Friday, December 30, 2011

Responses on Export Innovation Credits

A well informed respondent has rasied some concerns about Export Innovation Credits.

Let's start by reminding ourselves of the economic context. With consumer spending necessarily restrained as consumers pay down debt, and given the need to constrain government expenditure, the only way to achieve growth is through business investment and improving our balance of payments.  Businesses are currently hoarding cash (about £617bn I believe) because we are uncertain about the future and don’t trust the banks. The latest export figures are very encouraging and the consumer slowdown should reduce imports, but it is unlikely that the 1-month trends in Oct can be maintained and much more needs to be done to encourage exports especially to China, India and other Emerging Markets.  This is not a matter of a few £00M here and there but tens of £bn over the course of the next couple of years.

Meanwhile the banks are required to hold extra capital and are simply not transmitting the cash they are receiving from central banks to the real economy – indeed their funding costs are going up and they are seen as very expensive and unreliable sources of funds. This recent ONS survey paints a depressing picture in this respect.

Now let’s look at the points my respondent raised:
  1. Adding extra tasks to the VAT system could reduce the flexibility to make future improvements. The proposed adjustments are wholly orthogonal to any changes in the underlying VAT mechanism. And the problems of recession, cash hoarding and insufficient export innovation are much more serious than hypothetical VAT improvements.
  2. Contrary to VAT Directive. Given the serious economic situation I’m sure HMG would live with this. The fact that it would as a side-effect reduce the amount we paid to the EU from “own resources” in 2012 would not necessarily be seen as a disadvantage either.
  3. Extra Admin. Certainly there would have to be a very simple supplementary declaration.  However this scheme would only be open to exporters so only a small fraction of VAT-registered business would be eligible. It would be reasonable at least in the first instance to limit the scheme to firms whose exports over the last 12 months exceeded £100k and to claims of over £20k. I cannot find published data about how many businesses are in this category, but probably fewer than 50,000.
  4. Extra Training and Systems. I appreciate that outsiders will always tend to underestimate these requirements. But HMRC staff are financially literate and have reasonable common sense. Because these are loans and not grants the incentive for false claims is greatly reduced. And except in the most egregious cases (which could be caught by simple safeguards) it should be sufficient to take claims made in the first 2 quarters at face value, allowing time for training. The fact that false claims can be caught retrospectively would provide sufficient deterrent for almost all businesses, and frankly it is more important to get credit to the companies that need it than to avoid any possibility of VAT fraud – which is already sadly fairly easy.
  5. Definitions. This certainly needs some further work, but in principle it should be something like: “any expenditure which in the reasonable opinion of the Directors is intended to lead to innovation in the firm’s products, services or markets for export” This would include but would not be limited to R&D, Engineering, Market Research, market and customer visits, preparation of marketing materials, specialist staff, training or consultancy for the development of new markets (eg hiring native Chinese speakers). I think the only major relevant expenditure that would be disallowed would be sales and marketing activity that was wholly or mainly in the UK and commissions paid to agents. If a company was exporting its goods/services then all the R&D and Engineering on those good/services would be allowed.
  6. The reasons for being relatively relaxed and having a wide definition are:
    1. It’s a loan. Within reason the more they borrow the better the UK Public Finances will be in 2015.
    2. Anything that encourages business investment in 2012 will be helpful to the UK economy. These things all have positive externalities.
    3. Allowing a wide definition ensures that the scheme is non-distortive. Essentially firms can make their own plans secure in the knowledge that HMG will lend them 50% of the cost at essentially zero real interest. This essentially doubles the expected return and thus greatly encourages extra profitable investment.
  7. Some of the effect might simply be to bring forward investment that would otherwise occur in 2013/14. This would in my view be a good effect of this scheme. The sooner investments are made the sooner there will be a return in terms of increased exports. And as noted any effect on the public finances in 2012-13 will be more than compensated for in repayments by April 2015. Furthermore although they may increase gross public borrowing they will not increase net public borrowing, and should if anything have a positive effect on market sentiment.
  8. Other government schemes already support R&D and Exports. R&D Tax Credits are a very good thing and should certainly be continued and probably increased. But of course R&D is a very small proportion of total innovation spend. UKTI does great work but these schemes are pretty small beer, and won’t make a measurable difference if we are faced with a recession next year. I fully accept that HMG can’t afford to spend much more in the way of grants, but these loans are eminently affordable (Gilt yields have dropped even more since my initial suggestion).
I can see no other way of getting a substantial stimulus into the economy in Q2 in a way that improves the public finances and the UK’s productive potential. At the very least it should be held in readiness as a contingency plan if it looks as though we are faced with recession in 2012, of which I fear the probability is roughly 40%.

