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Taxpayers' money is spent on maintaining a vast army of bureaucrats

Kitty Miv, Editor
09 October, 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.

Lately, the European Union has been execrated on a regular basis by this column. Some may think this a little unfair, betraying a natural bias against a continent-sized super-state that has done more to stifle innovation and growth in Europe than to promote it, as it was supposed to do. But it's hard not to dislike this institution when you see just how much European taxpayers' money is spent on maintaining a vast army of bureaucrats in Brussels, Luxembourg and Strasbourg. The Commission claims that the EUR8.6bn budgeted for administration in 2015 represents good value for money, because it is only about 6 percent of the EU's overall budget of almost EUR146bn, which itself is only about 1 percent of the GDP of the EU. This may be true, but perhaps this figure could be even lower if Commission officials and MEPs weren't allowed to claim such lavish expenses for staff, travel costs and all manner of other things to make their working lives more comfortable; like the Commission's 42,000-bottle wine cellar, with its 2,000 bottles of spirits. Think you'll be needing to drown your sorrows Jean-Claude? With vast swathes of the EU facing the sobering reality of years of grinding austerity, no wonder euro-skeptic parties made such ground in the 2014 European elections. And as you might expect, those at the top are among the most profligate. Apparently, outgoing European Commission President Manual Barroso spent almost EUR650,000 on travel in 2012 (none of it his own money of course), which, curiously, was well over twice as much as the Commission's globe-trotting foreign affairs chief Baroness Ashton.

All of this brings me on to the matter of another potential waste of time and money: the Commission's state aid investigation into private tax rulings issued to companies in Ireland and Gibraltar. It seems that these investigations, which will take years to reach their final conclusions, are inspired as much by the OECD's BEPS work as a desire to maintain a competitive playing field in the EU by denying certain taxpayers a "selective advantage." Well, in my eyes, these investigations have the whiff of something "selective" about them also. If the Commission probed every tax ruling issued to companies by EU tax authorities, it wouldn't have time for anything else. So why pick these ones? Because the EU has to be seen to be doing something about BEPS, that's why, and perhaps, in the case of Gibraltar, because it is next to Spain.

Indeed, one country that has suffered particularly badly in post-crisis Europe is Spain. However, after swallowing some pretty bitter economic medicine, the Spanish economy appears at long last to be on the mend. About a quarter of the workforce are still without a job, but the unemployment rate is starting to fall in a meaningful way – in the second quarter of 2014 over 400,000 people left the ranks of the jobless, the highest since 2005 at the height of the country's property boom. Youth unemployment is still tragically high at over 50 percent, contributing to something of a brain drain of Spain's brightest and best, but there are signs that the rate is also beginning to fall, and Spain's economy is expected to grow by 1.5 percent this year, faster than France, Italy or Germany. There is a feeling that the Eurozone's fourth largest economy really is beginning to turn the corner, and much credit is due to Prime Minister Mariano Rajoy's Government for this, after unpopular but necessary economic reforms were implemented, such as in the labor market. Like most of the EU, public spending remains a problem, but at least the Government has created the platform for income taxes to be reduced, with both corporate and individual taxes to be cut in the 2015 Budget. There is a long way to go, but Spain appears to be on the right path.

If only Europe had oil in the sort of copious quantities found in the Middle East, perhaps it wouldn't have ended up in the economic mess it finds itself in. Then again, oil revenues are a finite gift that must be used wisely, and fiscal acumen isn't something you'd associate with Western Europe. We have to look to the United Arab Emirates, and more specifically Dubai, for a demonstration of how oil revenues can be used to power up an economy. It is actually a misconception that Dubai's current spending on infrastructure is being bank-rolled by oil revenues, because oil now only accounts for 2 percent of its GDP, whereas in the 1970s oil extraction accounted for about half of GDP. This is because Dubai's economy is now highly diversified, with industry, services and tourism all contributing to it in a substantial manner. And this has been achieved to a large extent by taxes that are among the lowest in the world. There is more or less a complete absence of taxes in Dubai's free zones, of which there are now over 20, and the Jebel Ali Free Zone, one of Dubai's oldest, now accounts for about one quarter of the entire economy. The free zones have also reported particularly strong growth in 2013 and 2014, including the Dubai International Financial Centre. One wonders what they think of all this at OECD HQ in Paris. So far, the UAE seems not to be on the OECD's radar, and Ireland, not nearly as low-taxed as Dubai, must be entitled to wonder why it has become the poster child for BEPS.

Another low-tax territory doing very well at the moment is Hong Kong, which has maintained its place at the top table of financial centers alongside New York and London. But as you might have noticed, not all is sweetness and light down on the streets of this Special Administrative Region of China at the moment. The problem is, while Hong Kong and China have a mutually beneficial economic relationship which China is more than happy to maintain under the "one country, two systems" model, the people of Hong Kong have very different ideas to Beijing about how they want to be governed. Since the handover of Hong Kong's sovereignty by the British to the Chinese in 1997, this has been largely swept under the carpet. But the "D" word was always going to be the elephant in the room for the Party. When democracy was promised to the Hong Kong people within 20 years of the handover, 2017 must have felt like a long way off. But now it is almost upon us, and there seems little desire by the authorities to give the people what they want – full democracy. There will be elections in 2017, but in reality this will represent not much more than a pretence of a democratic system, with voters choosing from a list of candidates approved by Beijing. Before the riots erupted, Chief Executive (himself selected by China) was considering ways of broadening the plate of candidates in a bid to appease pro-Democratic law makers who are bound to block the new electoral system in Hong Kong's legislature. But ultimately these candidates will still be assessed according to Beijing's criteria. In truth, the Chinese Government doesn't know how to deal with this situation. History tells us that civil disobedience on the mainland is ruthlessly suppressed. But sending the People's Liberation Army into the streets of Kowloon would be a PR disaster for China as it prepares to host the APEC Summit. President Xi Jinping's strategy appears at the moment to be based on the hope that the protestors get bored with standing around in the rain and eventually drift home. Of course, this is only going to be a temporary solution, and this issue will have to be dealt with one way or another eventually. China's next move could be a very important indeed for the future of Hong Kong.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 125th) 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 plus 1, 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:

Dubai diversifies

Spain bearing fruit

And Kitty's Execrations:

China undemocratic

European Union selective




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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