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it's as if the financial crisis never happened

Kitty Miv, Editor
14 December, 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.

You'd probably expect me to issue Indonesia a metaphorical pat on the back for the latest round of tax-cutting measures, this time designed to fire up the country's labor-intensive industries, but I'm not. These so-called economic stimulus measures are a sign that all is not well with South East Asia's largest economy. True, the Government can point to external economic influences for Indonesia's falling growth, particularly the situation in China, the country's largest trading partner, but some of the pain must be being self-inflicted – perhaps, partly as a result of the slow pace of economic reforms and partly because of government mismanagement. Indeed, it is another story that appeared in last week's news that I wish to highlight to support my argument: that of the resignation of Indonesia's top tax man, Sigit Priadi Pramudito.

In many senses, poor old Sigit was given something of a Sisyphean task by his political masters. Set a wholly unrealistic tax revenue target by President Widodo, reports suggest that he wasn't the ideal candidate to carry out the job anyway. According to the Jakarta Post, what happened was, Widodo, emboldened by his recent election win, strode confidently into a meeting with senior tax officials at the start of his term and demanded that they bring about a 60 percent increase in tax revenue in 2015. After several intakes of breath, and probably a few howls of protest, the officials regained their senses and began to haggle, and the figure of 30 percent was eventually agreed. However, as if this target wasn't difficult enough to achieve for a seasoned campaigner in the field of tax extraction, Widodo, apparently mistrustful of the senior officials who worked under the former administration, wanted his own man to spearhead the tax department's new thrust. And, according to the Post, connections, as well as qualifications, influenced the choice.

Whether Sigit's ability came into the equation is a moot point now, because recent figures revealed that the tax department is hopelessly off target, and the hapless tax chief has paid with his job. A relatively minor ripple in the global political pond you might say, but a worrying one nonetheless for those hoping to see Indonesia develop and succeed economically. It hints at the kind of cronyism and muddled thinking in government that tends to beset emerging nations, despite their leaders' best intentions. Of course, Widodo, a former businessman, won the 2014 election promising to crackdown on corruption and promote economic reform. But they all say that don't they. Well, he hasn't made much progress. The Heritage Foundation's Index of Economic Freedom (in which Indonesia lies 105th and is classed as "mostly unfree") says that corruption remains "endemic" in key institutions of state, including, worryingly, the legislature. Okay, in political terms, Widodo has only just got his feet under the desk. However, the Sigit affair hardly inspires confidence that the Government is able to tackle some fundamental economic problems.

Angela Merkel, on the other hand, is the one you want around when you've got an economic crisis on your hands (although you might not agree if you live in Greece). If you're not convinced, just take a look at the conclusions of a study by the UK's Institute of Fiscal Studies into the fiscal adjustments made by some key EU economies since the recession. Predictably, the data shows that Italy and France have attempted to tax their way out of their respective fiscal crises, hiking taxes by about 5 percent of GDP, while the UK has instead chosen to squeeze public spending by a similar amount. The report also lays bare the sacrifice made by the Irish, who have experienced a fiscal consolidation program totaling nearly 20 percent of GDP all told. Remarkably however, as far as Germany's state finances are concerned, it's as if the financial crisis never happened. In fact, the IFS's data shows that net taxes have fallen slightly, and while spending has been cut as a percentage of GDP, it's barely a blip when measured against some of the other countries in the study. This is all the more extraordinary when you think that Germany has been bankrolling Greece for a number of years, as well as propping up the weaker parts of the Eurozone.

As the beating heart of the European "project," and a supporter of some the EU's dafter ideas on tax, Germany doesn't often get a lot of praise in this column. But you have to hand it to Merkel – she's a mighty fine housekeeper. No wonder the German's call her "Mutti."

From a wise old head now to a young and handsome one. Sorry Vladimir, it's not you, despite your repeated attempts to convince us otherwise by posing bare-chested on a horse in Siberia, or flooring some unfortunate child in an exhibition of your prowess in judo. No, in political circles, it can only be Justin Trudeau, who has been bedazzling world leaders recently with his good looks and youthful bonhomie. But will the Liberals work similar magic on the Canadian economy with their fiscal plans? I fear not. To its credit, the new Government is delivering on its central tax pledge, to cut income tax for those in the middle and hike tax for those at the top. But one recent study suggests that far from raising extra revenue – money intended to subsidize the middle class tax cut – the plan to shift the tax burden to top earners could actually cost federal and provincial governments. The C D Howe Institute's Alexandre Laurin, the author of the report, said: "The Liberal election platform said that these changes would be more or less revenue neutral, however we estimate the federal tax changes could result in national tax receipts falling short of commitments for both federal and provincial levels of government by more than CAD4bn (about USD3bn), meaning higher taxes elsewhere, unplanned spending cuts, or larger increases in government debt."

C D Howe might be proved wrong of course. But hiking top rates of individual income tax, popular though such measures are with the public, doesn't necessarily lead to higher revenues, as has been shown in other countries. Indeed, in the UK it is widely accepted that the much-maligned former 50 percent tax may have led to lower tax receipts because the rich merely shifted their income into more tax-efficient vehicles, or simply worked less. Justin Trudeau may look young enough to be my son, but he'll have to learn pretty fast that populist policies aren't necessarily the best policies.

 

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

Germany wise

Kitty's Execrations

Indonesia cronyist

Canada populist

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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