Tag Archives: finance

The time value of money

One of the odd things about this blog is that though I work in finance, I rarely write about it. Partly this is to keep my blogging life and my work life separate, but perhaps that separation is greater than it need be. Shortly, I plan on publishing my review of Karl Marx’s Capital. In writing that review, it became necessary to critique Marx’s dismissal of the notion of the time value of money. However, I recognise that not all of you are necessarily chartered accountants or have A-levels in economics. So you may not have heard the term before. If you have, and are aware of it, you may happily go about and read something else unless you want to pick my analysis apart. For those for whom the term does not mean something precise, then I hope this will sharpen up the concept in your mind, though I apologise if this comes across as patronising.

The concept of the time value of money should be one that you find fairly instinctive. I’ll demonstrate this with a few examples. Firstly, I offer to you a sum of money, let’s say £100. You can have that today, no strings attached. Or I could ask you to wait a week and then I would give you £110. Which is more valuable to you?

You have a choice between a smaller value or a greater value in the future. Can you wait for a week or is your need for the cash flow so great that you would settle for a smaller sum, effectively forfeiting £10?

Another trade-off would be if I offer you £100 now or £101 in ten years’ time. Which is more valuable to you?

I would hope that in the first case, waiting is the better option for you and that in the second case it is better to take the guaranteed sum now. Yet all this hinges on a level of subjectivity. It can vary from person to person or from business to business. The trick is to try to find an equivalent rate whereby the current value is equal to some future value. For example, if our choice was between £100 now and £105 in a year’s time, then would you “um” and “ah”, being unable to work out which is more valuable to you. If you put the money in a bank would you get a net rate of interest of 5%? If you could get more, then it’d more rational to put the £100 in the bank and get more interest, so at the end of it you have more than the £105 you might have had. If the net interest rate is lower, is there another way by which you could get a greater return in one year? If not, then your best bet is the £105 in a year’s time.

So the time value of money is expressed as an interest rate, being the rate that you would consider reasonable for a rate of return if given the opportunity to have a different sum at a future point in time.

One of the consequences of this is that higher interest rates are associated with higher levels of risk. You may have heard the phrase, “high risk, high return”, particularly if you’ve looked at choices for pension investments or if you think back to the global financial crisis of 2008, particularly with regards to the critique that the high risk aspect was ignored by the bankers whose actions played a significant part in precipitating the financial meltdown.

In my view, a part of the reason for this was that the fundamental subjectivity of the notion of the time value of money was forgotten by the systematic use of the Black-Scholes formula for options trading. That attempted to turn finance into a science which is a category error. Risk cannot be accurately quantified and it is a mistake to try to do so. Measures such as interest rates are indicative, so one looking at bonds can tell that a rate of 7% is riskier than one offering 2%. I know this personally quite well as I had considered changing my ISA some years ago and found the best rates of interest available to UK investors were to be found in Iceland. I even got so far as to the have an application form on my living room table. But I was suspicious about the high interest rates and, coupled with the relative devaluing of the Icelandic Krona against the Pound, I hesitated. Two months later those Icelandic banks collapsed. They were offering a high return because they were high risk investments.

The other aspect to think about is inflation. This is another reason why I stated at the top that the time value of money should be fairly instinctive, even if the term is new to some. Inflation is the creeping rise of prices of various goods, services and assets. If you have a fixed sum of money then it’s value decreases over time. In my childhood, £1 could buy you four packets of sweets with change left over. Years later, £1 might leave the shopkeeper asking for the rest of the money if you try to buy a single packet. So looking at cash as the arbiter of value is inherently flawed. What we can do is ask about what is known as present value.

What this does is look at future (generally fixed) payments and ask how much is the sum of those payments worth at today’s values. For example, the rent on my one bed, mouse-infested and rather cold flat is £11,700 per year. Let’s say that that rent doesn’t change for 10 years. Is the present value £117,000? No, because in 10 years’ time £11,700 will not be worth the same as £11,700 is today. I need to employ my subjective interest rate, my measure of risk, to do a calculation. Yet even that calculation will be assuming a constant rate of risk, but who knows what the future may bring?

If anything, that’s the point. The world of finance and of economics in general contain a great many unknowns. Those who would profess to declare with confidence exactly what will happen in the future are generally false prophets. Look out for this in the economic arguments in the general election. There, politicians from party Y will declare unanimously that if party X is elected then the economy is doomed whilst at the same time asserting with equally misplaced confidence that if they are placed in stewardship of the economy (though I doubt they have the humility to use the term stewardship) then all will be well. This will be on top of party X and party Y making promises on the other’s behalf.

I wouldn’t trust either who take such an approach to finance, but I would also warn against placing trust in finance in the first place. Believe me, I’m an accountant!

Book Review: Faith in the Public Square by Rowan Williams

This was one of those books I picked up on the off-chance as I was browsing round a bookshop one lunchtime. I was aware of its existence a little while ago, when it seemed to cause a minor stir among some Anglicans but it seems to have little longer-lasting impact. The first thing to note about it, however, is that it’s not a book that Rowan actually set out to write. Instead, it’s a collection of transcripts of various sermons and lectures he gave between June 2002 and February 2012. Much of the vernacular used for a public address has been kept; in fact, I’m not certain how much editing was done to the transcripts at all, apart from the staff at Bloomsbury occasionally omitting spaces whenever they thought italics were most appropriate, something I hope they will correct in any subsequent print runs.

