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fiscal prudence is boring - As a political platform it lacks personality and pizazz

Kitty Miv, Editor
09 November, 2015

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.

Clearly, no single nation is going to tackle climate change alone. Which is why heads of state from around the world met ahead of the Paris climate talks last month to urge countries and companies to put a price on carbon. However, pricing carbon sounds fine in principle, but how do you do it in practice? Different countries have chosen different ways to go about this, from straight taxes on carbon emissions to more complex market-based mechanisms. And nobody really knows yet what the optimum carbon pricing system should look like, including me, because there just isn't enough data to assess the various schemes. But I'm going to stick my neck out and say that the ideal system won't look like South Africa's proposed carbon tax, the draft legislation for which I had the pleasure of reading the other day as part of another project. All I can say is, if your company is likely to be caught up in the carbon tax, and you've been given the thankless task of working out your firm's carbon tax liability, you better brush up on your math. The following is taken from section 6 of the draft Carbon Tax Act: "The amount of tax payable by a taxpayer in respect of a tax period must be calculated in accordance with the formula: X = {(E - D - S) x (1 – C) x R} + {P x (1 - J) x R} + {F x (1 - K) x R}." See what I mean? I'm not sure what's more baffling: the equation itself, or how the Government thought it was a good idea in the first place. And, unfortunately, South Africa has a bit of a bad track record when it comes to baffling tax laws and legislative processes, so it gets an execration.

Hong Kong is one of the world's most open economies, if not the most open – the Heritage Foundation hasn't named it the world's freest economy for the past 20 years for nothing. This makes the territory one of the world's better-behaved citizens in the global trading arena, for it doesn't apply any tariffs to its imports, non-tariff barriers to trade are low, and the Government tends not to retaliate against trade barriers in other countries, or restrict certain imports. Unfortunately, the same cannot be said for many of Hong Kong's trading partners, with some readily resorting to protectionist measures against other nations to shelter certain industries from foreign competition. Despite its vulnerability in this sense, the Hong Kong Government has traditionally eschewed the idea of entering into free trade agreements. But the Government is now rethinking its place in the world trade arena having formulated a free trade strategy, probably out of fear of being marginalized in a world of regional super-FTAs, including the Trans-Pacific Partnership and the soon-to-be-formed Regional Comprehensive Economic Partnership. With the world trading environment evolving at a relatively fast pace, no nation can really afford to get left behind as new regional trade alliances form, especially Hong Kong. So trying to figure out where it fits into this new world seems like a wise move.

Bill Clinton's famous 1992 election campaign catchphrase went: "It's the economy, stupid." He meant that any leader or aspiring leader who neglects key economic issues is likely to be given a bit of a kicking by voters. And with Canada's economy grinding to a halt, outgoing prime minister Stephen Harper and his Conservative administration sure know what it feels like to get a good electoral kicking. And this is despite the fact that, until recently, the previous Government's track record on the economy was actually pretty good, in so far as it avoided the worst of the financial crisis, delivered a budget surplus, and maintained public debt at low levels in comparison to other G8 countries. The corporate tax rate was also slashed to 15 percent, putting Canada among the Hong Kongs and Singapores of this world in corporate tax terms. But these things don't really excite voters that much, even though most people would probably agree, given what's happening in the euro zone, that balanced budgets and general all-round fiscal prudence are desirable things. But fiscal prudence is boring. As a political platform it lacks personality and pizazz, and sounds rather staid and technocratish. Enter Justin Trudeau, the 42-year-old Liberal Party leader, sworn in as Canada's second-youngest Prime Minister ever last week, who has promised to inject some youthful vigor into proceedings. He started as he meant to go on by appointing a relatively youthful cabinet with no member over the age of 50. Then, the PM-elect, his wife, and the cabinet all trooped off to the swearing-in ceremony in a bus – presumably, his point being that this is a form of transport that the last Conservative cabinet wouldn't have been seen dead in, perhaps preferring instead the privilege and isolation of the ministerial limousine. Indeed, Trudeau is promising a more open, informal kind of government all-round. But what's he got to offer on the economy? Well, he wants to invest in infrastructure, and that will mean running a deficit for three years. He also wants to reduce income inequality. But all he's offering on that front is a modest tax cut for middle-income earners. I'm afraid it all sounds a bit gimmicky to me – a bit style-over-substance. The cynic in me wonders how long it will be before the limousines emerge from their garages, or before taxes begin to rise. It all comes across a bit Tony Blair circa 1997, a bit "Cool Britannia." Trudeau will be hoping he doesn't suffer the same "hero to zero" decline in popularity Blair did.


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

Hong Kong wise

Kitty's Execrations

South Africa baffling

Canada Trudeaumania



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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