It is not just Japan’s deeply worrying leakage of radiation that is rattling investors. Last night’s downgrade of Portugal by Moody’s comes as a stark reminder that the Eurozone’s fiscal crisis hasn’t gone away. Muammar Gaddafi, Libya’s dictator, is slowly crushing the rebel uprising, making a joke of what passes for the West’s foreign policy. Calls for a no-fly zone are looking increasingly like a case of too little, too late; there is zero appetite for any Western intervention post-Iraq.
Middle Eastern powers have no such qualms: 1,000 Saudi troops and 500 UAE police officers have entered Bahrain, now in a state of emergency. There is a real possibility that the fighting between Sunnis and Shias in Bahrain could spiral out of control, triggering a long-dreaded confrontation with Iran, plunging the whole region into bloody chaos and threatening oil supplies. Meanwhile, it remains to be seen what actually comes of the revolutions in Tunisia and Egypt, whether anything really changes – and if it does, who ends up having the upper arm, liberals or extremists.
Everywhere one looks, the geopolitical situation is fragile. The horrific catastrophe in Japan has crystallised investors’ latent fears. Risk aversion is back with a vengeance, after a period of post-financial crisis complacency. It won’t be going away in a hurry.
TAX AND SPEND
ONE of the biggest conundrums at the heart of public spending is how the middle classes are capturing an ever-increasing chunk of welfare spending, even though the system was originally designed to help the poor. At the same time, the middle classes are also paying more tax – their right hand is handing money to the state while their left hand is simultaneously taking back from it. It’s a strange and rather inefficient money-go-round.
Around £31.8bn is spent on providing benefits to the middle classes, a quarter of the spending on cash benefits, according to a report from Reform, the think-tank. Around £23.8bn of this is received by people of working age, so this phenomenon has little to do with pensions. Over the ten years to 2008-09, the share of middle class welfare jumped from 17 per cent of total welfare spending to 24 per cent, while their share of benefits in kind rose from 31 per cent to 40 per cent. The increase in tax was equivalent to around 99 per cent of the increase in benefits – it was all a rather pointless exercise that has benefited few people other than those paid to administer the system. Taxes are higher than they ought to be: large numbers of people could pay less tax and receive fewer benefits and yet not be any worse off. Yet higher taxes always go hand in hand with higher administrative and economic costs, including reduced incentives.
Reform’s report also sheds some much-needed light on the tax gap – the difference between what the government thinks it is due in tax, given rates, and what it actually collects. Perhaps surprisingly, big companies only account for a quarter of it – three-quarters of the £40bn tax gap is due to VAT, income tax, national insurance and capital gains tax – all mainly paid by individuals and small companies. Reducing the tax gap not only requires a focus on big firms but even more importantly on small companies and families. The real answer, of course, is to come up with a much more efficient tax system which no longer wages war on wealth but isn’t riddled with thousands of reliefs and loopholes. Unfortunately, the system is getting worse, rather than simpler. The Office for Tax Simplification’s recommendations weren’t exactly exciting, though it did float the potentially radical idea of merging income tax and national insurance and ceasing to pretend that the latter is somehow different or used to pay for pensions. Let us hope that George Osborne tackles at least some of these issues in next week’s Budget.
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