Freesteel Blog » Does the Treasury know what they’re doing with the economy?

Does the Treasury know what they’re doing with the economy?

Wednesday, February 11th, 2009 at 9:36 pm Written by:

Probably not. But we now know that they don’t know what they can do.

Last year the Government suddenly cut the VAT rate to stimulate the economy, which was quite controversial. I blogged about editing the Parliamentary vote description here, speculating that the Government politicians didn’t care about whether it was going to make a difference or not, if they could use it as part of a General Election campaign against the Conservatives.

I got curious while looking into how the tax rate was able to get changed at the stroke of a pen using powers granted to the Treasury under the Value Added Tax Act 1994.

I wondered what other powers lurked in the Acts of Parliament which the Treasury could use to alter parameters in order to manage the flows of money around the State, and whether they had a clear dashboard overview, or some kind of simulation of the economy that they could run with different tax rate settings that could be varied under the powers that they knew they had in order to have some semblance of optimizing their values.

You know what I mean.

So, here’s my FOI request to the Treasury:

On 24 November, the Treasury made an Order exercising the powers conferred by sections 2(2) and 21(7) of the Value Added Tax Act 1994 to lower the VAT rate from 17.5% to 15% for one year.

Under the Freedom of Information Act 2000, may I have a copy of any documents or databases held by the Treasury that summaries or lists all available powers conferred to the Treasury by the Statute Law (including the powers I mentioned above) to make orders varying the rates of tax, duty, spending, and anything else within the jurisdiction and business of the Treasury.

Included with these documents, I would like to see the speculative range of predictions on record of the implications of each of these orders that are available to be made by the Treasury at any time it pleases.

I look forward to an early confirmation that such a complete summary of the Treasury’s statutory powers exists in a form that ready to advise the Chancellor of the wide array of options available, and its eventual disclosure.

The reply from the Treasury was quite striking:

Following a search of our records I confirm that we do not hold any document or database summarising all such powers.

If we interpreted your request as covering any information itemising any such power, it would exceed the cost limit under the Act to address that… As an indication, a search of our electronic records for “statutory powers” returned over 10,000 instances. In any case, I do not think that approach would yield what you are seeking.

In terms of the second part of your request, I can point you to the Direct effects of illustrative tax changes published by HMRC. Although this does not address the complete ambit of your request and does not provide the link to relevant legislation, it does illustrate the fiscal effects of a range of potential changes in similar fashion to the way actual changes are summarised in the Budget Report.

The illustrative tax changes [2 page document] gives a cost yield for a 1 percentage point in VAT of £4.6billion in 2009-10 and £4.8billion in 2010-11. I don’t know where these numbers come from, and how back-of-the-envelopy they are, but the sums of 13 months of 2.5% reduction gives a value of (4.6+4.8/12)*2.5=£12.5billion exactly, which exactly matches what the Chancellor announced to Parliament last November.

One can reasonably assume that his number was based on this one line in this thin two-page document, meaning that it must be based on assumptions such as that the response to the tax change is linear– and that there really is no sophisticated computer model of the Government taxation economy that they run policy options through to make predictions that they could then quote in Parliament. They’re just flying blind on no information, responding only to politics and special interests, and making less of a deliberate attempt to make things actually add up properly in the long term than when I calculate the rate of return for installing a new central heating boiler with insulation.

Perhaps they’ve learnt everything they know from the bankers, who we now know for sure did not care whether their numbers added up in the long term either– they only needed to cover things up for long enough to cash in their end of year bonuses. That was their time horizon. These bankers make politicians who see only to the next election look like paragons of far-sighted wisdom.

Shame they take all their advice from bankers and similar-minded consultants. Might explain why every policy takes exactly a year to explode these days. The advisors move on. The politicians also move on. And anything that ought to stick to their reputations in terms of decisions that they took — knowing that they were ill-informed — which have caused long-term lasting damage that could easily have been (and probably was) predicted, doesn’t.

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