As the title suggests, the book is largely about how issues of faith and religion play out in public life. The lectures have been ordered by theme, rather than by the order in which they were first given, so as to try to give some kind of coherency to discussions on a quite wide variety of topics. The first two parts of the book, which are the longest and, I think it’s fair to say, the most intricate, are about secularism, multiculturalism, pluralism and the different ways these are perceived, coupled with Rowan’s own thoughts about which is the right path to walk down.

If anything though, these chapters could be skipped, as Rowan summarises it all very nicely in the Preface. The rest is more filling in the details. Crucial to this point of view is the distinction between what he refers to as “procedural secularism” and “programmatic secularism”. The former is a stance where no religious (or non-religious) position is given undue privilege in places of public life, such in government or media. The latter is (though Rowan, if I recall from those early chapters correctly, does not use the phrase) “aggressive secularism” – a term that is too often used, more often than not, incorrectly. It denotes the idea that religion ought to have no place in public life; it should be out of sight, out of mind. He does single out the French for having this view, something I have written a little about some time ago.

Rowan advocates procedural secularism whilst rejecting programmatic secularism, as well as those who advocate the latter under the guise of the former. Though he does not mention by name the National Secular Society, the inference is all too easy to draw.

After this opening, which I warn you gets a little turgid, the book moves onto the application of religious (though mainly christian) thinking into other areas of public life. i.e. after having advocated that christians be allowed a voice in a liberal democracy, here is what one influential christian has to say on matters of environmentalism, justice, finance and community.

What he has to say is well thought through, effortlessly sensible and immensely thought-provoking. That said, it’s not going to be everyone’s cup of tea. Despite the back cover’s claim that he is “the finest theologian in Britain” (a title reader’s of Hannah’s Child may smirk at), there is very little theology here. This more ‘applied’ theology than ‘pure’ theology, to bring in a mathematical analogy. I suppose it is inevitable that the book would appeal to a christian secularist, such as myself, though I would be interested in reading the thoughts of an atheist secularist on the book.

Book Review: Theology of Money by Philip Goodchild

I picked this up in a sale from SCM Press, the title appealing to me mainly because I am a christian who works in finance. So I bought it on the basis of the title alone. I had never heard of the author nor had the book been recommended to me. In hindsight, I think I approached it with a fairly fixed expectation, based on the title. What I thought I would be reading would be an exposition of the idea of wealth, property, exchange and society within a biblical context, drawing out principles and then trying to apply those to either fitting around modern economics or proposing a fundamental shift in the very basis of the latter. In other words, I was expecting a fair bit of theology and have that applied practically to money.

If that’s the sort of book you want to read, then Theology of Money will be a great disappointment to you. In truth, there is not much theology in it; it is mostly a treatise on economics with a spattering of vague references to theology which might well be just enough to deter non-christian economists from it, if the title hadn’t already done so.

So what exactly is it all about? Well, Goodchild has adopted the style of Adam Smith (who seems to be mentioned more than any other economist) in looking at the very nature of money. It’s not about macroeconomic policy, but something far more fundamental than that. One could characterise the bulk of the book as being an answer to the question, ‘what is money?’ In style, it reads less as a book for the educated layman, more a thesis for the expert. It is a very tightly argued piece, with the analysis coming very thick and fast. This tended to prompt one of two reactions in me: I ether read it quite slowly, going over each paragraph a couple of times, or else I glossed over slightly, reading a page and at the end of it being none the wiser what the point was that was being made.

So what of the argument that is made? Well, Goodchild’s main premise is that money as we currently know it fulfils a variety of different roles that need necessarily be measured by the same unit. For example, money is the promise of things in the future. i.e. if I have some savings, then this is the promise of a deposit on my own home. Yet it also has the function of being the measure of past transactions, as in accountancy, the field of finance in which I work. I could critique his particular take on accountancy, as it doesn’t really give a true and fair view of the profession, describing it as a ‘reasonable fiction’ citing the example of debtor on one’s balance sheet as being a made-up quantity, as the debtor has not paid. Yet no mention is made of the accruals principle.

An interesting thing to note about the book is that it was published in 2007, a year before the crash that triggered the global financial crisis. So how we might think about money and credit has had a sea change since Goodchild wrote this. At several points then, I saw him to be somewhat prophetic in his assessments. For example, “On the one hand, bankers are placed in a position of power in relation to other classes, since they appropriate their property through interest. On the other hand, bankers remain susceptible to the fortunes of other classes, since a default on a loan may lead to a loss of reserves and a contraction of credit.” Yet just as one might think he was really onto something, little more than a page later, he carries on, “Misfortune can lead to significant losses; yet such losses may be controlled and limited by an effective money management strategy and automated stop orders. Since the risks can be limited in this way, it is possible to take out highly leveraged positions with limited risks.”

In his final proposal, he suggests that credit needs to be evaluated by a separate kind of bank, though he then goes on to describe the operations of this bank as being the same as a normal bank, only that it must be highly profitable and it must do so by engaging heavily in speculation on the markets. Given what we know now, I wonder if Goodchild would stand by this or if he would opt to have a radical revision.

