perfect. I think they have some silly laws and we have a problem with immigration. However, we need to be wise. These may be things we have to endure in order to protect our core industry. Leaving the European Union would severely damage our status as the world’s market place. The knock on effect of that would affect all of us.

If we think again of Bear Grylls, someone has to kill the pigs.

The Government Deficit

The Government Deficit


     We often hear politicians talk about “the deficit”. What is it? Why do they seem so keen to blame it on other people and to talk about reducing it? Does it actually matter? I want to explain it very simply to begin with, so here is a story (bear with me, it does have a point.):

Our story is set in Toytown, home to Noddy and Big Ears. Once upon a time, Noddy was put in charge of all of Toytown’s money. Every year he was given fifty gold coins and he could decide how he spent it. This worried Big Ears, could Noddy be sensible? He gave him a lecture about behaving responsibly, not having wild parties with the Barbie dolls when he needed the money to run the Toytown school and to pay the Toymaker to repair the broken toys and to make new ones. They all needed some new doll houses and some faster toy cars. Noddy nodded his head wildly in agreement, he was terribly excited.
All the gold was put into the money pot at the beginning of the year and every time Noddy needed to pay the Toymaker, or to build a new road, he took some out. For a while, all went smoothly. Then one day, Noddy had an idea. The summer was very hot and he wanted to build a swimming pool. All the toys could swim and enjoy the pool, it would be a place for toys to meet and chat and, best of all, he could invite all the Barbie dolls. But a swimming pool would use up all the money from the money pot and there would be nothing left to pay the Toymaker. He went to see Big Ears.
Big Ears listened to Noddy’s plan and thought about it. He agreed that all of Toytown would enjoy a swimming pool, it was not a bad idea. But they must continue to pay the Toymaker each year. He told Noddy that he could borrow the money to build the swimming pool. So, Noddy went to the Toytown bank. He explained that he wanted to build a swimming pool and needed the bank to give him some money. He would pay back the loan, giving the bank eight golden coins every year. The golden coins would come from the money pot. It would mean that for the next twenty years they would not be able to pay the Toymaker so much money, but all the toys would enjoy the pool, so they would not mind too much.
Noddy built the swimming pool and everyone was happy. For the next twenty years the toys had fewer new houses and fast cars but they did not mind. Everyone enjoyed swimming and watching the Barbie dolls. They all lived happily ever after.

This shows how borrowing arises. It is when a government has a deficit one year by spending more than it receives. If it spends the money on something everyone needs in the long term, no one minds that it means a bit less money for other things for a few years.
Now, our government does not have a pot of golden coins. It receives money through tax (boo, hiss, we all hate taxes.) That income goes up and down depending on the economy. When the economy is going well, there is more money and therefore more tax, so the government has more income. When there is a dip in the economy, people earn less money and pay less tax and so the government receives less income. Now, although their income goes up and down, we do not want everything they spend money on to reflect that. We do not want them to open a new school one year, when the economy is going well, then close it the following year when there is a dip, then reopen it the next year when things improve again. We like stability. This is another reason why governments might borrow money. The economy might be bad for a while but they know it is likely to improve, so they borrow money to keep things going.
We therefore work on the principle that government borrowing is allowed. A government can borrow money to spend now and they pay it back later. The problem is that governments are made up of people and people are not always wise. Politicians like to be popular. They therefore like to promise people lots of nice stuff. Nice stuff makes people happy. Happy people vote for politicians. If the government does not have the money to pay for nice stuff, they promise it anyway, figuring that the future generation can pay back the debt in about twenty years (when they are too old to be in government, so who cares?) This is how borrowing grows. And grows. And grows.
Where does the borrowed money come from? It is borrowed from institutions (banks) and individuals (for example National Savings Bonds) and from selling Government Bonds.
This is all a bit boring, so let’s have another story. This one is a true story.

