Who is Dan Neidle and what does he do?

 

Five big ways to fix Britain’s broken tax system

It is possible to encourage growth without crashing the economy. Here are the fatally flawed policies that need sorting now, says tax expert Dan Neidle

Dan Neidle retired to Norfolk but has taken up a mission to reform the taxation system and ensure the rich are paying their fair share

TERRY HARRIS FOR THE SUNDAY TIMES

Dan Neidle

Sunday January 01 2023, 12.01am, The Sunday Times

Former chancellor Kwasi Kwarteng’s “fiscal event” last September was widely perceived as a disaster, but at its heart was a kernel of undoubted truth: there are features of our tax system that discourage growth — and we should fix them. Some of our tax rules are contradictory and occasionally downright mystifying, often punishing people and businesses for being successful. Anyone completing their tax return this January may run into them - particularly if they earn between £50,000 and £60,000 or £100,000 and £120,000.

Stop income tax hitting the ‘comfortably off’ hardest

The boldest, and most criticised, element of the mini-budget was the decision of Kwarteng and Liz Truss to scrap the 45p top rate of income tax to “simplify taxes” and “incentivise growth”. The problem with this is that, even if you accept the premises of Kwarteng’s position, 45p is not even close to the highest marginal tax rate in the UK.

The marginal tax rate at any given income is the tax rate you pay on the next pound you earn. That’s crucially important, because it affects your incentive to earn that extra pound.

I’ve charted the marginal rate of income tax and employee national insurance for different incomes, and it looks like this:

This should immediately start ringing alarm bells. The comfortably off — people earning between £100,000 and £120,000 — pay a higher marginal rate of tax of 62 per cent. Why are they paying a bigger proportion than those on really high incomes? Because at this point the personal allowance starts to taper away — with every £1 of income earned above £100,000, the personal allowance reduces by 50p.

Correct the childcare trap

But we’re only getting started. What if you have three children all qualifying for child benefit? Well . . .

Child benefits starts to be withdrawn at £50,000, resulting in a marginal rate of 68 per cent between £50,000 and £60,000.

Unfortunately, we can make even that outcome look good if we throw in the effect of the government’s much-heralded “tax-free childcare” scheme. This entitles you to up to £2,000 per child. The catch is that it completely disappears if your earnings hit £100,000. In an astonishing flaw, a couple could each be earning £99,000 (a combined household total of £198,000) and they keep the benefit; but if one earns £100,000, even if the other earns nothing at all, they lose it.

What marginal tax rate is that? Well, if you’re claiming tax-free childcare for three children, and earn £99,999, your take-home pay is £69,884. If you earn £1 more, your take-home pay decreases to £63,942. That’s an infinite marginal tax rate, which is a slightly tricky concept to demonstrate in a chart. Instead, here’s a chart that depicts gross v net wages:

The dip at £100,000 demonstrates the drop in post-tax income, which isn’t recovered until you earn £120,000.

In practice, this means that people who can control their hours usually think very carefully before putting themselves willingly in the £50,000-£60,000 or the £100,000-£125,000 pay bracket. If they’re employed, they often make additional pension contributions, use salary sacrifice schemes, or find other ways to earn the money, but not pay tax on it. If they’re self-employed they often just stop working for the year. These are not good things for the UK economy.

And, worse still, all of these tapering effects are triggered, like the childcare flaw, by one person in a family’s income hitting the £50,000 or £100,000 thresholds. That means that the Smiths, for example, who each earn £60,000, are much better off than the Joneses, where Mrs Jones earns £120,000, and Mr Jones doesn’t work. The Smiths take home £93,000 after tax; the Joneses £75,000. There are many reasons why the Joneses may have decided that only one of them should work – it’s mystifying why the government should choose to slap an £18,000 penalty on their decision.

These inadvertent fallouts from the tax system are worth so much more than the deliberate tax policies that governments announce with much fanfare. The “marriage allowance” is worth a fairly pathetic £252 a year.

Why isn’t there outrage about this? I think in part it is because many people earning £50,000 or £100,000 feel it’s ungrateful or, worse, “un-British”, to complain about paying tax. Furthermore, people earning less don’t want to hear the complaints. But it’s not about whether people on high incomes should pay more tax — it’s about whether they should pay more tax in a fair and rational way, or in an unfair and irrational way.

Therefore, a truly reforming chancellor would declare war on marginal tax rates above 50 per cent. Jeremy Hunt can do this without giving a handout to people on high incomes as the cost can be recovered by slightly increasing the top rate of tax. The cost may be less than the Treasury historically thought, given that people are going out of their way to avoid paying these rates. And those on benefits also face ridiculously high marginal tax rates of up to 96 per cent as benefits are withdrawn, creating a perverse incentive not to work.

Here’s the challenge from a political standpoint: politicians on the right have to accept slightly higher taxes for some high earners, and politicians on the left have to accept slightly lower taxes for some others. Will they?

