How do we decide who to subsidise?

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There is not a tax-paying business in Wales (or in the wider UK come to that) which would not instantly look more profitable if it didn’t have to pay tax (with the caveat that abolishing tax on that business or that class of business is the only change). However, it does not follow from that assertion that tax is the 'problem', holding business back by making them unprofitable. Yet that often looks like the conclusion that politicians draw, when they demand that taxes be reduced on one or other type of business. The latest example a few days ago was from a Plaid MP in relation to beauty salons; but there are plenty of other examples of MPs in other parties demanding similar concessions for other businesses. But the bottom line is that, in simple terms, a business which cannot sell enough of its goods and services at a high enough price to cover all its costs (including tax) and make a profit does not have a viable business model in a capitalist economy.

The bigger problem, though, is that cutting a tax here or there to make a business viable is a micro-economic approach to a macro-economic question. Even supposing that it were possible to isolate a single tax change, a tax cut in one area might increase the spending power of individuals or businesses in that area, but for those who believe that any changes must be ‘fully-funded’ based on the household analogy (a category which seems to include most politicians in most parties), there needs to be a corresponding tax increase in another area. Overall spending power in the economy then remains unchanged – it’s just that spending power has moved from one group to another.

That’s not necessarily a bad thing. Using taxation policy to encourage some types of economic activity and discourage others is an entirely valid, not to say sensible, approach. Governments trying to determine which businesses should succeed and which should fail at a company level isn’t exactly a policy with a good track record, but identifying that deploying resources into certain types of activity serves the economy and society better than deploying them into others is a worthy aim. And if the limiting factor on growth is, in fact, not a lack of money but a scarcity of real resources, encouraging particular uses of those resources is essential to any policy aimed at achieving higher value growth with better-paid jobs.

Without disparaging in any way the training, skill and professionalism of those working in any particular sector or business, and with no particularly strong view on whether beauty salons per se (or whatever particular type of business for which an MP advocates) do or do not justify special treatment, when I see a call for special treatment – by any MP, for any business – the question I ask myself is whether or not that is the type of economic growth that we want for the Welsh economy, or whether the same resources could more usefully be employed in other activities. Building a strong Welsh economy might just require a certain hard-headedness and, if we’re going to call for subsidies (and that's what selective tax cuts are), maybe we should start by identifying what activities we most want to see increasing, rather than simply responding to those which say they are struggling.

Understanding compounding

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There is, apparently, no hard evidence that Albert Einstein ever described compound interest as the eighth wonder of the world, although the quote is widely attributed to him. Whoever did or did not say it, there is an underlying truth about the power of compounding. It is not well understood however. And pensions is a case in point. The pensions triple lock is an example of compounding in action – at least, in the years where both wage and price inflation are below 2.5%. In those years, the third element of the formula – the increase by 2.5% – increases the spending power of the state pension (albeit by a small amount) compared to inflation, but because that increase is a permanent increment to the pension, it is part of the sum on which the following year’s uplift is calculated. Over time, it will serve to increase the spending power of pensioners – which was, of course, the original intention, following the years of decline in pensioner spending power after Thatcher broke the earnings link.

What it means, though, is that those who benefit most from a long term implementation of the triple lock aren’t today’s pensioners, nor those close to retirement age, but those furthest away from retirement age, giving the power of compounding time to work its marvels. It’s strange how poorly understood this is.

This report from Saturday, tells us two things about Generation Z and millennials. Not only are they worried that their state pension will be worth less when they eventually retire than it is today – they are also the group most keen on abolishing the triple lock. On the other hand, those keenest on retaining the triple lock – existing pensioners and those about to retire – are the groups who stand to gain least from it. It's an inversion of the reality.

