May Won't Commit #Article50 Suicide

The cost of the Brexit referendum decision has finally begun to erode household confidence, even though Brexit hasn't even actually happened and the worst is yet to come. So you can bet the Tories will be preparing themselves for yet another U-turn as the costs and related uncertainty increase. Even they must now realise that triggering Article 50 would be committing economic suicide, pure and simple, and I doubt that even Theresa May will be fool enough to pull that trigger come her phoney deadline of March 2017. By then all but the most ardent 'BeLeavers' will have come to their senses, and the polls and regional high streets will be fearing the worst. UKIP has already imploded not because it has achieved what it set out to, but because what it set out to achieve has been demonstrated to be a very bad idea.

We know now that the Leave campaign was built on a tissue of lies, from the 'gross' figure of £350m a week, to the promise of extra spending on the NHS, to the idea that the UK can thrive economically on net migration of 100,000 people a year or lose any of the 1.5m EU citizens working in Britain today who would have to leave under the rules applied to non-EU migrants (even plans to publish lists of foreign workers have fallen flat). Indeed, the UK faces having to pay the EU billions for Brexit (at a poor exchange rate), not only to 'true-up' the UK's current EU budget contributions, but also if it is to secure any preferential access to EU markets (although that is not just a question of money, but of free movement of people etc). 

We also know that in reality the EU has no control over the major areas of government expenditure - social welfare, health, education, defence, public order, housing, transport. These are policy areas that the UK continues to screw up all by itself. And it's dawned on the UK's poorest regions that they rely on EU grants that Whitehall will not be set up to maintain after the current EU budget expires in 2020.  

And all the 'silly rules' on bananas etc that the Leavers complained about are international trade rules, not attacks on British 'sovereignty'. The UK would still have to play by those rules if it wants to engage in international trade.

Finally, we know that the UK imports more than it exports and that investment in Britain's export opportunities have relied on trade deals that the EU has achieved over decades by offering a market of 500m people - the world's largest economy, the world's largest trading bloc, the world's largest trader of manufactured goods and services and the top trading partner for 80 countries. We've learned that it would take the UK over 2 years to drive its own deals, and it will have to take what's offered because it can only offer a market of 60m - the 21st on the list of the world's most populous countries and right next door to the world's biggest trade bloc. Yet the UK can't even sign any trade deals until it has left the EU, which is scheduled to take two years. So investors would be waiting nearly 5 years to see what returns they might get for investing in British export industries that would be facing their biggest ever test. They would surely invest elsewhere in that timeframe. That would mean insufficient investment for export targets to be met. The trade deficit would worsen as the UK imported more (and at a poor exchange rate). Prices would go up, but incomes would not. The government wouldn't be able to raise more in taxes and wouldn't be able to borrow at low rates anymore (that credit rating is only going one way), so many more difficult spending decisions and cuts would loom.

For Boris Johnson to continue to insist that the UK will achieve better trade deals on its own in these circumstances is the same kind of fraud we saw painted on his big red bus: serving up any old lie that people can use to justify their blind, ignorant, nationalistic fervour, rooted only in the dust of an Empire long gone and, ironically, a genetic hotch-potch that has more in common with the French, Germans, Danes and Belgians than anyone else. It is just vacuous, populist politics, and an exercise in narcissism - like making the decision whether or not to back Brexit by writing his own newspaper articles either way and then taking the course suggested by what he thought was his own better article.

But you can't eat nationalistic fervour. It doesn't make your fuel cheaper or cut the price of whatever else you buy with ingredients that have to be imported. And you won't be able to 'buy British' when the UK, like Switzerland, is forced to open its market for 15 years before bigger trading partners open theirs. Competing home industries will be crushed, along with the related jobs.

So, somehow, the Tories have to find a way to avoid triggering Article 50, and it's my bet they will.

Involve The National Audit Office in Project Planning

So, two weeks have passed since the revelations of the latest (known) public sector IT disaster, and related wasted expenditure. But I'm willing to bet that nothing has changed in the way projects are planned, and we'll see many more juicy stories in future.  

Perhaps some kind of pre-emptive strategy would be in order...? 

Surely the National Audit Office is by now rammed with people who can spot the seeds of doom in just about any public sector IT project it cares to look at. So why not involve them at the start?

Forget all this talk of economic recovery, only the civil servants can save us now.

BS2 and The Planning Fallacy

In his excellent book Thinking, Fast and Slow, Daniel Kahneman explains that governments tend to reward bidders who over-estimate the utility of large-scale projects, while under-estimating the cost. This is known in the trade as "The Planning Fallacy". While Kahneman cited research that demonstrates the fallacy in relation to many railway procurement exercises over many years, we also saw if firsthand recently in the West Coast railway fiasco. Now the government is trying its hand again, with BS2 HS2.

The Planning Fallacy suits all those involved, except commuters and taxpayers. At the time of the West Coast debacle, costs were about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, had reached approximately £7 billion per annum. Approximately 10% of trains didn’t arrive on time. Only 42% of rail customers were satisfied with value for money for the price of their ticket. Only 69% said there was sufficient room for all passengers. And only 80% of rail customers were satisfied with punctuality.

