Could a Government be Financially Independent?

Often when I read about politics I despair. The problems of debt, and house prices, and the growing costs of pensions and healthcare, and under-funding of public services, social care, and so on and on, all seem insurmountable at times. After a while you almost have to switch it off and limit your exposure to the news because it will just make you depressed.

I must admit a few years back I actually thought that Osborne and Cameron might be able to get rid of the UK government’s deficit and that they might eventually start increasing government spending again. I was never a huge fan of austerity, and I didn’t vote for the Tories, but I could at least see what they were trying to do. And then of course Brexit came along and blew all their plans out of the water. You have to feel sorry for the current chancellor Philip Hammond, surrounded by power grabbing attention seekers and imbeciles, while the prospects for the UK economy slowly but surely diminish compared to other countries.

What seems to be lacking with the current government is any kind of big vision, any kind of plan for the future. Theresa May seems to think the Tory party should return to their roots, ie, become the nasty party again, and for her efforts she got shot down at the General Election. I have more sympathy for Corbyn but he seems to surround himself with loonies as well and he didn’t exactly get a mandate for his plans from the General Election either. The politicians and people of the UK are all horribly divided and way too focused on Brexit. And the less said about the press in this country the better to be frank.

We here in the FIRE community on the other hand, we’re all about big plans and visions of a better future. I would say we’re an optimistic bunch, at least in terms of our own finances (maybe not other people’s so much). We try to lead better lives and improve ourselves.

Anyway, where am I going with this? Well I did wonder a few years back whether the principles of FIRE could be applied to a government. Could the government save and invest, say five percent a year, into stocks and shares, and invest enough each year so that one day, in fifty or sixty years time they might derive all of their income from dividends and then not need to tax the people so much?

With the rise of the robots I would say that this is a conversation that needs to be had. Not a week goes by now without reading some article about how technology is going to make us all redundant. Not a week goes by without hearing about how inequality is wider than it ever has been, how the top 50 richest people in the world are now worth more than the bottom 50% of the entire world’s population.

oxfamwealth
This cartoon is a few years old, the world is even more unequal now.

Where is it going to end? Piketty suggests in his book Capital in the 21st Century that inequality will continue to widen, that the middle class will eventually die out and we’ll be left with a situation like late 19th century Britain and France, where there was a small very wealthy elite and a great mass of very poor people. When I look around me, at the growth of the gig economy and zero hours contracts and call centres, and the increase in house prices, I can see where he is coming from.

Some other ideas have been bandied about. I like the idea of a basic income, paid to everyone regardless of their earnings. I’m a little sceptical though as I’m not sure the government would be able to afford it. Then of course there is an idea I really like, that wealth should be taxed, not income. Income is what drives an economy, wealth slows it down. So why not tax the latter, not the former? Some say it would be difficult to measure, and may be like Heisenberg’s uncertainty principle – when you look at a particle it behaves differently, and if you try to tax land value then the land will decrease in value and you won’t get so much tax from it. But more on that another time.

Then of course there is the idea of a government investment fund. I think this is the strongest idea. It would take great vision from a government, it would take many years, probably decades to implement. But perhaps it is the answer?

Corporation Taxes

Some might say we already have a situation where the government gets income from businesses through the form of corporation tax. But let’s be honest about this now, the amount the government actually gets through corporation tax is not that great. Why? Because big businesses are all diverting their profits overseas to avoid it.

I remember a few years back I read about how Starbucks avoids paying corporation tax in the UK. It seems they employ two main methods. Firstly they pay ‘recipe royalties’ to their headquarters based in Holland where, predictably, the corporation tax is somewhat lower. They also buy all their coffee beans through an arm of their company in Switzerland, who then sell those coffee beans on to Starbucks UK at a much higher price. And so through these two methods the Starbucks UK division makes very little profit because it has such high costs of royalties and expensive coffee beans. Less profit means less corporation tax, but of course Starbucks as a whole is still making the same amount of profit.

Starbucks aren’t the only ones at it, Apple and Amazon, are also big offenders, and most other big companies are too. Their shareholders demand as high a profit as possible, and the companies are all competing with each other after all. The other day Kellogg’s announced they’d be reducing sugar in some of their cereal brands – this caused some consternation in the press. What should have caused more consternation was the fact they had £900m of turnover in the UK and paid only £60k of corporation tax. That is basically nothing – are they really trying to tell us they only made about £300k of profit on £900m turnover? Bullshit.