It highlights a lack of understanding of the basic mathematics of compounding, certainly. But it also highlights two other things. The first of those is an essentially short-term outlook on finances. And the second is the power of relentless propaganda telling us that a slow increase in pensioner spending power over the long term is somehow unfair to those who are working and paying taxes today, ignoring the fact that they will be the beneficiaries. As ever, the questions we should be asking are firstly, what is the ‘right’ level at which to set the state pension, and secondly, who benefits from the abolition of the triple lock. The first is a difficult question; it’s easy to see why politicians and governments try to avoid answering it, because the answer is almost certainly going to be ‘significantly higher than today’s level’. As for the second, well, as long as politicians and governments continue to promote the household analogy for government finances, those who benefit from reduced government spending (and a consequent reduction in taxation) will always be those who hold the most wealth and the highest incomes. What a surprise.

Who is really being subsidised?

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The hospitality sector is up in arms about changes to business rates which, they say, will make their businesses unsustainable, and are asking for changes which will reduce the amount of tax that they need to pay. They are saying, in effect, that they are unable to charge a price for their products which is sufficient to cover all their costs plus returning a reasonable profit. Looked at in hard market capitalism terms, as discussed here, that means that many of those businesses are simply not viable. Left to its own devices (which is what many capitalists claim to want), a capitalist market would force a reduction in capacity (some businesses would fail) such as to achieve a new balance between supply and demand at a (higher) price which makes the remaining businesses viable.

Now I’m not a huge fan of unfettered capitalism, and whilst markets are, in general, an efficient way of allocating resources, the idea that they are or should be completely unregulated is not a sensible way of determining social priorities. Governments have always interfered, in various ways, to moderate the impact of markets in pursuit of wider goals. And the government may well be right in thinking – for reasons of employment retention, or for reasons of social cohesion, that maintaining a higher level of provision of restaurants, pubs and hotels than the market can profitably sustain is a good thing, and thus decide to offer some sort of assistance. Those in the sector want to see that assistance in the form of reduced taxation, but it isn’t the only way of achieving the aim. Tax breaks are a form of subsidy. They don’t always look like that, because it involves taking less from the business rather than giving them a handout, but a tax regime which adjusts rates for some categories of businesses in order to keep otherwise unviable businesses in existence cannot be other than a selective subsidy.

It isn’t the only way of providing a subsidy. The government could, instead, decide to take the same amount of money and issue vouchers to each household, enabling them to enjoy a discount off the bill for food and drink – subsidising the pints not the pub. It looks very different, of course, but the effect is the same: people would be able to go out and enjoy a meal or a drink which they couldn’t otherwise afford, and the businesses would be receiving an income sufficient to make them viable. Better yet – for those who are greater fans of markets than I – it would enable the consumers to choose which pubs and restaurants received the extra custom and therefore money, rather than being a blanket subsidy for all.

For a number of reasons, I wouldn’t actually propose that, but it’s interesting to note that many of those demanding tax breaks would be furious at the idea of ‘giving’ people money to eat out. It’s a universal benefit which they are getting without working for it, they would argue. Yet, in economic terms, it’s exactly the same thing: the same amount of money produces the same effect in terms of people being able to afford food and drink and businesses remaining viable. It raises an interesting and more general economic question: when the government gives a subsidy, who is it actually subsidising? Is it the business, the owners of the capital involved, the consumers, the suppliers, or the employees? In practice, all of those people benefit in some way or another, regardless of the form in which the subsidy is paid or to whom it is paid. So why is a ‘tax break’ deemed an entirely valid approach, whilst a handout to customers is some sort of undeserved freebie? The answer, of course, lies in who sets the agenda and boundaries of debate. And it isn’t the customers.

Following the money

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There is a popular meme, which has been shared many times over on Facebook and elsewhere, claiming that the reason why so many of the wealthiest in our society are so keen to ‘get Brexit done’ this year is to avoid an EU-imposed deadline on tax avoidance.  It’s been well and truly debunked – whilst it’s true that the EU is not over-keen on tax avoidance, there simply is no specific legislation coming into force in January which Brexit will help people avoid.  The meme retains its currency and potency, however, because it is otherwise so easily believable.  One only has to look at some of the financial backers of Brexit to see people whose whole behaviour is enough to convince anyone that they probably would be venal enough to pursue a course of action designed primarily to help them avoid the application of the same laws as apply to we lesser mortals.

