EURO TAXES: A RETROGRADE STEP

Janusz Lewandowski, the EU’s Budget Commissioner, has proposed an EU-wide tax to finance the European Union’s budget. A tax on financial transactions, a tax on air travel, and a tax on energy consumption have all been mooted as a possibility. Although I am mildly pro-European, I can see no sense in imposing an EU-wide tax: such a move is undemocratic and self-defeating.

I have always believed that a European Union of freely-trading sovereign nation states, which come together to tackle common problems is the kind of European Union that will benefit Britain. The attractions of a single market that spans continental Europe, within which there are no barriers to trade, are overwhelming. However, I do not- and never have favoured a Federal Europe: such a Europe would most probably be protectionist, corporatist, bureaucratic, centralised and inward-looking (a Fortress Europe). My eurosceptic side has no problem with the concept of ‘ever closer union’, so long as it is in the spirit of the Treaty of Rome and an ever closer union between the peoples of Europe, through the strengthening of cultural ties and mutual understanding, as opposed to the idea of ever-more centralisation and interference from the Commission. I am opposed to the imposition of a common external tariff, believing the the EU should set an example to the rest of the world in opening its borders to trade from the rest of the world. A European Union that not only allows free-trade between its members, but also allows for free-trade with the rest of the world would be a richer and more prosperous Europe.

My opposition to the imposition of these taxes, or indeed to any form of tax harmonisation within the EU, is both political and economic. I am a great believer in the Reverend Mayhew’s maxim “No taxation without representation”. The EU Commission, from which this idea has emanated, is not directly accountable to the peoples of Europe. The appointment of EU Commissioners has always been a matter of political patronage, and sometimes a good opportunity to exile political embarrassments (Lord Mandelson, anyone?). It would be an insult to representative democracy to allow an unelected group of officials to impose a tax upon us- we cannot remove EU Commissioners, we have not elected them, and they do not have to listen to us. Because we have not elected these people, and they are not accountable to the peoples of Europe, we should not be forced into paying an EU-wide tax.

On the economic side, I am left wondering why the EU is so afraid of tax competition between its members. It was Chris Patten, a fellow pro-European, who rightly observed that a competitive tax system within the EU would allow for higher growth rates. Mrs Thatcher made equally compelling and correct observations regarding the need to oppose tax harmonisation, stating in her memoirs that “competition between tax regimes is far healthier than ... a single system”. For a start, as Mrs Thatcher points out, and I agree entirely, that tax competition forces governments to reduce the burden of taxation and maintain balanced budgets, thus keeping inflation low. In concluding the analysis of that particular logical plane, it allows companies and individual wealth creators to move to where the tax regime allows them to make the most of their investments. Increased investment leads to job creation and thus increases prosperity. If the EU is to be successful, member states have to be allowed to compete with each other for inward-investment, for it the member-states that set their own budgets and their parliaments are accountable to their own electors.

The imposition of an EU-wide tax, of whatever form, would set an unhealthy precedent- it would give the Commission the belief that they could start imposing other taxes from the centre, and indeed start directing member states as to how to set their budgets. We have already seen from the financial crisis in Greece, and from our own financial crisis here in Britain, that expansionist economic policies do not work, and that balanced-budgets are a political and economic good. Do we want the EU Commission to start running up fiscal deficits in our name? Giving the EU powers over taxation and spending would be like letting Kerry Katona having access to one’s credit card.

In reference to the Euro, the harmonisation of taxes would be a retrograde step. If the Euro is to be a success, that is if it can be a success given recent events, the Commission must allow Eurozone members to set their own budgets. There is no need for EU-wide taxes, or fiscal transfers between member states, if Eurozone members maintain balanced budgets. For many years, I said that I would support Britain’s participation in the European Single Currency if present Euro-members maintained sound financial policies. This is not happened, as we have seen, and I am now of the belief that Britain has benefited from retaining its own currency- and that we should not adopt the Euro any time soon.

I am sure that David Cameron will do what he can to oppose this ridiculous policy and retain our parliament’s right to set its own budgets. The EU is in need of radical reform to compete with emerging economies such as India and China. A lighter-touch European Union based upon a common partnership of European nations, which is more accountable to the peoples of Europe and which welcomes competition and free-trade with the rest of the world is the kind of Europe that I would like to see.

The Importance of Being Prudent

I was thrilled by George Osborne's first budget last month, which resisted the temptation to increase government borrowing and instead set about reducing Gordon Brown's gargantuan deficit. Of course, our dear old friends- the Labour Party and Scotland's beloved First Minister, Alex Salmond- have condemned the coalition's budget, pretty much accusing us off trying to turn off the life-support machine whilst the patient floats between this life and the next. I do not believe that such a charge is credible- it is based on a misunderstanding of macroeconomic theory and cheap point-scoring.

The problem that faces this government is that of the possibility of a return to recession- in effect, a second credit-crunch. In economic terms, the rate of monetary expansion is slowing down and is thus reducing the volume of available credit which banks can lend to the private sector, subsequently leading to declining growth. Now, the Labour Opposition and Alex Salmond would have us believe that a massive reflationary package- low interest rates combined with an expansion of government borrowing- will keep us out of recession. But will it?

Imagine a person who decides to start a business. They might have some money to start up this venture, but in order to keep their business afloat until they have a steady income stream they will have to rely on bank loans and overdrafts to pay bills, wages and other such overheads. If the economy is tipping into recession, then bank loans are going to harder to come by as banks will be worried about risky lending. So, in order to help keep the economy going, the government may decide to run a deficit to maintain a given level of demand. However, if banks are not lending money due to worries about increasing inflation, government borrowing will only push interest rates up further due to increased demand for a declining volume of credit. An increase in interest rates could be the difference between solvency and insolvency for some companies- particularly those which are in the early stages of start-up.

So what if the government decides to reduce a deficit during a credit crunch? Obviously, if the government is not borrowing money then there will be less competition for loans, and thus there will be more credit available for struggling businesses. A reduction in government borrowing will also lead to lower interest rates, again because there is less competition for credit in the market place. A fall in the rate of interest charged on loans is seen in the same light as manna from heaven in such difficult circumstances.

George Osborne, like Norman Lamont in 1992, has rightly decided that this economic crisis can only be solved by a loose monetary policy and a tight fiscal policy: in lay terms, low interest rates and cuts in government borrowing. We need low interest rates and an abundance of bank lending to help producers expand their businesses, and to help consumers buy goods. We need to reduce government borrowing so that the private sector is not starved of resources. When one is hard-up, one needs to prioritise one's budget: the size of our public sector and its total budget would have made the late Luciano Pavarotti look emaciated. If we want public services free at the point of use, we need to create more wealth in order to have the tax revenues to finance them. The only to do this is for the government to reduce its spending and live within its means. I believe that George Osborne accepts this fact- unlike his predecessor who behaved like the man about to be bankrupted and decided that the only possible course of action was to go out and buy a mansion. But thankfully we have George Osborne as Chancellor, and not his predecessor.