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Politics & Law Series: General Election

Academics discuss 2015 Budget

Experts from City have given their views on George Osborne's last Budget before the general election

Academics from City University London have offered their analysis of the 2015 Budget, delivered by Chancellor George Osborne on Wednesday 18th March, 2015.

It was Mr Osborne's last Budget before the UK general election and was an important opportunity for the Conservative Party to appeal to voters before the poll on 7th May.

Ronen Palan"Google Tax"

Ronen Palan, Professor of International Politics, commented on the so-called "Google Tax", which the Chancellor says will see companies that move their profits overseas to avoid tax pay for "diverted profit".

He explained former US president John F Kennedy had attempted to stamp down on tax avoidance in the 1960s, but had not succeeded.

Professor Palan said: “President Kennedy promised a complete elimination of such practices. More than 50 years later, the Chancellor of the Exchequer, George Osborne, is making similar announcements.

“But lacking a serious analysis of the reasons why it has proven so difficult to eliminate these practices, or a thorough detailed explanation of how he plans to implement the policy, the danger is that Osborne’s policy will achieve just as much as President Kennedy back than in 50 years ago.”

Recently, more and more enterprises organized abroad by American firms have arranged their corporate structures – aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees, and similar practices which maximize the accumulation of profits in the tax haven – so as to exploit the multiplicity of foreign tax systems and international agreements in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.
President Kennedy’s presidential address on 20th April, 1961

George OsborneTidal lagoon

Professor of Hydrodynamics, Professor Qingwei Ma, is cautiously optimistic about the Chancellor's proposal to open a £1billion tidal lagoon power generation scheme in Swansea, which would power 120,000 homes for 120 years and which would be the first of its kind on such a scale anywhere in the world.

“Compared to wind, tidal energy is much more reliable and predictable as a renewable energy source. Coupled with this, it can produce a much more regular energy supply than wind," he said.

"However, consumers should bear in mind that they may have to shoulder a higher cost for this kind of power supply into their homes.  We cannot fully assess the benefits until the project is completed and fully functioning.”

Help-to-buy ISA

In response to the Chancellor’s proposals on pensions and the introduction of a new help-to-buy ISA , Dr Peter Hahn, Senior Lecturer in Finance at Cass Business School, predicted changes in the way we will invest in the future.

“Previously, pension money was more likely to go into equities and diverse investment rules," he said.

"What we are seeing now is a bunch of opportunities for individuals to take that money to invest into housing, particularly those who have money for buy-to-let housing. That’s going to create much more competition and push up prices.

“The Chancellor’s help-to-buy ISA proposal may see more people saving for deposits, however, property prices are not currently supported by incomes. So you have property prices that are high, but where is the income to pay for it?

“With reduced pensions and sales of annuities, what we may now see is people with pension pots over the age of 55 choosing to take that money out and invest in the housing market to help their grandchildren, or pass to their children, to help the next generation to buy property.”

Portrait of David  Stupples Driverless cars

Professor David Stupples, a specialist in the research and development of networked electronic and radio systems, welcomes the Government’s announcement to contribute to the costs of research and development in driverless cars.

He says it will greatly assist in positioning the UK at the forefront of this technology, particularly in the field of complex systems integration in which City is a world leader.

However, Professor Stupples says that while driverless cars “offer the hope of the future in road transport with safer motoring, improved fuel economy and less pollution, the widespread use of this technology is not just around the corner as potential producers would have us believe”.

He argues that there is still a need to understand much more about the integration of sensors, navigation and car control particularly in fast-moving congested motorways and roads.

North Sea oil industry support

There was much pre-Budget talk on whether there would be help for the North Sea oil industry.

In his Budget, the Chancellor announced that from the start of next month there will be a "single, simple and generous tax allowance to stimulate investment at all stages of the industry".

Professor Michael Tamvakis, Professor of Commodity Economics and Finance at Cass Business School, explained the potential impact of new measures on the exploration and production (E&P) industry.

“Given the dire straits in which many oil companies, especially E&P ones, find themselves currently," he said, "the Chancellor’s Budget announcement regarding help for the North Sea oil industry has not come as a surprise.

"The proposed Petroleum Revenue Tax, cut from 50 per cent to 35 per cent to support continued production in older fields, is substantial and will make at least, some marginal projects more viable.

