A tall tale

Tweet Last week, the UK Treasury told us that an independent Scotland would be unable to afford to pay pensions unless the country opened its borders to a veritable flood of immigrants, so they had better do the right thing and say no.  No surprise that die-hard unionists should leap upon the argument as ‘proof’ that an independent Scotland would be unsustainable.

But it actually proves no such thing.  What it does prove (as if something so obvious needed any further proof) is that a pensions system which depends on paying today’s pensions out of the contributions of today’s workers will be put under increasing stress if longevity increases and the birth rate falls.  Scotland is not unique in this respect – it’s a problem facing the whole UK, it’s just that Scotland (like Wales) will get there sooner than the South East of England.

The Treasury’s suggested response for Scotland – growing the working population by attracting immigrants – misses the point completely.  It’s a sticking plaster approach (which raises a whole host of other questions), and since longevity is still continuing to improve, one which would need to be repeated for some time to come.

The approach adopted by the UK Government is a more sustainable one (although not one I support) – increase the pension age so that fewer people receive pensions and those who do receive them for a shorter period – but it’s still missing the point.  We need to move to a state pensions system which is more like the occupational pensions to which many of us contribute, that is, one based on savings and investments rather than payments out of revenue.  Even were a decision taken today to do that, it’s a process which would take some decades to complete, and politicians, who always have an eye to the short term rather than the long term, prefer sticking plaster.  It’s ‘only’ the old who suffer as a result.

There’s another problem as well with depending on attracting working age immigrants who will pay taxes here to pay pensions.  It doesn’t actually solve any problem – it just moves it from one country to another.  When large numbers of working age people leave a country to work elsewhere, that country potentially ends up in the alleged position of Scotland today – it’s left with an aging population, unable to properly support those in need.

And in that context, there was surprisingly little analysis of why Scotland (and again, the same applies to Wales) has a population which is aging faster than the UK as a whole, with fewer young workers to support those who have retired.  There are, of course, a number of reasons for that – but surely one of them is the way in which young working people from all the peripheral areas of the UK are attracted to the South East where, on the basis used by the Treasury’s figures, they are now contributing to the pensions of people in the South East rather than those of their own elderly relatives.

In short, migration – which the Treasury presents as the solution – is actually part of the problem.  An over centralised UK economy attracts migrants in from the periphery to the centre and then tells us that the periphery is too poor to look after its elderly and needs help from the centre or massive immigration to do so.  The truly amazing part of this is how many people swallow it.

Why isn't Denmark empty?

Tweet There was a slight misconception underlying the reported comments of Gerry Holtham at our conference over the weekend. Since I wasn't at the session, I'm not entirely sure how and where the misconception arose. The implication of what was reported was that our proposal to reduce the level at which the new top rate of income tax would apply from £150,000 to £100,000 was a 'Wales-only' proposal. It was not. Since this is a UK election, our sums have been worked out at a UK level.

Notwithstanding that misconception, it's worth considering whether such a difference could be introduced on a 'Wales-only' basis, and what the effect might be. The suggestion of detractors is that any application of higher taxes in Wales than in England would more or less automatically lead to an outward migration. Actually, we can widen the issue beyond the 'Wales-England' scenario; some opponents of Labour's current tax proposals have argued that there will be an exodus from the UK as a result.

So, do differing tax regimes in neighbouring countries really lead to mass movements of people? I'm not sure that there is any real evidence to back up such an assertion. Denmark has a top rate of 58%, whilst neighbouring Germany only goes as high as 45%, but Denmark doesn't seem to have been depopulated as a result. Some of the latest countries to join the EU have very low top rates of tax, but there's been no huge movement of people from higher tax areas to lower tax areas.

It might be argued that the question of migration based on tax rates doesn't apply to all of us, merely to the highest earners, and that they take their wealth-creating skills with them. Again, where is the evidence for this? I'm sure that someone can point to one or two high profile cases, but there really is no evidence that a difference in tax regimes causes significant levels of migration.

In reality, people decide to either stay put or migrate elsewhere for a variety of reasons; and economic advantage is but one of those. And even economic advantage is assessed by reference to a range of factors, of which income tax rates are simply one. There is nothing wrong per se with different countries, even neighbouring countries, having different tax regimes, including different rates of income tax, as long as the overall economic conditions are conducive to the sorts of businesses and economic activities which we want.

I wouldn't suggest that that's a balance which it is easy to achieve; but the bogeyman of people leaving is often more a way by which opponents of a more redistributive tax regime seek to defend the position of the few, rather than being a real problem.