Published:

22 comments

FLIGHT Howard 2

Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004.  He is now chairman of Flight & Partners Recovery Fund.

The cost of the EU

The EU Reforms that are needed are manifestly major.  At £133 billion per annum (for the UK, E14 billion and E7 billion net), costs are both unacceptable and unaccountable.  The CAP, which costs £44 billion, remains a protectionist waste.  £5 billion goes on taxpayer-funded politics, with the EU typically financing 40 percent of these organisations.  The EU now has 140 Embassies with 44 diplomats in Barbados alone!  The respected monetarist economist, Tim Congdon, calculates that, in aggregate, EU membership costs roughly 11 per cent of UK GDP – of the order of £170 billion a year, of which 5.5 perc ent comprises the costs of regulation and, particularly, the resulting reduced employment; 3.25 per cent the costs of resource misallocation and, particularly, the CAP; and 3/8ths per cent the cost of waste, fraud and corruption.  Since 1998, the cost to the UK of regulations of EU origin has been £88 billion, and now costs UK businesses £7 billion per annum.  The crucial issue is that this is not accountable to national Parliaments or Governments, as we have recently witnessed with the failed attempts to reduce EU expenditure (where the requested cuts were simply pushed forward into next year’s expenditure budget).

For the UK economy, the worst effect has been the regulatory assault on the UK Financial Services industry.  While evidently not the most popular sector, it contributes £65 billion (13 per cent) of total UK Government tax receipts and earns a similar amount for the UK internationally – effectively helping to pay for all the cheap Chinese imports.  It employs over a million people and contributes 12 per cent of the UK’s GDP.  It was a disaster for the Brown Government to have ceded sovereignty for financial regulation to the EU.

Tax credits and the minimum wage

We had first the MIFID Regulations, which were poorly suited to UK practice, where the proposed MIFID2 contains protectionist measures which would damage third party involvement with London.  The Alternative Investment Fund Managers Directive (AIFMD) will cost the investment management industry a fortune, encouraging those who do not market to the EU to locate elsewhere.  It was intended as an attack on hedge funds, but affects the whole range of funds other than UCITS – e.g.:Investment Trusts and VCTs.  The massive reporting and risk analysis requirements are unlikely ever to be read or used by anybody, or to make any useful contribution to the management of the funds and managers who are required to AIFMD report. Worst of all, we have the proposed Financial Transaction Tax (FTT) which would be a disaster for London, albeit that the UK will remain outside the regime.  It would impose huge costs on financial transactions entered into in London with any FTT member state; and using a route which is legally questionable, would oblige the UK to collect the tax on such transactions.

We are seeing Brussels deliberately imposing a range of anti-competitive measures aimed at the UK’s Financial Services industry/the City, which constitutes our biggest and most important industry from the perspective of GDP, overseas earnings and tax receipts.  Without a major roll-back of this, international organisations based in London will move their operations for markets other than the EU to other locations.  I hope the Government and the Chancellor, in particular, understand the magnitude of reform that is required across the board in reversing the ever-rising number of laws and regulations which overrule our Parliament, and, particularly, as regards financial regulation.

Back in 1974, the Heath Government sought to introduce a negative income tax regime, essentially similar to the tax credits introduced by Chancellor Brown.  The leading Labour politicians then argued, convincingly, against a negative income tax on the grounds that it would lead to the suppression of natural pay increases and end up costing a fortune, much as had the “Speenhamland” system in the early 19th Century.  This is precisely what has happened.  I argued against Tax Credits being introduced at the time, quoting the well-considered opposition of previous Labour politicians back in 1974 to the negative income tax proposals.

Not surprisingly, the Government is now considering increasing the minimum wage to try to offset the effect of tax credits in holding down pay and so ballooning their costs.  This would, however, represent little more than a sticking plaster measure.  The tax credits regime needs to be abolished, to allow wages to reach their natural, market levels, with compensation where required via the welfare payment reforms.

In the wake of the 2008/09 financial and economic crisis, it may have been a good thing, in the short term, that tax credits suppressed wages, thus enabling employment levels to hold up; but in the longer term, wages need to be driven by market forces, and individuals need to see that if they improve their skills, their take home pay increases.  Moreover, the sort of massive subsidisation of employment which Tax Credits represents leads, inevitably, to over-employment in many areas and a fall in productivity growth, (as occurred with the Speenhamland system) as we have seen over the last 5 years.  Hiking the minimum wage by Government dictate may reduce the current costs of tax credits, but will also serve to price unskilled employees out of work.

22 comments for: Lord Flight: The cost of the EU

Leave a Reply

You must be logged in to post a comment.