I’m sure that the story in today’s Guardian, highlighting the extent to which the UK (together with its offshore territories) is a haven for money-laundering, corruption and tax evasion will reinforce the belief that those making a personal fortune by gambling and speculating with our money and by avoiding the taxes which should be due on their ill-gotten gains are indeed supporting Brexit for reasons which have nothing to do with giving money to the NHS, controlling immigration, or any of the other spurious reasons that they’ve given.  Taking back control, however, just maybe – but in the generic sense rather than the specific.  Co-ordinated, international action against dodgy dealing doesn’t suit their purposes, but having individual jurisdictions competing on tax and regulation most certainly does.  The EU is a threat to them – not in the narrow sense of specific regulations as portrayed by the meme, but in the generic sense that international co-ordination makes it harder for them to play off one jurisdiction against another.  Maximising competition between jurisdictions is in their interest (which is why they see Brexit as just one step - their real aim is to destroy the EU), and as long as competition exists, a clamp down in one jurisdiction merely encourages them to shift their anti-social activities elsewhere.  Effectively controlling corruption, money-laundering, and tax evasion requires international co-operation and co-ordination, and that, ultimately, is why they’re so opposed to such co-operation.  And I doubt that such co-ordination and co-operation will figure very large, or even at all, in any post-Brexit trade talks.

What a strange coincidence - or maybe not

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It seems to be a well-established practice that all spending pledges made by the Labour Party must be accompanied by a detailed analysis of where the money will come from, whilst Conservative politicians are allowed to make wild promises as and when they wish, depending presumably on an assumption that the magic money tree only works for Tories.  The media, by and large, play along with this, and the Labour Party make themselves vulnerable by dutifully falling in with the requirement rather than arguing that government finances simply don’t work that way. 

The front leader in the Tory leadership race has duly obliged by promising to reduce taxes for higher earners.  Some of his opponents have criticised him for this pledge, but I wonder if that’s mostly because of regret that they didn’t think of it first.  It’s been made clear that the main beneficiaries of his proposal would be rich pensioners.  By a curious (and I’m sure entirely unrelated) coincidence, the final choice of leader will be made by members of the Conservative Party, a group in which rich pensioners are extraordinarily over-represented.  To be blunt, what did people expect of someone whose only interest is himself?  Trying to win a context in that particular electorate by promising to increasing the living wage shows a remarkable lack of awareness about the concerns of the target audience.  For what may, perhaps, be the first time in his life, Johnson is being brutally honest – he’s identified those who can make the difference to his chances and is deliberately setting out to buy their votes.  What the rest of his opponents – let alone the public at large – think of that is irrelevant to him.

Facing the reality of choices

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I’ve posted before on the debate about devolution of Air Passenger Duty (APD) to Wales, and the fact that many of those supporting its devolution are confusing the means and the ends.  As an independentista, I’m always going to support the devolution of more taxation powers to Wales (although I tend to the view that it’s more about claiming our right to levy taxes than having part of the power graciously devolved back to us), but that isn’t the same as supporting the immediate reduction of those taxes as soon as they are devolved, which is the real objective of many of those arguing the particular case for APD.  It is for the Welsh Government and the Assembly, once in control of taxes, to decide how to set the level of those taxes and rebalance the raising of revenue between them, and the interests of the state-owned Cardiff airport aren’t the only interests to be considered.

Given the emphasis being placed on climate change by so many Welsh politicians, one has to seriously question whether encouraging an increase in air travel (which is the deliberately planned outcome of a reduction in APD) is in any way in line with the demands for the declaration of a climate emergency.  It will be interesting to see how those making that demand respond – but I’m not going to hold my breath on that.  Interestingly, one devolved administration in the UK has already faced up to that contradiction, with the Scottish Government announcing this week that its planned cuts to APD will not now go forward.  It’s a bold move, breaking a clear pledge given in the past, but who can honestly disagree with the assessment by the Finance Minister that reducing the tax is “no longer compatible” with its climate targets.  It’s the sort of change in policy which governments need to be making, rather than simply declaring symbolic emergencies.

