Time to cut public spending

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Here's a letter I had published in the Evening Standard yesterday:

The voters are ahead of the politicians in recognising that whichever party wins the next election is going to have to cut public spending - in a poll for Politicshome in March, 72 per cent thought spending had risen too high.

Belatedly, the Conservatives are saying the right things. But they are not yet going nearly far enough. Research by European Central Bank economists has suggested Britain could save £96 billion a year if our public sector was as efficient as Japan’s or Australia’s. That works out as a 16 per cent spending cut. If we want to restore sanity to the UK’s public finances, these are the sorts of numbers we need to be contemplating.

Local government and public procurement might be the easiest targets but – whatever the Tories say – the NHS must not be spared from this process. It now consumes more than £100 billion of taxpayers’ money every year, and is notoriously unproductive. Without radical reform, things are only going to get worse.

Tom Clougherty, executive director, Adam Smith Institute

The BBC: Under threat from competition

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There's a proposal in the air to take about £130m out of the TV Licence Fee and use it for promoting broadband access in Britain. From the flurry of interviews and debates on the BBC's radio and TV channels, you would think this is the end of civilization as we know it. But it's just £130m out of a licence fee revenue that is twenty times that. So why the fuss?

The answer is that the BBC knows this is the thin edge of a fatal wedge. Already, money from the TV Licence Fee has been used to help the general conversion to digital television. Now here's another proposal which will also take some of it for other means of communication. If the BBC can't hold the pass now, it's slaughtered. Once the principle is broken, that the Licence Fee exists to fund the BBC, it will be open season on it. Scores of broadcasters will be pointing out that they too provide 'public service' broadcasting, so why should the BBC alone get a free ride.

And they're right. TV and radio channels should support themselves, through advertising or subscriptions, without imposing a regressive communication poll tax on the public. If you really believe that we need 'public service' broadcasting funded out of taxation, then fair enough – but it should go to the providers of that broadcasting on the basis of cost and quality, and should not be doled out exclusively to just one, particularly one that is so large and powerful, a real monopolist on the communications scene.

To be honest, I think that 'public service' broadcasting is mostly just a chance for politicians to preen themselves in public, so I wouldn't give it a penny. But if we're going to have it, let's buy it in from a range of suppliers and at least get the benefit of competition.

Defined benefit pension schemes

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For many years, the gap between public and private sector pension provision has been widening considerably – the sense of manifest injustice is certainly becoming stronger. Recent developments in the private sector with regard to the financial viability of defined benefit pension schemes are particularly relevant. With falling returns – due to a weak stock market and low gilt yields - many pension fund deficits have spiraled.

The share price ratings of both British Telecom and British Airways are being seriously damaged by their ongoing pension fund liabilities - accounting standard changes now require companies to report their pension fund liabilities in their balance sheets. Few FTSE 100 companies now offer a defined benefit pension scheme to new employees. Even BP has recently announced that it was withdrawing this option. More seriously for the future of such schemes, Barclays has confirmed that its defined benefit pension scheme will be closed to existing employees. In the longer term, few defined benefit pension schemes are expected to survive in the private sector as companies recognize their many drawbacks.

But in the public sector, defined benefit pension schemes are continuing to rack up massive liabilities for taxpayers –a figure of close to £1 trillion has been cited by the Institute of Economic Affairs. Action to stem these vast pay-as-you-go liabilities is vital. Options include levying higher pension contributions on public sector employees, a requirement for them to work longer to secure such benefits and a paring back of pension-related entitlements. Apart from removing the attraction of a defined benefit pension scheme for most new recruits, the Government could also introduce a far more radical option – the phasing-out of its defined benefit pension schemes for most existing public sector employees.

The potential savings would be massive, but such a policy would be controversial. Very controversial.

Failings of the points-based migration system

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Students are not the only people hurt by the UK’s points-based visa application system. Non-EU citizens who seek employment in the UK are also disadvantaged. The government intends to accomplish three objectives with the new migration control system. First, Gordon Brown’s government wants to curtail the number and type of non-EU citizens working in the UK. Second, the government wants to keep visa holders off the dole. The third government objective is to raise money from visa applications.

The first objective has been publicly stated by the Home Office. The second objective is revealed through a review of the new visa application forms. The points-based system requires all visa applicants to have sufficient funds to support themselves, and any dependants, throughout their stay. Applicants also certify that they will not receive welfare benefits whilst in the UK. The third objective is manifest by hike in visa application fees. For example, unsponsored visa applicants must now pay between £675 and £1020 for the application fee. Sponsored applicants must pay a £265 fee. Even students are required to pay £145 to apply for a visa. Applicants in these three categories who have dependents must pay the same application fee for each dependent. Visa application statistics are sparse for the period since the points-based system was launched, but in the 2006–2007 financial year, the UK government received 2.7 million visa applications. That translates into millions of pounds of revenue for the government.

The concerns underlying the government’s objectives can all be traced to the maladies of the welfare state. Welfare states attract people who are content to live on the dole. The new points-based system cracks down on would-be social loafers from non-EU nations, but European freeloaders are left undeterred. This is especially problematic due to the combination of the UK’s high standard of living and relatively generous welfare benefits. Welfare states are also expensive to run, which explains the high taxes and government fees.

