Much has been said by British Eurosceptics about the flagging state of health of the eurozone economy. Now 60 years after the sun set on the once great British Empire pundits still see the Union Jack enjoying the respect and glory of pre-war status. Such euro sceptics view the decision not to discard the Sterling by joining the euro with vindication seeing that the euro has depreciated so suddenly against the dollar. Still the dream of having a club of 16 disparate countries all following (as much as possible) the Growth and Stability pact has given proven a success.
It certainly gives a leg up to a number of Mediterranean countries which basked in the glow of low inflation and dirt cheap interest rates. The honeymoon is over and it is the time for austerity measures following the onset of a credit crunch . Now that the chicks came home to roost it is the Sterling’s turn to prance about like a Peacock showing the euro’s weakness mainly due to downfall of PIIGS. (Portugal, Italy, Ireland ,Greece and Spain).It is true that all these countries have quickly introduced acute austerity programmes reflecting the fact that in the past they were all living beyond their means. Their politicians particularly in Greece are now biting the dust reneging on all past promises of affluence and bonanza. But the family of 16 eurozone members have stood fast to heal the damage.
It is true that solidarity and subsidiarily concepts have so far held the club united in helping the lot of the profligate ‘black ‘ swans. It is amazing how quickly a mega euro protection fund of euro 750 billion has been installed to buttress future distress signals. It is true in Britain the ex chancellor Mr Darling pointedly ruled out helping to bail out Greece.
But then what about the countries facing massive deficits that stayed out of euro principally U.K mainly on grounds of sovereignty and hurt pride? Who will bale the U.K out when its annual deficit hits record highs?. Perhaps the state of ambiguity has clouded the electorate’s minds at the recent general election. We just witnessed the electorate‘s fickleness in refusing to give a relative majority to any of the three big parties. This produced a hung parliament in the first time for almost 40 years. As the coalition agreement said, deficit reduction and continuing to ensure the economic recovery is the most urgent issue facing the urgent task to stabilise the Sterling currency. It does not take too much effort nowadays to calm the fears of the British voters other to remind them of what will happen if governments lack the wherewithal to act decisively and quickly.
The new Chancellor George Osborne said he believed they needed “to act even sooner to restore confidence in our economy”, which has been battered by a deep recession. According to Osborne, the new established independent Office for Budget Responsibility, will be headed by Alan Budd, a former Bank of England Monetary Policy Committee member, and in this manner it is out of government hands to issue future economic forecasts. Osborne is proud of himself that he is the first chancellor who gives up the control of the economic and fiscal forecasts and said: “We need to fix the Budget to fit the figures, not fix the figures to fit the Budget.” Osborne added: An emergence budget date is expected to be presented to parliament by 22 June, amidst a number of controversies, spin and speculations.
The Prime Minister David Cameron promised to tackle Britain’s record deficit of £153 billion by cutting a paltry £6 billion this year. In the view of many this is just tinkering at the edges when major surgery is paramount. Of course the patient needs acute care and it is a combination of more taxes and a serious cut in public expenditure. After weeks of uncertainty there will be an increase in Capital Gains Tax (CGT) for “non-business” assets in the UK, affecting second homes, buy-to-let properties, art, and share portfolios. Upon reflection ,this may not be the deepest cut since the outgoing Labour administration had already jacked up the personal tax rate to 50 %. Still the current capital gains tax rate of 18% is relatively low in comparison to the rates of income tax in UK; therefore it is not unthinkable that it will rise with the rates of income tax, what means to 40 or even to 50 per cent!
For example up to now if an investor acquires shares say for £3,000 in November 1990 and sell them for £13,000 in December 2009, you have made a gain of £10,000 and this will be taxed with currently 18%.Capital Gains Tax is worked out for each tax year which runs from 6th April to the 5th April of the following year. Of course not all of your assets are liable to CGT, exempt are e.g. your car; personal belongings worth up to £6,000 such as jewellery, paintings or antiques; betting or lottery winnings; UK government gilts (bonds) and your main home. Furthermore you only have to pay Capital Gains Tax if you have gains above the annual tax-free allowance which is called “Annual Exempt Amount”.
This tax hike was not taken gently by the conservative electors within the Tory / Lib.Dem. coalition. Thus last week The Daily Telegraph launched a campaign against the tax increases and invoked the readers to lobby Osborne to reverse his plans. On the contrary the ‘skin the fat cats ’ doctrine of the Liberal Democrats who want to reduce the Annual Exempt Amount threshold to a nominal £2,000, means the number of investors forced to pay CGT each year would quadrupling to a million. If this happens, it would push hundreds of thousands of middle-class investors into tax levels for much higher earners, that’s why members of the Tory party do tend to label it as “legalised theft”. Such is the beauty of a coalition of two parties who are well known for their diversity. Another casualty is the middle class who will be most affected by such tax increments. In another example we see how the investment house Fidelity International, which manages £150 billion of individual and company saving plans, had “serious concerns” about the proposed increase in capital gains taxes and stressed the government should target short-term speculators rather than create an “unfair financial hardship to long-term savers”. It is feared that middle-class Britons who saved long-term, have now to share the burden of stabilising the Sterling ,rather than high-earners like financiers or private equity executives.
Austerity measures might help towards reducing the national deficit in the short term, but longer term, if we disincentivise savings, we’ll simply end up with more people reliant on the State during their retirement years.” Expect more austerity measures in the coming budget piloted by the coalition administration as it needs billions to shore up the gargantuan deficit … a legacy of the out –going Labour administration.In this scenario, middle-class families would also be hit by the coalition’s proposal to strip of child tax credits and pensioners with small share portfolios will also be negatively affected. A final note points to pensions contributions are expected to be raised.
There are already rules to restrict the amount of higher rate relief that anyone earning over £130,000 can claim on pension contributions. The Lib Dem manifesto proposed the removal of all higher rate relief on pension contributions. It is not certain when or if this measure will be introduced, but if one planned on making contributions in the current tax year, now may be a good time to do this.
To conclude it is true to say that the Union Jack is not flying high over the roof tops of financial centres. Certainly the do –it alone attitude has not helped the British electorate to benefit from the growth and stability restraints enjoyed by the 16 eurozone countries. Perhaps sending out an SOS to other members of the 27 strong E.U group will not too much a price to pay even though it will certainly hurt the pride of the islanders of the fading Empire.
Law & Finance
Researcher at PKF Malta