I struggle to think of those to whom I might recommend it. Perhaps those who are heavily involved in finance and would like to read a different take from that of Smith, Marx or Keynes (interestingly neither Friedman nor Hayek are referenced, the closest to these extremists he comes is Niall Ferguson).  While I could not agree with some of his assessments or proposals, it is a book that, if taken seriously, makes you think. For that alone, it is worth reading, but I won’t be rushing to urge anyone to push it to the top of their reading lists.

Book Review: The Spirit Level Delusion by Christopher Snowdon

As I stated in my review of The Spirit Level, my intention was to read a counter-argument in order to get a more well-rounded view on the issues being discussed and thought through. As with that earlier review, I will also have to beware of my own potential bias, given my rather left-wing views. Having identified some flaws with detail of The Spirit Level, though whilst largely agreeing with the general drift, I approached this wondering if those same flaws would be picked up by Snowdon. Before purchasing the book, I didn’t do extensive research into the author’s background (neither did I do similarly with The Spirit Level), hoping, instead, that the evidence presented would be a sufficient basis upon which to build an informed opinion. Given the very premise of the book, I did not expect this to be in agreement with what Wilkinson & Pickett wrote, though I was interested in the approach taken, bearing in mind that it is probable that someone who sets out to write such a book has an existing prejudice against the values of fairness & equality which Wilkinson & Pickett are equally and oppositely biased towards.

Suspicions were first around before I even got to the first words of Snowdon. The foreword, written by someone called Patrick Basham from something called The Democracy Institute. This is a right-wing “think tank” that Basham founded and who appear to have been instrumental in getting this book written. The opening starts with praise for an earlier volume that Snowdon wrote in praise of the pro-smoking lobby. I have no hesitation in asserting that anyone who is in favour of smoking is seriously lacking in sound judgement. So the early impression of Snowdon and Basham was not positive. This was only the first paragraph. The rest of the foreword is a diatribe that seems to have been generated by some sort of ‘conservative clap-trap generator’.

Anyway, when Snowdon gets to writing, he doesn’t dive in straight away but looks at the methodology of the studies behind The Spirit Level. Key to the original book was the idea that economic growth had reached the limits of how it could benefit societies that were well-developed. In spite of the subtitle, Why Equality is Better for Everyone, the focus of the Spirit Level was not on all countries, but between economically developed studies. But Snowdon’s critique of the methodology results in him including some more countries than Wilkinson & Pickett used for their analyses. Interestingly, though, as a secondary measure in the original book, a comparison was made between different states of the USA. But Snowdon chooses to overlook this entirely and his book does nothing to attempt to discredit the evidence which came from this second set of data, relegating his ‘reason’ to an unconvincing footnote, inviting readers to visit a website which he set up.

He then progresses, chapter by chapter, to look at some of the specific studies carried out from The Spirit Level drew. Much of this is a fair enough critique, though as with the original, the conclusions reached are stated with greater affirmation than the evidence really justifies. So while Snowdon does a good job of casting doubt on some of the work done by Wilkinson & Pickett, he doesn’t get close to falsifying it. It is probably convincing for those who are already convinced, but it’s unlikely to win any converts.

Undermining his case is his misleading caricature of what The Spirit Level is all about. In several places, Snowdon tries to deceive his readers by supposing that Wilkinson & Pickett were proposing making societies more equal via tax-based wealth redistribution. In truth, they actually rule out progressive tax policies on the basis that they could be easily reversed by alternative governments. Snowdon even gives a partial quote which stated just this, but attempts to twist it to mean the opposite of what it does.

By about half way through, he clearly runs out of steam. His take on crime and imprisonment statistics is a mish-mash of non sequiturs with little coherence. Following this, he looks at infant mortality and spends 10 pages basically conceding the proposition put forward by Wilkinson & Pickett.

After this, Snowdon just goes to pieces. The last 60 or so pages contain little of any merit. Snowdon attempts to further mislead his reader by supposing that Wilkinson & Pickett’s primary aim was to put an end to economic growth, when in truth their idea was to recognise the limits of the good that economic growth may have and instead to focus on how to make societies more equitable. It might not be unfair to characterise Snowdon’s erratic rantings as those of a fundamentalist capitalist. He labours under the misapprehension that fairness and equality are the great evils that must be combated. While he attempts to placate his readers by stating forthright that he is not proposing greater inequality, everything else that he rambles on about belies this.

His final flourish is to look at the relation between correlation and causality. Though he is correct in stating that the former doesn’t necessarily imply the latter, he doesn’t actually engage with the argument (even though it was a vulnerable point in The Spirit Level) than Wilkinson & Pickett give. Instead, his argument, if followed through, would actually undermine the bulk of the better researched chapters of Snowdon’s own response. It seems he want to cross his bridges and then burn them behind him. What had some promise for being a revealing critique, with some good points made, ends up as the mad ravings of someone who is economically illiterate.

Putting my money where my mouth is

The 6th of April marked the start of a new tax year. At this time, there were a number of changes to the rates and bands in income tax and national insurance. Other changes to the social security system began on the 1st, with the government coming in for much criticism, in my opinion rightly so. One of the consequences that was much vaunted was Iain Duncan Smith declaring on radio 4 that he could live on £53 per week. I don’t think I could. During my time of being unemployed last year, I received £142 per fortnight. This was to cover all expenses: rent, council tax, food, utilities and travel to and from interviews. Some people told me that I ought to have been able to claim more, but this was flatly contradicted when I asked staff at the Job Centre Plus. Anyway, there was a public demand for Iain Duncan Smith to stay true to his word and demonstrate that he could live up to his claim. This was later dismissed by him as a “stunt”. Yet over 19 times as many people have signed that petition as voted for him at the last general election (at the time of writing, the figure stands at 438,210 compared to his election vote of 22,743). I wonder if his election was a stunt too.