This spring, the figures don't look any better. In fact, only 29% of UK commuters thought they got good value for their rail fares. Adding a fancy new rail project doesn't seem likely to fix their day-to-day experience.

There are numerous hard-headed dismissals of the alleged viability of HS2, including John Kay's piece yesterday. And it wasn't reassuring to learn from a Channel 4 news interview with the Transport Secretary that he has set aside a £14bn 'contingency' in an apparent budget of £40bn. It smells like 'waste' to me.

There must be ways to spend that kind of money to improve the lot of today's commuters, rather than saddling the next generation with a whole load of BS.

PAC Fiddles While Public Money Burns

This week saw the publication of two reports that highlight the woeful set of priorities that govern the activities of the Public Accounts Committee and the media bandwagon that follows it. 

The first was the repeat of PAC's outrage over Google's international tax affairs. It seems we really are expected to believe that (1) these MPs are unaware of the rules governing where a company is 'permanently established' under OECD/UN Conventions and other tax treaties; (2) that the amount of additional tax that Google might have otherwise paid on about £3bn a year of revenue during 2006-2011 would have saved the UK economy; and (3) the UK does not benefit from the application of these rules to its own firms in other jurisdictions.

The second report came in the form of the lastest Bumper Book of Government Waste (itself hardly 'new'), which highlights yet again the £120bn that the public sector burnt last year for absolutely no benefit whatsoever.

With priorities like these, we should add PAC's own budget to the bonfire.

Only Civil Servants Can Save The British Economy

That's the conclusion I reach from reading Lord Young's report on Growing Micro Businesses. The report makes it clear that government plans to fund small business growth and harness public spending power are still medium term options. Absent substantial growth, all we can do in the short term is make sure our tax revenues aren't wasted on a day-to-day basis. Can our public sector colleagues plug the leaks?

The scenario

Public spending is still roaring away at 44% of UK GDP and tax revenue barely exceeds 35%. This represents a yawning chasm that remains to be filled with higher taxes and/or spending cuts - unless GDP grows substantially faster. This would make public spending less of a drag on the economy (35% is the ideal number) and produce more tax revenue to pay off public debt and narrow the deficit. Unfortunately, the productive economy is limping along, largely due to problems in the UK (and EU) banking systems. This is particularly bad for the UK, as businesses rely on only a few major banks for over 90% of funding.

The growth strategy

Unable to improve the flow of funds to the productive economy via the banks, Lord Young's report reveals that the government's growth strategy depends heavily on educating over 4 million small businesses about alternative ways to finance increased production and employment, and using public sector procurement to buy more from those smaller businesses. Theory has it that, as they grow, the rest of the private sector will also benefit, and away we go...

Awareness of alternative finance

Unfortunately, Lord Young notes that the government is yet to come up with "a robust, evidence-based strategy for communications to all micro, small and medium sized businesses" to explain the alternative funding options available. Some money is being offered via alternative finance platforms, which leverages their private marketing spend, but apparently the government still needs to issue more information on support schemes via Gov.uk (the 3rd attempt at a government portal).

However, educating SMEs about non-bank funding options is only one side of the equation. Success also depends on persuading mainstream savers and investors to put money into alternative channels. This collides with the £400bn ISA programme, which massively subsidises bank deposits and regulated investment funds that don't support the productive economy. Countless people have explained this particularly vicious circle to the government. But the Treasury seems determined not to level the playing field, either by extending the ISA scheme to include alternative financial services or by reducing the size of the incentive that favours only bank deposits and regulated funds.

This is a problem that seems unlikely to be resolved any time soon.

Smarter public procurement

So where are we on the road towards smarter public sector procurement?

Unfortunately, the smarter procurement drive is mired in the need to "simplify and standardise procurement practice across all parts of Local Government, health trusts and the wider public sector".

This seems an enormous challenge. The next step, for example, is to initiate consultations on reforms to public sector procurement standards...

So actually getting the public sector to buy more from SMEs from the top down is likely to be a very long way off.

The last card - plugging the leaks

That leaves only one option in the short term: civil servants spending less and more wisely.

That doesn't mean slashing welfare payments, and so on. It means wasting less money in the context of the £166bn the public sector spends on its own goods and services.

Surely not all of this needs formal consultation. I mean, isn't it partly a mindset? Thriving private sector businesses recognise the need for constant change to remain aligned with their customers' evolving behaviour and changes in the market, and public sector organisations face the same challenge. Yet we hear little about how the public sector evolves to be more customer-aligned and efficient. Do public sector workers realise the scale of the opportunity to help? Surely they aren't resistant to the idea - after all, they must be among the most publicly spirited people in the country...

It's unfortunate that the public focus is preoccupied with the other side of the government balance sheet. It seems such a waste of time and resources to get distracted by the moral panic about how much more tax foreign corporations should pay, when we could be getting so much better value for the crushing amount of tax that each of us already pays personally.

The process of hauling people before the Public Accounts Committee alone costs money. And we have to be mindful that reforming international tax treaties will rest on the shoulders of public sector staff who may well spend, very inefficiently, huge amounts on travel and other services in the negotiation process. 

