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commitment and action are not the same thing

Kitty Miv, Editor
26 July, 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 UK's process of decoupling from the European Union is much alike a marital breakdown or separation from a long-term partner. Everyone knows the scenario: two partners are coexisting with each other, unhappily, for a considerable amount of time, and yet it still comes as something of a shock when the bombshell is dropped and one decides to call it quits. Then there's that strange period of time immediately post-separation when nobody's quite sure what happens next. One will eventually have to go, but it won't happen overnight – there's so many things to arrange. So they stick around together for a bit. However, it doesn't take long for the other party to become thoroughly sick of the sight of the other, and after not very long their patience snaps: "So when exactly are you moving out," they ask?

The UK and the EU have had an uneasy relationship with each other for a long time, but the EU thought the UK wouldn't have the courage to leave, so when the referendum result came through, it was a bit of a shock. But the UK didn't give much of a thought about life after the EU, hence it's sticking around, biding its time to bring up the prickly subject of how to divide their articles. In fact, there's so much to think about, and Prime Minister May insists divorce proceedings can't possibly begin before 2017. However, the EU is getting impatient and fidgety. "Isn't it about time you left?" President Hollande effectively told the UK last week. Indeed, many members of the EU family are now urging the UK to draw a line under this fractious relationship so everyone can move on.

The danger for the UK is that it could come out of this divorce quite badly. The latest economic indicators suggest that it is already getting poorer, with confidence among manufacturers the lowest since 2009, and an economic contraction now firmly on the cards for this year. We already know that the situation is uncertain and financially volatile. But the future fiscal situation is also becoming increasingly foggy after new Chancellor Phillip Hammond said that he is considering hitting the fiscal "reset" button at this year's Autumn Statement, a sort of interim budget normally announced in the final weeks of each year. This would have major repercussions for tax and spending; effectively it'd be chucking out the last six years of fiscal policy and starting again.

Looking back, it was certainly remiss in the extreme of the UK Government not to have planned for an "out" vote and drawn up at least a vague outline of a negotiating position for the final withdrawal agreement. But I suppose better late than never, and it is commendable that the UK has not, so far, been browbeaten to the negotiating table by a partner possibly in a vengeful mood. It is incumbent on the UK to get the best deal it can, and its strategy must be formulated carefully. It is certainly under no obligation to keep trying to make the EU happy. That's a large reason it decided to leave in the first place.

Moving on, many a government has promised to simplify and reform their country's nightmarish tax code, only to fail to deliver before its time is up. But just because this happens a lot does not lessen the severity of the crime in my book. So when a government fails to deliver, it deserves to be called out. And this week's villain of the piece is the Philippines, where businesses have once again been imploring the Government to reform the nation's dysfunctional tax system.

For its part the Government has frequently assured taxpayers that it is committed to tax reform. But commitment and action are not the same thing. And the lack of action is now showing. The Philippines ranked a miserable 126th out of 180 countries in PwC's Paying Taxes Index 2016. This index tells us that companies have to make 36 separate tax payments, a process taking an average of 193 hours per year. What's more, the Philippines' spaghetti bowl of tax incentives has now become so complicated that they are more likely to deter investors than encourage them, involving as it does more than 200 special laws and more than a dozen investment promotion agencies. And don't take it just from me. The former head of the Philippines' own tax authority, Kim Jacinto-Henares, told a conference in New York last year that the country is failing to attract any new investments as a result of this confusing system of incentives.

Filipino Senator Francis Escudero summed the situation up quite well in response to the Philippines' dismal Paying Taxes ranking last October, when he observed that "it's even easier to pay taxes in Iraq, Iran, and Afghanistan. What does that say about us?" However, he needed just one word to encapsulate investors' feelings towards the country's tax system: "tedious."

One would probably have to find an even more negative adjective for Italy, which has an even worse tax system (137th in Paying Taxes 2016). More generally though, the country cannot be accused of being a dull place. Indeed, one interesting feature of life in Italy is that since the country has been a united, single entity, it has been starkly divided between north and south. The economic divide is especially marked. According to The Economist, while the economy of Italy generally stagnated between 2001 and 2013, the north still managed to grow by 2 percent during this time, while the south shrank by 7 percent. Shockingly, of the almost 1m Italians who lost their jobs between 2007 and 2014, 70 percent were from the south. One could go on at length about the root causes for the south's problems, such as corruption, organized crime, and low investment, but this isn't the place to do it. Suffice to say it comes as no surprise to learn that northerners pay more tax than southerners, and by a quite considerable margin. 

Italian Prime Minister Matteo Renzi seems to have the right ideas about how to inject some life into the Italian economy, like reducing Italy's stifling tax burden and creating incentives for investment and job creation. However, when you consider the above statistics, he has, in effect, only got half an economy to play with. Italy is by no means the only country in the world with a population divided along economic and geographic lines, but its division seems particularly wide, and won't be an easy rift to heal. One gets the feeling the nation won't perform to its potential until it is. But then Italy's elected officials have got more pressing concerns at the moment, namely shoring up an ailing banking system.

Indeed, other worrying developments have occurred in the more economically vulnerable parts of the EU lately. Having utterly failed to rein in the budget deficit, Spain could be the first country, along with its similarly errant neighbor Portugal, to be officially placed on the fiscal naughty step by the EU, and made to pay for mismanaging its budget. The threat of punishment has also forced interim Prime Minister Mariano Rajoy into an embarrassing u-turn on tax, after he promised, rather rashly, tax cuts during the recent election campaign.

Having implemented some tough and unpopular economic reforms, Spain looked like it was turning itself around. So it would be tragic if EU-enforced austerity undid all the hard work, sending the Spanish economy back into the doldrums. And surely making the country pay a financial penalty would only exacerbate the problem. It seems to sum up the paradox that is the EU in the 21st century. Backing the monetary union to the hilt and in doing so potentially destroying it at the same time. In a few years, perhaps London will be found looking on from the sidelines with a wry smile.

 

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 doughty

Kitty's Execrations

Philippines tedious

Italy divided

Spain naughty

 

Ciao

Kitty



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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