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Sprinkling Fairy Dust

Kitty Miv, Editor
26 March, 2015

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.

It's difficult to know what to make of George Osborne's sixth budget as the UK's Chancellor of the Exchequer (that's finance minister to the rest of the world). In the days leading up to the last budget of the current Parliament, Osborne promised that headline-grabbing gimmicks would be absent from his speech. But with the general election less than two months away, he would have been almost foolish not to have sprinkled the Budget with at least some fairy dust in the form of tax cuts for low- and middle-income workers and pensioners – winning over the substantial "gray vote" is one way to ensure electoral success. And sprinkle he did. The taxation of savings will be more or less abolished for ordinary savers, while another increase in the personal income tax allowance will ensure that most low-paid workers will be lifted out of income tax altogether. Pension rules will be further relaxed to give people more control over how they spend their retirement savings. By the time of the election, corporate tax will be 20 percent, further supporting the Chancellor's claim that the UK has the most business-friendly tax regime in the G7.

The fact that the UK is growing faster than most advanced economies – as Osborne never tires of telling us – has given him room for these and other tax giveaways and permitted him to announce that the Government's fiscal consolidation program will end a year earlier than planned in 2019/20. That'll be just before the next general election. (Coincidence? I don't think so.) The UK's relatively strong economy allowed Osborne to claim that the sun was coming out again for Britain's taxpayers. But is this position of economic strength merely superficial? Looking at the situation objectively, it's perhaps overegging the pudding somewhat to suggest that boom times are returning to Britain. With much of the eurozone crashing and burning, the UK probably looks like it's doing better than it actually is. Yes, the budget deficit has been halved from its peak of 10 percent during the banking crisis. But under the Government's original plans it should have been eliminated by now. He also didn't mention that, under his new fiscal plan, the squeeze on public spending will be greater in the next two years than at any time during the current Parliament. That Osborne kept schtum about this is unsurprising when there's an election to be fought. On balance, he probably deserves an encomium. However, the Chancellor's silence on other issues of quite fundamental importance to the UK economy spoke volumes.

Maybe the most worrying aspect as far as the UK is concerned is its chronic under-productivity, which the current Government seemingly has no answer for. UK productivity has been stagnant since the crisis, and now lags well behind the leading industrialized nations. As wage growth has virtually frozen, it is perhaps unsurprising that tax receipts have been relatively subdued, in spite of the UK's growing economy. What's more, the 2015 Budget was not all sweetness and light. There is plenty of devil in the detail: the ill-conceived diverted profits tax remains; and there will be a further erosion of taxpayer rights as the Government intensifies its crackdown on tax avoidance, including the presumption of guilt for those with undeclared offshore bank accounts. And the banks were up in arms after Osborne once again increased the bank levy. Not that they'll get a great deal of sympathy from voters. The measure is expected to raise around GBP900mn a year, which is probably the size of a large banking group's annual bonus pool. It's almost worth an encomium on its own.

The British Government's sense of economic security may be unfounded to a certain extent. But Italy would probably bend over backwards to swap its current predicament with the problems facing the UK. Earlier this month we saw further evidence of the high tax and administrative burden that continues to stifle business investment and growth, with a medium-sized company in Italy spending on average EUR7,500 a year to comply with Italy's bureaucratic tax code, according to the ImpresaLavoro research center. This gives Italy the dubious distinction of having the EU's most burdensome tax regime, and that's saying something.

However, it's not as if this is a surprise revelation: reports about the state of taxation in Italy are a regular feature in the news. What's worrying is the Government's apparent inability to do anything about it. Italy's economy continues to be weighed down by a large and inefficient state sector, and businesses tend to be over-regulated and over-taxed. A key difference between the UK and Italy is that the former has a fairly flexible labor market, which has been credited with a fall in unemployment since the end of the recession there. Italy's labor laws by comparison mean that hiring and firing personnel can be a time-consuming, expensive, and onerous business. Prime Minister Matteo Renzi has put the transformation of Italy's economy at the heart of his program, yet there are few signs of real progress. Last November, after the Chamber of Deputies approved the Government's 2015 Budget, Economy Minister Pier Carlo Padoan professed his conviction that the Bill "will allow Italy to begin a reversal in fortune, in terms of economic growth and employment." We must wait for him to be proved right, but I'm not that convinced. I read a quite startling statistic recently, that Italy's economy has effectively grown by only 4 percent since the single European currency was created 16 years ago. It suggests that Italy's problems are much deeper than Padoan would probably like to admit, and even harder to overcome.

There couldn't be much more of a contrast between uncompetitive Italy on the one hand, and uber-competitive Singapore on the other. In the World Bank's latest annual Doing Business ranking, which (unsurprisingly) ranks economies on their ease of doing business, Italy is in 56th place. Singapore is top. PwC's annual Paying Taxes Index, which measures how easy it is to pay taxes in 189 countries, puts Italy 141st, while Singapore flies high at 5th place. Singapore is also the second-freest economy in the world according to the Heritage Foundation. Italy is down in 80th place (just below Samoa and Madagascar) and is considered only "moderately free."

Regular readers will know that praise is heaped on low-tax jurisdictions like Singapore on a fairly regular basis. So it feels strange, given all this, to dish out an execration for the city-state this week. I suppose it's only for a minor offense, but that offense does set a precedent. In the 2015/16 Budget, Finance Minister Tharman Shanmugaratnam introduced a new top rate of personal income tax. At 22 percent, it is considerably lower than the top rates found in many developed countries, but one of the reasons why Singapore has been so successful is that investors are attracted by its low – and flat – taxes.

That the Government has said that it is determined to enforce this measure shows that it is worried about current fiscal trends. In last year's Budget, Tharman warned that with increased social and health care spending, the Government is forecasting a small budgetary deficit of SGD1.2bn (USD950m), or about 0.3 percent of gross domestic product (GDP), in 2014/15, after a surplus of 1.1 percent of GDP in 2013/14. Government spending is expected to rise by 8.3 percent, outstripping a 4.1 percent rise in revenue. He then disclosed that expenditure is likely to increase by 3 percent of GDP by 2030, due to infrastructure spending and social spending, especially in health care. Health care spending, on account of the ageing population, is expected to double from 2011 levels to SGD8bn by 2015, before reaching SGD12bn by 2020. It is remarkably reminiscent of Hong Kong, which is also facing upward pressure on taxation as a result of projected increases in public spending. The fiscal situation in the two places can hardly be described as dire, and both Singapore and Hong Kong have sensibly built up fiscal reserves. But it won't be surprising if we see more tax increases, albeit on a fairly small scale, in the future.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more 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 minus 2, 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.

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:

United Kingdom winning over the "gray vote"

And Kitty's Execrations:

Italy stifles investment and growth

Singapore raises personal income tax



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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