Reconstruction could ease Japan’s pain: Keith Wade of Schroders

15th March 2011

"Before any analysis of the impact of the earthquake and tsunami which has hit Japan, we offer our sympathy to those directly affected.

"Current estimates suggest more than 10,000 fatalities, making this worse than the Kobe earthquake in 1995 and in the words of the Prime Minister, the worst crisis since the second world war.

37 thoughts on “Reconstruction could ease Japan’s pain: Keith Wade of Schroders”

  1. James says:

    The whole idea of these issues has skewed public policy for years:
    1. NI is an absolutely pernicious tax, as it has persuaded many older people that they have a government pension pot to which they are entitled, whereas of course it never existed and the taxes were spent at the time in exactly the same way as income tax. This has led to a false sense of entitlement, in my opinion, among many older people;
    2. The published rates are somehow politically symbolic, rather than economically led. This is the case at both ends of the spectrum. I have seen very little logic in the discussions as to whether we would be better with or withoit a 50% rate. You see almost nothing about the marginal rates at the bottom, except a general feeling that it is not worth while for many poor people to work. I do believe that Ian Duncan Smith is attempting to deal with the bottom end, although I do not know the details.

    1. Drf says:

      Hi James,

      I don’t think it was that many older people believed that there was a government pension pot which resulted in them feeling that they had an entitlement, as you claim. I think you will find that the belief was on the basis that if they paid the NI Contributions (of all increasing and sequentially multiplying types) they had a legal right to expect the contractual agreement to be kept by the government. That is surely still the same now?

      You need to remember the tricks which successive governments got up to over many years: first there was the additional Graduated Pension Scheme (a scheme to get more taxes for a previously impoverished government, by promising a larger state pension than the basic one to higher earning contributors); then there was the first SERPS (another scheme to raise taxes on the basis of a promise of a yet higher state pension). These were contracts to pay a higher state pension, but of course successive governments have welshed on all of these and using debasement have made the cumulative value to be little more than the previous state pension. So I would suggest that the reason older people may believe they have any entitlement is because of the implied contract; pay extra now, receive later when you retire?

      1. James says:

        Your points are well made and are a more accurate reflection of what has happened than my comment.
        I suppose a common point from what you say and the whole argument about marginal rates etc are that we cannot trust our elected leaders to tell it how it is. The deception over many years has now put us in a position where we cannot afford to keep promises made (real or implicit) because of the sustainability of borrowing levels (about which we were also deceived). As a result, everyone feels let down and many many people will have planned inadequately as a result. This is extremely unfair.
        I fear that this will all get much worse before it gets better. We already are seeing strains, as the interest groups (doctors,trade unions, high earners etcetc) all fight to maintain their status quo within an economy which as a whole is probably unsustainable

  2. Anonymous says:

    Isn’t there a saying that if you ask any opinion of twenty economists there will be 25 differing views (or something like that)?

    More to the point of the true reason for the letter in the first place, I am always concerned to know who has sponsored the letter. It is likely to have been written by a think tank but we do not know. Why only twenty economists? What about the next day’s letter from another group with a dissenting voice? 

    It is the same when letters from a group of captains of industry appear in the press. Always to be taken with a good dose of political cynicism.

    1. Anonymous says:

      Hi Kit

      If you take the conventional “on the one hand but on the other hand rule” I think you have to start counting at 40!

      Also you have reminded me that the track record of such letters is poor…..they have often ended up hoping that it would be forgotten as for example Mervyn King would not want people to be reminded of yet another mistake would he?

  3. Michael says:

    When I was earning in 1970s 80s & early 90s the top rate of income tax was 60% so perhaps some of these whingers should put up and shut up.
    Now I’m a pensioner over 65, I receive a state pension of c£5K per annum and an increased personal tax allowance of c£9.5K. My personal pension takes me over c£19K per annum is therefore taxed at 50% even at that meagre level as I lose £1 of allowance for evey £2 of extra income over that sum (and that includes bank interest)!!! Then I pay 20% tax on top of that!!!
    High earning whingers frankly make me sick, but not as sick as the Philip Greens and the assortment who kick footballs around a field for a living. They pay less than me even, on £millions!
    Let us all park our wife in Monte Carlo and assign everything to her? Or let us all set up an offshore trust and draw income as borrowings? Why not?