It struck me that since he was being asked to put his money where his mouth was, it would only be right to be willing to do so myself. I ran some figures through the BBC budget calculator and worked out that in the 2013-14 tax year I will be about £179 better off. The thing is, though, I don’t think I should be better off. If I didn’t contribute to a defined contribution pension scheme or didn’t gift aid any donations then I would be a higher rate tax payer. As such, I know that means I am a hell of a lot better off than most people in this country.

The economy does have a problem with a large deficit and efforts should be made to reduce it. However, I disagree with the way the coalition government has gone about doing this. Instead of asking those who are most able to pay, the onus has been on those who have the fewest choices: the poor, the disabled and the unemployed. There is a paranoia among those on the political right that if you apply the sensible notion of “from each according to their ability, to each according to their need” then this will result in those who pay the highest marginal rate of tax choosing to leave the country, thereby denying the economy of their spending power and robbing the treasury of potential tax revenues. So those are paid excessively more than they need to live on have been given a tax break. But remember, even at the highest marginal rate (i.e. the rate you pay for every ‘extra’ £1 on your earnings), their effective rate (total income tax & national insurance paid divided by total gross income) is far lower. For example, though I am a higher rate tax payer, I only pay 42% (40% income tax and 2% NI) on the top few pounds of my earnings. My effective rate is 26.5%.

Yet I am unconvinced by scaremongering which suppose that the rich will flee the country to avoid taxes. Even if a small minority do, shame on them. By choosing to squeeze those with the least disposable income, the government has tried to fix the problem in the most inappropriate way. While it is a good thing in principle to encourage people into work, there have to be jobs for people to go to. Not only that, but they should be jobs that pay a decent wage. To use an analogy, imagine someone being asked to walk along a tightrope. What’s the best way to keep them safe? I would say it is to help them stay on the rope, not by removing chunks of the safety net. Yet the recent raft of reforms seems to be doing the latter

As my salary is above the national average (see link to the report from the Office for National Statistics above for details on the average being £26,500), I think I ought to be paying a greater proportion of my income in taxation. Yet I still get this £179 ‘bonus’ because of changes in the bands and rates. What should I do with this? Well, it would be hard to ‘donate’ it to the Treasury, so I am here, publicly, pledging to donate this to charity. On top of any other giving I may have, I promise I will set up a standing order for £20 per month (I rounded up) to a new charity I have not previously made a commitment to. What I need is your help.

Firstly, I need your help in choosing which registered charity to donate to. Ideally, I’d like it be one that helps those who are worse affected by the changes to social security that the government has brought in. I would appreciate your nominations from which I may then choose.

Secondly, without anyone else taking up this challenge, this will be a mere act of tokenism on my part. I would like this to become ‘A Thing’ amongst those of us who are socially minded, are paid more than it costs to live and who feel it wrong that they should benefit while those who are worse off suffer. So I would like to encourage you, even issue you a challenge, to undertake a similar commitment.

Some potential measures to improve welfare & unemployment

As you are probably aware, I have been unemployed for the majority the last 6 months. This has given me, amongst other things, some time to watch the goings on at the party conferences in late September through to early October. As a left-wing christian, I fully support the idea that society should look after it’s more vulnerable members, whether they be children, the elderly, the jobless or the disabled. When I post views such as these on Twitter, I often get responses from trolls (or maybe genuine conservative apologists) who sometimes suggest I ought to come up with a perfect welfare system, fully costed, in 140 characters. So in this post, I plan to explore some ideas of how improvements could be made. I am not, by myself, a full government department which ought to be looking at these things, so any figures I use are reasoned estimates.

My first point to note is that job seekers’ allowance (JSA) is not enough to live on. It covers food costs and, when considered on a daily cost basis, utility bills. But it doesn’t cover all the cost of rent or travel to and from interviews. Also, costs of living vary around the country. So it is nonsensical to even ask for ‘a number’ that would suffice for JSA. I have seen no evidence of any costing behind the £71 per week that it currently is.

Instead, I would propose a reimbursement of living costs. That is, make claiming JSA more akin to claiming expenses from an employer. Lay down rules about what can and can’t be reasonably claimed and reimburse when evidence is presented for those claims. For example, for my rent I could present my lease contract, for my travel I could present train tickets and emails confirming dates and locations of interviews, for food I could present a till receipt from Asda.

The second point is about reducing unemployment. I have been to interviews and lost out to people who are moving from one job to another. All this time they are working, gaining experience and making themselves more attractive to potential employers. So it’s a virtuous circle for some, but a vicious circle for others. The longer I spend unemployed, the worse it looks on my CV and the less attractive I am to employers.