Stop VAT punishing small businesses for being successful

This chart should keep Jeremy Hunt up at night:

This piece of evidence shows, for a given pound of turnover/revenue, how many businesses there are in the UK at that level of turnover/revenue.

You’d expect a reasonably smooth curve, falling from a large number of small businesses on the left side to a smaller number of larger businesses on the right. However, we don’t see that at all — we observe a dramatic cliff edge right on the VAT registration threshold, which is now set at £85,000 a year (the graph shows the drop at the old cut off of £81,000). Businesses whose revenue hits the threshold suddenly have to charge VAT, meaning that — overnight — they must either raise prices or suffer a profit loss of up to 20 per cent.

This chart tells us that many businesses respond to this by suppressing their turnover so it never hits that £85,000 threshold. A cynic would say that they do this by taking cash under the table, and therefore not telling HM Revenue & Customs. But there’s recent academic evidence that the cynic is wrong: businesses are genuinely holding back their growth as they approach the £85,000 threshold. The data is compelling, but I hear plenty of first-hand stories too — plumbers going on holiday for the rest of the tax year; electricians not hiring an apprentice; coffee shops deciding not to open another branch.

As a result, there’s powerful evidence that the UK tax system has created a break on the growth of small companies, some of which might, in time, grow into large companies.

There are two uninviting possible fixes for this problem, and one acceptable but difficult one.

The first poor option is that we should increase the threshold. This would cost the Treasury a lot of income and doesn’t solve the problem, but simply moves it.

The second bad option is that, given that the UK has one of the highest VAT thresholds in the world, we should reduce it to the average, which is about £30,000. However, the sudden impact that this would have on tens of thousands of businesses would require a chancellor to be not just brave but politically suicidal.

The potentially positive — but difficult — answer is that we shouldn’t have this kind of cliff-edge threshold at all. It can be argued that the proliferation of apps and digitalisation mean that now we don’t need it. Instead of VAT suddenly coming in at 20 per cent at £85,000, what if it applied at 1 per cent at £30,000, and then slowly crept upwards, hitting 20 per cent at £140,000? We’d collect the same amount of tax, but without creating an incentive to halt growth.

Until recently, expecting anyone to operate a system like that would’ve been delusional, but the modern digital systems HMRC has put in place make it achievable. It would take years of planning, with HMRC having to provide free apps and compliance solutions to small businesses, but the challenge is less technical and more political — politicians have to sell, and voters have to accept, the idea that raising tax is necessary for growth.

Abolish council tax, business rates and stamp duty

We have three taxes on land in the UK: council tax, business rates and stamp duty, which come together to form three parts of a very broken puzzle.

Here’s a chart showing how much council tax is paid as a percentage of the value of a property:

The more expensive the property, the less significant council tax becomes. That’s not how any tax should work. And in England, council tax is based on valuations made in 1991 that bear little relation to the housing market today.

The equivalent tax for businesses is almost as bad as council tax. The most common criticism — that it’s not fair to tax retail businesses — is wrong. All the evidence shows that, in the long run, most of the economic burden of business rates falls on landlords (because rents are lower than they would be if business rates didn’t exist).

However, there are other big problems with the tax. It’s based on the “rentable value” of a property, but the rentable value is so infrequently updated that you can end up with a situation where rents have fallen and the business rates haven’t caught up (which is where we are now in many cases). A further problem is that business rates are taxed on the rental value of a property, taking into account whether it’s been improved. That’s a disincentive to invest in improving property.

The final broken piece of the puzzle is stamp duty. It’s a good rule of taxation that we shouldn’t be discouraging transactions. Yet, as everyone who buys a house knows, that’s exactly what stamp duty does. It distorts the housing market and, by punishing people for moving in search of work, distorts the labour market too.

How can we solve the land-tax puzzle? By scrapping all three broken taxes and replacing them with a land-value tax — an annual tax based on the unimproved value of land. Instead of acting as a brake on investment, it would encourage it. Moving house would become a tax-free event. The economic burden would fall on landlords, not tenants.

Land-value tax has political support from economists across the political spectrum. All we need are politicians with courage to sell the idea that if we want to repeal bad unpopular taxes, then we have to create new, better ones.

Make corporation tax simpler

From 1997 to 2017, according to the Office for National Statistics, the UK had the lowest level of investment as a proportion of GDP in the Organisation for Economic Co-operation and Development.

Is tax one of the reasons behind this?

It’s trite economics that businesses do things they’re incentivised to do. The problem is that UK tax relief for investment exhibits the two deadly sins of tax policy: it’s really complicated and it changes all the time. This means that you’d have to be brave or foolish to make long-term investment plans on the strength of today’s tax-relief rules — you can’t be sure you’ll qualify, and you certainly can’t be sure the rules will be the same when your investment actually comes to fruition. This is another way of saying that the tax relief rules fail to achieve their purpose of incentivising investment.

