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National Governments in Europe are Palpably Failing to Deal with the Crisis

Kitty Miv, Editor
01 May, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

A fall in average deficits in the Eurozone and the European Union in 2013 sounds like good news, but lift the hood and the picture is not so pretty. Total debt in the Eurozone (17 countries) increased to 92.6 percent of gross domestic product from 90.7 percent in 2012, ever further above the European Union's Maastricht limit of 60 percent. For the whole EU, debt increased from 85.2 percent of GDP to 87.1 percent. The fall in deficits is not to any significant extent the result of lower public spending: overall EU public spending fell only marginally to just less than 50 percent. The improvement in deficits merely testifies to a concomitant increase in tax revenues which ate into the gap between incomings and outgoings.

At a time when politicians across Europe are making great play of an oncoming revival, these figures are scary indeed, and are matched by figures for unemployment, which show EU jobless down barely perceptibly from 12 percent to 11.9 percent in the last 12 months.

Such marginal falls in key economic indicators are on the level of rounding errors, while the significant increase in tax revenues of nearly one percent has got more to do with increased efforts on the part of Finance Ministers to pull in extra revenue with new taxes and improved compliance than to the consequences of any overall economic advance.

What is to be done?

National governments in Europe are palpably failing to deal with the crisis, with possibly the partial exception of the UK, although its 5.4 percent deficit and increasing public debt are hardly the stuff of miracles. Otherwise, the only countries in which real change is taking place are those where the feared Troika is imposing harsh measures, being primarily Greece and Cyprus, with Ireland and Portugal further on into their much milder purgatorial regimes, which may or may not have done enough to bring about any permanent improvement to their overall fiscal landscapes.

You can argue over whether the creation of the euro has been to blame for the current dire situation, or whether the errant countries brought on their own nemeses by trying to save their banks, or whether it has been a straightforward demonstration of populism by insouciant politicians, but it seems inescapable that democratic government as it has been practised lately in Europe has failed its populations. Now that the damage has been done, people are simply not going to vote for their own impoverishment, even if that is in reality the only path left to them in a situation of overwhelming indebtedness. A non-democratic solution is required, and the Troika, as a benevolent despot, fits the role. It may or may not be successful in saving its patients, but one has to accept that its existence with such Draconian powers is a denial of democracy.

No-one dares to face this new paradigm squarely. There is a comfortable belief that it will all blow over, and we will soon be back to the days of surpluses, growth, wine and roses. Well it ain't so. I don't suppose that there will be a return to fascism, as happened in the 1920s and 1930s, the last time that the status quo broke down irretrievably, only because the population of Europe, including its central bankers, economists and administrators is now far better educated and considerably less economically illiterate than was the case 100 years ago. But as to what will replace the broken model of statist bread and circuses, I have no guesses. Long-term, genteel decline seems the least horrible of the possibilities.

The IRS, which like most tax authorities is subject to a regime of democratic accountability only indirectly, has not had a good week, after it was accused by the Treasury Inspector General for Tax Administration of paying bonuses to tax-deliquent employees, and told by the United States Government Accountability Office that it needs to sharpen up still further even after having had to deal with a series of past budget cuts. The GAO also criticized the IRS for failing to audit a sufficient number of large partnerships, a relatively new phenomenon in the investment sphere. Nobody much loves tax collectors, but you have to have a degree of sympathy with the IRS, which has become a victim of internecine political rivalry on the Hill, as sequestration and a series of unimplemented budgets have left it with yesterday's level of resources to cope with today's level of demands. Obamacare, right or wrong as a policy initiative, and who would be brave enough to say, may be the straw that breaks the camel's back.

Mind you, the IRS is in clover compared to the tax collection authority in Europe's proto-state, the European Union, which has no direct power to collect tax, and has to rely on percentage scrapings from Value Added Tax receipts and customs duties, for which it is beholden to national administrations, in addition to direct payments from member states based on a proportion of national income. Needless to say, national governments jealously guard their own income flows, and have always tried to prevent the Brussels bureaucracy from gaining any direct control over taxation. As part of its ambitions towards statehood for the EU, the European Parliament would of course like to change this system towards one in which the Union has direct tax-collecting power, and this week it was busy forwarding such an agenda, as it rolls towards the end of its term. For a while the Financial Transactions Tax was the great white hope of the EU's tax centralizers, although they were deluding themselves if they believed that the countries collecting such a tax would willingly pass any of it over to the centre. Now that the FTT itself is under a cloud, they are left without any clear road forward. Hence the Parliament's futile, last ditch attempt to lay down a marker for the future.

The UK's tax collection agency, HMRC, also has its fair share of travails, and is under constant attack from its parliamentary minders for real or imagined sins of commission and omission, but it can at least point to a rising trend in overall tax receipts. This week it will not be happy to read that major betting firm William Hill will be closing more of its UK network due to a proposed increase in Machine Games Duty from next year. The Treasury's figures show that revenues from betting and gaming have risen from GBP1bn in 1990 to GBP2bn in 2013; but that is just about in line with the GDP deflator (i.e. revenue has been static), in addition to which more than all of the increased revenue is due to new taxes, particularly the lottery duty, which didn't exist at all in 1990. So the apparent success actually masks a disaster, although HMRC is arguably not to blame for the wholesale shift of classic betting and gaming to offshore and the Internet. It will be interesting to see whether the Government's proposed 15 percent "place of consumption" gaming duty, in place from the end of this year, will make any difference. I'm betting not!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 102nd) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at neutral, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

European Union a bit less bust

United Kingdom bets away

And Kitty's Execrations:

United States generous to a T




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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