    1. James says:

      Good points and well made. I for one had no idea as to how you lose pension allowances. Just adds to Shaun’s point, really, as to how all sorts of high rates crop up in unexpected places.

      From my perspective (running small entrepreneurial companies), I do believe that high rewards can be justified by high risk and should not be taxed highly, as there is a clear beneift to the economy from the people who take these risks.

      I would like to add, however, to your list of those who are razily overpaid for doing absolutely risk-free and socially useless jobs:
      1. City traders etc;
      2. Lawyers and accountants. Even junior partners at big law firms and accounting firms earn over £1 million a year. For what exactly? I have dealt extensively with these firms over thirty years and can assure you that competence has not risen, but expectations have soared. For example, I have recently dealt with KPMG valuation department and the LOWEST charge out rate, for the junior (who of course knew nothing) was £435 PER HOUR.
      Rant over.

      1. Zubedaky says:

        Hi James,

        I work as an accountant, formerly at the Big 4, but now running a boutique firm (a small entrepreneurial company).  If you don’t like the prices charged by the Big 4, the answer is simple, shop around – you can get excellent service and real expertise at a fraction of the price you just paid.    

        (Also, just to put the record straight, from talking to former colleagues of mine, not that what they do actually get paid is justified, but new partners at the Big 4 do not get anything like the annual salary you mention).   

    2. Anonymous says:

      Hi Michael and welcome to my blog

      I did look at the age allowance but my calculation of the margianl rate went as follows.

      You pay 20% income tax

      You lose 50% of your allowance which is taxed at 20% so 50%x20%=10%

      So the marginal rate by my maths was in fact 30%…

      I am happy to be corrected if anyone feels that this is wrong.

  4. Anonymous says:

    I watched Julie Meyer last night on NN – I think she was from Ariadne Capital. She brought some reality in to the Vickers debate and expressed the view that all the talk of ring fencing banks will become subsumed by events. Meanwhile she pointed out that growth is withering on the vine and why are we not talking about this more and the need to breath life in to the SME sector ( a topic I have mentioned). Given Ed Balls’ apology in relation to banking supervision and the Financial Secretary’s admission that governments ‘manage’ markets when are we going to see a growth management initiative from the Westminster ‘talkers’.

    Turning to economists and their views, I would prefer to listen to the views of entrepreneurs who are trying to fight the fear and take risk to invest. Stuart Rose didnt have a problem in his rate of tax being higher than his secretary’s. He said how could he face her in the morning if her marginal rate of tax was higher than his….as regards the ECB the losses are parcelled back to national central banks as you have pointed out and no doubt we shall find out that much is covered by credit default insurance, wont we?

    1. Anonymous says:

      Thanks for your comments Shireblogger, it got us thinking.  Julie does raise some interesting points and so we got in touch with her for a quick interview to  delve deeper into her opinions on the banking reforms and why she thinks we should be concentrating on growing the economy rather than focusing on the banks. 
      Here is a link to the article:
      Hope you find it interesting.
      Community Manger.

      1. Anonymous says:

        Thank you Grace, I will read the contribution with interest…Julie caused even Mr Paxman to question the meaning and effect of the proposed reforms and Will Hutton lost something in the discussion also…..good for this community to hear from her directly.

  5. Anonymous says:

    This is part of a bigger but related problem – if you believe that taxation has an affect on behaviour – and that is the erosion of real wages as a secular trend for a sizeable – and I venture increasing – proportion of the population.  This has been disguised by a burgeoning lending market to households.  It coincides with the secular trend away from manufacture and towards low paid service jobs with little or no potential for real growth in purchasing power that are subsidised by council tax benefit and tax credit payments.  These are the same people who hit the poverty traps mentioned in the article. 

    Our economy is geared to importing and selling consumer shit we don’t need but still buy to impress people we don’t care about – conditioning through advertising and popular TV programmes.

    OK so the switch to the service sector also involves higher paid jobs in finance and corporate services.  The concentration of these in cities and not just the City dislocates local economies away from poorer local residents who cannot compete for jobs, houses and other resources.

    Where’s the trickle down?  There isn’t any.

    A cut in the highest rate of tax from 50% to 40% would apply irrespective of what economic activity the tax-payer is involved in.  Whether or not the activity kept money circulating in the UK let alone the regional or local economy or contributed to the rebalancing of the economy.  So, at the very most, the cut in taxes would be contingent upon activities being undertaken.

