People are asking the wrong question

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By Andrew Graeme

In 2014 we shall be asked if we want Scotland to become an independent nation and those of us who are already committed to this ideal will find ourselves becoming an Ambassador for Independence.

In this role, you will be asked again and again, can we afford independence?  My advice is to tell the doubters they are asking the wrong question!

Two weeks ago brought yet another budget and yet another missed opportunity for much needed reform.  Instead, we got more pointless patchwork – a little of this, a little of that and nothing that makes much sense. 

So now, you will no doubt be as thrilled and delighted as I was to hear that the VAT status of rented chairs in a hairdresser’s salon has, at last been cleared up.  More minor loop-holes, like paying no tax at all by calling your salary ‘Capital Gains’ and feeding it through a holding company on the Isle of Man, remain as open as ever.

If we ever needed proof of the limited intellect of those in power in Westminster, the 2012 budget provided it in spades.  In an asinine exercise in rich-people-bashing, VAT is now payable on the maintenance of listed buildings.  This is unlikely to make any rich people lose sleep, as they are nearly always able to claim back their VAT, but it will hit churches, schools, village halls and charitable nursing homes. 

But if you are looking for absurdity, look no further than the ‘Seed Enterprise Investment Scheme’ (SEIS) designed to provide tax relief for start-up businesses.

Apart from a bewildering array of restrictions on when you may invest and who is or is not an employee, or an investor, it is the sums involved that has me wondering if any real thought has gone into this scheme.  

The investment must not exceed £150,000 and the total assets of the company must not exceed £200,000 – not enough to buy a couple of diggers for a plant-hire company or a pick-and-place machine for a small manufacturer.  But because the tax relief is a whopping 50%, more than enough to call your more expensive hobby a new enterprise. 

There are of course, severe restrictions, so I’ll have to invest in your sailing boat, if you invest in my daughter’s horses.  Our accountants will sort out the details!

Yet the true madness is the level of debate in Westminster.  The Lib-Con coalition preaches austerity and Labour wants ‘borrow-and-spend.’   You wouldn’t even run a sweet shop along such lines.  It is as if the whole of the UK economy is being treated like a simple credit card debt, or an excessive overdraft.

This either-or approach is based upon a false premise and asks the wrong question.  Even the smallest of companies seeks to expand some things and draw back on others and at any one time, most companies are drawing down one section and expanding others.  

The UK does not need 500 generals or 78,000 civil servants at the MOD, but it desperately needs capital spending on large parts of its infrastructure.  And yet the public waste continues and spending on infrastructure has been cut back. 

This gross mismanagement of our economy is not without consequence.  In just twelve short months, our GDP per capita in the UK fell from $43,540 to $35,170 (2010-11).  That does not mean of course that we become immediately 20% poorer, but it pushes up the costs of almost everything and leads to inflation, which, in turn, makes the general population poorer and feeds inequality, already at dangerously high levels. 

All Western economies, except the US, lost large parts of their wealth and even Germany dropped by 10% to $40.670 per person, though Ireland remains the Celtic Tiger, despite falling from $60,460 to $51,050. 

But Britain achieved a new record, though hardly one to be proud of. 

If you tot up all the public debt and all the hidden debt that successive governments have carefully brushed under the table, such as unfunded pension obligations, PFIs and the like and all the debt held by government owned companies and banks in particular, then this time last year, public debt came to 360% of GDP.  Add to that, all the various forms of private debt and it comes to five times GDP – the highest total-debt-to-GDP ratio on Planet Earth!

Robert Chote, head of the Office for Budget Responsibility pointed out in a press statement recently, that public spending in Britain is now at £26,000 for every household, but the tax-take per household is just £21,300. To bridge that gap, the government is borrowing £5,000 each and every year, on top of all the borrowings from previous years – and those borrowings are going to have to increase as interest costs mount up.

Yes, Britain may have been overtaken by Brazil to fall to seventh largest economy, but we have overtaken Japan to become the most indebted nation in the World!

Private debt is slowly sinking as people and companies tighten their belts and living standards fall, but public debt (despite, or perhaps because of) all those austerity measures, continues to rise.  Nearly all that debt is very long term, which is why we are still able to live and are not yet a Third-World country.  Like a man falling out of a tall building, half-way down, we are very apprehensive, but still perfectly healthy!

Nobody really knows where this mountain of debt will lead – nowhere good, that is certain!  Probably just more slow decline and a steady fall in living standards.  Any growth we strive for over the next few decades will have to be used, servicing that mountain of debt.  Faced with such a monumental problem, it is good to know that the Westminster Government has closed that scandalous loop-hole on VAT for rented hairdressers’ chairs!

So when they ask you, can we afford independence, show them the figures and ask them, can we still afford the Union?

 

Andrew Graeme is an economist (LSE) and businessman with interests in Scotland, the US and Germany.  He is also convener of the Dingwall and Black Isle SNP branch.