Ironically, even the argument about extra tax revenue demonstrates why it's critical to fix all the holes in the bucket before pouring more money into it.

BubbleAid

A Conservatory Dream

Last night we were treated to the story of a family who can now achieve their dream of building a conservatory, thanks to a generous donation by UK taxpayers. 

But the story goes way beyond enabling home improvements whose name bears a cunning resemblance to the leading UK political party which spawned the spending programme. 

In fact, even the name "Help to Buy" is misleading, because this scam scheme unlocks plenty of other fantasies at the same time: the home owner couldn't even afford the house, much less an extension; the building company wouldn't otherwise make a profit on building it (and wouldn't build it at all); the bank wouldn't have the mortgage on its books; and the Treasury wouldn't end up with a 20% 'investment' in overpriced residential real estate. 

In short, we simply couldn't have another housing bubble without this scheme. 

So the least we can do is call it "BubbleAid".

While the economic justification of BubbleAid is maybe a little er... soft, it's difficult to question its political brilliance, coming as it does right out of the Fabian Society playbook. I can't think of a single middle class person who wouldn't want to realise their dream of a conservatory at other taxpayers' expense. We're talking a tsunami of greed rolling right across the entire United Kingdom, coast-to-coast.  

And nobody will ever vote it down because they won't believe that killing the programme will ever see a reduction in their taxes. 

Besides, UK taxes will never go down. The UK government will never spend less. Those are pipe dreams. 

Haha. Tax and spend less. Imagine it...

Are you smoking crack?!

When we need more money, we're just going to get those vicious, good-for-nothing global corporations to pay more in UK taxes. Simple. 

I mean, clearly other countries don't need the extra tax revenue, otherwise they'd be making those evil death stars pay more already, right? So it's open season. Britain can charge the bastards whatever the hell it likes. Nobody can stop us.

Don't pay any attention to that lunatic Senator Levin and his mutinous crew. Their demands that the United States should get a fair share of Apple's revenues will never take precedence over every Briton's right to realise the Conservatory dream.

So dream on!

Long live BubbleAid!

The Future Is Not Behind Us, It Lives Locally

For every old saying there's an opposite. Today's conflict lies in the adage that "those who don't know history are destined to repeat it." Yet "our history is not our destiny." This leaves a fine line between useful historical insight into how the world works and steering solely by what we see in the rear-view mirror. The distinction becomes critical as we lurch ever more quickly from one financial crisis to the next.

So what lessons from recent history will help us move foward, and which should go in the scrapbook? Here are 5 that I think are worth taking forward, in no particular order:

1. Clearly, the Internet is not a fad. Consumers are the winners, aided by facilitators in their battle against our creaking institutions. Yet e-commerce is still only 10% of all retail. And we are still in the 'primordial soup' phase in the evolution of our tools for extracting meaning from the great, chaotic swirl of data. So this trend has a lot more mileage in it yet and will sweep across more service sectors - if you can buy it online and have it delivered it won't be sold in high volumes on the high street. In fact, it might even be made locally...

2. In addition to democratising services, the Internet is also returning the means of production to local communities through e-enabled machines. Remote/home-working is replacing central workplaces and 'factories' are getting closer to customers, requiring a rethink of corporate systems, processes and supply chains. Huge production plants and sole-occupancy office towers will gradually become a thing of the past. High streets may well regenerate to support this trend, or as a result of it.

3. Cities with at least 3 private workers for every public sector worker see the most growth. Give that some thought if you live in a city near the bottom of this chart. This chimes with findings that economies (regional and national) whose public spending exceeds 35% of their GDP struggle to grow. You have to feel sorry for Northern Ireland...

4. The public sector is very inefficient and needs to act locally - public institutions are already being relentlessly affected by lessons 1 and 3 above, and 2 should increase  the pressure. Civil servants really have no alternative but to spend public money more wisely. Meanwhile, we'll help drive down the cost of government by dealing with the government online. Big government offices must surely go eventually. Fortunately, the moves to devolve more power to local government coincide here, but I don't think we should be fooled into thinking that's part of any real plan to future-proof the UK...

5. The UK's financial system is seriously inefficient at allocating money to people and businesses. The fact that we all rely heavily on a few major banks for whom lending to small businesses is not a core activity is part of the problem, but innovation and competition are constrained by our outdated and rigid regulatory framework and the related incentives. Crowdfunding, or peer-to-peer finance, platforms are springing up all over the country, and are increasingly focused on specific sectors, activities and locations.

In short, if I were a civil servant (see 4) based outside the south east of England (3), I would start an Internet-based service (1) that efficiently provides low cost finance (5) to help localise the means of producing stuff using e-enabled machines - or buy my own 3D printer and start renting it out (2). Now. 

Image from KC Anderson.

Submarine Welfare

The Tory spin machine was in overdrive today, with the Chancellor linking a fatal house fire to excessive social welfare payments, while the Prime Minister used the recent bout of North Korean toy-throwing as the kind of "extreme threat" that justifies Britain's entire nuclear submarine programme. Hell, why don't we just pay for Trident straight out of the welfare budget and be done with it?