We need a radical solution. What if we didn’t have complicated rules governing what kinds of investments get tax relief, but just gave tax relief to all investment, paid for by increasing the rate of corporate tax, so the reform was tax-neutral overall and guaranteed to remain unchanged for the length of a parliament. This would be ideally made with cross-party agreement that gives reasonable assurance for the longer term. Suddenly we’d create a powerful incentive to invest, made all the greater by the increased tax rate.

This isn’t my invention — it’s called “full expensing” and it’s supported by the Confederation of British Industry and economists across the political spectrum. But, again, we’d need politicians and voters to accept the counterintuitive truth that, to encourage growth, sometimes taxes have to go up.

Dan Neidle was head of tax at a large global law firm and now runs Tax Policy Associates.

@danneidle, taxpolicy.org.uk

Lots of good Macro(n) in this:

Emmanuel Macron, the French president, presents himself internationally as a bold statesman – yet his much-needed domestic reforms are remarkable for their timidity, says Frédéric Guirinec.

Last weekend was a good one for Emmanuel Macron on the world stage. The French president’s speech at a ceremony in Paris to mark 100 years since the end of World War I, in which he warned of the dangers of nationalism, won him praise in much of the international media. His reputation as a global statesman got a significant boost – helped by the contrast with US president Donald Trump, who was mercilessly mocked for missing a memorial visit to an American military ceremony in France the previous day because it was raining too hard.

At times like this, Macron, who is just 40, often manages to look like the leader Europe – and the world – will need for the next couple of decades as German chancellor Angela Merkel comes to the end of her time in power. But domestically, it’s a very different story. Just three days before his speech, Macron was booed by workers at a Renault factory as he tried to defend his economic policies. The previous day, he was criticised for praising Marshal Pétain, the World War I general, as a “great soldier”. Pétain’s reputation was irreparably sullied when he later headed the Vichy government that collaborated with Germany in World War II. At the end of October, his decision to take a few days off for a break in Normandy led to speculation that he was burning out under the pressure of the job (rumours that seemed entirely credible given that he is reported to be an obsessive micromanager who sleeps just four hours a night). Next weekend, he faces nationwide protests that aim to bring traffic on motorways to a halt over high fuel prices.

His approval ratings are dire: just 21% of voters said they have confidence in him in one poll last week – less than François Hollande, his hapless predecessor, at the same stage of his presidency. And his En Marche party has slipped behind the far-right Rassemblement National (RN – formerly the Front National) in opinion polls for next May’s European elections. France is disenchanted and discouraged with its president, once again. So why has the new man who promised to transform a sclerotic and over-taxed French economy failed to deliver?

Meet the new boss, same as the last boss

The simple answer is that Macron, who was finance minister under Hollande, has so far continued the same policies: increasing taxes, maintaining the same eye-watering level of public spending and unsurprisingly getting the same poor economic results. The fruit never falls far from the tree. That has contributed to his collapse in popularity and the rapid departure of many of his ministers. Over the past 16 months, seven ministers have left the government including Gérard Collomb, the interior minister, last month. That departure was especially notable – Collomb was the first major supporter of Macron during his presidential campaign, so it is telling that even he has become completely disillusioned.

Admittedly, the roots of Macron’s rapid fall from grace are multiple and complex. They result in part from a deepening cultural identity crisis and nostalgia in France (as underlined by the huge success a few years ago of Le Suicide français, a book by the right-wing writer Eric Zemmour that argues that four decades of change have destroyed France) and a profound and growing distrust by the public in what they see as an arrogant and self-interested governing elite (a distrust compounded by Macron’s disastrous communication and leadership).

Meanwhile, the country has fallen in global stature, from the fourth to the seventh largest economy in the world. France is also isolated in Europe on the two major topics of the euro – where Macron wants to strengthen the eurozone through greater integration of the banking and financial system – and immigration, where he has tried to position himself as the main defender of open borders against increasingly anti-immigration parties elsewhere in Europe.

Tax, spend and regulate

To be fair, utter inconsistency in what the electorate demands also plays a role: they press for reforms to improve the economy but baulk when pensions are nearly frozen or public spending curbed, as they must be to improve the public finances. Still, finding a way to sort out the economy was considered Macron’s core competence, given that he was formerly an investment banker at Rothschild. Hence voters have become disenchanted by the continued huge tax burden, amounting to 45% of GDP, the slow pace of structural reforms and, above all, the lack of economic results.

