Jeremy Warner's Outlook: Booze cruise hypocrisy as black hole grows

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The Independent Online

The British government is being hoisted on its own petard by the European Commission in the continuing row over "booze cruise" purchases of cheap alcohol and tobacco. The Chancellor, Gordon Brown, never misses an opportunity to preach the virtues of tax competition between nations to his European peers, yet whenever it adversely affects his own coffers, he seems determined to stamp it out.

The European Commission is planning to refer Britain to the Court of Justice over what it judges to be excessive penalties - such as seizure of goods and cars - applied to people caught bringing large amounts of drink and tobacco into the country from the Continent, where rates of excise duty are generally much lower. The European Union reckons this is illegal, even though anyone driving a truck load of tobacco into the country couldn't conceivably be intending to smoke the whole lot himself. The intention is to make a handsome profit selling it to others.

The Treasury counters that the case is only being brought because of personal animosity by the Internal Markets Commissioner, Frits Bolkestein, who resents British opposition to his plans for tax harmonisation across Europe. As far as it goes, this is perfectly true. There's much personal animosity there, but only because the Treasury has repeatedly briefed against Mr Bolkestein in the British press in a manner which misrepresents what he is trying to achieve.

In fact Mr Bolkestein isn't in favour of tax harmonisation at all. Indeed I would place him firmly in that small group of European reformers who believes not only in tax competition, but also serious structural upheaval across Europe to make it economically competitive more generally. His views are actually much closer to those of Mr Brown than the Treasury imagines, yet somehow or other they have managed to get off on the wrong foot.

Mr Bolkestein isn't a tax harmoniser, but what he does want is a level playing field. As a result, he's presided over a number of European initiatives that can sometimes look like tax harmonisation, such as the mind-numbingly complex attempt to find a common way of recognising a profit, this for the purpose of preventing corporations from artificially shifting profits into territories with the most benign tax regimes.

If the tax competition arguments so often peddled by Mr Brown are to be taken at face value, then he should heartily approve of the small time traders toing and frowing across the Channel in search of low-tax booze. This is only tax arbitrage, afterall, and that's one of the main benefits of tax competition.

One look at new figures for the public finances published yesterday tell you why the Chancellor is not going to let allegations of hypocrisy get in the way of protecting the tax base. Data for September show the public finances veering further off course. The net cash requirement last month - that's the amount the Government has to borrow to fund the shortfall between spending and tax receipts - was the worst for any September since records began.

With only half the financial year gone, the Chancellor has already borrowed two-thirds of what he's budgeted for the year as a whole. There's still time to catch up, and perhaps encouragingly from his point of view, the shortfall in tax revenues was not as bad in September as it has been. It's in spending, particularly on defence and education, where the damage is being done. Still, no matter. The wonderful thing about the "golden rule" is that it is completely flexible. It is no wonder the Treasury was able, straight faced, to say after yesterday's figures that "we remain firmly on track to meet our strict fiscal rules". Balancing the budget across the economic cycle is easy when there's no knowing where the cycle begins and ends.

The one thing we can be certain of is that the tax burden on the economy will continue to rise, particularly if Labour wins the next election. As things stand, the reason for opposing tax harmonisation is that Britain has a lower tax burden than is generally the case in Europe. The way things are going, it may soon be because we have a higher one. Small wonder the Government is so keen to discourage the booze cruisers.

Santander questions

The outcome of today's vote by shareholders of Santander Central Hispano on their company's bid for Abbey National is not in doubt, yet that's not going to stop the meeting degenerating into a public row that will make the outpouring of complaint Abbey directors experienced at last week's home fixture look like a vicars' tea party by comparison. Banco Santander seems to have more ginger groups among its shareholders than Abbey has branches, and whenever there's a meeting, they vent their frustrations. Nor is this just down to Latin temperament. There's good reason for concern about standards of corporate governance at Spain's fastest-growing bank.

Chief among these is that the chairman, Emilio Botin, has been charged in Spain with misappropriation and tax fraud. Everyone is innocent until proven guilty, and in any case Banco Santander may be right in characterising the cases as more in the nature of vexatious litigation than full blown criminal charges.

None the less, if the same situation were to happen with a British bank the Financial Services Authority would not even so much as allow Mr Botin to be put on paid gardening leave, pending the outcome of the trials, let alone remain at his desk and engage in further acquisition making. It's impossible to imagine that Matt Barrett would be allowed to continue as chairman of Barclays, or Sir George Mathewson as chairman of Royal Bank of Scotland Group had they, or even their companies, been charged with tax fraud.

The legal system is very different in Spain, and as Santander points out, the presiding magistrate has had repeatedly to over rule the public prosecutor, who wanted the cases struck out, in bringing the cases to trial. All the same, it's a rum old state of affairs which is raising eyebrows in many quarters of the City. The FSA will continue to be responsible for the prudential regulation of Abbey once it has been taken over by Santander, so it may not seem to matter very much if Mr Botin is eventually judged to be a crook. Furthermore, the Bank of Spain, which is responsible for regulating Banco Santander, seems to be perfectly relaxed about the position.

The authorities both in Britain and Europe are keen to encourage cross border banking mergers, presumably because they believe it will promote greater European integration. Yet the fact remains that Britain is one of the few countries in Europe where it is practically possible for a foreign bank to buy into the market, or even, as egg found to its cost in France, to enter the market at all.

The FSA still has the power to block the deal should it judge Santander not to be fit and proper to own a British bank. However, there appears little appetite to rub the Spanish up the wrong way by going that route. To the contrary, the FSA has already attempted to ease the path of the takeover by publicly announcing ahead of the Abbey National egm that at this stage it sees "no material impediments to working with the relevant parties" so that the necessary approvals can be provided. I'm not sure any other European regulator would have been quite so accommodating had a British bank whose chairman had been charged with tax fraud come knocking at its door. All very odd.

MPC puzzle

Whenever the Bank of England's Monetary Policy Committee cannot fully understand something, it calls it a "puzzle". According to the October minutes, there are several puzzles right now but they come down to one central question; why's inflation so low and apparently still falling when oil prices are sky rocketing, the labour market is tight as tight can be, the pound is weakening, and nominal GDP has been accelerating?

The MPC promises an answer in the November Inflation Report, but it is worth reflecting that were it not for the high oil price, the Governor would almost certainly be puzzling over the letter he would have to write to the Chancellor explaining why the inflation rate was so far below target.

jeremy.warner@independent.co.uk

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