John Redwood MP


The government’s approach to making working more worthwhile for families

I have been sent a reminder of changes coming in this April:

There are a number of welfare reforms and tax changes that come into effect in April. These  reforms are  about building a stronger economy and a fairer society.  We want to support people in work, as well as ensure the welfare system works as a safety net for those who need it.

The measures include:

 A further increase in the Personal Allowance to £11,500; an increase of over 70% since 2010. Since the start of this Parliament we have cut income tax for 31m people and taken 1.3m of the lowest paid out of income tax altogether.

 Increasing support for low earners by raising the National Living Wage to £7.50. This marks a £1,400 a year increase in earnings for a full-time worker on the National Minimum Wage (NMW) since the introduction of the NLW in April 2016. – a pay-rise for one million people.

 Helping working parents with childcare costs by launching Tax Free Childcare from 28 April – saving working parents up to £2000 per year for each child under the age of 12.

 Increasing income for 3 million households by reducing the Universal Credit  taper rate from 65 per cent to 63 per cent.

 Ensuring young people are always better off in work by delivering the manifesto commitment to end automatic entitlement to housing support for 18 to 21-year-olds who can safely live at home for new claims to full service Universal Credit.

 Investing £330m in practical employment support to help disabled people back into work, and aligning the rate paid to new claimants who are placed in the ESA work-related activity group or the Universal Credit limited capability for work group with the job-seeking equivalent in both benefits.

 Tackling worklessness by ensuring that those in receipt of Universal Credit will be expected to prepare for employment when their youngest child turns 2 and to look for work when their youngest child turns 3.

 Aligning the benefits system between those in work and those out of work by limiting Child Tax Credits and the child element of Universal Credit to 2 children (new awards will not be made for third or subsequent children born on or after 6 April).

 Removing the higher rate of child element for the first child in Universal Credit and the family element in tax credits for claims where the eldest child is born on or after 6 April.

 Widening help so that more bereaved people get the support they need by introducing the Bereavement Support Payment on 6 April. This will replace Bereavement Allowance, Widowed Parent’s Allowance and the Bereavement Payment for those who lose a spouse or civil partner on or after this date.

Helping savers with the launch of a new NS&I bond offering a market-leading interest rate of 2.2% and increasing the annual ISA limit to £20,000.

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Who are the rich?

If we are going to develop a better approach to taxing the better off, we first have to decide who is better off. One of the most difficult issues which tax policy has to face is the relationship between capital assets and income.  How do we feel about people who are asset rich but income poor, or people who are income rich but capital poor?

Let us look at some difficult examples.

Mrs Hardup  is a widow living in a one bedroom flat in what is now Chelsea – it used to  be Fulham. She lives on a state pension, with no savings or private pensions to top up what the state provides. She and her  husband bought the flat in the 1960s when it was much cheaper, and paid off the mortgage. Doing that got in the way of other savings.  The flat  is worth £1.2 million today.

Mrs Lucky lives in a Council bungalow on her state pension, but has recently won £1.2 million on the lottery. She has so far put it into cautious investments. She might live for another 20 years, so she could draw down and spend more than £60,000 a year depending on how well she invests the money. Alternatively she could buy herself a property, remove the rent  bill and pay herself a bit less.

Mrs Hardup decides to sell her Chelsea  flat, move  and  buy a small detached property near her daughter in Bolton for £200,00, leaving her £1 million to invest to provide her with an income well above the national average.

Mr Feckless retires early, sells his £1.5m southern counties executive house, buys a £500,000 smaller property, and spends three years on expensive cruises,  buying luxury cars and other consumption, using up much of his spare £1m.

Mr Prudent retires with a good  pension of £35,000 a year, and continues living in his £1.5m southern executive home. He is surprised by the choices of his former  neighbour, Mr Feckless.

Mr Whirlwind is in the prime of life and earns £150,000 a year. His income has risen quickly recently, and he has been too busy to get round to buying a home of his own. He pays a lot out in rent for the smart new property he has recently taken on, eats out most days and takes expensive holidays. He has few assets.

Do we have views on which of these, if any, is rich? Do people have moral preferences over who should pay more?  Should we tax income more, because it is available to be paid to the government as it comes in? Should we tax assets more, to make people reorganise their assets?

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Taxing the rich.

Here’s a surprise. I agree with the three main political parties  in the UK that we have to tax the rich. They are right to say most of the tax has to be paid by those with the higher incomes and with more assets.  All three main parties have been living high on rhetoric about taxing the rich and closing tax loopholes for the last decade, and all three in power have decided to put tax rates up and impose new taxes on the rich. It’s certainly worked. The top 1% of Income taxpayers pay 27.5% of all Income Tax, and the top 25% pay 75% of all Income tax paid.  44% now pay no Income Tax.

Some of this is not  socialism but  commonsense. There’s no point setting out to extract tax revenues from those who have little income and  no assets. Even the steeliest state tax tyrant knows you can’t get money out of those who do not have it in the first place.

The issue between socialism and commonsense is how you tax the rich, and by how much. Socialists want to tax the rich because they do not like them. They do not mind if they tax them beyond the point where they leave the country or to the  point where they are no longer rich enough to pay the extra taxes. Sensible Conservatives want to tax the rich because we want decent public services and understand it is the richer part of the country that has to pay for the bulk of them. We want to tax the rich in ways which will coax the money out of them we need for a decent society, without taxing them so much that they leave, stop investing, decide  not to participate fully in the private sector economy for fear of having to pay more. We believe in the power of aspiration. Many people who start out with no assets and little income aspire to have assets and a decent income. Too much tax can blunt aspiration or thwart ambition.