The total tax take in 2018 is expected to reach €1.05trn, up from €1.038trn last year (the first time it passed the symbolic €1trn level), despite lower growth compared with 2017, when France benefited from the short-lived synchronised global growth. But even as tax continues to rise, the budget deficit remains stubbornly wide – France has not run a surplus since 1974 – and hence public debt is closing in on 100% of GDP. Efforts to manage the budget rather than reform it lead to short-term, trivial decisions – a controversial reduction of the speed limit on regional roads, officially to reduce accidents, is expected to generate €1.2bn in revenue through more speeding tickets.

Meanwhile, corporate leaders now doubt Macron’s capacity to unshackle the economy. French industry is suffering heavily from competition between Germany (which produces higher added-value products) and Spain and eastern Europe (which have lower costs). Locked into the eurozone, France cannot devaluate its currency to compensate for its deteriorating competitiveness. This has resulted in structural and deep trade deficits since 2003. The trade deficit amounted to €62bn in 2017, of which more than 70% is generated within the eurozone. This compares with a surplus of €250bn for Germany during the same period. This imbalance is also the result of too many French companies that are structurally too small to export – a problem that is linked to excessive taxation that make it harder for them to invest for growth in the first place. Hence some 40% of France’s exports are made by just 100 companies, such as Airbus, Dassault, LVMH, Sanofi, Renault and Peugeot.

Meanwhile, Macron has yet to deliver on many of his promises to loosen the grip of an oversized and inefficient state on the economy. The gap between theatrical speeches about a “start-up nation” and the reality is huge. Dealing with the URSAFF, the network of organisations in charge of collecting social taxes, quickly saps entrepreneurial spirits. More widely, the huge number of civil servants, at 5.5 million or nearly 20% of the working population, is broadly unchanged despite modernisation of public services that are now available online. The president complained in June that France spends “a crazy amount of dough” on welfare, yet has taken few steps that will help to solve that. The labour market is still extremely rigid and unemployment is unchanged at 9%. His only major move has been changes to working conditions and benefits for railway workers and efforts to open up the network to competition from 2023, as dictated by the European Union.

A striking lack of ambition

France recorded the lowest economic growth in Europe in the first half of 2018 at 0.4%, mainly driven by build-up of inventories. Third-quarter growth, which also came in at 0.4%, was better than many European peers, but still trailed expectations. So targeted growth of 1.5% for 2018 – steadily cut from initial forecasts of 2% – is now unrealistic given oil prices, rising bond yields and global macroeconomic headwinds. No wonder finance minister Bruno Le Maire had to admit that “our economic results are unsatisfactory compared to our European neighbours” when presenting his 2019 budget in September. So, too, are the measures proposed in his budget.

The overall budget deficit is set to reach €100bn (2.8% of GDP), meaning France will have to borrow a total of €228bn in 2019, including refinancing of maturing loans. Le Maire claims the wider deficit reflects changes to the way income tax is collected and that otherwise it would shrink to 1.9% – but with public spending at 55% of GDP, the highest level in the developed world, expectations for smaller deficits in future should be tempered. Corporate tax will be lowered from 33%, the highest in Europe, to… 32%. That’s still far off Macron’s promise of 25% (and the 19% rate in the UK). There have been some small steps in the right direction such as the flat tax of 30% on capital gains introduced last year, while proposed legislation that gathers together 70 laws covering cryptocurrencies and autonomous cars includes some pro-business elements.

But it is not an ambitious budget at this stage, and that is hard to understand since Macron has little effective opposition. The centre-left Parti Socialiste seems close to liquidation, the far left makes Jeremy Corbyn look like an unfettered capitalist, the centre-right Les Republicains are more divided than ever and the far-right RN has hardly any MPs. Trade unions, often the stumbling block to reform in France, represent only 9% of employees. So despite having a moment of opportunity, Macron continues to disappoint everyone, including pensioners, who are the most affected by tax increases, workers and commuters, public employees, councils and the corporate world.

For all his ambitions to be an international statesman, Macron is overlooking the advice of Charles de Gaulle, France’s most famous modern leader – a man he professes to admire and whose war memoirs were carefully positioned on his desk in his official photograph. “La politique la plus coûteuse, la plus ruineuse, c’est d’être petit,” wrote de Gaulle: the most expensive and ruinous policy is to be small. Macron needs to think big and pursue real reforms.

Solid article on France & structural reform:

This is good for EU context, as well as being a comparator for UK policy:

France is on a road to nowhere without reforms

With strikes and red tape a part of everyday life in France, can the eurozone's second largest economy haul itself out of stagnation?

A French flag is seen on a striking taxi as drivers block traffic during a demonstration at Porte Maillot during a national protest about competition from private car ride firms like Uber, in Paris, France Photo: Reuters

By Szu Ping Chan

3:40PM GMT 13 Feb 2016

96 Comments

It’s almost lunchtime in Canary Wharf, and Julien shivers in the shadows of the giant buildings. A French banker who has worked in London for more than seven years, he’s never quite got used to the cold. 

