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Boris Johnson and Rishi Sunak have, it is reported, agreed to pay for long term reform of social care by raising national insurance by a penny in the pound for both employers and employees.

The move would raise an estimated £10bn annually.

The government is braced for unease among its backbenchers because the Conservatives promised not to raise income tax or national insurance in their election-winning 2019 manifesto.

It perhaps ought not to be too worried about that. The prime minister can always point to the crisis in social care and the need, more broadly, to repair the public finances after the COVID-19 pandemic.

The chancellor, meanwhile, can point out that one of his predecessors, Gordon Brown, did something similar in his April 2002 budget. Having pledged not to raise income taxes in Labour’s election-winning 2001 manifesto, Mr Brown broke the spirit of that promise, slapping more than 4 million workers with a 1% increase in national insurance.

The risk of breaking an election promise is the least of the problems with this proposal.

For a start, the move will perpetuate the myth that national insurance is some kind of special safety net, hypothecated to pay for pensions, unemployment benefits and other elements of the welfare state such as the NHS.

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It is remarkable how many people still believe this when, for many years, national insurance has simply been income tax by another name.

Yes, there is something called the National Insurance Fund, but essentially it is a government accounting wheeze.

The money raised in national insurance contributions is insufficient to pay for the benefits and public services that many people think they do. It just disappears, effectively, into the government’s coffers and is spent in the same way that revenues from income tax, VAT and corporation tax are spent.

Because the UK state pension system is a so-called ‘pay as you go’ system, the national insurance paid by today’s workers pays the pensions of today’s pensioners, not their own.

This misunderstanding of national insurance may be precisely why the government is proposing going to go down this route.

 Treasury building in London
The Treasury risks hurting those worst affected financially by the COVID crisis through any rise in NI contributions

Polling suggests people are happier paying national insurance rather than income tax because they genuinely appear to believe they are getting something, a benefit, for doing so.

It is why chancellors down the years have reached for national insurance as their favoured stealth tax. In 1979, national insurance receipts were equal to half of income tax receipts. This year, according to the Treasury, they will be equal to roughly three-quarters of income tax receipts.

There are also other problems with this proposal.

One is that it exacerbates intergenerational unfairness. Unlike income tax, workers of state pension age do not pay national insurance on their earnings, so the hike will fall entirely on younger workers.

Moreover, because national insurance – unlike income tax – is levied only on earnings, rather than other sources of income, such as interest on savings, the cost of this measure will fall disproportionately on younger people rather than older ones.

In other words, having made sacrifices throughout the pandemic to protect older people, younger people will again be paying through their earnings for a benefit that will benefit older people rather than themselves.

This move, then, may deepen the problems the Conservatives have with younger voters.

An explicit aim of reforming social care is to prevent people having to sell their homes to pay for such care. Younger people, unable to buy a home in the first place, may wonder why they are being asked to pay higher national insurance contributions so that others may keep theirs.

Others will criticise the lack of progressivity in this proposal.

All workers (other than those earning more than £100,000 annually and who do not benefit from the personal allowance) can earn up to £12,570 before they have to start paying income tax. By contrast, national insurance kicks in as soon as a worker has earned £9,568.

Accordingly, a wealthy pensioner living off a generous final salary pension or on income from their savings and dividends will not be paying this proposed hike, but a low-paid worker earning just £184 per week will be.

Another major problem with this proposal is the unwanted consequences it will have. Taxes, by their nature, reduce the activity on which they are levied. It is why chancellors tax smoking heavily.

Because this proposed national insurance will fall on employers, as well as employees, it will make the cost of hiring someone more expensive.

Higher payroll taxes mean fewer people in work and, potentially, lower growth. It is why, in response to Mr Brown’s national insurance hike in 2002, the then-Conservative leader, Iain Duncan-Smith, called the move a “tax on jobs”.

Gordon Brown introduced an extra tier of National Insurance in 2002
Gordon Brown introduced an extra tier of National Insurance in 2002

So, too, did David Cameron and George Osborne when Mr Brown ordered his chancellor, Alistair Darling, to announce a 1% rise in national insurance in March 2010 to pay for the financial crisis. Mr Darling had wanted to increase VAT instead. Mr Brown’s decision ensured Labour had barely any support from business in that year’s general election.

So, to conclude, what the PM is proposing is a tax increase that will disproportionately hit younger and low-paid workers while making it harder for employers to hire people.

Or, as Nick Macpherson, the former permanent secretary at the Treasury, put it on Twitter: “Rentiers and trustafarians won’t have to pay a penny. And the low paid young will subsidise the wealthy old. Higher spending does require higher taxes. But national insurance is a regressive tax on jobs.”


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Andrew Bailey says Bank of England in period of ‘heightened tension’ after runs on Silicon Valley Bank and Credit Suisse




Andrew Bailey says Bank of England in period of 'heightened tension' after runs on Silicon Valley Bank and Credit Suisse

The Bank of England governor has told MPs the regulator is currently in a period of “very heightened tension and alertness”.

However, speaking to the Treasury Committee on Tuesday, Andrew Bailey said the country is not in a period comparable to the financial crash of 2008 – but that vigilance is needed.

He said: “I do not want to give you for a moment the idea that we are not very vigilant because we are, we are in a period of very heightened, frankly, tension and alertness and we will go on being [in that position].”

Stress testing of banks will have to include the fact that deposits can be withdrawn electronically in seconds, deputy governor Sam Woods added.

“A very striking feature of the Silicon Valley Bank run, not so much of the Credit Suisse run by the way, was just the speed with which it took place”, he said.

“We know all of us can move money from our accounts in the short time it has taken me to answer this question, as you say, that is a relatively new feature of the market.”

