Taxation As Punishment

There is a profound dishonesty about Alistair Darling's pre-budget report. It didn't suprise anybody, but as usual with New Labour, anywhere there is substance, there is also obfuscation. Stealth is the norm.

But even the substance lacked substance. The big ticket items, i.e. a 1% increase in National Insurance and the freezing of personal allowances, will raise an estimated £4.4bn and £2.2bn respectively. Against a backdrop of a £178bn deficit, these are paltry. But the NI increase, to all intents and purposes an increase in income tax, can be disguised as omething else, and few will spot the freeze in personal allowances at all.

At the same time Darling has actually loosened the purse-strings in his ludicrous ring-fencing of what he calls 'front-line' spending, in a midly offensive military analogy.

But the high-profile items, such as a tax on evil bankers, are simply designed to please the electorate. And this is becoming a theme. The government has begun taxing unpopular people (mainly bankers and the rich) because they must be wicked and therefore they deserve to be taxed. Never mind if the new tax actually loses the exchequer funds, as is likely with the bank bonus tax.

Whether we like bankers or not this should worry us. Tax is for the purpose of allowing government to fufill its responsibilities. Full-stop. It should not be used as a punishment, or even worse, as social engineering (a tax on fizzy drinks is now being enthusiastically discussed. Save our teeth, Alistair!)

The electoral dividing line is whether VAT will go up or not. Labour have hamstrung the country by promising it will not. They have therefore committed themseleves to years of swingeing taxes on jobs and production.

But if there have to be tax increases, and the enormous debt mountain burgeoning under us mandate that, then wouldn't a tax on consumption be better? That would be green, right? And what's the best way to achieve this? A hike in VAT. It's the 'least bad option'.

But don't expect the debate to be honest. As we hit election season, truth is always the first casualty. The first real budget will be the one after the election, regardless of who gets in.

Goodbye, Dubai

How can such a tiny place as Dubai cause such amazing ructions in world markets? My little bro, BalancedPaul, has long worked with Middle Eastern investment organisations and he has unique knowledge to share. Here's his brief but insightful take:

Before...

I have been asked to guest this week on the subject of Dubai. This raises two thoughts: one, I'm flattered and two, Ubergrumpy doesn't know me very well. Nevertheless having pretended some inside knowledge I'd better deliver something. So here goes.

Dubai is one of seven autonomous Emirates that makes up the UAE. Together with Abu Dhabi, Dubai dominates the UAE. That is, however, rather like saying that Canada dominates the Americas along with the USA. No prizes for guessing which Emirate is the USA.

Up until the 1920's Dubai's main source of income was pearling - the Great War saw an end to that however the discovery of oil (the UAE has the sixth largest proven oil reserves) gave Dubai an economic leg up. The rulers of Dubai (the Al Maktoums, of horse racing fame) foresaw the end of oil and wanted to diversify. They chose finance and construction.

The construction boom was so successful that oil only contributes 6% of GDP. This is a good thing as Dubai is running out of the stuff, and all the real oil wealth belongs to Abu Dhabi.

...and after.

The construction boom gave us the palm island development and the Al Burg, the world's tallest freestanding hotel; seven stars! It also landed Dubai with eye watering debts in excess of $100bn. This may not seem so huge compared to the UK national debt of $1.3 tn or so, but per capita (Dubai contains a shade over a million souls) this equates to near $100,000 a head.

Of Dubai's $100 bn debt, only a small proportion is sovereign. This is important; the confusion between sovereign and quasi-sovereign is what causes the uncertainty and it is uncertainty that spooks the market. It is this opacity, often a feature of Middle Eastern enterprises, that militates against western style dealing. Take your pick - structural opacity or complex instruments that lead to unquantifiable risk. The fundamental issue is that business in the Middle East is not as straightforward as some overpaid bankers think it is!

Luckily it is always good to have a rich brother¹ so the Central Bank of UAE has guaranteed Dubai's banks liquidity in case of a run. Nakheel (effectively a state construction company) has asked for a moratorium on its debts and the amount in global terms is small but, bankers being bankers, it has caused panic around the world's financial markets.

Could it be that they are waking up to the fact that Dubai is an Empire that is, literally, built on sand?

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1 - Whatever could you mean? - UG