Emmanuel Macron, France’s rock star economy minister, famously said France’s controversial 75pc top tax rate would turn France into “Cuba without the sun”. Britain is certainly not Cuba, but it also doesn’t have the sun. 

But Julien, like thousands of other French nationals who have moved to London and other parts of the UK, is undeterred by the winter weather. 

It’s been more than three years since David Cameron, the Prime Minister, said he’d roll out the red carpet for high-earners looking to flee France’s high tax regime. 

For Julien, who first came to the UK a decade ago to study and now works for a top investment bank, France has never been a place of opportunity. He left for the second time in 2008 and never looked back. 

“I used to think London was the city lacking dynamism, but there are a lot more opportunities here,” he says. “There is just a more open-minded atmosphere. It’s a much more global city.” 

Many of his friends have also moved abroad. Those who stayed and “accepted their fate” in France complain about inefficiencies and bureaucracy that are holding the economy back. 

“France has this paralysed mindset, it’s conservative, narrow minded. People still have a very socialist attitude towards businesses. For them, there is no two-way relationship. Bosses and managers are almost enemies. It’s like everything has to involve a struggle.” 

Plainclothes police officers check chauffeurs at the Paris' Gare de Lyon railway station. "Chauffeurs" - like those who drive for Uber, claim they are victims of discrimination by the government, while taxi drivers complain about unfair competition.  Photo: AP

Even Uber, which introduced the free market to taxis, has experienced France’s meddling state at first hand. 

Threatened by the competition, France’s highly regulated taxi industry lobbied the government to impose stricter controls on companies such as Uber. It got its way. 

The California-based company is fighting back in the only way France knows – by striking. Uber is suspending its service in France for four hours on Tuesday in a protest against the government’s decision. After all, if you can’t beat ’em, join ’em. 

In some cases, things have got ugly. 

Security staff help a shirtless Xavier Broseta, Air France human resources manager, to safety after angry workers ripped off his clothes

Last October, two Air France executives had their shirts ripped off their backs by furious workers protesting against job cuts at the airline. 

In another example, Renault, France’s second-biggest car manufacturer, put itself on a collision course with the government last year after the state beefed up its stake in the company to secure double voting rights under French law. 

It was thought the government was trying to ensure that jobs at Renault-Nissan were kept in the country. Some even believed France would try to move Nissan’s factory in Sunderland across the Channel. 

While the dispute was eventually resolved, it is only the tip of the iceberg of France’s problems. 

Weak growth, near-record unemployment and mountains of red tape threaten to leave France in permanent stagnation. 

It wasn’t always this way. Before the 2008 financial crisis, France’s unemployment rate stood at 7.1pc. This was the lowest since the 1980s and even below Germany’s rate of 7.8pc. 

Fast forward seven years and the tables have turned. In Germany, the jobless rate has dropped to 4.5pc, while France’s rate remains stubbornly high, at 10.2pc, according to Eurostat. 

The International Monetary Fund (IMF) recently slashed its forecast for French growth over the next two years. 

While France continued to cling to its social safety net and bloated public sector, Germany reaped the benefits of its radical Hartz reforms between 2003 and 2005. 

France's labour laws make it extremely difficult to fire permanent staff, so companies have responded by only offering temporary contracts, many of which last less than a month. 

Christine Lagarde, the IMF’s managing director and France’s former finance minister, warned last year of a “new mediocre” for global growth. France is quickly becoming the poster child. 

The eurozone’s second-largest economy has consistently been in Brussels’ bad books for spending more than it earns in taxes and is unlikely to reduce its deficit below the 3pc limit this year. 

France has struggled to shake off its reputation as a fan of red tape and bureaucracy. According to the World Bank’s “doing business index”, it’s easier to start a new company in Kazakhstan and Ukraine than in France. 

All these factors led Francois Hollande, the French president, to declare a “state of economic emergency” last month. 

French Economy Minister Emmanuel Macron (L) comes face to face with companion robot BUDDY during a visit to French tech startups at CES 2016 in Las Vegas  Photo: AFP

Enter Macron. The former Rothschild banker is trying to guide France back towards competitiveness. While he found himself in the middle of the Renault-Nissan spat with the government last year, Macron has most recently been championing entrepreneurship at the Consumer Electronics Show (CES) in Las Vegas. “We created 1,500 start-ups last year,” he declared. 

This pro-business strategy is backed by Hollande, who announced extra measures last month to try to bring down France’s jobless rate. This includes the creation of 500,000 training schemes, more subsidies for small business and a programme to boost apprenticeships. 

This, combined with tax cuts for business worth €40bn (£31bn) over three years, is designed to give the economy a shot in the arm. 

Pierre Gattaz, president of MEDEF, France’s main pro-business organisation, describes the plan as a “step in the right direction”. 

“We’ve seen a change, because [Hollande’s] speech was pro-entrepreneurs and pro-business. So the direction is there. We need business, we need agile companies. The world is moving fast so we need to rehabilitate the jobs market.” 