Our story begins years and years ago, when Egypt was run by Pharaohs. One night, when most of the world was asleep, Pharaoh stood next to the river Nile. He watched the black water lapping against the bank and listened to the frogs chirrup peacefully. Suddenly, the water began to swirl. Pharaoh watched carefully, was a crocodile about to emerge? He watched the water part as a nose appeared. It was a pink nose.
     Feeling confused, Pharaoh leaned closer. The water was bubbling and swirling and the nose began to be joined by others. There were seven and they all began to emerge from the water. First there were nostrils, huffing and puffing droplets of water, then long furry faces with long lashed eyes. Then strong necks and heavy shoulders, then backs and tails and legs. They were cows! With much splashing and mooing, the cows fought their way to the bank. When their hooves were safely on dry land, calm descended and they began to graze, nosing amongst the reeds for food. Pharaoh watched in amazement. The cows were fat, with great pink udders bursting with milk. Their damp coats shone in the moonlight, their stocky legs bearing the weight of wide flanks as they wandered along the river bank.
      Then the water began to swirl once more, to bubble and boil. Seven more noses appeared, followed by snouts and eyes and bodies. Pharaoh watched as seven new cows heaved themselves onto land. But these cows were not lush and fat and brimming with health. They climbed weakly from the river, emitting only the thinnest of moo. They were skinny beasts, with shrunken udders and sharp bones protruding from their flesh.
     The thin cows approached the fat cows. At first, pharaoh thought that they too were going to eat the lush grass that grew beside the river. But, in horror, he watched as they opened their mouths, showing great pointed teeth and they bit into the flesh of the fat cows. The night filled with screams and wails as the thin cows crunched through bone and flesh, lapping blood and chewing muscle. Pharaoh dropped, sickened to his knees. The thin cows had completely consumed the fat cows, yet they looked just as gaunt as before.
     With a great heaving sigh, Pharaoh awoke. It had been a dream, disturbing and vivid. He got up from his bed, drank some wine and emptied his bladder. Then, feeling tiredness seeping back he sank back into the comfortable warmth of his bed. His mind began to wander.
     This time he dreamed not of cows, but of wheat. He stood in a cornfield, feeling the golden sun warm his back and he saw that one stalk had seven ears of corn. They were plump and good. Then seven thin ears grew next to them, straggly and full of blight. The thin ears swallowed up the fat ears.
     When Pharaoh awoke, he was very uneasy. His dreams had been vivid and he was unable to forget them. What could they mean? He was Pharaoh, a powerful man, so he began to tell everyone he knew about the dreams, asking what they might mean.
Eventually, one of his servants told him about a man who he had met years ago, when serving time in prison. The man was called Joseph and he could interpret dreams. Pharaoh had Joseph hauled from prison and told him his dreams.
     Joseph said that God would tell him the meaning. He told Pharaoh that both dreams had the same meaning. There would be seven good years, when the harvest would flourish and everyone would have plenty of food. This would be followed by seven bad years, when there would be a famine on the whole land. He said that God had sent the dreams, so that Pharaoh could appoint a wise man to organise the food. During the good years, they could put some of the extra food into storage, so that during the famine they had a supply of food to survive on. Pharaoh was very glad to know the meaning of his strange dreams, and being a wise leader, he appointed Joseph to be in charge of all the food.
     And that is the end of the story. (Actually, it isn’t – you can read more in Genesis 41!)

Let’s look at another true story. From 2002 to 2007, the British economy was doing well. Remember, this means more tax (income for the government.) So, were they wise like Pharaoh? Did they pay off some of their debt? Er, no. Actually, they increased the borrowing by having a deficit. They still spent more than they were earning.
Then, in 2008 there was a financial crisis. They had to borrow even more because they now were receiving less in tax plus they had to bail out some banks. Oh dear, sad story.

Now, what happens if this continues? “Does it matter?” I hear you ask, “What happens if a government goes bust?” Well, we can look at countries where exactly that has happened to find out the answer. Greece is one example. Other countries stepped in to help. They decided that some of the debt could be ignored and never paid back (so institutions and individuals who were owed money would never be paid back.) They also loaned them some money (from the International Monetary Fund.) They gave the loan in chunks, with lots of conditions, refusing to pay the next installment if Greece did not conform. They set tough conditions on how Greece was to be run.
Now, because Greece was part of the European community, it was saved from the worst consequences of going bust. If we look at Russia and Brazil, we can see how awful life could become. One of the first things to change is the exchange rate (how much your currency is worth compared to other countries currencies.) This makes all imported goods very expensive. Too expensive to buy. So, if you were Russian, you could only afford Russian cars, Russian petrol, even (horrors) Russian chocolate. Anything that is imported becomes way too expensive to buy. This would not be good for Britain….

At the moment, all politicians are discussing “deficit reduction”. It should be noted that what they mean is that at some point in the future, they will stop spending more than they earn. No one is suggesting that they should only spend what they earn now. The borrowing continues to grow……..


More articles at:

The New Tax……

101 Tax (Yuk)


       Here is a first very simple guide to tax in the UK. Due to the proximity of the next election and the possibility of a new mansion tax, I will explain what that might mean.
However, please note that I am definitely NOT promoting any particular party. Tax is just one issue amongst many.

     At the moment, there are three main types of tax. This will possibly increase to four types if Labour win the election. No one enjoys paying tax but probably it is worth understanding the different types so you can have a view about which are essential and which are unfair.