So I would I would propose an incentive to companies to encourage them to employ those who are currently unemployed. How would I do this? A tax break. At present, the expense of hiring someone and paying their salary reduces a company’s profits which lowers their tax bill a bit. i.e. if you hire someone on a salary of £30k and have a £5k recruitment fee, in that year you will get a tax benefit of £35k multiplied by the rate at which that company pays corporation tax (which depends on how big their profits are). I would propose that the amount that is tax deductible by increased if that person has been unemployed, the evidence for which would be a P45 from the Department for Work & Pensions (DWP). So as an example, let’s say the multiplication factor is ‘W’. This would be effective for any recruitment costs and the first year’s salary. After that, no additional tax break could be claimed.

At present, for employing someone at a total cost of £35k, the company has a tax deductible amount of £35k. But if they employ someone who has been unemployed for a month, then their tax deductible amount would be W x £35k. The difference is of course, £(W-1) x 35k. If the company pays corporation tax at 24%, then they get an additional tax benefit of £(W-1) x35k x 24% = £(W-1) x 8.4k.

How would this be funded? It would be self-funding as the newly employed person would no longer be claiming JSA and would be paying income tax and national insurance. Assuming there are no complications in their tax affairs, a person on a salary of £30k would pay roughly £4,379 in income tax and £2,689 in national insurance. There would also be a contribution for the employer’s NIC of £3,107. This make a total contribution back to the treasury of £10,175. So by employing someone, even if they were unproductive, that’s what they would contribute. But if they’re no longer unemployed, they wouldn’t need to claim JSA. A year’s worth of that costs 52 x £71 = £3,692.

So let’s work out what W would be to break even.

(W-1) x 8,400 = 10,175 + 3,692
W – 1 = (13,867/8,400)
W = 2.651

So we could in fact give a tax break to companies by allowing a tax deductible amount that is exactly double the actual cost and the net cost to the treasury would be less than the revenues raised.

Of course, this is one example, with many other variations possible, such is the complexity of life. I’ve done some testing for other W figures based on other salaries and they tend to be about 2.3-2.8.

This is not an incentive to create employment, merely a way to encourage companies to take on those who are currently unemployed. It’s not a panacea, but I think it’s a small improvement on what we have now.

I hope I’ve shown that this is an idea worth pursuing. So those are some of my ideas. What measures do you think would help improve the benefits system and reduce unemployment? Please be constructive.

Tips on personal financial management

Seeing as I am once again on an enforced sabbatical, I decided it might be good to use some of my financial experience to come up with some handy tips for you. What follows are only suggestions that I have found work for me. They may not work for you, but I hope they will. Figures are for illustrative purposes only. If you want any spreadsheet templates, let me know by leaving a comment; if you include your email address as you fill in (don’t put in the text of the comment!) then I, as web administrator can see this but no one else can.

I will assume that you get paid monthly. I always work with net income. So regardless of any deductions for tax, national insurance, pension contributions, student loans, etc. always think of your income as the cash you receive. For illustrative purposes, I will assume for the sake of argument that your net pay is £1,500 per month (about the average salary).

What I then do is siphon off some fixed amounts. These are for the regular, monthly payments that are known and fixed. For example, my rent is £750 per month and my council tax is £89 per month. I put that in a physically separate bank account. I do this for 2 reasons: 1) psychologically, it is no longer “spending money” and so I am not tempted to touch it; 2) A separate savings account typically has higher interest than a current account.

After this, I put aside an amount for regular payments that are not monthly and not fixed, but which can be reasonably estimated. My list includes water, gas, electricity, tv license. You may also have other things such as insurance in there. What I do with this is I have a spreadsheet where I input the dates the last bill ran from & to and the amount of the bill. For example, my last electricity bill was £73.60 and ran from 22 May to 22 August. From that, the spreadsheet works out what my average cost per day was (80p) and how long it has been since my last bill. What I then do is multiply the average daily cost by the time since the last bill to give an estimate of what the next bill will be if it were to arrive now. To be cautious, I always add about 5%. If you do this for all of these types of expenses, you can aside an amount each month, so that when the bill does arrive you already have the money ready and you can then start again.

What this does is it means I don’t really get nasty surprises when a bill comes through. It’s not perfect; I recently had to buy new glasses which I hadn’t set any money aside for, so that hurt a fair bit. But when I got my first gas bill for over 2 years, I already had the several hundred pounds needed easily to hand.

Once I’ve deducted my fixed and variable expenses, what is left is what I would deem to be my disposable income. What you do with this is very much a personal choice, though you might want to note that I didn’t take out an amount for food – I pay for this from my disposable income – you might want to do it differently. To help budget, I then divide this amount by the number of days left until the next payday (again, a spreadsheet template is easier than faffing about with a calendar and calculator).

If I set myself a target, then I can easily track if I am above or below that target as I go through the month. Typically, if I am over-spending then I just cut back and if I am under-spending then I transfer the excess into long term savings. Though at this time of year, I tend to put the excess into a fund for Christmas, so when it comes to December I have all the money I need for the family’s presents and for travel expenses.

Should christians accept bonuses?

Background

I had a recent chat with another christian when this question came up as part of the conversation. Anyone who knows me or reads this blog will know that I am distinctively left-leaning. One of the main reasons for this is because I am a christian. I have a lot of difficulty understanding the idea of the “christian right” as I consider it to be an oxymoron.

Subsequently, I have quite strong views when it comes to money. So I wanted to lay out my reasoning for why I think the answer to the question ought to be “no,” though I wanted to understand the counter-argument. As a result, I asked around a little bit, which is laid out below. I have also attempted to play devil’s advocate.