"There’s always something policymakers have to row back on or tweak." 

Jessica Hinds, Capital Economics 

Gattaz followed Macron to Las Vegas last month, and insists that the government’s drive to create more entrepreneurs will be a success. 

But success also requires reform. Policymakers are now ready to take on one of France’s untouchable political totems – the 35-hour working week. 

The policy was first introduced by Lionel Jospin’s government in 2000, but policymakers want to relax the law so that companies can decide on an individual basis the maximum number of working hours. 

Gattaz believes the government can pass reforms while preserving the 35-hour week for most companies. “Sometimes, when it comes to the 35-hour week, people say around the world that French people don’t like to work any more – this is the kind of French bashing we expect, but Hollande’s speech, and the advice we hear from the prime minister [Manuel Valls] and of Macron has been in the right direction.” 

For others, France’s problems are much deeper. Jessica Hinds, at Capital Economics, says “steps in the right direction” and rhetoric are not the same as executing the policies. 

“The French have started to do the right things, but the reforms have not been ambitious enough given the scale of problems facing the French economy. 

"There’s always something policymakers have to row back on or tweak. Reforms to employment tribunals were deemed unconstitutional. There’s just no sense that the government is really going for reforms. 

“This means if you’re a businessman or factory owner and employ people in France, despite the fact that the workforce is well educated with high productivity, if you’re going to be saddled with regulation and unable to fire people when things go wrong you’re never going to take the plunge and that really does hold the economy back.” 

"The French are always complaining – but I can tell you that the business community understands and appreciates the reforms." 

Pierre Gattaz 

Gattaz remains optimistic. “I think we have to create at least one million jobs within five years and continue to work on the competitiveness of the French economy. 

"Lower taxes, more flexible hiring and reforms of labour laws will create confidence for investors. And when confidence arrives, so will success for the French economy.” 

“The French are always complaining – but I can tell you that the business community understands and appreciates the reforms. “You have to be coherent and tenacious, that’s what Hollande, Valls and Macron are trying to do.” 

For Julien, while ministers like Macron are a “breath of fresh air”, there are not enough radical thinkers in government to make a difference. 

“French people are looking for a messiah that will guide them and enlighten them,” he says. “But there is such a mistrust of the political class that at the end of the day they never find this messiah. So they always end up disappointed, and things always seem to end up even more hopeless than they used to be.”

Which EME to use as an example in essays:

For those of you still referring to BRICs as potential sources of growth and new markets for the UK, wise-up! This article looks closely at India - which, in reality, is the last BRIC standing (geddit?).

You won't be able to absorb everything in here, but think in terms of the global context questions - what is India doing that is good for its economy? - (reducing government ownership of assets, reducing regulations), what does it need to do (infrastructure) etc. etc. Think particularly about supply-side polices, which really have been (will be) the key for India, and are probably the key obstacles elsewhere. Skim read and make some notes on key points

India – the coming force

02/05/2015 |

With China’s economy slowing, Brazil rocked by scandal and recession and Russia frozen out of world affairs and now beginning to pay the price, the world is increasingly looking to India to pick up the slack. By Shruti Chaturverdi

With a population of 1.25bn, half of which is under 25 years old, India's potential is vast. It has political stability, it stands to benefit from a demographic dividend that will generate demand, and it is implementing a programme to promote its underdeveloped manufacturing sector. 

Perhaps most importantly, it is taking small but deliberate steps towards removing the bureaucratic hurdles for which it has become notorious.

Hopes are high for what can be achieved by India’s prime minister Narendra Modi, who came to office in May 2014, and finance minister Arun Jaitley. And they are fortunate in their timing: India’s economy is on a much sounder footing than at any time over the last seven years. 

Year on year growth in the fourth quarter of 2014 weighed in at 7.5% (higher than China’s), inflation is falling, low commodity prices are helping a country that imports more than 80% of its energy needs and the current account deficit is declining. 

“Ours is the only economy of larger economies that is growing at 7%-7.5%,” says Venkat Nageswar, chief general manager and regional head of East Asia at State Bank of India. “We are expecting growth at 8%, making India the best of the pack [of major world economies] in terms of overall growth.”

So far, so good. But India doesn’t exactly have a glowing track record when it comes to transparency in business transactions, especially those involving auction of government assets. The nation has long been perceived as one where crony capitalism thrives and kickbacks are par for the course.

This is changing. The new establishment has concluded the reallocation of coal blocks in a smooth and timely manner. The government also raised Rp1.1tr ($17.45bn) from a telecom spectrum auction this year — a process that was widely praised for the speedy and transparent manner in which it was done. All this reassures investors.

Not done yet
India’s prospects, then, look promising. But there is still much to be done for that potential to be achieved. Important areas of reform remain to be tackled, notably recapitalising the banking system, increasing the country’s power capacity and improving infrastructure. 