    The UK economy needs to be redeveloped by developing industries in sectors where there is scope for import substitution.  There may be scope using the personal tax system to reward entrepreneurs who bring or maintain local jobs in an area in these types of industries.

    This could increase the complexity of the tax system, and it may even be the case that the effect of such measures would be too small to justify the change.  But a radical change to the economy is required to ensure that it doesn’t continue to fail an increasing proportion of the population, and I don’t think it will come about by giving tax cuts to highly paid salarymen in large corporations.  

    1. Anonymous says:

      Produce in the UK – this is not an attractive business proposition. Banks charge business excessive fees. Commercial leases are very expensive and come with feudal terms and long tie ins which often require personal guarantees which allows the landlord to bankrupt you personally, not just your limited company. There is a huge amount of red tape and a mountain of compliance issues – provides work for expensive consultants who add nothing of social value to the UK GDP. And then try finding hardworking employees who can read, write and punctually arrive to work.

      1. Anonymous says:

        Commercial leases are very expensive and come with feudal terms and long tie ins which often require personal guarantees which allows the landlord to bankrupt you personally, not just your limited company.

        This is a key element regarding entrepreneurial activity. As important if not more so than employment reform. Still based on pre industrial law.

        There will be no change. Since before Norman times property has been power.

        Yes I am bitter, I have been on the bad end of one of these.

        1. Anonymous says:

          Identifying the problems are the first part of a solution. If Clegg, Osborne and Cameron want to help business they could try the following … Simplify red tape to common sense that does not require an army of compliance consultants. Work toward having affordable well regulated commercial leases available to entrepreneurs. Set up a bank system that allows affordable international payments. Encourage university courses in science, engineering and technology.

          Sadly I tend to agree there will be no meaningful change. Too many politicians have vested interests. Peter Mandelson buys property that is unaffordable on his taxable income. I do not believe that he gets free loans with no strings attached.

          1. Jomhn says:

            According to research, by business, the most costly item of regulation is the working Time directive at some 17 billion pounds over a decade.
            Of course, introduced (mandatory) as an EU directive, incorporated into Health and Safety legislation, it CANNOT be removed or altered by a UK government.
            Since most small businesses largely ignore regulation if it suits them (over 40 years working for same) the only change would be they carry-on as usual.
            Have a read. .PDF file:

          2. Anonymous says:

            Agreed. I want a referendum on EC exit and EEA membership. Switzerland and Norway are EEA members – neither economy appears to suffer from being outside the EC

    2. JohnM says:

      I very much doubt that such a system would be approved by the EU.
      Without approval it would attract massive fines.

  6. Anonymous says:

    Posen speaks again ”  How to do more”

    1. Anonymous says:

      Hi Shire

      Yes he is in tonights Evening Standard too. Those affected by the inflation his policies have helped create may get a chill down their spine from phrases like “Sustained high inflation is not a threat in such an environment” as he told us that before.

      They may well wonder that on his track record “How to do more” will turn out to be more inflation!

  7. Hi Shaun, glad to see you that returned to these important themes. 

    The media seems to have been rather quiet lately on IDS’s benefit reforms and his planned ‘universal credit’. One of the main aims of this is to reduce the highest marginal deduction rates but I have a feeling it may still be another year before we see the final proposals and an even longer time before it fully takes effect. As with the ongoing consultation on the impact on business of NI and PAYE collection, the Coalition seem to be heading in the right direction even if they are moving slowly, possibly too slowly.

    In terms of a wider debate I would very be interested on your thoughts on the balance between taxes on income and taxes on expenditure/consumption within the UK. 

    The main reason I ask is that one of the potential political compromises over cutting the 50% rate could be the introduction of some variant of a ‘mansion tax’ which would be a clear, if minor, switch from taxing income to taxing consumption.  The second reason is that various ‘green’ taxes including APD, Landfill Tax and a myriad of price increases due to the Government’s energy policy are taking place without much debate about any wider implications.

    1. Anonymous says:

      Hi Mark

      I support the efforts of Ian Duncan Smith in the same way as I support(ed) the policies of Frank Field ( a man who interestingly also thought QE would be inflationary to tie in with Shires comment on Adam Posen). Work towards reducing the poverty trap is something I recommend as a priority.

