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action of a much more seismic magnitude is going to be required

Kitty Miv, Editor
01 March, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. 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.

The European Court of Auditors, which acts as the European Union's spending watchdog, has concluded following a review of technical assistance provided to the Greek Government that the program has produced "mixed results." Well I don't know about yours, but my socks certainly weren't blown off by this revelation, being pretty obvious even to the most casual observer.

Apparently, the major objectives of the task force were to improve public administration, improve the Greek tax system, and bring about a return to growth by fostering the country's business environment. I suppose you could say that some progress has been made on achieving these three goals. Tax revenues have been increasing, the budget deficit falling, and the economy will only have shrunk by 0.7 percent in 2015, according to recent estimates. But to turn the Greek economy around with mere technical assistance was always going to be a tough ask for the task force, particularly given that, as the Court of Auditors report relates, it was set up rather hastily and lacked a clear remit with defined objectives.

Indeed, as Lord Mervyn King, who was Governor of the Bank of England for 10 years until 2013, warns in a new book, extracts of which have been published by the UK's Daily Telegraph, action of a much more seismic magnitude is going to be required now to save Greece, and certain other vulnerable countries on the periphery of the Eurozone, from what looks like a never-ending cycle of bailouts and crushing austerity – and that is to allow them to leave the Euro zone and plot their own course back to growth. While he acknowledges that such an event could cause economic chaos in the short-term, in the long-term, Grexit (and perhaps Pexit, Spexit and even Itexit), is going to be the lesser of two evils. Lord King goes on to observe that the current policy of monetary transfers and forced austerity has exposed a democratic deficit between the EU's bureaucratic "elites" and ordinary taxpayers, leading to a rise in populist parties on the Left and the Right, a development he warns is potentially "dangerous."

From one danger area to another now. In this column, I've regularly praised the dynamism of certain international offshore financial centers in what remains an increasingly uncertain world economically. But, all is not well in the world offshore it seems. The financial crisis highlighted just how vulnerable some of these small "countries" are (although most are independent, several IOFCs still have significant constitutional ties to the United Kingdom). In terms of size, many of these island-nations would fit snugly into the metropolitan area of a large city in the United States, and as such they usually lack the resources enabling them to diversify away from tourism and financial services. So, the recession that struck North America and Europe was a double whammy for them, because many of the tourists stopped coming, and so did some of the international investors, meaning that income from tourism-related activities and company registration fees and other charges suddenly dropped.

Some IOFCs have weathered the storm mostly intact, but others, as the sea of red ink in government accounts attests, are still suffering something of a hangover from the financial crisis. Bermuda is a prime example. Last year, the British Overseas Territory entered its seventh-straight year of recession, and public debt has risen from just 5 percent of gross domestic product in 2008 to around 40 percent. Barbados saw its public debt almost double to 101 percent between 2008 and 2015, while the Bahamas saw a heart-stopping 10 percent leap in its public debt in the year to June 2015.

So what are these territory's doing to turn the situation around? Just like any other countries, they are raising taxes. Bermuda has just announced a payroll tax hike and the introduction of a five percent general services tax; the Bahamas introduced value-added tax in 2015 in an attempt to raise more revenue; and the British Virgin Islands, another country experiencing fiscal difficulties, plans an overhaul of its tax system next year to increase tax receipts. What you won't see these jurisdictions doing any time soon, however, is introducing or raising corporate tax on international business, which most no-tax IOFCs would probably equate to signing their own economic death warrants. That they've made it this far into the OECD/EU-driven crackdown on "harmful" tax regimes and the post-crisis world without having done so tells you that they would probably contemplate just about any measure but income tax. Still, an uncertain future is faced by these islands.

Now to South Africa, and it's only a month since the Government finally enacted legislation giving effect to measures announced in the 2015 Budget, and already the 2016 Budget announcement has come and gone. Indeed, the parliamentary procedures of some countries really does make my mind boggle sometimes. Often, when you're trying to track the progress of a particular tax announcement, you might find that that the initial budget legislation has been split into two or more separate bills, some of which might have been put out for consultation, others fast-tracked through the assembly, or shunted into the siding for consideration at some ill-defined later date. The South African law-making progress feels a bit like this sometimes.

However, it's not the finer points of parliamentary procedure in South Africa I wish to dissect here, but the 2016 Budget itself. It raises taxes, by about the equivalent of USD3.25bn over the next three years, and doesn't appear to cut any taxes. Also, it felt as if the tax increases were hidden behind the headline announcement that 2015's income tax hikes wouldn't be repeated. So surely South Africa's in line for an execration this week? Well, no actually. I'm going to give Finance Minister Pravin Gordhan the benefit of the doubt. He's only been back in the job a matter of weeks, and it might take a little more time for his more cautious fiscal stance to play out. Because it was beginning to look like South Africa was at the top of a slippery fiscal slope, with spending outstripping tax revenue, the budget deficit growing, and economic growth slipping. Let's see if he can pull the country back towards safety.


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

South Africa wait and see

Kitty's Execrations

Greece dangerous

Bermuda hangover




Tags: Euro | Government | England

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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