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Showing posts from January, 2012

Scotland's currency conundrum

This post considers some of the issues that would arise if Scotland were to vote in favour of independence. The timing of the referendum is not yet clear, and there are ongoing debates as to the actual questions to be asked of the Scottish people. This post only considers full independence, i.e. Scotland leaving the United Kingdom and becoming a separate sovereign country. Other proposals that stop short of full independence are also likely to be on the table, and I will return to these in a subsequent post.

One of the major arguments has been whether Scotland leaving the Union would in effect mean that the United Kingdom (UK) ceases to exist. The Scottish National Party (SNP) seems to think that it would have this effect, and appears almost gleeful at the prospect. But I concur with the writer of this paper from the Centre For European Reform (1999), who concluded that the principle of parliamentary sovereignty, which is fundamental to the UK's constitution (and historically one …

The trouble with Hungary.....

.... is the European Union.

Let me explain.

Hungary has a silly government which is doing some objectionable things and playing fast and loose with the country's finances. On that we can all agree. But it has a two-thirds majority in its parliament and the disarray of the opposition parties means that there really isn't a credible electable alternative. Yes, there have been street protests against its policies. So what, frankly. There have been street protests against government policies in many European countries now, including the UK. That is no indication that the government is either undemocratic or about to fall.

Hungary, unlike the Eurozone members, is a sovereign country that issues its own currency, the forint. It is therefore technically unable to go bankrupt since it can if necessary print the money it needs. It also has control of its monetary policy as well as fiscal policy, which means it can raise interest rates to counter inflationary pressures and protect the v…

Tax oddities

I am puzzled. On Thursday 5th January, there was a report on the BBC's Newsnight programme which outlined five ways in which people and organisations might seek to avoid tax:

1. by changing the location of transactions to take advantage of lower tax rates
2. by changing the timing of payments
3. by changing the identity of the person or organisation to which the taxable income is allocated
4. by changing the type of transaction to one that attracts a lower tax rate
5. by obscuring information

Now, all of these can be perfectly legal methods of minimising tax bills, although the last can run dangerously close to unlawful evasion. Most of us use some of these methods of avoiding tax - for example, giving gifts to grandchildren to reduce inheritance tax (point 3), or accepting part of our remuneration in shares instead of money (point 4 and possibly point 2). And indeed, no-one in the report suggested this activity was unlawful, though Richard Murphy of Tax Research UK did say it was…

It doesn't work like that - government finances edition

This is intended to be a short "idiot's guide" to how government finances REALLY work. I'm writing it partly as background for my posts on economic policy in the UK and Eurozone (and maybe the US), and partly to debunk various urban myths about government spending.

Firstly, let's define some terms.

"Deficit" is the excess of government spending over its income
"Surplus" is the excess of taxes over government spending.
Please note that for the purposes of this post, these terms relate only to government finances, not to trade finances. We also use the terms "deficit" and "surplus" to mean the excess of imports over exports and vice versa, but that is not how they will be used in this post.

"Taxes" are the contribution of the population to government spending - this is by far the largest part of government income, but there can be other components to government income such as asset sales. "Taxation" is the…