The decision to change tack was greeted with the inevitable criticism by those involved in the aviation industry who remain committed to growth regardless of impact, but there was one comment by the Chief Executive of AGS Airports which struck me as a good illustration of very different understandings of economics.  He said that, “Over the course of the past year alone, we have seen the withdrawal by airlines of almost 30 routes from Aberdeen and Glasgow airports because of Air Passenger Duty".  I’m not in a position to dispute whether that number of 30 is correct or not, but he’s probably in a better position than me to judge.  But whether it’s a bad thing as he claims or actually a positive thing that fewer flights are taking place is surely a matter of opinion rather than fact. 

And the idea that it’s “because of Air Passenger Duty” is a complete nonsense.  The truth is that the number of people travelling at the price at which tickets are being sold is inadequate to cover the costs of providing that service (and tax is one of those costs) and return a profit.  The abolition of APD might be enough to fix that mismatch, but that isn’t the same thing as saying that the tax causes that mismatch.  It’s ideology, not economics, which drives the idea that taxes are somehow a special sort of operating cost which ought to be dismissed from consideration in determining profitability and abolished if profitability is otherwise marginal.

Identifying the real beneficiaries

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A few days ago, I referred to Lord Lawson and his decision to seek formal confirmation of his right to live in France, noting that the opposition of Brexiteers to freedom of movement – insofar as they’re really opposed to it at all – was targeted at ‘other’ people, not at themselves.  And particularly at the poorest.

There’s another aspect to this, which is more general in application.  It’s a classic example of the way in which a ruling elite divide and rule.  It’s never the rulers that cause the problems, it’s always others amongst the ruled.  Turning some groups of the disadvantaged against other groups of disadvantaged – and usually those even more disadvantaged than themselves – is a neat way of diverting attention away from where the real inequality in society is lurking. 

So, immigrants, those on benefits, the sick and the disabled – all are turned into targets, and all are blamed for the lack of jobs, poor education systems, and a failing health service.  Those with the most highly-paid jobs, who buy the best education for their children, and pay for the best health care for themselves and their families tell those on average incomes, with access to average schools, and an average health service that the problems are all being caused by those on the lowest incomes, in the catchment areas of the worst schools, in areas which struggle to attract the personnel to provide an acceptable health service.

Among the latest targets are the old, who are apparently a burden on the state because they (perhaps I should now say 'we'!) are using a disproportionate level of resources from the NHS, and not contributing enough in taxes to pay for it.  One of the lowest state pension levels in the EU is presented as ‘unaffordable’, and there are calls for increasing taxation and reducing benefits for the elderly.  Recently, one celebrity called for those in receipt of the winter fuel allowance to be ‘allowed’ to contribute the sum to the NHS instead.  (As an aside, I’m not a fan of the winter fuel allowance at all – it is and always has been more of a political gimmick than a serious attempt to reduce fuel poverty amongst pensioners.  It would be better just to pay a proper level of state pension in the first place than to complicate it with gimmicky extras.  I feel much the same way about free TV licences and the Christmas bonus for older people – more gimmicks delivered instead of increases in the basic pension.)

And it’s true, of course, that the call has been for people to ‘voluntarily’ give up their fuel allowance (and there have been similar calls in the past in relation to the TV licence), but an appeal to people to ‘volunteer’ is in some ways even worse than an enforced change.  As many charities will confirm, the less well-off are often willing to give proportionately more of their incomes; a ‘voluntary’ system of taxes (for that is what we are in effect talking about here) benefits the most well-off rather than the poorest.  And that brings me back to the underlying point here.  The problem is never that the wealthiest do not pay enough tax, it is always that the least well-off receive too many benefits.  And attempting to create divisions between groups in society, including between young and old, is a classic strategy of divide and rule which diverts attention away from the real overall beneficiaries of the UK’s tax and benefit system.

