A French think-tank, the Institut Francais des Relations
Internationales, thinks that, for Europe, "A slow but inexorable
movement onto history's exit ramp is foreseeable." At the same time,
those who want a United States of Europe have brought forth a
Constitution which is now being fiercely debated. This is the background
for an excellent article by Hamish McRae, the economics editor of The
Independent. For those interested in Europe or of the likely scope of
government welfare spending generally in the future, the following
article from yesterday's paper will be well worth reading.
<<<<
EUROPE CAN'T BUCK THE MARKET
Hamish McCrae
When economics and politics clash, economics usually wins. Whether or not
the proposed European constitution means that Brussells will have a say
over British taxes -- and there is so much obfuscation that I don't think
it is possible to know at this stage -- economic pressures seem likely to
push down Europe's taxes to UK levels, maybe beyond. The politics may be
for higher taxes but the economics are for lower ones.How so?
Well, the pressure on governments across the whole of the continent will
be huge for the next two generations. Government will be under tremendous
pressure to spend more but also will find it harder and harder to raise
revenue.
This is the result of the clash between two forces, demography and
mobility. The first story can be told quickly. Continental Europe will
become, after Japan, the oldest region in the world in terms of the
proportion of people over the age of 65. The UK becomes older too, but at
a rather slower rate. The effect of this is that, whereas there are
currently just under three workers for every pensioner in Germany and
France, in another decade there will be only two and a quarter. In 2050,
when young people now entering the workforce are drawing their pensions,
there will be fewer than one and a half workers for each pensioner. In
Italy and Spain the ratios are even worse, for there will be more
pensioners than workers by 2050. In the UK they are rather better:
we are, as a country, getting older, but more slowly than the
Continent.
European governments are well aware of the implications of these changing
ratios on their finances for, not only will the bulging ranks of
pensioners need their state
pensions, they will also be a charge on health and care budgets. However
governments find it hard to make even modest changes. The present bout of
French
strikes is one response to minor revisions to pension entitlements. If
the protesters knew the extent to which their benefits would have to be
cut, they would be rioting, not striking. The big fights are still to
come -- and if the pressure is serious in France it will be greater still
in Germany, Italy and Spain.
If demography adds to the cost of government, mobility cuts its revenues.
One form of revenue, company taxation, is already in serious decline, as
corporations have started to move their activities to low-tax countries.
For the winners this has been wonderful. Ireland has transformed its
economy by attracting mainly US companies with tax holidays. It does not
get revenue directly from the firms, but it does from the people they
employ locally.
The next stage looks like being the movement of company headquarters.
There have been examples of German companies moving to Switzerland and US
ones to Bermuda. But the greatest gainer may well be the States, with
this administration's new plans to cut tax on dividends.You can see why
the European Union is anxious to have a reasonable measure of company tax
harmonisation to stop Ireland scooping more than its share of Europe's
pool of foreign investment. But the big game is not within Europe; it is
between Europe and North America and it is hard to see much tax
harmonisation there. For a firm such as DaimlerChrysler or
GlaxoSmithKline, the legal headquarters could rationally be on either
side of the
Atlantic. If the tax advantages became big enough, they could
move.
Over the past 10 years there has already been a sharp fall in company tax
rates. This,
I suspect, is a trend that has only just begun. Company taxes are,
however, only a small proportion of government revenues. Here in Britain
the rate is less than 8 per
cent. The big money comes from income tax (including social security
contributions) and consumption taxes, in particular VAT. So what matters
is where people earn money, and where they spend it.
For the very rich, the choice of where to live is already very largely
determined by tax. Tax havens including Monaco and the Channel Islands do
a great business. There are people who live in the Channel Islands but
work, in effect, a full week in
London without, technically, ever being there for tax purposes.
Much more significant is the mobility of the young. You can see this best
in London,
which has become a magnet for young professionals from all over Europe
and indeed North America. The South-east of England has the largest
expatriate professional community on the globe. Continued professional
inward migration is one of the reasons why me UN now expects the
population of me UK to grow by 12 per cent over the next half-century.
This compares with a rise of 8 per cent in France and falls of 4 per cent
and 22 per cent in Germany and Italy.
Tax is not the only reason for professional mobility but it is a
significant one. Young professionals are a hugety attractive proposition
for any country They bring skills, they create growth, they pay tax both
on their income and their spending -- and they are not big burdens on
social security systems. I suspect that one of the main areas of
competition within Europe will be for just these people and, of course,
with the EU's single job market they are free to move anywhere.
If that is great for Britain, it is not so much fun for, say, Italy or
Germany. The nigh-eartimg young move out, leaving an even greater burden
on the taxpayers who stay. The only way to keep them will be to cut
taxes. And the more the European economy becomes like the American one,
the greater the mobility of labour.It follows that if Europe is to become
a more dynamic economic region, the result will be population movements
that force down tax levels everywhere.
You can see early signs of this already. In Sweden, the highest-taxed
country in the
world, spending has afready fallen from its 1993 peak of 67 per cent of
GDP to about 52 per cent. The top marginal tax rate is down to about 60
per cent (it varies depending on where you live), me same as Britain in
the 1980s.
In a more or less closed economy, countries are free to choose the size
of the state sector -- if they want to pay higher tax and get better
services they are free to vote for that But in an increasingly open
economy this choice closes off. It is already, in effect, closed for
company taxation. It is starting to dose for personal taxation too.
So whatever the provisions of the European constitution on tax powers,
the reality will be set by the market. Of course it can try to buck that
market. The result could then be rather on the lines suggested by the
Paris think-tank, the Institut Francais des Relations Internationales. In
its recent report World Trade in the 21st Century, it warned that
the EU, even after enlargement, might shrink by 2050 from its present 22
per cent of the worid economy to a mere 12 per cent. "A slow but
inexorable movement onto history's exit ramp is foreseeable." It
painted other somewhat more optimistic scenarios -- but it makes a sombre
backdrop to grand ideas about the European constitution.
>>>>
Keith Hudson, 6 Upper Camden Place, Bath, England
- Re: [Futurework] Exit ramp for Europe Keith Hudson
- Re: [Futurework] Exit ramp for Europe Stephen Straker
- Re: [Futurework] Exit ramp for Europe Ray Evans Harrell
- RE: [Futurework] Exit ramp for Europe Cordell . Arthur
- Re: [Futurework] Exit ramp for Europe Ray Evans Harrell
- Re: [Futurework] Exit ramp for Europe Harry Pollard
- Re: [Futurework] Exit ramp for Europe Ray Evans Harrell
- Re: [Futurework] Exit ramp for Eur... Harry Pollard
- Re: [Futurework] Exit ramp for... Ray Evans Harrell
- RE: [Futurework] Exit ramp for Europe Cordell . Arthur
- Re: [Futurework] Exit ramp for Europe Ray Evans Harrell