Given the gravity of the UK's economic predicament, you might have thought our political leaders would be sticking to hard facts, rather than inciting moral panic. But you'd be wrong. Party politics is all about cynically exploiting fear and greed:

"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." Source: The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009

That's right, the Tories have been tearing pages out of the Left wing playbook, even if they're trying to work the same trick in reverse. Blame all bad stuff on the welfare state, so most voters will want to spend less on it.

Ironically, the Left seem to think they got this idea from the Right, as explained by Rhiannon Lockley in her “Red Book” essay on "Understanding the Psychology of the Working Class Right Wing": 

 "...the key achievement of propaganda is to make the belief being transmitted internalised to the point where its origin is lost and it is accepted as natural and self-discovered by the individual... The volume and diversity of negative messages about scapegoated groups in the right-wing media today does much to achieve this, and it is also supported by the factual style of reporting which presents arguments as definite rather than exploratory." 

The truth is, they're all at it... endlessly spinning and scapegoating instead of solving the root cause of real problems. And we're paying for it. Big time.

So how do we get these people to focus on the real issues? Where do we start?

I think we need to play them at their own game. And the best place to start is closest to home. We should link all our ills to government waste - not the welfare budget or the healthcare budget, but the £166bn that the public sector wastes on itself - nearly a quarter of the UK's entire annual exenditure. Every time a politician strays from a discussion of the hard facts in any area, we should ask them how he or she is going to spend less on travel or communications costs, or office space or, dare I say it, expenses.

Once they demonstrate an ability to get that basic level of waste under control, they can graduate to discussing how to control state taxation and spending in other areas. But the bizarre rants of North Korean leaders and random criminal acts, however tragic, should be a long way down the list.   

Waste: The UK Government Shopping Channel

Whatever you think about taxes, we have to put an end to wasteful public spending. This is not about making 'cuts'. There are no hard choices here, no job losses. This is about staff being intelligent in how they spend money. 

Believe it or not, the government is trying to reduce waste. Today's example is the 'mystery shopping' channel that enables suppliers to report poor public sector purchasing practices, as explained in the short video embedded below. But I've been disappointed not to see more signs that the public telecoms bill has fallen by 30-40%, as Green reckoned it could (progress on IT strategy is reported to be slow, and limited to central government). And I'm yet to see the total figure for travel expenditure (let alone any reduction), despite an announcement in 2011 on central procurement of travel.

But, hey, let's applaud progress where we can.

After 18 months of mystery shopping over 300 complaints have been received. Of all complaints made about 80% are said to relate to the buying process itself, followed by contract mis-management (7%), bureaucracy (5%) and technology/systems (5%). A more detailed breakdown of the 240 'process' complaints suggests significant problems with pre-qualifying suppliers and poor 'purchasing strategy'. Central government is responsible for a third of complaints, but most relate to the NHS and other 'wider public sector' bodies. About 80% of cases referred resulted in a "positive outcome" - a great achievement from zero. The recommendations (summarised below) provide further insights.

However, it would be helpful to know how this complaints process fits into a more comprehensive approach to improving the public sector procurement process. I suspect that 300 complaints in 18 months represents too small a sample of all procurement opportunities to be relied upon as a guide to root causes of major problems. And the fact that 20% of complaints were not resolved satisfactorily leaves a lot of room for improvement. While it's critical to seek and listen to 'customers' comments and complaints, I would prefer to see a more data-driven approach overall, with simple metrics aimed at detecting problems in each step of the end-to-end procurement process. One can then look at which steps are attracting the most complaints, from whom and the value at stake before dedicating resource to figuring out root causes and improvements. There are also plenty of internal suppliers and customers to the procurement process whose complaints will be important to capture in addition to those of SME bidders. Maybe that more comprehensive approach is inherent in the suggested lean sourcing process, but I haven't seen specific mention of it yet. 

It will be critical to understand the bigger picture and to see how this programme develops over the next few years.

Recommendations:

• Public sector buyers have been told not to use "pre-qualification questionnaires" for contracts with a value below the relevant EU procurement threshold.

• A supplier's history of dealing with the private sector must also be given the same weight as any record of selling to the public sector.

• Insurance only needs to be in place once the supplier has actually won a tender, rather than when responding to a tender.

• Buyers are encouraged to engage with suppliers before a tender to ensure the tender document makes sense from the start of the bidding process, to avoid endless changes along the way or even cancellation because the wrong product is being requested. That also enables SMEs to group together to win a tender against big suppliers.

• Dynamic marketplaces and the Contracts Finder portal are designed to avoid all SMEs having to sub-contract to a large supplier (and the inevitable fat mark-up). But more time needs to be provided to answer some advertisements.

• Specifications should also be drawn broadly enough to enable more suppliers to compete for the work.

• Faster payment of invoices is critical. The public sector buyer is responsible for ensuring that prime contractors pay sub-contractors within 30 days of the receipt of a valid invoice in goods and services contracts.

• Public sector buyers must not charge suppliers for the right to bid. Instead, the cost of promoting "framework agreements and other catalogue type arrangements should be related to the value of business a supplier derives from those arrangements, rather than an upfront charge."