Comparing apples and pears

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One of the difficulties faced by the authors of the Government Expenditure and Revenues Wales study (GERW) was that information on many items of expenditure and revenue was not available separately for Wales, so they had to make estimates.  And any estimate will always be based on one or more assumptions.  There’s nothing at all wrong with that; it’s the only way of producing even an outline idea of Wales’ position.  The problem arises in deciding which assumptions to make; different people would make different assumptions – and I suspect that the same people might make different assumptions as well, if the context were different. 

That question of context is one of the reasons why a study aimed at analysing Wales’ position in the past (2014/2015) within the UK will never produce the same answers as a study aimed at considering Wales’ position in the future as an independent nation.  GERW was clearly aimed at doing the former not the latter, and it seems to me that the assumptions made are reasonable in that context, and that the document therefore helps a great deal to aid understanding in that context. 

If we were to attempt to look to the future rather than the past, even within the context of the continuation of the union, we would need to make a range of additional assumptions about future policies and their impact on revenues and expenditures, and we would also need to change some of the existing assumptions on apportionment of revenue and expenditure.  I won’t cover all of those, but it’s worth considering a few just to give a flavour of the differences which would emerge.

Firstly, what would be the position in relation to the national debt?  What would Wales’ share be?  At the time of the Scottish referendum, the UK Treasury indicated at one stage that it would continue to be responsible for the whole of the debt, even if Scotland became independent.  That was more about reassuring the lenders than about establishing a start position for negotiation; and the SNP’s response (that Scotland would take a share) was similarly about establishing and maintaining international credibility.

But on what basis should we estimate Wales’ share of the debt?  GERW uses a per capita basis, but there are other approaches.  Part of the reason for the debt is current expenditure, so if Wales receives more in benefits should we take a larger share?  But part of it is also about funding infrastructure projects, where Wales receives less money than our fair share, so should our share of the debt be less than on a per capita basis?  And even after establishing a base line (difficult enough in itself) at the point of independence, if we want to project forward we need to make assumptions about future budget deficits or surpluses, borrowing patterns and rates of interest.  None of these factors is entirely straightforward or uncontroversial.

Or take defence spending.  GERW uses a per capita basis – entirely reasonable to estimate Wales’ share of current spending.  But the UK spends around 2% of GDP on defence – other countries spend less (Germany, for instance, spends around 1.1%).  What would an independent Wales spend on defence?  And GERW draws a clear distinction between spending for Wales and spending in Wales; much of the current spending on defence goes outside Wales, which means that we pick up the cost in the GERW figures, but don’t get the whole GVA benefit, or the multiplier effect.  In an independent Wales, whatever we spend on defence would be in Wales as well as for Wales.

Or take pensions.  How do we assign the costs of pensions?  Wales has a higher proportion of pensioners than the rest of the UK taken as a whole.  Part of the reason for that is that people choose to retire to Wales.  Who should pay their pensions?  In a unitary UK, the question doesn’t arise, but in the scenario of an independent Wales, it most certainly does.  When citizens of the UK retire to France or Spain for example, their pensions are paid by the state in which they contributed when they were working, i.e. the UK.  France and Spain do not pay those pensions.  So, in an independent Wales, would Wales be expected to bear the cost, or would the arrangements be the same as they are for any other member country of the EU?  The latter seems likely, but even then there is a further complication – does that apply to existing retirees or only to new ones?  The latter would seem to me to be easier to implement and manage, but the historical commitment might well be a factor which those negotiating a share of the national debt would wish to take into account.

My purpose in all the above is in no way to disparage the work of those who have produced GERW; indeed, we should be grateful to them.  It is, rather, to give a flavour (there are many more points which could be made) of why a study of Wales’ current position cannot simply be extrapolated without significant change to a conclusion about the position of an independent Wales at some future date.  And that's a project which will require a lot more work.