The Indian budget of 2015 did not contain any big bang reforms, but it certainly set the agenda. The government recognised key areas that need to be overhauled to facilitate foreign investment into India, as well as to stimulate domestic investment.

India has been enjoying a wave of positive sentiment ever since prime minister Modi clinched his sweeping victory. Modi’s corporate and reform-friendly image has been a big factor in fuelling sentiment in the country.
He has been particularly active in trying to woo overseas investors, with high profile visits to several countries, including Brazil, France, Germany and the US.

That can only go so far, however, and market participants believe domestic investor confidence is crucial to attracting foreign investments. “The overseas visits of the PM are bound to help,” says Nilendu Mukherjee, director, local coverage at Royal Bank of Scotland India. “However, we need to see a start and the start should happen from domestic investors.”

Government measures to boost investments on both fronts include unifying rules related to foreign investment and targeted initiatives to boost the infrastructure sector and small and medium enterprises, which would spur consumption as well as attract capital.

Soaring equity markets
India’s equity markets are also receiving unprecedented levels of attention from investors eyeing the large and growing consumer base, with over 62% of the population in the 15-59 year age bracket.

“Indian equity markets have had a combination of high ROEs (averaging 13.5% over the past 20 years) and high earnings growth (averaging 12% in the past 20 years), leading the Sensex Index to post a CAGR of 10% in US dollar terms,” wrote Société Générale analysts in a report published in March.

“Importantly, the markets have historically outperformed peers such as Asia Pacific ex-Japan, EM and Bric markets, barring the initial three years of the current decade.”

Indian stocks have traded at a premium of 39% to global emerging markets and 21% premium to Asia Pacific ex-Japan, according to the report. The higher return on equity of Indian firms is sustainable in the medium term, as these firms have scarce capital at their present stage of development.

India also ranks second highest among 39 emerging economies, with an internal growth rate of 13.34%, behind only Indonesia.

However, there is a need to grow direct investment, believes Mukherjee. “Equity investors are investing [into India] but there is a need for more direct investment as against portfolio investments.”

India has recognised that to realise the potential of its working age population, it needs to generate employment, wealth and demand. The country has announced policies such as the Jan Dhan Yojana scheme to provide universal banking facilities and Mudra Bank to help fund small and medium enterprises.

It has also rolled out the ambitious “Make in India” initiative, which is aimed at spurring companies to set up manufacturing bases in the country, thereby boosting exports, current account and trade balances.

Ease of doing business

With China’s economy slowing, Brazil rocked by scandal and recession and Russia frozen out of world affairs and now beginning to pay the price, the world is increasingly looking to India to pick up the slack. 

Byzantine rules regulating foreign and domestic investment have curbed appetite, but the country is looking to change that through reforms to ease investors’ entry path into the economy. “The government is focused on making it easier for investors to do business in the country and has announced reforms in all areas,” says Nageswar.

He notes the reduction of corporate tax to 25% from 30%, the deferral of the anti-tax avoidance “General anti avoidance rule” (GAAR), and the rollout of a goods and services tax in 2016 as among those reforms that should lead to higher capital flows.

On the flipside, however, difficulties and delays in acquiring land to set up projects throw calculations awry — and have resulted in the country losing out on investment. The government is seeking to address this problem with the “Right to fair compensation and transparency in land acquisition, rehabilitation and resettlement Ordinance”. The land acquisition ordinance seeks to ease the process of securing land assets, while also ensuring rehabilitation, compensation and fair valuation for land owners. 

Getting the ordinance through the upper house will still be far from easy, however. The incumbent government does not have the majority in the upper house that it would need to be sure of enabling it to become an act or law. At present, opposition parties in India are opposing the proposal on the grounds that passing it could be exploited by companies.

Infrastructure and power

India’s underdeveloped infrastructure has proved to be the biggest stumbling block in its growth. Power disruptions, a very low rate of electrification and problems related to power evacuation — the process by which generated power is made available to the distribution network — make it hard to run factory operations consistently.

Key measures to try to tackle this and which were announced during the annual budget include the establishment of a National Investment and Infrastructure Fund (NIIF), with an annual investment of Rph200bn ($3.25bn).

“[The NIIF] would provide long term funding for projects and will eliminate major concerns of asset-liability mismatch faced by companies in the current scenario,” analysts wrote in a note by SBI Caps Securities that was published after the budget.

This initial capital can be leveraged four to five times, allowing the country to cover a portion of the shortfall, adds Nageswar. 

The government has also proposed a tax “pass-through” for Category-I and Category-II Alternative Investment Funds, so that tax is levied on the investors in the funds and not on the funds themselves.

“This will step up the ability of these funds to mobilise higher resources and make higher investments in small and medium enterprises, infrastructure and social projects and provide the much required private equity to new ventures and start-ups,” said Jaitley in his budget speech on February 28.