Image from Malvern Hills District Council.

Waste: A Panic Closer To Home Than Foreign Taxes

It never stops

As the moral panic over taxing foreign companies continues, MPs and other politicians must be increasingly relieved not to be focusing on far bigger problems closer to home.

For a start, the UK government has a lot of trouble keeping track of its own finances, which must suit those on the inside very nicely. While France, the U.S. and Australia can produce a comprehensive set of government accounts in less than nine months, it took 20 months to produce the UK’s first set of “Whole Government Accounts”, covering 2009-2010. Worse, the Public Accounts Committee was “surprised to find that Treasury did not have a grip on trends in some key areas of risk or plans for managing them.” 

Now you might be worried that the government wrote off £10.9bn in unpaid taxes, and perhaps a bit personally alarmed that it expected to pay out £15.7bn for clinical negligence claims. 

But let's get this into perspective. According to the Institute of Fiscal Studies, the government spent just under £700bn in 2010-211, up £30bn on the year before. At about 50% of GDP, that alone explains why our economy has ground to a halt. Of the total, 60% went in just 3 areas: social welfare (30% or £200bn), health (18% or £120bn) and education (13%). After that came defence (6%), public order and safety (5%), personal social services (4%), transport (3%) and housing (2%). Spending on trade, industry, energy, employment and the environment together only add up to 3% of total spending.

The UK government has never received tax revenues above 40% of GDP, and by far the majority of what it does receive comes from individuals. In 2008/09, the UK government collected £41.8bn in corporation tax and £149.6bn in income tax. Together, we and the corporations paid about another £180bn in National Insurance and VAT.

So we need to forget about taxes if we're to have any chance of turning around the public accounts. 

Public infrastructure projects and government consumption are great places to start. And they provide plenty of big corporate scalps to go after.

The Private Finance Initiative (“PFI”) was invented in 1992 as a way of funding the construction and operation of public infrastructure using private funds, so that the cost could be kept neatly off the public balance sheet. While initially attacked by the Labour government, the programme was massively expanded once they came to power in 1997, after the Health Secretary now infamously remarked, "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust." 

As a result, there are 717 PFI contracts in the UK with a total capital value of £54.7bn. The woolly "Whole Government Accounts" put the present value of payments due to private financiers at £131.5bn. However, the true cost to taxpayers has since been discovered to be about £300bn, including running costs and interest payments at rates well above what the government could command directly. Yet the Treasury have trumpeted savings of only £1.5bn so far.

Government also tends to reward bidders who over-estimate the utility of large scale procurement projects, and under-estimate their cost. This "Planning Fallacy" is explained in Daniel Kahneman's book Thinking, Fast and Slow, and the recent West Coast railway fiasco is a case in point. Such a tendency can only suit the public and private institutions involved. It certainly isn’t benefiting commuters or taxpayers. Costs are about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, have reached approximately £7 billion per annum. Approximately 10% of trains don’t arrive on time. Only 42% of rail customers are satisfied with value for money for the price of their ticket. Only 69% say there is sufficient room for all passengers. And only 80% of rail customers are satisfied with punctuality. 

But if you really want to indulge yourself in a good panic, you need go no further than the government's own expense accounts and the suppliers who benefit. 

In his review of government financial efficiency in October 2010, Sir Phillip Green found that “the government is failing to leverage both its credit rating and its scale” in its expenditure of £166bn on goods and services. He attributed the inefficiency to poor data, fragmented procurement activity, the lack of motivation to save money, the absence of budgeting processes and inconsistent commercial skills across departments. 

The Green review estimated that the government could save up to 40% on its telecommunications bills by acquiring its own telecoms capacity. Travel savings were harder to get at. Two widely varying estimates were put on central government travel, before the real figure of £551m emerged. No figures could be discovered for the wider government travel bill (I'll bet it's those pesky railways again). There were also 71,000 central Government buyers with payment cards that had a monthly spending limit of up to £1,000, none of which was monitored. Railways again?

Phillip Green declined to estimate the total waste or the corresponding savings opportunity, but said rather ominously: 

“There is a huge opportunity that has been clearly identified both in central Government and beyond, but without a clear mandate, energy, focus and commitment, this cannot be delivered.”

Sadly, however, notwithstanding this "huge opportunity", it seems our MPs would rather focus on the amount of tax paid by foreign corporations. Even where those corporations are abiding by UK tax law and the sums to be gained (if any) are paltry by comparison to wasted expenditure that might be saved. 

What a waste.

The Bumper Book of Government Waste is available here.

Feel The Fear And Forego Child Benefit Anyway

The Inland Revenue is busy cleaning up part of Gordon Brown's poisonous legacy by clawing back Child Benefit payments made to households earning more than £50,000. Either you decline it, or you'll pay the equivalent in tax as a "Child Benefit Charge".

Given that you paid the government to pay you Child Benefit in the first place, you would be insane (or extremely passive aggressive), not to simply decline it. 

But if you do decide to hold onto the benefit undeservedly, the Child Benefit Charge means you know exactly which tax is being used to repay any Child Benefit you receive. Screwy, but it should teach you a lesson.