Supporting British jobs

Tweet There seem to be few people in Wales supporting the construction of the HS2 rail link, most of them preferring to argue that Wales should have its share of the money and use it for other purposes.  I disagree – not because I expect Wales to get any benefit from HS2 itself, but because, unless we are going to prevent people from travelling at all, the alternative to better and faster rail links is more runways and aeroplanes.  So I’d prefer to see Wales making the case for HS4 (we’ve already missed the boat for HS3 which is likely to serve Scotland) so that we become part of the high speed network rather than whinging on the side-lines.  And the only way that HS3 and HS4 will happen if they are treated as part of a UK network rather than seeing the three projects as entirely self-contained.

Where I find myself more in line with mainstream opinion in Wales is with the idea that infrastructure projects (of which HS2 is one) are a good way of boosting a flagging economy, and that investing in them can create economic growth and jobs, as well as boosting skills and knowledge in the economy.  It was in that context that I was astounded to see that on his trade mission to China, the Chancellor has urged Chinese firms to bid for construction contracts on the project.

‘Scope creep’ is one of those things which can all too easily happen on any project, but for it to lead to the mission becoming the opposite of the original intention is a rare achievement.  Osborne went to China to drum up business for British companies, with the stated aim of China becoming the second biggest customer for British companies.  There is currently a significant gap between the level of the UK's exports to China (at around £16.7 billion), and imports from China (t around £37.6 billion) - see Figure 2 here, so his aim of increasing UK exports to China is a wholly reasonable one.   But, instead of that, he’s ended up trying to drum up business for Chinese companies in the UK.  Even if the Chinese companies would employ local workers to carry out the work, the profits (and the tax on them) would still end up being syphoned out the UK economy rather than reinvested here.

It’s another take on being ‘business-friendly’ I suppose – it’s just other countries’ businesses that he’s supporting.

Competition and races to the bottom

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One of the reasons which have been given for not devolving Corporation Tax to the Assembly is the fear that it could lead to a ‘race to the bottom’ as the countries of the UK compete with each other to attract industry by lowering taxation.  And one of the arguments put forward by the Tories for devolving Income Tax to Wales is that it would allow Wales to compete with the other countries of the UK by lowering income tax rates.

I find it difficult to see much difference between a ‘race to the bottom’ and ‘competition’ in this context.  The potential effects certainly look very similar.  The point, however, is surely that for devolution of taxation to work, it has to include a sufficient range of taxes so that governments can raise money using taxes in different combinations to suit differing circumstances.  Picking on individual taxes seems almost guaranteed to limit the usefulness of the power, since reducing them simply reduces revenue, in the short term at least.

The Tories genuinely seem to believe that promising to reduce the level of income tax is a vote winner which will transform Wales from a country where the Tories have a respectable and fairly consistent level of minority support to one where they will somehow sweep the board.  I say ‘seem’; but I wonder.  If they were really confident that this approach was going to transform their fortunes, they would have had more sense than to make it dependent on a referendum which is unlikely to be called any time soon and unlikely to inspire much of a turnout if it does get called.

Perhaps it’s some sort of double bluff.  They know that the amount by which they could reduce income tax in isolation in Wales alone is very limited; they also know that the number of voters likely to be swayed by it is not large either, and they just want to sound like a party of lower taxes, knowing that they’ll never have to deliver on any promises.  But is talk of lower taxes really the vote winner that they believe?

The Tories’ pitch on taxation is based on the assumption beloved of economists which is that we are all, ultimately, selfish and will act in ways which maximise our own individual benefit.  Whether that’s a valid assumption is an open question; the evidence is mixed.  Opinion polls seem to suggest that many people would be prepared to see taxes increase if it meant that the money was spent on things dear to their hearts.  But there has also been some research suggesting that the way people talk when asked openly and the way that they vote in the privacy of the ballot box don’t always match.  Public altruism can sometimes hide private selfishness.