Any other comments would be very much welcomed.

Wednesday, December 28, 2011

Blairism and "enlightenment" - but signs of economic hope

Filling in a survey about the future direction of the RSA. The RSA is too smug about "enlightenment" and Blairism and should reflect much more deeply about the serious downsides of these ideas. It is not an accident that the "enlightenment" launched the reign of terror and that Blairism lead to disaster in Iraq and Afghanistan and a vast increase in government expenditure coupled with a deterioration in the UK's standing in almost every international league table.  In both cases the fundamental problems are intellectual arrogance coupled with such a strong belief that "we stand for PROGRESS" that evidence-based policymaking is suspended.

There is a serious problem with long term unemployment and I still think we need something like Opportunity Credit Vouchers. The economic outlook is highly uncertain and could be a bit dire over the next 6 months, but I'm not entirely sure it's as bad as people think.
  • The US economy seems to be growing nicely, and US Consumer Confidence has shot up. The US is our largest export market so growth there will boost UK business.
  • The German economy also seems to be defying the Eurozone gloom. Again Germany is a very big export market for us.
  • The FTSE 250, which is more reflective of the UK than the FTSE 100, is somewhat (2.4%) up from it's 2011 low (Oct 4th).
We shall see...

PS Interesting quote from this post on Labourlist:

The upper echelons of the Labour party is dominated by brothers, sisters, husbands, wives, and friends. They are a group and tribe of their own and they don’t speak to or for modern Britain.

Tuesday, December 27, 2011

Boxing Day

Stayed near Banbury with C's sister for Christmas, also joined by her parents. Travelled back via Oxford where we stopped to go up the oldest tower there - that of St Michael at the North Gate.  This Church does an excellent job of making visitors aware of the Gospel, and indeed has a splendid panorama of Oxford from the tower.

We then travelled down to Alton Abbey. Alas we couldn't stay for a service but we were able to spend some time in the grounds and the Church. I bought a new Benedictine Breviary and this entailed summoning one of the monks. Dom Anselm the Iconographer came and it was great to hear their news. They have a Novice (Brother John) and a Postulant which is great!

The office is closed but I will be working a bit - a good time to think and not be interrupted by phone calls. Had one v god work idea which I need to develop and write up.

I have never known the economic outlook for the next 6 months to be so uncertain. On the one hand we have the Eurozone mess. On the other, the US economy seems to be recovering rather well. Becasue of our big push into China last year the prospects for us as a firm seem good, but much needs to be done to help the UK economy move forward. One thing I have to do this week is respond to the Treasury about one of my ideas to help this happen.

Sunday, December 25, 2011

Merry Christmas, snakes and ropes

Got back from Harvard on Tues morning - straight into conference call with Chairman of our collaborators in Beijing, then meeting someone from Harvard in London, then Hong Kong Association Christmas Lunch, meeting with another Chairman, staff drinks and finally went with Daughter and Grandson to Comedy of Errors at the National. An excellent production starring Lenny Henry.

Following day set off with Daughter to Cornwall to be with my mother for the anniversary of my father's death. We stopped off for the night in Salisbury - staying in the Red Lion which traces its history back to a hotel built in 1220 for the workers on the (third) cathedral there.  They think it may be the oldest purpose built hotel continuosly in use in the UK, and perhaps in the world(?) On the way down we were listening to wonderful choral evensong from Portsmouth Cathedral and watching the most amazing sunset in the clouds.

Thurs we went to 730 communion in Salisbury Cathedral and then looked in on the great JR Lucas en route to Cornwall. John was as ususal fascinating, discussing philosophy, theology and life. He points out that the Woman of Samaria says "we worship on that mountain" whereas a redactor/inventor would presumably have had her say "Mount Gerizim."  We stopped for lunch at Exeter and saw the Cathedral, getting to our family house at a reasonable time.