Of course, I am not judging christians who do accept bonuses as part of their remuneration. If you do, all I’d like to do is make you think and question your motivation for accepting it.

Why I think the answer ought to be “no”

The fundamental reason why I would not be happy to accept it is one of motivation. Without giving too much confidential information away, employees in my company are given a choice. They can accept a fixed salary of £x per year, or else they could take a lower salary with a bonus which, when combined is greater than £x. So let’s say someone might be offered a basic pay of £30k, or they might be offered £28k with a £4k bonus. Of course the bonus is tied to their meeting certain conditions. If they meet their targets, they will obtain their bonus; if they get part-way they will be awarded part of their bonus. If they don’t meet the minimum target, they won’t get anything.

To my way of thinking, this creates a danger that we then work, our motivation becomes the creation of personal wealth. Following on from my recent post on worship, this would indicate that we are worshipping money. Of course, we may to rationalise this by claiming that we are accepting the bonus structure in order to pay our rent, fund the train fares, feed the family, etc. What I do not like about this view is that it creates the false impression that we would not be able to make ends meet without the bonus.

I would rather my motivation to work be because I want to do a good job. As I touched on briefly recently, there are many ways we can worship. To me, trying to do a good job at work is a part (though by no means all) of my worship. There is the very famous warning in 1 Timothy, where Paul writes “if we have food and clothing, we will be content with these. But those who want to be rich fall into temptation and are trapped by senseless and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evil, and in their eagerness to be rich some have wandered away from the faith and pierced themselves with many pains.” (1 Tim 6:8-10, NRSV) Often only a part of that is quoted, but I wanted to include the lot.

Having worked in financial services for several years, and subsequently working in the finance side of a different type of business, I am surrounded by those who are obsessed with money. It would be very easy to get sucked into that world, where I’d care about profit and trying to boost my own pay, quite possibly at the expense of others. That’s not someone I’d ever want to become. I want to be someone who is content with what I have.

Another passage in my thinking (though I recognise that money is not the primary purpose of this particular discourse) is Romans 4, where Paul writes, “Now to the one who works, wages are not credited as a gift but as an obligation.” (Romans 4:4, NIV) This is as close as I can find to anything about bonuses. I hope you don’t think I’m stretching scripture too much; that’s not my intention.

The devil’s advocate argument (why it might be OK)

You have to recognise that the pay culture we have in modern society would be totally alien to those living in the 18th century, let alone anyone before then. So the people of the bible wouldn’t have known enough to either speak in favour or against company bonuses.

There are various people in the bible who had great wealth and who were not condemned for it. Abraham was a bit of a Richard Branson-type figure of his day, and in terms of a single individual owning a high proportion of the world’s wealth, Solomon was probably one of the richest men in history. Yet neither of them were condemned for their wealth. It was incidental to them. This brings us on to the so-called ‘prosperity gospel.’

Proponents of this view often cite Psalm 37 as a justification for not only claiming that wealth is acceptable, but that it is a sign of reward for faithfulness: “Trust in the LORD, and do good; Dwell in the land, and feed on His faithfulness. Delight yourself also in the LORD, And He shall give you the desires of your heart.” (Psalm 37:3,4, NKJV) I interpret this quite differently. Given the preamble of verse 3, I think what constitutes the “desires of [our] hearts” will be changed so that we no longer will be desiring of wealth, but rather we will be desiring the riches of God. (c.f. Romans 12).

Given the balance of the number of times wealth and money are referred to in the bible, I think that prosperity advocates must have a hard time defending their position. For brevity, I’ve omitted most references I could use to back this up; maybe another day.

Some practical considerations

Of course, not everyone is given a choice to not have a bonus as part of their pay packet. You have to be in a particularly high-end job to be able to change the terms of your employment contract. Given that I have only ever taken jobs whilst unemployed, I never had much bargaining power, so I simply wouldn’t do anything to jeopardise the prospect of employment.

Then you have the choice of what to do with it. I asked on Twitter what people thought about it, though I only got 1 reply which was that it’s OK to accept a bonus, so long as it is donated to charity. More widely, there are a number of good things you could do with additional money, of which giving to charity is but one. However, I think christians always have to keep a tight reign on their motives. For example, if you donate via a Just Giving page (or similar) do you disclose your name and the amount you are donating, or do you go by the principle of “But when you give to the needy, do not let your left hand know what your right hand is doing.” (Matt 6:3)?

Conclusion

For my conscience, I am happier to not take a bonus. I do not think it is inherently wrong to do so. What is important is what you do with it. In this, I probably ought to be honest about my own pay packet. I contribute to a pension scheme which removes from my pay packet 10% of my gross pay. This pushes me down into the “basic rate” tax band. Had I opted not to do this, I would be higher rate tax payer, having a marginal rate of 40% on a small portion of my salary. As it stands, my effective rate (total tax+NI/total pay) is 26.7%. From this, you can tell that I am paid significantly more than the average salary. This is slightly tempered by my train fares of £87.50 a week. Once you take tax into account, this means that if I got a job within walking distance of home, I could take a gross pay cut of just over £6,000 per year and it would have no effect on my take-home pay.