“Given, however, that oil prices have fallen by 50 per cent already, the 15 per cent tax reduction will only help the most profitable - or least loss-making - North Sea projects to go ahead. As this is also an election Budget, incentives for the oil industry to continue investing are likely to benefit directly business and employment in the oil services industry, especially in Scotland.

“In my mind the decision is quite sensible, although I am sure there will be critics who say that the Chancellor is simply pandering to the oil and gas industry and investing in more E&P in the North Sea simply encourages the continued use of emission-producing hydrocarbons.

"As always there are many sides to an argument.”

Portrait of Michael Ben-GadAre Tory cuts "excessive"?

Dr Michael Ben-Gad, Professor of Economics, examined the broader context of the Budget. He said that although George Osborne has been criticised by some for “unnecessary” cuts, he does not think that “excessive thrift” is the greatest risk to the UK economy.

“The most interesting thing about the 2015 Budget is the commentary surrounding it,” he said. “There seems to be broad consensus that the cuts executed by George Osborne in the first years of the government were certainly excessive, perhaps even largely unnecessary.

“This view may be at least partly correct, but the truth is we will never know.

"Would the UK government have been able to borrow yet more than it did and at such very low interest rates? Would the UK have been able to avoid a sovereign debt crisis, particularly if the extra borrowing had been ploughed into higher investment in infrastructure rather than social spending?

“Perhaps, but perhaps not. How many would care to the run the experiment again, to see precisely how much longer the UK could have continued to run a deficit equivalent to 11 per cent of GDP?

“More fanciful is the idea that extra government spending would have been self-financing, that the rise in GDP from higher consumption by both households and government would have kept the debt burden from rising.

“It is a theoretical possibility, but only if one is prepared to make some fairly extreme assumptions about the structure of the economy, including the way goods and services are produced, and about the myopia and perhaps irrationality of the people who inhabit it.

“In any event, the UK has been running a current account deficit in every single quarter since 1999 and it is currently more than 5 per cent of GDP. If one was looking to diagnose the greatest threat to the UK economy, excessive thrift would not be my first choice.

“The cost of borrowing is currently lower than it has ever been. When higher rates of interest return, the cost of financing the debt burden will soon begin to rise. All the cuts together mean the debt burden will begin to decline but only very slowly.

“Why? Because though the proposed cuts to defence, welfare payments and other government spending are indeed substantial, they will increasingly be offset by the growing burden of financing higher spending on the NHS and pensions as the population continues to age.

"Unless further cuts are found, immigration rises dramatically, or the retirement age rises faster than already planned, eventually, on present projections around 2040, the debt burden begins to rise.”

Effect on the Tory election campaign

Tom Felle, Acting Director of Interactive and Newspaper Journalism, explained the "feel good" announcement had "something for everyone".

He said: "With changes to taxes and pensions putting money back in people's pockets after years of austerity, Mr Osborne undoubtedly hopes his pre-election Budget has done enough to break the deadlock in the polls between the Conservatives and Labour in the run up to May's election.

“The feel good Budget, with something for everyone, may give the Tories the political momentum they need to hold on to power for another five years."

Inheritance Tax

Writing for City A.M. Philip Booth, Professor of Insurance and Risk Management at Cass Business School, said tentative Conservative plans to reform Inheritance Tax will make a bad system even worse:

"If this tax change goes through, two families with identical total assets could find themselves paying vastly different amounts of Inheritance Tax if one of the families invested in shares and the other invested in their home. Such discrimination against business investment is wholly unjustified. It adds to the already heavy tax discrimination in favour of owner-occupation.

The proposal will encourage investment in housing rather than in other forms of investment. Given the fixed supply of housing due to planning constraints, the result will be higher house prices. It will also encourage older people to remain in larger properties rather than downsizing, moving into more appropriate sheltered accommodation, or moving back in with their family. The incentives will not be trivial. A 90-year-old woman, for example, living in a four bedroom house in Leicester might pay an extra £100,000 in Inheritance Tax by choosing to move into sheltered accommodation, or an extra £140,000 by choosing to be cared for in her son’s or daughter’s house.

Ideally, we should follow Australia, Sweden and many other countries and abolish inheritance tax entirely. People should not pay tax on assets accumulated from income on which they have already paid tax. And the inheritance of assets can give people a chance to invest in establishing a business."

The full article is available to read on City A.M.

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