Probably the most amusing outcome of all this was the situation in Ireland recently where the EU forced Ireland to make Apple pay several billion in tax to them. “We don’t want all these billions,” the Irish government protested. Why? Because they’d given Apple a sweetheart deal whereby Apple would give them a large amount of money to shelter their business there and pay no corporation tax. It was a cynical move by both parties and should be shut down, but then of course everyone complains that the EU is interfering too much, and blah blah blah.

Some people in the UK say we should just tax these multinational companies on the profits they make in the UK. But as mentioned above this is basically impossible, because big companies are very good at making it look like their profits are earned elsewhere. For every scenario where a company is abusing a loophole, there are plenty of companies that are respecting the rules in understandable circumstances. HMRC are toothless (and under-funded by the UK govt I should add), and it seems all they can do is get companies to pay nominal amounts, token gestures.

There has been a movement through social media by some to persuade us all to stop buying newspapers that advertise certain companies, and stop buying from companies that divert profits overseas, but it’s just that, a grassroots movement, and unlikely to get anywhere. Besides, all the companies are doing it, so what are you going to do, make your own smart phone?

Someone once suggested to me that companies should be taxed on turnover, not profit. Frankly I think this is the most absurd suggestion yet – all those companies that have a high turnover but make their profits on very small margins (supermarkets for example) would be screwed over.

Personally I had hoped that the big countries in the EU; Germany, France and the UK, might work together to do something about it, and it does look like the EU is going to enact legislation to try to prevent corporations cynically shifting profits to lower tax countries. It’ll be interesting to see how successful this is. But in any case the legislation won’t come into force until the middle of 2019 I believe, just when the UK is supposed to be leaving the EU. Funny that, it’s almost like the whole Brexit thing was planned to avoid EU rules on corporation taxes… Surely not, I hear you say.

Ideally you would hope that as the EU matured then tax policies between countries would start to align, but it doesn’t look like that is going to happen. The Conservative government is intent on reducing corporation tax to make the UK more competitive, but that will just force other big countries to do the same to maintain competitiveness. It is a race to the bottom, and the people lose out.

Sovereign Wealth Funds

As far as I’m concerned, the government is fighting a losing battle when it comes to corporation taxes. But what if the government was to hold shares in a large variety of companies, possibly worldwide? The companies would still hopefully be self-interested and efficient, because the government would only own a small stake in each one. But the government would be guaranteed to get the same dividend as other shareholders, and therefore there would be no conflict of interest.

One of the interesting suggestions of Piketty’s book is the suggestion that rich alumni of the major universities in the US, of Harvard and Yale, should stop donating to their former universities. Why? Because Harvard and Yale have massive investment funds that make huge profits every year. They take advantage of economies of scale to get comparatively cheap active fund management that your average small time investor cannot possibly hope for and this means they can make even bigger gains each year.

Recently I read somewhere that Norway has a sovereign wealth fund. I’m naturally a curious person so I thought I’d look it up. It turns out Norway decided to invest the proceeds of their oil revenues in the 1990s into investments in many companies around the world. Norway’s Government Pension Fund Global, as it is called, is the world’s biggest sovereign investment fund. It currently holds over $1trillion of assets, which is 1.3% of the world’s stocks and shares. That’s actually mind-boggling when you think about it, that a country of just 5.2m people would hold 1.3% of the world’s stocks and shares.

Putting that into something we can understand, that is $192,307 per Norwegian citizen, on top of the wealth individual Norwegians will already have elsewhere. Apparently the Norwegian government draws down 3% of the fund each year, which is $5769 per person. That’s $5769 that each citizen doesn’t have to pay in tax (on average). That’s your basic income right there. Once it is big enough that could replace pensions, unemployment and sickness benefits, and much more.

Now, we in the FIRE community talk about Safe Withdrawal Rates (SWRs) all the time. The idea is that if you have investments worth about 25 times your annual expenditure then you could retire, because you could draw down 4% (one twenty-fifth) of the total amount, and it would never run out. Naturally some are more conservative, saying 3%, or even 2.5% might be a more sensible amount if you don’t want the fund to run out. This sounds very similar to what Norway is doing to me, though Norway’s fund has actually increased in value by far more than 3% per year on average.

norwayfund

Norway has, since 2013, started to take more of an interest in those companies it invests in, especially as, being such a large shareholder it has started to have more and more influence. Some might worry about this. From what I can see it looks like a good thing – Norway have stopped investing in companies selling things like tobacco, alcohol, and weapons.