The easy way to eliminate the government’s welfare-based concerns is to do away with the welfare system. That may not be politically practicable at the moment, but an effective compromise would be to pare down welfare benefits to the point that the UK’s dole is much less desirable than welfare programs in other EU nations. This will encourage net negative residents to look elsewhere for government handouts. With fewer freeloaders, many of the government’s immigration concerns will be allayed. The Home Office could then relax its points based system rules to make it easier for industrious, innovative applicants to make positive contributions to the UK economy.

Chuck on economics

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Why we shouldn't learn economics from Charles Dickens.

You tube: the playlist

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Blog Review 996

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A very simple solution to the gender pay gap (which isn't actually a gender pay gap, it's a mothers' pay gap).

Ooooh, how tangled it can get when politicians call for people to do things for moral reaons rather than legal ones.

As Paul Krugman has pointed out, having the pound rather than the euro has been pretty handy.

Another 17,314 things we could probably do without.

This is a constitutional reform Netsmith could get behind. Truly separate the legislature and the executive.

Something wrong here, surely? A bankruptcy judge who understands bankruptcy law? What will the UAW think of that?

And finally, which blogger is even less in touch with the real world than the Autorantic Virtual Moonbat?

Why the exodus?

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The technological advance in communication, particularly over the last decade, is the primary catalyst that has given ordinary people the very realistic opportunity to move abroad. The advent of social and business networking sites has revolutionised the way in which people communicate with each other. You can build up a network of friends and business contacts on the other side of the world through no more than a few degrees of separation.

Combine this with your ability to send and receive an email from just about anywhere in addition to further advances in Voice over IP technology and suddenly moving to the other side of the world doesn’t seem as daunting as it once was. The proposition is more affordable, made even more so by cheaper and more available travel.

A significant proportion of job seekers have emigrated or are looking to emigrate due to the effects of the harsh market conditions we have experienced over the last 18 months in the UK. At the same time, certain countries have incentivised UK workers to move abroad by offering advantageous tax breaks and an “enhanced quality of life". For example, the lure of The Middle East has been too great for many to ignore. Attractive relocation packages, a cosmopolitan lifestyle, the opportunity to work for a top international business tax free, good schools, restaurants and hotels are just some of the draws. The job seekers we speak to on a daily basis refer to “the work life balance". They are therefore prepared to be more adventurous in order to experience a different lifestyle, a different culture.

Finally, the news in the recent budget that people earning over £150,000 will have to pay a hefty 50% tax is likely to have implications on the number of people moving abroad. The very high earners may well be drawn to the traditional “bolt holes" of Monaco and Switzerland, whereas high earning job seekers will have further incentive to move to more tax efficient shores, particularly as international experience is increasingly sought by employers looking for talent.

To conclude, boundaries, both physical and mental, are being overcome at an alarming rate with the result that the world is becoming a far more accessible place for the increasingly adventurous and transient job seeker. People are no longer restricted by the limitations of the city they live in or even the borders of the country they were born in. Emigration, both short and long term, is bound to increase in the future and potentially at an alarming rate if the UK government makes it unappealing for job seekers to work here.

David Morel is Managing Director of Tiger Recruitment Ltd.

New report: Regulatory Myopia

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'Regulators, not under-regulation, caused the financial crash'. The financial crash occurred because regulators were too preoccupied with form-filling and did not see that the whole financial system was at risk, a leading economic think-tank says today.

Like Members of Parliament in the expenses scandal, the banks did not actually break any of the regulators' rules. But the rules were targeted on the wrong things, allowing a disaster to flare up under the regulators' noses.

The comments come in a report, Regulatory Myopia, from the Adam Smith Institute, which is its response to Lord Turner's Report on financial regulation, and published ahead of the Chancellor's Mansion House Speech in the City of London.

The Institute says that Turner is wrong to suggest that regulation was too 'light touch' for the job. The banks, it says, are minutely regulated, from how they deal in the credit markets to how quickly they pick up the phone to their customers. More regulations would not have saved the system, and will not do so now. Rather, the mistake was a shortage of overall supervision that would have seen the potentially fatal risks that the banks were running and would have intervened to curb them.

The report's authors, London Business School Fellow Tim Ambler and regulation consultant Keith Boyfield, say that the Bank of England should take on this supervision role, and that far from being expanded, the powers of the regulator, the Financial Services Authority (FSA), should be cut back to 'match its competence'. The FSA, they say, must realise it is 'part of the problem, not the solution'.

Click here to download a PDF of Regulatory Myopia.

REG lunch with Sandra Boss

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London is slipping as a world financial centre, being overtaken by the likes of New York, Singapore, Hong Kong, Geneva, Zurich, Chicago, Frankfurt and Boston. It has a bit of breathing space to put things right, but it needs to move quickly. That was the conclusion from a high-power lunchtime seminar of the Adam Smith Institute's led by Sandra Boss, Senior Partner of McKinsey. Four issues for London were identified. First, the regulatory burden. London has benefited from having a well-policed financial market, but now new EU regulations threaten to add much more to the burden, putting London's world-leader status at risk. Second, UK taxes have risen, prompting a number of financial firms to leave. The tax on non-domiciles, the threatened 50% income tax rate, and changes in capital gains tax, have all made London more expensive once again. Third, London's infrastructure remains poor. Heathrow is still struggling to cope, internet bandwidth is less than perfect, and transport strikes are adding to the frustration of doing business in London. On the other hand, London is relatively welcoming to foreigners, while New York has become much more restrictive since 9/11. And of course London has English, everyone's second language. So it is still a talent magnet. But if the tax and regulatory burden continues to rise, for how long? To find out more about the ASI's Regulatory Evaluation Group, please click here.