Tax on Earnings
This is tax on anything that you earn, including your salary, capital gains (if you sell something and it makes a profit), interest on your savings.
In some ways it seems a fair tax. The amount you pay goes up depending on how much you earn and most people pay it.
However, it can be unfair because some people manage to avoid it, to cheat the system (which means the rest of us have to pay more, because those people still use the roads, NHS, police, etc.) If you are an employee, then you have no options at all, the tax is removed at source – in other words, your employer kindly (!) removes it from your pay packet before you are given your salary. So, someone who works in a shop will be given their monthly pay minus the income tax. Someone who is self employed has more opportunity to be clever and cheat the system. The nice old builder who says, “Pay me cash, it’ll be cheaper for you,” is possibly not declaring those earnings and therefore not paying tax on them. Wealthy people with clever accountants can also avoid paying by hiding their investments in offshore accounts. The government doesn’t see them and so does not remove tax from the interest.

Inheritance Tax
This is a one-off tax on everything you own at the time you die.
Again, this seems reasonably fair. If Bob works hard his whole life and is a jolly clever chap, why shouldn’t he enjoy a nice amount of cash? However, we might not feel that Bob’s son also deserves to have an easy life just because his Dad was talented, so the government can take a slice of the wealth and use it for the rest of us.
However, it does feel rather a personal tax, especially if you are the person who was related to dear old Bob. Plus, if Bob worked hard and wants to leave a valuable painting to his son, is it fair that the son has to sell it just so he can pay the inheritance tax? Should people be allowed to keep heirlooms within their family or should they be sold to pay tax? There is also the point that it does not seem to actually generate much cash for society. It certainly used to be the case that the admin costs involved in collecting inheritance tax were pretty much equal to the amount of tax collected. So actually, no one benefits. It is interesting that UKIP plan to abolish this tax if they come to power.

Consumption Tax
This is a tax on everything that you buy. It includes VAT (currently 17½%) and stamp duty (tax when you buy a house.)
This seems quite a good tax. Everyone pays (apart from a few dodgy builders who tell you there is no VAT if you pay cash) and no one can cheat. It is easy to collect and everyone pays.
The unfairness comes in when you consider that everyone pays the same amount. So the poor old lady and Bob the millionaire, both pay the same amount of VAT when they buy a washing machine.

     So, there we have the three main types of tax that are currently in use. The are a pain to pay but are mostly fair. We all hate paying them but we all know that if we want roads, police, schools, health service, etc, the money has to come from somewhere. Now we come to the new tax that Labour are proposing:

Mansion Tax
This is a tax on an asset, something you already own. The proposal is that every year, if you own a house above a certain value, you will have to pay an extra tax on it. You will still pay the normal taxes when you buy it and when you sell it, this is a tax for just owning it.
Firstly, this will probably be popular. It will initially only affect very rich people (who we are all a bit jealous of) and most of us will only benefit from the extra revenue.

      However, is it fair? It only targets one type of asset:houses. You can be wealthy and own other things, like jewelry, paintings, land, even pensions (I’ll come back to that one) and you will not have to pay the tax. There are other assets which cannot possibly be taxed, like being beautiful or healthy or living in a fantastic location and unless they generate income, you will not be taxed on them.

      Let’s come back to pensions. (If you haven’t read my article on pensions, read it now.) Now, government workers all receive defined benefit pensions. This is a HUGE asset. When they start to receive the pension they will pay income tax, just like when someone sells their mansion they will pay tax, but in the meantime it is a highly valuable asset which they own. Just like a house. Strangely, no politicians are suggesting that anyone should be taxed just for owning this hugely valuable asset of a valuable pension. Even though some other people (those not on defined benefits pensions) have invested in their home, expecting that when they are older they will sell it and use the money as part of their pension.

     The new tax will cause house prices to be distorted (because who will want to buy a house that is just inside the amount where they have to start paying the tax? Remember, it is every year, not when the house is purchased.)
It is also unfair. No one is suggesting that other assets should be taxed, that if you own a valuable painting you should have to pay tax every year while you own it. Sometimes, things that are unfair are worth fighting against, even if we are not affected.

      Once the new tax has been introduced, it will not be difficult for governments to lower the threshold when they do the budget. At the moment, the house price they are suggesting is huge, way above what most of us could afford. However, what will stop that from creeping downwards? How long before most people in senior positions, our doctors, head teachers, managers, who have worked hard and invested their savings in a house, will start to lose those savings? It is called a ‘mansion tax’ but if someone lives in London it might actually be an ‘apartment’ tax.
We do not know if there will be a cap on the tax or if someone who lives for many years in these houses could eventually end up owing more than the house is actually worth.

       Personally, I am very unlikely to ever be able to afford a house that will be charged the mansion tax. However, I do not like the thought that a tax could be introduced which is blatantly unfair. It is just not very British……