This also exposes Gordo's trick.

In paying child benefit to higher earners, Brown was trading on their greed, as well as their fear. He knew higher earners would feel justified in receiving the benefit because they already paid so much in tax and felt they should get something back. The stupidity of paying the government to receive a needless benefit would not dawn on them because it was all done indirectly, by stealth. There was no tax labelled "Child Benefit Charge", as there will be going forward (at least for undeserving recipients). As a result, he knew higher earners would struggle to believe that taxes would ever be reduced if they voted to restrict Child Benefit only to deserving families. The government would always find another sneaky use for the tax money.

The current government has had no alternative but to lift the lid on this nonsense. Public spending must be narrower and more targeted if the government is to spend less, get rid of the structural deficit, and release the tax drag on the economy.

Ideally we would seeer clear links between taxes and what they're used for - like crowdfunding public services.

Clearly income tax cuts are a long way off. But rather than shoot the current government as the messenger, we should blame Gordo and his Nude Labour cronies, including Balls and Milliband, for this predicament. None of those people must ever be allowed anywhere near the nation's coffers ever again.

Stop The Moral Panic Over Corporation Tax

MPs and the media have a responsibility to put the corporation tax issue into proper perspective.

The outrage is not how 'little' corporations pay. It's how much tax the rest of us pay, and how much the public sector wastes while failing to improve services. The media, MPs and campaigners should be focusing on how to make domestic spending programmes narrower and better targeted, rather than second-guessing international tax treaties over which the UK has little control.

Similarly, we can't lose sight of the need to incentivise foreign private sector corporations to operate in the UK. They employ people, generate income for local UK suppliers and compete with UK-based businesses to keep them from charging us whatever they like for goods and services.

But this is not 'the big story' either. 

The real story on the growth and employment front is that the government must do more to foster an environment in which entrepreneurs can thrive and expand their businesses. According to the Institute of Economic Affairs, just 6% of new firms create over half of all new jobs in the UK. Compliance costs, product market regulation and employment protection have remained a constant drag on the ability to grow businesses, despite efforts to eliminate red tape.

Attacking a few foreign corporations over their tax affairs won't help the government spend tax revenues more effectively or enable UK entrepreneurs to thrive. Especially when, ironically, those same foreign companies happen to provide British start-ups with plenty of meeting space, low cost server capacity, online marketplaces, software and customers...

Innovation Is Vital For Growth, Not Just Cost-Cutting

There's a lot of concern about how to grow the UK economy. Some have pointed to banks and the public sector as 'the enemies of growth' because they are 'extractive', rather than inclusive 'facilitators'. Government spending is too high, as are taxes, and there's a concern that national public sector pay awards have 'crowded-out' private employers. Banks are not lending. 

But there's much more to this, of course. 

Clearly even the generous private credit available during the noughties merely went on houses and consumer spending, rather than building sustainable and globally competitive businesses, especially in the regions. As Steve Randy Waldman of Interfluidity recently explained in the context of southern Europe's troubles, it's the poor allocation of capital, not lack of finance or high labour costs, that causes "an incapacity to produce tradable goods and services in sufficient quantity." Governments aren't alone in their ability to waste money and other resources.

How do these things fit together?

Experience shows that countries whose governments try to spend more than 30 - 35% of their overall output (GDP) gradually produce less and less. That's because governments impose taxes to pay for spending (and borrowing), and tax is a 'deadweight cost' or economic inefficiency. As output declines, the government receives less and less tax so ultimately must spend less on public services. Those services then start to break down. Eventually, everyone speaks Greek. UK government spending is about 50% of GDP. Yet tax receipts have averaged around 38 per cent of GDP over the last twenty years and have never exceeded 40%. The UK government can a funding gap (deficit) of up to 2.5% of GDP before it becomes a 'structural deficit' - an albatross around the country's neck that takes a special effort to remove - George Osborne's current challenge. By contrast, the Australian and Swiss governments spend around 35% of GDP (source: OECD, IEA, p. 47).

On a regional basis, the UK picture gets worse. Public spending in London and the South East has remained under 40% of regional GDP. But public spending equates to 45% of regional production in the East, and a whacking 70% of what the North East produces. Public spending in England is cruising at 50% of national output, while in Scotland it's at 60% and in Wales and Northern Ireland the good citizens are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57).

So, if you live somewhere outside London and the South East your community has a choice. Either you ask the government to start spending a hell of a lot less on you. Or you make sure the region produces enough so that government spending only represents about one third of your output. Pick neither and you'll αρχίσουν να μιλούν ελληνικά.

It's possible that high public sector pay rates make both of these tasks harder - it means the government is spending more (on its staff), and it's more expensive for businesses to hire the staff they need, so they charge higher prices and their products are are less competitive.  Public sector pay is mainly agreed centrally, in national pay awards. Those who work in more expensive places than the average, like London, get paid a bit more. But employees who work in places where it's cheaper to live than average don't get paid less. So their communities will find it harder to keep government spending in the right proportion to what their community produces.