      The fear is that we get a Sir Humphrey Appleby style solution like the Vickers report where you name a date so far into the future that by the time you get there events will have overtaken it…

    2. Anonymous says:

      Hi Mark

      This area is full of potential landmines. I felt at the time of the election that whoever won would have ended up raising VAT and whilst not perfect it helped us begin to edge our deficit downwards. However taxing consumption has problems if you persist with it as it is regressive. One possible route might be a form of higher VAT on luxury items to try to avoid any regressive impact but this is fraught with danger.

      As to mansion taxes I can see a clear flaw and it comes from where I grew up which is Camberwell. If you go to the area of Camberwell Grove there are now houses where the value would perhaps be a million pounds or more but some of these people are not wealthy as they have always lived there. Accordingly they could not pay a mansion tax but it is and has been their home, would we evict them and what sort of nation would we be if we did?

      Sorry for replying twice

  8. Jan says:

    I agree with all the comments about our over-complicated tax and benefits system which is now so ridiculously difficult to understand.  I also agree with Sean that NI and tax should be combined into a single tax.  The main problem with the system we have is that it is way too complicated.  I wish the best of luck to Ian Duncan Smith in trying both to simplify things and to make the system fairer. No wonder HMRC get such a bad press when they have such a long-winded system to administer. 

    The last government added to all the complications over the years they were in power and their approach was exemplified with the 10p tax fiasco which when abolished by Gordon Brown threw up a number of anomalies for low-paid workers who would be adversely affected.  He then tried to rectify the situation for these individuals by additional rules to complicate matters further instead of re-introducing tthe 10p rate. He after all was the chancellor who introduced it in the first place!

    I actually think purchase taxes in the form of VAT is a fairer system than the current income tax system. Those who are paid a fortune can be taxed as they spend it on all their luxury goods whereas those at the bottom end spend more on the necessities of life such as food which is for the most part VAT-free. Unfortunately gas and electricity are no longer zero rated which affects us all but taxation of consumption can be used to directly affect how much we all use.  It is also harder to avoid VAT than taxes on income and as we know a lot of very rich people often go to great lengths to avoid taxes on their incomes with all sorts of avoidance schemes and offshore acounts etc.

      1. Anonymous says:

        Hi JohnM

        Welcome to my part of the blogosphere and thanks for the links. I have taken a look at the Adam Smith one and to my mind they are wrong so I will leave a comment on it.

        I am not an accountant but if you withdraw something at a rate of £1 in every two that is 50% so it is the personal allowance times two that is levied at 60% surely?

        1. JohnM says:

          I was amused that income from £100,000 to £107,475 attracts 62% deduction, while that of £107,475 to £140,000 attracts a rate of deduction of 42%.
          Add another £7475 onto that and back to 62%.
          If my employer gave me a pay increase of a few quid that means me paying more they would be told where to stick it.
          And while the NEWSPAPERS seem to think the average Joe on PAYE has no idea that NI is so high….they’re wrong. We are well aware that the rate of taxation is not 20% once you stick NI into the calculator.
          All this merging of IT and NI is just to cover an increase to enable the employers contribution to slowly go away.
          The way things are going they may need to bring the troops back from Iraq and Afghanistan,  and use them to surround parliament.
          I doubt they can rely too much on the police having just scammed them over pay and pension !

  9. Guest says:

    In response to Michael “When I was earning in 1970s…”.  As another pensioner with pretty much the same income and taxation as you, I share your feelings, (in the 50s we had no great problem with 33% basic rate!).  But I see the 50% marginal rate you  described (accurately enough) in a  slightly different light.  As you say, it arises because 1) there is a special beneficial rate of personal allowance over a certain age – the age allowance – and 2) that allowance is lost above a certain income level, at a rate of 50% on every £ above the given level.  In that sense you are quite right, its a marginal 50% rate on income above £19,000. 

    But its not altogether that simple, because the higher tax free allowance can only be understood is a sort of charitable gesture to the old;  hence the clawback we both ‘suffer’ is a judgment that at a certain income level we shouldn’t get the charity.  Presumably HMG or whoever would describe you not as being taxed 50% on anything, merely reverting to the same personal allwoance as everybody Leese.

    Put like that, it seems more reasonable?  But like the NI silliness, what we could do without is the byzantine, clever-clever, madman’s flytrap complications that arise from confounding and compounding the taxation system with the social benefits system, and in this case with general charitable pandering to a sentimental stereotype of ‘the poor old folks’ that then has to to be reworked in the real world.  Gordon Brown’s beloved ad hoc “extra help” is no way to get to a fair, just and well-provided for society.  Nor will the Laffing-all-the-way-to-the bank curve show us the way.  A simple progressive tax system based on simple, transparent principles is what’s needed. 