Investment in infrastructure will rise by Rp700bn in the current fiscal year, with funds coming from the exchequer and the resources of central public sector enterprises, he said. However, this is still small change compared with the $1tr infrastructure spending target that the country plans to meet by 2017.

Nageswar reckons a lot of that money will come not from the government’s coffers but from long term investors such as pension funds, says Nageswar.

“They [the government] have to go out of India for fundraising. These are long term assets that require 10, 15, 30 year investments. A lot of pension funds would like to invest in India for a longer term because of the good yields it offers.”

He contrasted India’s bond yields with those of countries such as Switzerland and Germany, where yields are negative. With quantitative easing under way in Europe, a lot of fund investors will look at increasing allocations towards emerging economies. India, with its stable political environment and promising growth, is a notable bright spot.

It also helps that Moody’s has changed its outlook on the country’s Baa3 rating to positive, particularly as many funds are constrained by ratings when allocating to a certain country, say market observers.

On the power front, the government is planning to set up five new “Ultra Mega Power Projects”, each with a capacity of 4GW. These will be built under a plug-and-play model that will see all clearances and linkages in place before the project is even awarded.

The government reckons these projects will bring in investments of Rp1tr ($16bn). It is also mulling similar plug-and-play projects in roads, ports, rail and airports, which will create attractive opportunities for bank investors.
All the positive sentiment in the world cannot overcome frustrating bureaucracy, however, and the complexity of rules and processes related to obtaining permissions for new projects has often thwarted the hopes of those looking to build infrastructure in the country, said market participants.

“Only one thing is key — make the regulatory environment easier so approvals come in a timely manner and there is no uncertainty in doing business,” says Mukherjee. “If I have to get approvals in five months, it should mean five months. Multiple clearances from various approval authorities need to move into a single window of approvals.” 

The budget has addressed such concerns to an extent. The government said has set up an Ebiz Portal — a platform that allows users to access 11 central government services under one roof.  The move is aimed at helping businesses obtain permissions easily rather than having to knock on one door and then another.

Challenges

The improving macroeconomic picture is evident in the increasing dovishness of the country’s central bank. The Reserve Bank of India has cut rates twice this year, by 25bp each time, with the latest cut coming on March 4.
“Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation,” said the central bank in a release on the day of the second rate cut.

These are the first rate cuts since Reserve Bank of India governor Raghuram Rajan took over as Reserve Bank of India governor in September 2013. Indian commercial banks have also started reducing base rates for the first time in years. SBI reduced its rate by 15bp and banks like ICICI and HDFC have also cut, so the relaxation is being transmitted to the real economy.

This ought to make the environment conducive for domestic corporates to borrow, but the cuts are also a response to a fall in inflation. India, a net importer, has benefited greatly from the general fall in commodity prices. 

A sustained period of lower inflation is also not desirable, though. “Over the past four years, India’s domestic demand has remained weak while investment demand fell even more sharply,” wrote Société Générale analyst Kunal Kumar Kundu in a report entitled India: entrenched disinflation published on April 15. 

“Not surprisingly, India has experienced one of the longest periods of inventory drawdown. Even the stalled projects are moving at a much slower pace despite being one of the top priorities of the newly elected government. In such a weak environment, every spurt in domestic demand has been met by the drawing down of inventories rather than an increase in production.”

Kundu pointed out that in addition to weak domestic demand, India is also facing weak external demand, as reflected in its export performance. India’s exports in March 2015 stood at $23.95bn, a 21.06% slide year-on-year. 

Kundu attributed the decline to an appreciation of the rupee in real effective exchange rate (REER) terms. The REER, as opposed to the nominal effective exchange rate, takes into account the difference in the purchasing power of two currencies. 

Figures on the domestic manufacturing front are not comforting either. Manufacturing has declined from 18% to 17% of GDP, while manufacturing exports have remained stagnant at about 10% of GDP.  

Despite these systemic and persistent problems, the government seems determined to usher in change. Market participants are confident that India will see a gradual transformation into a global investment hub. But there is a recognition that this will take time. Although the Modi government has completed nearly one year in office, those on the ground say they are yet to see any substantial and demonstrable change in its economic circumstances.
“The investment climate has changed in sentiment terms but it will take some time for it crystallise into on-the-ground capital expenditure,” says one India-based head of debt capital markets. “Even if people have taken decisions to commit, giving orders for capex and funding requirements takes time as most large plants have gestation periods of two to three years. 

“From a capital raising perspective we will continue to see the kind of transactions we saw in 2014, and so far in 2015, which are mostly refinancings and some M&A related.” But he adds that a real pick-up will become visible next year.

http://www.emergingmarkets.org/Article/3450133/Indiathe-coming-force.html?LS=EMS1158867