But this does not necessarily mean labour costs are the main reason for some regions being more competitive than others. Steve Randy Waldman, of Interfluidity, argues that competitiveness is about capital much more than labour:

"... to the degree that unit labor cost statistics capture what they claim to capture ... European workers, North and South, have come to earn roughly equal pay for equal product. Southern European workers do earn less overall, simply because they produce fewer or lower-value goods and services than their Northern neighbors. [But] unit labor costs are not the problem at all: it is the scale of aggregate output. And what determines the scale of aggregate output? Is it the laziness of workers? No, of course not. We all know that when residents of poor countries emigrate to rich ones, the same weak bodies and flawed characters that produce very little at home suddenly explode into economic vigor. The difference is “capital depth”, broadly construed to include all the physical equipment, business organization, public infrastructure, and governance that collude to enable two small hands and a broken mind to accomplish outsize things. Workers’ pay level is not the problem in Southern Europe [or, say, UK regions]. It is deficiencies in the arrangement of capital, again broadly construed, that have left Greece and Spain unable to produce value in sufficient quantity to compete with their neighbors."

 As a result, Steve suggests: 

1. "If Southern Europe lacks competitiveness, the part of the cost structure that needs to be reformed has to do with rents paid to capital rather than the sticky wages of workers; and

2. "The European periphery was rendered uncompetitive by toxic patterns of capital allocation." For this he cites Arnold Kling's recent paper for the Adam Smith Institute, which concluded:

"...economic progress involves creating new patterns of [sustainable] specialization and trade [PSST]. When new opportunities suddenly emerge, there can be periods in which high productivity growth in industries with relatively inelastic demand creates a surplus of workers. It takes time for entrepreneurs to discover new ways to exploit specialization and comparative advantage, and it takes time for the labour force to adapt to new skill requirements. These real adjustments are needed in order to restore full employment."

In short, the UK and each of its regions needs to foster self-employment and entrepreneurship, by creating an environment in which it's easy to start and grow new businesses. Removing the difference between public and private sector pay may help incentivise public sector workers to move to the private sector - as could laying off more public sector workers. The necessity to find new work may be the mother of invention, after all. But that doesn't remove the ultimate need to focus on fostering the process of creating new businesses for those workers to join.

Image from NE Generation.

 

The Enemies of Growth

The Economist article on The Question of Extractive Elites certainly resonated with me last week, as it did with those involved in the subsequent discussion on Buttonwood's notebook. It's another way of looking at the difference between 'facilitators' and 'institutions'.

In “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, Daron Acemoglu and James Robinson, suggest "extractive economies" experience limited growth because their institutions “are structured to extract resources from the many by the few and... fail to protect property rights or provide incentives for economic activity.”

"Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ulimtately short-lived."

Acemoglu and Robinson place certain 'third world' economies into the "extractive" category, but place the developed world into an "inclusive" category on the basis that their institutions tend not to be extractive. But as Buttonwood notes, there are elements of developed economies that fit the description of extractive economies, citing banks and the public sector as the most likely candidates - although I would add the institutions that comprise the pensions and benefits industry as another example. And we should define "public sector" quite broadly to include political parties, unions, quangos and so on.

These extractive institutions tend to be linked, since the public sector is not only capable of extracting resources in a way that starves business or crowding out private investment, but it is also responsible for regulating the private institutions that are themselves extractive.

As previously discussed, high levels of public spending and national wage bargains are partly to blame for throttling the UK economy and preventing the development of manufacturing, particularly in regions which struggle to capitalise on the lower cost of living to keep wage costs down. The tax and regulatory framework favours banks and regulated investment institutions over new entrants. 

The current UK government is trying to spend less, but it's refusal to regulate means extractive frameworks are not being overhauled. Of course there is a danger that the new entrants seeking a level playing field may be tomorrow's "extractive institutions". But that would at least imply significant creative destruction in the meantime. Ideally the rise of "extractive institutions" would be kept in check by more dynamic regulatory intervention, but future overhauls may be required.  

That is the politicians' job. But they, too, have a tendency to be the enemies of growth.

A Pint and 40-a-Day Will Keep The IMF Away

I'm hopeful that the UK government's personal tax statement will end the cynical political ploy of leveraging middle class ignorance, fear and greed when introducing public spending programmes. Once we see exactly how our tax money is spent we'll get a decent perspective on the real issues. And we'll realise there's no point paying higher taxes only to get some of it back dressed up in the language of moral panic, like "Child Benefits", just so we can employ a few more civil servants. We'll start to insist that the cost of public services be cut or contained. Improved access to government data will mean we can track and demand progress.

Even better, we'll be able to target our taxes. Particularly those that are voluntary, like the excise duties on beer and cigarettes. Drinkers and smokers across the land will have a list of public funding options at the bar or on cigarette machines.

Toxic taxes crowdfunding toxin removal, rather than the purchase of toxic assets from toxic banks.

INT: TYPICAL [ENGLISH/WELSH/CORNISH/NORTHERN IRISH] PUB

REGINALD enters and approaches the bar, where GARY is cleaning a pint glass.

GARY

Evenin’, Reg.

            REGINALD

Gary. All good?