The Tories certainly believe that their take on the motivation of the electorate is valid.  Given the willingness of the Labour Party to accept the same assumption, much of the UK’s political debate is framed within the assumption that we are all motivated by selfish and competitive impulses.  It seems to me that that’s what some people mean when they refer to ‘post-ideology’ politics – but all it really means is that the main political parties now share the same ideology.

Blatant bribery

Tweet The UK Government’s new Pensioners’ Bonds seem to be popular amongst those pensioners who can afford to buy them.  There seems little doubt that the whole of the £10bn issue will be sold, and a million or more pensioners will be very happy with the above-average return on their investment.  There are, though, two sides to any investment.  As anyone who’s ever had anything to do with accounting will realise, one person’s savings are another person’s debt.  And in this case, the debt is the government’s – and therefore ultimately ours.

What has been presented as ‘selling’ £10bn worth of bonds to pensioners is in effect borrowing £10bn from pensioners.  There’s nothing wrong with that of course; governments borrow all the time, and most of their money is borrowed from citizens.  As an alternative to simply taking our money away in taxes, paying us a guaranteed rate of interest to loan them money is not without its attractions to many.

There are, however, two special factors about this particular bond issue.

The first is the generous rate of interest.  A government which has spent most of the past five years telling us that we must cut the deficit because continued borrowing commits the taxpayers to paying interest in future has decided, in effect, to pay over the odds to borrow £10bn which it could easily have borrowed on the bond markets at a lower rate of interest.

And the second is that it has restricted access to this generous rate of interest to a small section of the population, namely those pensioners who have spare cash to invest.  To put it another way, they have decided to commit all those of us who pay tax to paying interest at above the going rate to the most well-off pensioners. 

I don’t know how anyone can see this as anything other than a blatant bribe to a targeted section of the population – wealthier pensioners – in advance of the UK General Election in May.  And a bribe paid for by the rest of us at that – which is spun as a safe and well-rewarded investment to help our elderly.

But there’s another little lesson that we should learn as well.  When they say that we can’t afford to go on borrowing because of the future interest payments, what they actually mean is that we can afford to borrow as long as it helps them to win an election.  The worst of it is that it might actually work, and the irony is that many of those benefiting are probably amongst those whose support for cutting borrowing is strongest.

Who's subsiding who?

Tweet A story in the Times on Sunday drew attention to a report from Oxford Economics. The report analysed the pattern of tax receipts and government spending by 'region' across the UK and came to the conclusion that only in London and the Southeast of England is the balance between the two a positive one. For the rest of the UK (including Wales, of course) the balance is a negative one.

So far, so utterly unsurprising. But the story as reported went beyond the facts by stating that it showed the "the increasing reliance of the country on the capital", and placed the whole story under a headline claiming that "Tax from southeast props up rest of welfare-hungry Britain", as though those conclusions inevitably flow from the hard facts.

It's not as simple as that, however. Let's take the example of a major retailer with stores all over the UK, but with its headquarters in London. The profits come from all of their stores, but most of their staff outside the southeast receive below the average annual salary, whilst most of the HQ staff in London receive salaries above average. As surely as night follows day, the result will be that many of their HQ staff will pay above average tax bills, whilst many of their staff elsewhere will pay low tax bills – and may even be in receipt of working tax credits.

But who's subsidising who here? For sure, that tax on those higher earnings is being used to pay benefits to the lower earners, but the money to pay those higher earners came from all over the UK in the first place. There isn't only one redistributive transfer taking place here; there are two. The first is the one which flows from the decisions taken by private companies about where to site their HQ and how to distribute salaries; the second flows from the tax and benefit system and is an attempt to at least mitigate the first.

But it's only ever the second which comes in for criticism in the media. The problem isn't restricted to the private sector either – it's also reflected in the distribution of higher paid civil service jobs, as well as jobs in all those other government agencies. Why is redistribution considered by so many to be a good thing when it's done by the private sector and when money flows from the poor to the rich, but a bad thing when it flows the other way?

I wonder where the reporters live...