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Another relatively new development is the rapid transfer of information on social media, described as a noticeable phenomenon by Mr Woods.

“The other aspect that we’ve had and we have dealt with, by the way, in various situations in the past, but it’s more prominent is the speed with which news can travel, particularly among communities and sometimes sort of through private messaging groups, that is a noticeable phenomenon both here [in the UK] and elsewhere,” he said.

A learning point from the collapse of SVB is the speed with which money can travel, he added.

His comments follow the greatest financial turmoil since 2008 as the midsize lender SVB collapsed and its UK arm was subject to a last minute takeover by HSBC. Less than a week later the embattled second largest lender in Switzerland, Credit Suisse was forcibly merged with its rival UBS as its share price plummeted and clients withdrew money.

A difficulty faced by the tech companies and start-ups that banked with SVB was that many had their deposits all with SVB, rather than numerous banks, so when SVB’s share price plummeted depositors took fright and withdrew their money.

That problem may exist in the UK as Mr Bailey said holding many bank accounts can be hard for some new companies.

“Another point that I think we will naturally have to look at … is that something that businesses say to me and actually – particularly start-up businesses, but it’s not just start-up businesses – that opening many business accounts to get a sort of diversified range of banks is not easy.”

“There is I think a point there around the ease of account opening for businesses.”

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FTX’s Sam Bankman-Fried charged with bribing Chinese officials




FTX's Sam Bankman-Fried charged with bribing Chinese officials

Disgraced FTX founder Sam Bankman-Fried has been charged with bribing Chinese officials with payments of $40m (£32.4m).

Prosecutors have accused him of directing the payment to unfreeze accounts belonging to his hedge fund linked to FTX.

The accounts of his trading firm Alameda Research, which Chinese authorities had frozen, are said to have held more than $1bn (£812m) in cryptocurrency.

Prosecutors claimed they were unfrozen after the alleged bribe payment was made around November 2021.

Bankman-Fried is accused of transferring tens of millions of dollars worth of extra crypto to complete the bribe.

The 31-year-old has already pleaded not guilty to eight counts over the collapse of FTX last year.

It ran out of money on 11 November after the cryptocurrency equivalent of a bank run.

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Prosecutors say Bankman-Fried stole billions of dollars in customer funds to plug losses in Alameda.

He faces a total of 13 charges.

They include four counts which accuse him of orchestrating an illegal campaign donation scheme to buy influence in Washington DC.

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Banking turmoil: How worried should we be in Britain?




Banking turmoil: How worried should we be in Britain?

How worried should we be about the banks?

It’s a question that’s been hanging over the financial system since the collapse in the space of a fortnight of three moderate American banks, including Silicon Valley Bank (SVB), followed by Swiss behemoth Credit Suisse.

The spectacle of regulators, political leaders and bankers spending sleepless weekends managing insolvencies, bailouts and takeovers, against the red-ink backdrop of lurching markets, has stirred memories of 2008 and the financial crash.

The answer from Bank of England governor Andrew Bailey, repeated to MPs on the Treasury Select Committee on Tuesday, is “don’t panic”, not yet anyway.

Mr Bailey conceded that recent events made this a moment of “heightened tension and alertness”, but that comparisons with 2008 are erroneous and, so far, UK regulations introduced post-crash are passing the test.

His diagnosis is that while the issues that brought down SVB and Credit Suisse are distinct and separate, the interconnectedness of the financial system means the risk of contagion cannot be ignored.

SVB collapsed because of poor risk management, with deposits locked into fixed incomes investments that fell in value as interest rates rose. Credit Suisse meanwhile, after a decade of unerringly finding new scandals in which to become embroiled, finally stepped on a rake it could not recover from.

Mr Bailey found himself directly involved with the fallout from SVB, engineering the sale of its UK subsidiary to HSBC over a long weekend, with the deal only confirmed he said at 4am on the Monday, hours before markets reopened.

The actions taken by the Bank he said proved the value of new regulation.

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A five-point guide to the banking panic of 2023

SVB had a distinct UK presence because its British branch had grown to a point it was required to become a separate subsidiary. That in turn gave the Bank of England and the Prudential Regulation Authority options in managing its decline, one of which was a sale.

Mr Bailey and his colleagues did concede there are lessons to learn, primarily from the speed with which confidence and, crucially, deposits were withdrawn from the banks.

As a result they will re-examine whether the current bank “stress tests” governing liquidity – the amount of cash banks must have on hand to absorb shocks to the system – are adequate.

Technology may have helped change that calculation. In 2007 we knew Northern Rock was on the brink because customers were queuing outside branches. Today you can withdraw funds digitally in the time it takes to read this sentence, and a bank run could be underway by the end of the paragraph.

Deputy governor Dave Ramsden told MPs that messaging apps further accelerate the potential for bank runs, and said this was a factor in the SVB collapse, with the bulk of depositors all working in the tight-knit US tech industry.

“They were a tech-savvy group, already using messaging in ordinary situations, using it in a run situation.”

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The result was what Bailey called “the fastest journey from health to death since Barings”, a reference to the British investment bank that collapsed spectacularly in 1995.

But he insisted the issues are bank-specific and isolated, describing the jitters that have seen banks stocks rise and fall rapidly as markets “testing” various institutions, looking for weakness. The latest example came on Friday afternoon, when Deutsche Bank’s valuation fell without an obvious trigger only to recover on Monday.

“My very strong view of the UK banking system is that it is in a very strong position,” Bailey said. “But there are moves in markets to test out firms, they are not based on identified weakness, rather they’re testing out. There’s a lot of testing going on.”

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