  10. Anonymous says:

    A number of German banks have decided to withdraw from the stress testing of the European Banking Authority. 
    To which my response is: are they smoking crack?

    1. Anonymous says:

      Is ze stress test meaningful or is it a propaganda farce to pretend there are no problems ?

      If the latter why waste time and money on nonsense ?

      It’s either a common sense money saving measure or an attempt to sweep some US mortgage backed junk under the carpet

    2. Anonymous says:

      Hi Kit

      Thanks for the link although I have to confess its an odd article.

      The European Banking Authority has the current credibility of Fernando Torres without the past record to my mind and the stress tests were/are a farce.

      If you wish to get worried about German banks the place to start would be somewhere else as in holdings of US mortgage backed securities….

  11. Jim Kingston says:

    Just a small point, but shouldn’t you include employer’s NIC as well?  It is, after all, just an extra slice of total payroll costs that ends up with HMRC. The headline salary simply provides a convenient reference from which the various cash flows may be calculated.

    1. Anonymous says:

      Hi Jim and welcome to my blog

      Employers national insurance contributions are something I thought of putting in but decided not to. The reason was that employees do not actually pay them and the eco nomic effect is felt on the employer. I did discuss them in my update discussing America’s jobs act but this was on the effect on employment of us raising them whilst the US cuts them. After todays figures that resonates a little more does it not?

      So for me they are part of a different debate (employment). I am not saying there is a right and wrong here it was one of those 55/45 decisions which an accountant rather than an economist might see as more 45/55..

  12. The Wee Macgregor says:

    I don’t think there is a scintilla of doubt that the 50 economists are either paying the top rate of tax, or cleverly avoiding it, so self interest is clearly a factor in their conclusions. Self serving claptrap springs to mind. Why don’t they all emigrate? Believe me, they won’t be even slightly missed by Mr Average, who is paying through the nose daily as a result of the gross incompetence (not to mention venality) of the UK “establishment”, whose numbers include these 50 self-important, puffed-up economists. I heard a spokeswoman for the “fabulous fifty” on Radio 4 a week or so ago. She was inarticulate, and didn’t have a shred of coherent evidence to back up their case for a “me,me,me” tax cut. Impressive? Not!

  13. AndrewD says:

    I think you may find that there are some people paying more than 100% tax. I was a Councillor in London between 1994 and 1998, and was unemployed for the majority of the time I was on the Council. When I attended a Committee Meeting, or a Full Council, I received an attendance allowance of around £16.00. When I signed on each fortnight, I had to declare these “earnings” – on which I paid tax – and immediately lost my JSA of about £12.00 for the day.

    If I attended more than two Committee meetings a week (I chaired the Economic Development Committee, and sat on 3 other Committees, so this happened quite often) I lost my Income Support, and also my NI contribution for the week – all in all FAR more than the amount I “earned” for the week. When I asked the Head of Legal if I could decline to take my Attendance Allowance, I was told that, according to Social Security Regulations, I would be “deemed to have received payment”, even if I did not accept the payment, so I wouldn’t even have had the money, but would still have lost the Benefits.

    To add insult to injury, an exception had been written into the Regulations, in that service on a Jury would NOT be treated as “any work, paid or unpaid”, but as public service, and so any compensation received, would NOT be treated in the same way, so that no loss of Benefits would accrue. My argument to the JobCentre that serving as an elected Councillor was pari passu with service on a Jury, in that both were pubic service carried out under due process and legal compulsion, was not accepted.

    I had a VERY unhappy 4 years on the Council, taking out loans from e.g. an endowment policy, and using Credit Cards, on which I had a good credit history, fro my time in paid employment, prior to being elected – I was made redundant before the Election – put me in danger of not being able to service my mortgage, and of losing the roof over my head. I stood down in 1998, and found work almost at once – something my being a Councillor had made almost impossible, as no one wants to hire someone who may be called away at short notice.

    1. Anonymous says:

      Hi AndrewD and welcome to my part of the blogosphere.

      Thanks for pointing this out I had wondered if we might find an effective direct tax rate of over 100% and now we have. Whoever invented this structure should be thorough ashamed of themselves.

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