If we were really worried about the influence Norway might have on companies, then perhaps we ought to set up our own sovereign wealth fund, and then at least we will have a similar weight of influence.

I looked around to see which other countries have sovereign wealth funds and it seems to mostly be Middle Eastern countries, presumably for the same reason as Norway, that they want to use their oil wealth to generate revenue far beyond the time when their oil runs out.

The UK has oil too in the form of the North Sea Oil. So what have we done with the revenues so far? Bugger all as far as I can tell. It has pretty much all gone into tax cuts for the rich according to John Hawksworth, Chief Economist of PWC. It may have also been a contributing factor in the massive house price inflation we’ve seen in the last few decades. We’ve been getting oil revenues as a country since the mid 1970s, but neither the Tories nor Labour have done anything with it of note. I searched and it doesn’t look like the UK has any sort of sovereign wealth fund to speak of. At some point it will run out and we’ll have nothing to show for it.

Could a Government be Financially Independent?

So could a government invest for the future and one day be financially independent? Could the UK be like Norway, the Mr Money Mustache of the international world? Well, I don’t see why not. It just takes a leader with vision and successive governments to follow through with that vision. It would make things a little tougher for a while, and taxes would no doubt need to be raised (I would argue for the rich as they are the ones who’ve been benefitting so far). I would like to see it happen but something tells me there will be many barriers, many vested interests that would join forces to prevent it. The fact it’s not even being talked about at the moment would suggest that the owners of the press (who are mostly all billionaires let’s not forget) don’t want to talk about it.

Or maybe I’m missing some vital piece of information? That’s also very possible. I’d love to hear your thoughts.

Wephway

Advertisements

3 thoughts on “Could a Government be Financially Independent?

  1. The story of the Norwegian sovereign wealth fund is a fascinating one and it does make you think what could have been if only things had been handled differently here as the UK had the same opportunity, in terms of access to North Sea Oil/Gas.

    We are culturally very much not Norway though, so maybe it was never on the cards? We are also a much larger country, I’m not sure whether or not that had a bearing on things?

    The analogy between government and personal finance can only stretch so far as the ability to print your own money makes the two quite different?

    Like

    1. I read that the North Sea Oil could have been worth about $480bn by now if it had been invested. So about half of what Norway has, and our population is over 10 times the size. So yeah, maybe they just thought it was better to boost the economy now with tax cuts than to try and invest for the future.

      Yeah I don’t know about the printing money thing, that would surely just result in inflation? Though I think quantitative easing is basically printing money to avoid deflation. My economics is very hazy around this area!

      I did read once that government finances are very different to the personal because a government is basically immortal. Whereas we mere mortals have to save up for the day when we’re no longer able to work, the government doesn’t have to do that, and so it is often better to borrow some money now to invest in things like education and infrastructure that will boost the economy and therefore tax revenues in the future. You hear a lot of people say the government should spend within its means, but that is applying personal finance to government finance and is therefore an incorrect analogy.

      So yes, I agree. On the other hand, when the robots take over… maybe we won’t be able to work because robots will do our jobs better than us, and therefore there will need to be a basic income and possibly a government investment fund to take advantage of the profits businesses with robots will be making.

      Like

  2. > The UK has oil too in the form of the North Sea Oil. So what have we done with the revenues so far?

    The UK had oil in the form of North Sea Oil. The vast majority of it has been extracted. The proceeds were used to pay for Thatcher’s tax cuts in the 1980s (my younger self paid a much higher tax rate on a higher proportion of my income than my older self) and some of it went into sponsoring higher house prices, by flogging of existing capital below market price in the Right to Buy bonanza.

    Then some of it was used by Blair and Brown to fuel some of the Goldilocks economy chimera, which ended up fuelling a housing boom via liar loans and then BTL…

    Cut a long story short, we spent it.

    > It just takes a leader with vision and successive governments to follow through with that vision.

    We don’t have that sort of leadership. Our problem at the moment is as Yeats observed –

    The best lack all conviction, while the worst
    Are full of passionate intensity.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s