PFM Board
Medium Term Expenditure Framework => The Revenue Framework => Topic started by: John Short on December 11, 2024, 09:57:14 GMT
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Economics and politics – Do the politicians speak to the economists, do they listen and do they understand?
In the UK there have been tax policy changes in the last budget to support a fiscal table where revenue has to fund current spending and borrowing targeted at capital spending governed by an expanded fiscal rule. Autumn Budget 2024 (HTML) - GOV.UK
There has been tinkering with various taxes following the Manifesto pledge “We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” As a result National Insurance on employee has been increased.
National insurance explainer (Budget October 2024 update) https://www.tax.org.uk/national-insurance-explainer-oct24 To quote “A National Insurance Fund? What does it fund?
It funds contributory benefits such as the state pension, contributions-based jobseeker’s allowance, contributory employment and support allowance, maternity allowance, and bereavement benefits.
The fund operates on a ‘current need’ basis; i.e. this year’s contributions pay (broadly speaking) for this year’s benefits (of which state pensions amount to about 90% of the benefits paid out). If you pay NIC, you are effectively paying for the benefits and state pension received by today’s claimants, your contributions are not set aside by the government to be paid out when you reach the state pension age or need to claim other benefits in the future.
However while the fund is limited by law (the Social Security Administration Act 1992) in terms of what it can be used for it would be wrong to think of it as a totally ring-fenced pot of money. If the fund builds up a good surplus then it lends money to other parts of government, effectively reducing the national debt.
On the other hand, if the fund runs low and there is a risk of there not being enough money in it to pay the benefits in question the Treasury tops it up from general government funds.
There is no automatic relationship between the total amount raised from NICs and the generosity or otherwise of contributory benefits.)”
Since the budget there has been an outcry from both the private sector and the public sector as costs of employment has been increased which it is claimed will necessitate cuts in employment, increased prices or the need for increased transfers from the Treasury to fund the increased costs.
The question is has the Government missed the opportunity to revamp and reform the direct taxation system by its manifesto pledge? Could it not have done away with National Insurance and raises the necessary revenues by adjusting direct tax rates and thresholds for employees and increasing profit taxes for employers to raise the same amount of revenues from both categories? And link the benefits system to the direct tax system if so needed? At the same time it could have taxed all sources of income under this new tax policy. (It may need to have a withholding tax on dividends that are paid out of the country to ensure that they are not tax free as the USA does).
Universal Basic Income: Personal tax taxation reform is essential https://pfmboard.com/index.php?topic=9099.0
This simple overall change in policy would also reduce the level of public expenditure by the employers’ national insurance contribution as it would no longer need to be funded.
Another area of content from the budget has been inheritance tax on farms which had been exempted. Summary of reforms to agricultural property relief and business property relief - GOV.UK
Much of the justification has been centred on the ways to avoid it which suggests that this has not really been thought out and breaks the good tax rules espoused by Richard Bird and outlined on the PFM Board in Professional Diaries #2 Taxation - 25 years of progress? https://pfmboard.com/index.php?topic=7707.0
And so to the USA and tariffs being the most beautiful word in the English language! On much of the “debate” there has been no mention of Effective Protection nor indeed Nominal Protection just tariffs and this is more of a political negotiating too. The late greats Béla Balassa and Max Corden would be aghast!
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Donald Trump says he wants to introduce more tariffs on imports during his second presidency. He’s mentioned targeting imports from countries including Mexico, Canada, China and Demark as well as floating the idea of a universal tariff on all goods coming into the US.
So why does Trump like tariffs so much? What can we realistically expect him to do? And what would the effect be on the rest of us?
Good presentation and analysis
The Briefing Room
Why does Trump love tariffs?
https://www.bbc.co.uk/sounds/play/m0026nh1
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Interesting article in IMF F&D Magazine
Behind the Veil of Tariff Fixation
MICHAEL PETTIS
September 2025
The world needs a broader conception of trade policy that considers how economies allocate income
"In the heated debates over trade policy in Washington and beyond, tariffs are often portrayed as the primary—or even the sole—instrument by which governments intervene in global commerce. They are easy to quantify, easier to politicize, and readily wielded in bilateral negotiations.
But this focus on tariffs is misleading. It obscures the more fundamental mechanisms by which countries shape their trade relationships with the world. Because a country’s internal imbalances between consumption and production must always be consistent with its external imbalances, anything that affects the former must affect the latter, and vice versa. Tariffs are just one of many tools a government can use to change a country’s internal imbalance.
Like most such tools, tariffs work by shifting income from consumers to producers. But because of their visibility, they are often among the most politically contentious of these tools. By contrast, many of the most powerful trade interventions in today’s world occur not as tariffs but as policy choices that don’t appear to be related to trade at all. Fiscal decisions, regulatory structures, labor policies, and institutional norms can all affect how income is distributed, and how economies are balanced between consumption and production, with far-reaching implications for global trade.
To understand why tariffs receive such disproportionate attention, it helps to consider their visibility. A tariff is a line item in a trade negotiation affecting the price of an imported good. It’s easy to identify, easy to weaponize, easy to reverse, and very obviously linked to trade. But the very simplicity that makes a tariff politically salient also makes it a poor proxy for trade policy as a whole."
https://www.imf.org/en/Publications/fandd/issues/2025/09/point-of-view-behind-the-veil-of-tariff-fixation-michael-pettis