Friday evening we had the customary party with my sister and all her descendants (9) as well as a friend on my sister's who is also a violinist and inherited an Amati (I think Nicolo although slightly patched but still sounding great).  Played some old favourites (arrival of Queen of Sheba, slow movement of Bach Double Violin Concerto) and loads of carols.

Back to Cambridge via Sherbourne Abbey which was also really beautiful. And had tea with Martin Rees before celebrating son's birthday. This morning 8am 1662 communion in the church of King Edward Saint and Martyr.

As a Christmas offering I offer this fable from Questions of Truth:
A philosopher, an engineer, and a simpleton—none of whom could swim—were trapped in a cove with sheer cliff faces. They split up, but the tide kept coming in. Rescuers lowered a rope with a safety harness. The philosopher said, “Ah, this looks just like a rope, but I might be mistaken—it could be wishful thinking or an illusion.” So he didn’t attach himself, and he was drowned. The engineer said, “Ah, this is an 11 mm polyester rope with a breaking strain of 2800 kg. It conforms to the MR 10-81 standard,” and then proceeded to give an exhaustive, and entirely correct, analysis of the rope’s physical and chemical properties. But he didn’t attach himself and was drowned. The simpleton said, “Ah, a python! I’ll attach myself to its tail.”

A merry Christmas to all!

Sunday, December 18, 2011

Three pianos

Went last night to the brilliant Three Pianos at the Loeb Theatre in Harvard. This is a show based around Schubert's Winterreise done by three gifted writer/composers - who can also sing and act - - called Rick Burkhardt, Alec Duffy and Dave Malloy.

It was apparently inspired by a party they had in which they played though the Winterreise rather in the style of a Schubertiade and they play three friends meeting up but also Schubert (played by Rick) and his various friends (played by the others). There are, as the title suggests, three pianos on stage and these are wheeled around to create props as well as pianistic mayhem. They all play and sing, sometimes all at once.

The most impressive piece of pianistic clowning is when Dave is playing an annoying guest so Alec says "let's barricade him in with the pianos" and he proceeds to play the accompaniment of Auf Dem Fluse rotating each bar between a different piano.

In addition to being good fun it raises some pretty profound points about music and life. It's on for another three weeks in Harvard and well worth a visit.

Saturday, December 17, 2011

Export Innovation Credits

We urgently need business investment in innovation leading to higher exports. HMG can’t afford large grants but has excellent credit.  2012 will be a crunch year. So in 2012/13 HMG could offer loans of up to 50% of companies costs of export innovation, repayable in 2013-15. This can be done simply and efficiently through the VAT system.

Exporters who wished to claim Export Innovation Credits (EICs) would send a supplement to their VAT Return which gave their EIC claim and their expenditure on Export Innovation (investment of labour, overheads, materials and expenses in product or market innovation in goods or services intended for export), and their Total Exports over the last 4 quarters. They would have added their EIC claim to box 4 of their Return (The EU might not like this, too bad: it’s an emergency measure) and thus would automatically get the money with no extra admin or systems required by HMRC.

Safeguards would include limiting the cumulative EIC claim to 50% of expenditure on Export Innovation or 25% of the last 4 Qtrs pro-rata Export Value Added (Total Sales less Total Purchases times Total Exports/Total Sales),  to ensure the money goes to genuine value-adding exporters. Spot checks would ensure that the Export Innovation claims were genuine, but this is no worse than policing other VAT claims. Total Exports can be checked for plausibility from past VAT returns.
  • The EICs are a loan: at the end of 2012/13 the cumulative EIC plus 5% interest is divided into 8 quarterly instalments and paid back (by deductions from Box 4) over the following 2 years.   So HMG makes roughly 4% pa on a 2½ year loan, and since 3-year Gilt yields are under 0.5% and the VAT writeoff rate is c.2% this will result in lower total public borrowing by April 2015 even in the absence of any stimulus to the economy.
  • But the stimulus would be considerable. Especially for SMEs, a guaranteed 2 ½ year unsecured loan with no fees at 4% pa interest is much cheaper than any other form of finance.  This roughly doubles the RoI of investment in Export Innovation.  During 2012/13 this scheme could stimulate/protect £5-20bn of business expenditure, and total public sector debt by April 2015 could be reduced by c. £4-30bn.*
  • This would also increase the productive capacity of the economy and our long term growth rate. Thus the fall in the structural deficit would be even greater than the debt reduction.