Given that I am such a highly paid job, putting me amongst the top few percent of UK workers, I think that to demand any extra would be selfish and immature. When I work long hours, I don’t complain about a lack of overtime, in spite of pressure to do so. When I think of all the millions in this country alone (let alone the billions elsewhere in the world) who do not have the material riches that I have, it is very humbling. “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.” (Luke 12:48b, NIV) It is a huge responsibility and one that has to be taken seriously. Personally, I find those who have abundant material wealth, and yet who complain about a lack of it, to be repugnant; it’s one of the biggest intolerances I have. Maybe I’m being harsh and lacking grace; I don’t know.

So that’s my choice. What’s your take on the matter?

Debt and the ratings agencies

Last night, before I went to bed, there were rumours circulating about the possible downgrade of the American credit status by one of the ratings agencies. When I woke up this morning, it was confirmed.

This week has been extremely very busy for me, so I have not a very good opportunity to keep on top of all of the facts. So I’m just sharing some thoughts, and if you spot any mistakes, omissions or the like, then please let me know.

At the start of the week, the reporting we had in the UK about the US “debt crisis” was along the lines of saying it was on a knife-edge where different factions who had a say in the matter could not agree on whether or not to raise the debt ceiling, an international version of a credit limit. This made no sense to me, really. If I have a time limit to pay my credit card bill, it doesn’t help if the action I take is to simply increase my credit limit. What I need to do is to start paying down the debt. Mercifully, my own finances are in good order (which is helpful, since I do work in finance!) and I can always pay down my debts.

But let’s suppose that I had managed to save enough of a deposit and get a mortgage. I would need to pay down this mortgage at a sensible rate. I’d need to make sure I had enough cash to pay for my everyday needs. If I paid too much, too quickly, then I’d have to cut back on some of the essentials. In terms of national economic finance, this would mean public service cuts which inevitably means unemployment. This is the strategy which the current conservative-led government is pursuing.

What the americans seem to have done is remortgage their country. It’s not a long-term solution, and I was shocked when I found out that they had raised their debt ceiling several times over the last few years (I forget the precise number).

What fascinated me was the credit ratings agencies. I have a lot of questions that I haven’t found adequate answers to. To me, as a mathematician, it would be fair to call me a Platonist. So I view the credit ratings as merely recognising a platonic reality that already exists. So if the US has become less credit-worthy, then the downgrade merely reflects this, rather than the US becoming less credit worthy as a result of the downgrade.

But who are these credit ratings agencies? A brief look at their websites show they have some blurb but not a lot of substance. What is surprising is that they seem to be listed companies, rather than international bodies. So who are the shareholders and what are their political-economic agendas? The same question could be asked of those who run the companies. I’d love to find out their political links and leanings, but I don’t have the spare time to research.

Book Review: Treasure Islands by Nicholas Shaxson

I became interested in this book after reading an endorsement from it by the writer and columnist, George Monbiot, who I have some time for, even if I don’t agree with him in all things. The subtitle of the book, Tax Havens And The Men Who Stole The World, gives a better impression of what the book is about. This also impinges on my own area of professional expertise: accountancy. I have often been struck by how poorly tax related issues are reported in the news, particularly issues of tax avoidance and evasion. So while most people are aware that the former is legal and the latter is not, the “common knowledge” of such matters goes no further than this. Even amongst people who are more politically aware, I still hear and read comments such as “companies try to avoid capital gains tax by….” which demonstrate an ignorance that companies are not liable for capital gains tax. It is purely a tax levied on individuals. Or similarly, the term non-domiciled (non-dom, for short) as a shorthand for people who don’t pay income tax, when the truth is that a person’s domicility is irrelevant as far as income tax is related; as that is entirely dependent on their residency status.

Anyway, I digress. My hope was that Shaxson would be more financially literate than the vast majority of most journalists. In the first chapter, I seemed set for disappointment, due to a lack of clarity in his terminology and a very clumsy attempted sleight of hand in order to make an erroneous point of rhetoric. The particular point in question was on page 12 when he mentions some companies “did nearly $750m of business in Britain but paid only $235,000 in tax…” Now the phrase “did x amount of business” is not particularly precise or helpful, though in more careful wording, one might say that $750m is the revenue. However, his implication is that this inherently unfair. But what he doesn’t state until the following chapter is that tax is based on profit, not revenue.

From this shaky start, the book massively improves. Shaxson’s main thrust is that a tax haven is about secrecy and being able to hide income behind layers of silence. He then goes about giving a history of how these structures have arisen. He begins with a look at probably the most famous tax haven in the world: Switzerland. The notion of this being a tax haven is not so much the fact that they have generally low taxes (which is still true) but more to do with the code of banking in that country and the laws surrounding it. For Shaxson, the term he uses constantly is secrecy, although the term confidentiality may equally be used. The difference is merely the connotations each word has, depending on your political leanings.

Given my introduction above as a recommendation from George Monbiot, there is little room for doubt as to Shaxson’s own left-of-centre leanings. His broad approach is to give the historical story of how tax havens have come into being along with the key lobbyist who have sought their existence and protection as a proxy for the protection of their own wealth.