            GARY

Yeah, never bad. What’ll it be?

            REGINALD

Pint o' bitter.

GARY

Where d’you want it to go?

Gary points to the list of local, government-approved recipients of excise duty on beer.

REGINALD

(Peering through the gloom) Rehab centre.

GARY

Nearest?

               

REGINALD

(Pauses in thought) Nah, the missus is in there. Give it t'the one up the ‘igh street.

Gary presents the pint. Reginald hands him a £50 note.   

REGINALD

(Heading for the cigarette machine, muttering) Now for a pack o' fags to get me knee done.

Image from the Vreeland Clinic.

Regions Unleashed...Eventually

Scrapping national public sector pay rates is great news at last for regional growth.  As mentioned previously, government spending is crowding out private businesses in the regions, and strangling their ability to compete nationally and globally.  Labour costs are a big component of this, and businessses should be allowed to base themselves in regions where lower local living costs mean workers don't need to charge as much for their services. 

This means the unions will need to be more flexible and do more work locally if they are to represent their members effectively. Instead, the likes of Brendan Barber, the Trade Union Council general secretary, would rather play on middle class fear and greed, suggesting this will “suck demand out of local economies, increase joblessness and worsen the North-South divide”. This is a bizarre claim. More civil servants will keep their jobs if the government can reduce its wage bill. Similarly, with local wages lower, businesses can afford to employ people who they otherwise could not. So this move means more jobs, not fewer.

But when? The gap between public and private sector pay in many regions is huge:

"In Wales, public sector workers are paid on average 18 per cent more than private sector workers doing the equivalent job. In Yorkshire and the Humber and the East of England the difference is 13 per cent, while in the North East the pay gap is 11 per cent." 

It could take many years for this difference to be removed.

Greed, Fear And The Child Benefit

The UK's Child Benefit spending programme is too broad. It was conceived amidst the devastation of 1945 - a far cry from where we are today - and it benefits people who don't need it... except to compensate them for paying higher taxes. 

In other words, higher income earners are fussing over the withdrawal of the Child Benefit because they don't trust the government to reduce their taxes if the Child Benefit is removed. Their focus is on being 'no worse off'. Officials know this, because this phenomenon is relied upon to 'sell' new spending programmes.

So, like the plan to raise the personal tax allowance, narrowing the Child Benefit provides a golden opportunity for the government to restore faith with those who pay taxes, rather than to continue the proud tradition of cynically preying on their greed and fear. 

That means the government has to be really clear about how a more efficient benefits system is going to mean lower taxes.

A Dogmatic Approach To Social Housing

For today's post, I'm again drawn to the Red Book and the 'problem' of social housing.

Remember, the game here is not to solve anyone's housing problem. It's to get the Labour Party elected to run the country. So it becomes necessary to explain the social housing problem in that light, rather than in a way that might elucidate its root causes and allow us to figure out a solution.  The facts should not be allowed to get in the way of a good story.

Why social housing? Because, as Dr Eoin Clarke explains, Labour's figures show it was deserted by a disproportionately large number of private renters, compared to property owners, in 2010 compared to 1997.  I can't vouch for any causal connection, but let's roll with it.

The primary challenge for the Labour Party is that this slide in support appears to have beeen a problem of its own making. Dr Clarke explains that in his view, "The Right to Buy scheme launched by Margaret Thatcher in 1981 was initially a good thing." And by the time she left office in 1990, the government was building social housing at about the same rate as it was being sold. That continued during the Major government, although both social housing sales and builds decreased steeply. 

Dr Clarke then asserts that the reason for the decline in sales and new builds of social housing was that Thatcher wouldn't let councils keep the sales proceeds - although that doesn't explain why the programme seemed to go okay for its first 9 years so I suspect something else was going on...

But never mind all that. Here's what happened next, according to Dr Clarke: from 1997 to 2010 there was virtually no social housing built at all, social housing sales boomed and the population grew by 4.41 million. House prices "rocketed". Young families had no option but to rent and "their rent payable was often extortionate... That," confirms Dr Clarke "is the legacy of New Labour's handling of housing."

Enough said, one would have thought. Yet against this background, Dr Clarke then asserts:

"Thus, it is fair to conclude that Margaret Thatcher's Right to Buy scheme was, on balance, a disaster for British housing."

"... we don't trust the Tories to build adequate stocks of social homes, because in their last 18 years of power they only built one for every four they sold."

Huh? Where does that come from?

Ironically, a little later, in her later essay on "Understanding the Psychology of the Working Class Right Wing", Rhiannon Lockley has this to say:

"...the key achievement of propaganda is to make the belief being transmitted internalised to the point where its origin is lost and it is accepted as natural and self-discovered by the individual...  The volume and diversity of negative messages about scapegoated groups in the right-wing media today does much to achieve this, and it is also supported by the factual style of reporting whch presents arguments as definite rather than exploratory."

All of which leaves the following questions: Is there a social housing problem? If so, what is it? How big is it? What are its root causes? What improvements could we make to address those causes? What controls could we put in place to show that it doesn't happen again?

But whatever you do, don't ask a dogmatist.