* The total EICs (say £2.5-10bn) would underpin expenditure of £5-10bn but perhaps half would have happened anyway. Still the total tax take from biz expenditure is c 30-50% so this is worth £1-5bn. Expected payback of these investments would probably be under 2 years so assuming 20% margins the total increase in exports over the 3-year period would be about 5x the extra investment (£12-50bn) or a further £3.6-25bn to HMG.

PS A well informed commentator has raised some issues about EICs, and my responses are posted here.

Saturday, December 10, 2011

La Traviata

To  La Traviata with Elder Daughter - an opera which despite having gone to opera for over 30 years I had never seen.  This was the classic Richard Eyre production of 1995 with Ailyn Perez singing an excellent Violetta, Piotr Beczala as Alfredo, and the ever wonderful Simon Keenlyside as an outstanding Giorgio Germont.  Ji Hyun Kim made a fine début as Gastone de Letorieres,

It was a fine set of performances and a very good production, and there is much to admire in the opera. But I confess I find it underwhelming. This is partly because it takes itself so seriously, whereas the great Mozart de Pontes, like Shakespeare, mingle comedy in the seriousness.But perhaps I was a little tired and ill.

The programme notes point out that the "inside outside" duet (where Violetta is debating whether to fall in love with Alfredo, whilst Alfredo is singing his love-ballad outside) is one of the things that only Opera can do. In general Opera allows the characters to speak simultaneously in a way that the Theatre cannot.

Wednesday, December 07, 2011

Kids for Kids Christmas Concert

Last night to the Kids for Kids Christmas Concert.  This delightful and moving event was held this year in All Saints Margaret Street which has just been restored to its full glory as the prototype of Victorian Gothic and the masterpiece of William Butterfield.

Alastair Stewart was a masterful compère and we had readings by Timothy West, Prunella Scales, Diana Quick and others. The choir of Danes Hill School and their associated St Andrew's Singers provided the bulk of the music, and as usual the absolute highlight musically was a performance by the great Ruth Palmer. This year she played the very moving Meditation from Thais by Massenet.

Patricia Parker gave her usual speech updating us on the situation in Darfur. It is pretty desperate but since Westerners are strongly advised not to travel there because it is considered too dangerous there is not much reporting.  Kids for Kids have done amazing things in the 59 villages they have helped, and because they have their own (local) staff on the ground they can continue to operate. Do support them if you can! Until the 9th the big give will match your donation.

On Sunday we had an amazing day where we had all my descendants and ancestor(s) together. Hence not blogging much.

Friday, December 02, 2011

Onegin, Beijing and Li Yundi

Back from a fascinating trip to Beijing with many interesting but unbloggable meetings.

However I can mention a delightful evening at a remarkable Classical Music Club where we were taken by a friend who is a long-standing member. It's run by Beijing's foremost Classical Music fan, who has signed photos from many of the world's major musicians and an enormous collection of Callas memorabilia.

What made the evening so special was that just after we came in Li Yundi arrived to practice in one of the practice rooms. As we were being given a tour of the building we heard this astonishing playing of Beethoven Concerto No 1, and listened outside the closed door transfixed.  His manager came out to make a phone call and after the 3rd movement had finished he very kindly introduced us to Yundi who signed some CDs for us.  He really is an outstanding pianist and seems exceptionally nice as well.  There is some talk of a London concert and I really hope to hear him again soon.

Had breakfast meeting in Beijing on Weds am and, since the flight was delayed, had to go straight to dinner meeting in London off the plane.  Don't want to do that too often.

Just before leaving for Beijing we took some friends to the ENO Eugene Onegin which was simply a delight.  Toby Spence was a tremendous Lensky and Catherine Wyn Rogers as always on excellent form as Filipievna. Ed Gardener conducted superbly, the production was wonderful and everyone sang really well.  Catch the last performance on Sat if you can. Or catch the production when it comes to the Met (2014 I think alas).