This poses two questions. What is the right rate for taxing income and consumption of luxuries? Tax at too high a rate and you will collect less revenue and do damage to the productive economy. Tax too high and the marginally ambitious for a better lifestyle will conclude it is too difficult. What is the right balance over taxing things the rich do which are usually thought of as a good if others do it, like buying a home or investing in a pension fund.?

It is clearly right that we will only have a successful economy if the rich share their surplus somehow with those on lower incomes. We rely on the rich to invest in businesses that will employ others, to buy luxury items and services which others supply, to redevelop our cities and build new buildings. If they do not spend and invest enough willingly, the UK economy may be impaired. Germany’s refusal to share her massive surplus with her partners in the Euro shows what misery large scale underspending and underinvestment can create if the rich surplus holder is too cautious.

Taking some of the money off the rich in taxes does ensure more of it is spent, as much of this money is given to people on lower incomes as benefits or in the form of public services free at the point of use. Take too much and you may get the opposite effect, as the rich go elsewhere or adapt their behaviour to an even more cautious private sector pattern. If a relatively well off person feels their tax rate is too high, they may well spend less to conserve what money remains.

In subsequent posts  I will look at what this means for the detail of tax policy on income and assets.

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Some of you want to talk about Syria and want to know why I have not written about it. The main purpose of this website is to raise issues I am pursuing for constituents and for the wider nation. The aim is not to mirror the concerns of the media all the time, or to try to repeat what they do. Nor am I going to post items which assert that the main news media have got this story of the missile attack factually wrong.

I aim to present news, not recyle olds in the way so many media journalists do. That is why I have wanted in the last few days to highlight Network Rail’s losses on derivatives and foreign currency borrowing, because you cannot see or read that elsewhere . That is why I have sought to provide background and new analysis to the policy work and exchanges underway over Gibraltar, Brexit and Scotland.

I have not so far sought to intervene in the recent debate about Syria. This is mainly a matter for the USA, the country that decided to take limited military action against the Assad regime. It does not look as if Mr Trump wants ro get involved in a major way in the Syrian civil war, which is probably wise.

As I have pointed out before I do  not back either  Sunni or  Shia. I have no view on who could best govern Syrian and reunite it around a peaceful governing policy that can  bring  people together. I have no love of the barabric attacks on his own people by Assad, but nor do I have any time for one of his main opponents, the terrorist movement ISIL. I am also aware that there are other unpleasant murderous groups at large who also do not deserve our support.  I have heard previous UK ministers in the  Coalition argue we need to help so called moderate  rebels.  So far there is no evidence of a powerful enough group who could both defeat ISIL and Assad simultaneously and then rule a peace loving country thereafter. One of the reasons the West’s interventions have been sporadic and so far unsuccessful is trying to find a side we want to win the war.

Mr Obama threatened Assad  if he used chemical weapons but  failed to enforce his threat. Mr Obama allowed Russia to take a much more prominent role in suppport of Assad, making it  more dangerous and difficult for the west to intervene militarily.

I suspect Mr Trump will not wish to extend his  military involvement, and will hope Assad will now desist from using chemical ordnance. Presumably were Assad to use chemical weapons again there would  be further US attacks.  The aim seems to be to try to get more of the protagonists  into talks. Recent events will clearly disturb efforts for there to be more collaboration between Russia and the USA to fix world problems. Mr Trump hopes that Russia will  now exercise more discipline over Assad, and will see the need to seek a peaceful political solution to Syria’s riven factions in conjunction with others around the negotiating table. Let’s hope that works out.

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The curious case of the Scottish economy

Before the EU referendum the Scottish economy was growing far more slowly than the UK as a whole. From the 2008 crash to 2015 the Scottish economy only advanced by 4% in cash terms, compared to 23% for the UK. Since the referendum the Scottish economy has continued to underperform. On the latest figures the UK is growing around 1.2% real more per annum than Scotland, with the Scottish economy in danger of stalling.

It clearly isn’t the EU referendum doing that as a few would suggest. It is a longer term Scottish  trend. Part of the reason is the decline in oil output. The North Sea fields are in decline. As oil volumes and revenues tail off, so that has knock on effects to the supply industries and the service sector that has lived off the oil industry where it is strong.

Recent figures show disappointing results for manufacturing as a whole, and a weak balance of payments. Scotland spends more per head in the public sector than England. Scotland borrows more as a percentage of GDP to support public spending than the UK as a whole. If larger deficits and higher public spending made for more growth , Scotland would have a more successful economy than England. It does not seem to.

I would be interested in views on why Scotland has been lagging, and what the Scottish government can and should do about it. The SNP live on the fact that the Scottish average GDP per head is  not too bad compared to the UK and European averages, but this relies on the residual advantages of a declining North Sea oil sector and past achievements from pre the 2008 crash. They need to answer more of the questions about the disappointing performance over the last decade when they have been in office, and to explain why so far their approach has not even succeeded in getting Scotland back to the average growth rate for the UK as a whole. The crash of course hit the high value added financial sector whose Investment Bank activities were concentrated in London, but this has  not had the same impact on the London economy as the oil decline on the Scottish one.

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