The book is quite wide-ranging in its scope, though I found the most interesting sections to be those on the Caymen Islands, Jersey and the City of London. Ironically, it was while I was reading the chapter on the square mile that I was on a tube train on the Northern Line going from London Bridge, through Bank and Moorgate, up to Old Street, thus traversing the City and passing almost (if not actually) directly underneath the Bank of England. It gave a wonderful sense of irony, and though a few people glanced at the cover with interest (I do not have a Kindle, nor do I wish to own one). It reminded me that I would still like, at some point, to sit outside 1 Canada Square whilst reading a copy of Das Kapital.

As mentioned earlier, Shaxson does write about some topics that I know quite a bit about, having worked in those areas for some years. Specifically, he talks about accountants, auditors, LLPs and the International Accounting Standards Board (IASB). It is here that he woefully falls short of anything resembling understanding, which leads me to question the integrity of the rest of the book, where I rely on his word to provide an accurate picture.

Audit

To be specific, he refers to auditors as “the private police force of capitalism” and “audits are the main tool through which societies know about, and regulate, the world’s biggest corporations.” This is pushing a widespread misconception that leads to much misunderstanding and unnecessary vilification. An auditor is not a regulator. Their job is only to provide an opinion on whether or not the financial statements give a “true and fair view” of the company’s position at the period end and the activities during the period being audited.

When I worked as an auditor, one of the jobs I was given was to make notes on the 2006 Companies Act, and present it to one of the partners. This was immediately after it was published, so no one really outside of Parliament had had a chance to read it in full. At the time it was (and I think it still is) the largest single piece of legislation ever passed by the UK Parliament. The role and duties of an auditor are very clearly laid out in the Act, though they take up a tiny amount of space, as deference is effectively given to those who make the accounting standards. For publically listed groups of companies (which make up less than 1% of the total number of companies in the UK) these standards are set by the aforementioned IASB. The standards are known as the International Financial Reporting Standards (IFRS).

Financial Reporting Standards

Now I do not agree with 100% of the IFRS standards. When I was studying them, there did appear to be some level of obfuscation, where the standards are derived from a set of principles laid out in what is known as The Framework. What we end up though are standards like IFRS 9, which is a labyrinthine standard relating to exotic financial instruments which are very seldom used in the vast majority of companies. Though it makes sense in a step-by-step logic derived from the Framework, when looked at as a whole, it just seems devoid of common sense. One of the principles is to make financial statements understandable to the ordinary reader, unversed in accountancy and reporting standards. I have tested this on a small scale by giving some accounts to some non-accountants to have a read to see how well they understand them. I must add, that these were from publically available accounts published online by the companies in question, all of which were audited by different firms from the one I worked for, so there is no hint of any potential breach of confidentiality. Shaxson’t beef though is not with the standards that tend to baffle. Instead, he is not happy about segmental reporting, where a company breaks down its figures into the different segments that are used to report to management. He would rather make all companies disclose all cross-border transactions.

Transfer pricing

The basis of this is transfer-pricing, which he misleadingly states is a method by which companies move costs into high tax areas and profits into low tax areas. The reason I call this misleading is that in a short space, the author has misdirected in several different ways, which is quite an impressive feat. The first is in financial literacy. He treats costs and profits as though they are unrelated. It is like saying I’ll move my apples to Germany and my oranges to Switzerland. If you move costs to a higher tax jurisdiction then you do not then move your profits. Your profits are your total income minus your costs; yet Shaxson seems to be unaware of this most simple of equations. The other is to pretend that transfer-pricing is a tax dodge mechanism, when it is the precise opposite. Transfer pricing is the mechanism by which to avoid the unfair transfer of costs for tax minimalisation purposes. These agreements have to be presented to the auditors (who will usually bring a tax specialist onto the team for this purpose) and the agreements are subject to inspection by HMRC, who can prosecute if they think a given company is trying to avoid paying taxes by such methods.

LLPs

The last point which I think needs addressing is that of limited liability partnerships (LLPs). LLPs are portrayed by Shaxson as a tax-dodge vehicle which the big 4 accounting firms (PWC, Deloitte, KPMG and Ernst & Young) pressured the UK government into adopting. What he fails to mention is that the reason they were set up was to recognise the growing corporate nature of professional service firms such accountancy firms and law firms, which had historically been for the most part plain old partnerships. These would be governed by partnership agreements, but the English Law (I cannot speak for Scottish law or that of any other jurisdiction, as I have never studied, nor taken any exams in it) that governs partnerships was not designed for firms that had grown to the size of large corporates, where company law was more apt for this. So the LLPs were set up as a half-way house whereby large swathes of the Companies Act were adopted by the LLPs, whilst allowing them to retain their partnership structure, thus not destroying the heritage and ethos that allowed them to flourish; along with the many mergers that happened along the way to give the weird and wonderful compound names and acronyms that govern the largest firms in the marketplace.

Conclusion

OK, so that was an extremely length aside. But if you’d read this far (or seen the word ‘conclusion’ and skipped straight to it – tut tut to you for your laziness), then you show the level of patience needed to get through Shaxson’s book. As demonstrated above, it is not factually correct in all places, which does undermine slightly the credibility of the rest of the book. That said, I do not think it is entirely erroneous and would recommend it as an introduction to the history of tax havens and how they operate. There are some incredibly powerful testimonies included; most notably for me were those of William Taylor’s battle with the Corporation of London, the secrecy laws that are in place in the Cayman Islands and the subculture that pervades Jersey.

Read it with due scepticism, and learn what you may never have realised was going on right outside (or even inside) your office.