A Budget of wasted opportunity

Tory MPs cheered wildly as Chancellor George Osborne unveiled his budget proposals, and Iain Duncan Smith punched the air in delight as the government committed itself to a “living wage” by 2020.  Yet more dispassionate observers watching from afar sighed in disappointment as the Chancellor took not one of the opportunities he had to reshape the economic and political landscape.

It was a very political budget, and it did not need to be.  Five years before an election, the Chancellor could have left his mark by improving the way in which Britain is governed and taxed.  He could have given the country an economic budget to transform its future, but instead he decided to score political points.

If circumstances limited his scope for action now, he could at least have laid down markers for the future basis of a sound economy attractive to investment and promising raised living standards.  Cutting Corporation tax first to 19% then to 18% is good, but he could have announced his intention to later lower it to the Irish level of 12.5%.  That would have sent a clear signal to investors.

The Chancellor made modest changes to tax thresholds, raising the starting level for the basic 20% rate to £10,600 – well below the minimum wage.  What he could and should have done was to simplify the tax system by having only two rates, 40% and 20%, and cutting out many exemptions.  

His lifting of the minimum wage to £7.20 per hour next year and £9.00 by 2020 used the language of the left’s “living wage,” for a political coup, but the reality will be lost jobs for low earners, 60,000 of them according to the IFS.  Osborne’s calculation is that those in minimum wage jobs will thank him, whereas those who now fail to enter minimum wage jobs will not tag him as the author of their misfortune.

Raising the threshold for the death tax (IHT) on housing to £1m for a couple looks good, but will put more pressure on house prices.  It should have applied to all assets to avoid sucking money into housing, and the level should have been £2m. 

The Chancellor could have helped millions by ending stamp duty on shares.  This would have given pension funds a boost, and increased the capital available to firms to expand and create jobs.  

Instead Mr Osborne’s budget plans to raise an additional £9bn in tax revenues by 2020, making this a clear tax-increasing budget.  He could have proposed a tax-cutting, tax-simplifying, spending-cutting budget.  Instead he raised taxes and played politics.  He wasted the opportunity, and there may not be another.

Heraclitus v. Parmenides – Flux v. Stasis

I gave the opening lecture at Freedom Week at Sidney Sussex College in Cambridge last week.  My theme was “Flux versus Stasis,” and I contrasted the views of Parmenides and Heraclitus, two of the Presocratic philosophers.  Parmenides took the view that nothing changes in reality; only our senses convey the appearance of change.  Heraclitus, by contrast, thought that everything changes all the time, and that “we step and do not step into the same river,” for new waters flow ever about us.

I divided the world between those who seek permanence (the stasis of Parmenides) and those who embrace change (the flux of Heraclitus).  Those who prefer stasis resist change and innovation, and try to keep society following traditional practices, using social pressures and, if necessary, the force of law to sustain conventional norms.  They include people who resist technological change and the changes it brings to employment, as well as those who urge subsidies and tariffs to sustain domestic markets against foreign competitors.

Those who accept that change happens and try to adapt to its flux follow Heraclitus.  Their societies allow experiment and innovation, even knowing that some will be upset by the disturbance they bring to traditional ways.  They allow markets to pulse and flow, reacting to inputs, and adapting to and coping with those changes.  

Stasis societies value order and tend to entrust government to maintain their status quo.  Flux societies value new ideas and look for progress toward their citizens’ goals.  It is the flux societies, the ones ready to embrace change and develop its positive aspects, which are most friendly to liberty and the right of people to pursue self-referring goals unimpeded by arbitrary restrictions imposed by others.

The full text of my lecture can be seen here.

Which aid is worthwhile?

In the second edition of “How to Win Every Argument” I introduce 12 new fallacies, one of which is the False Zero Sum Game.  This is the fallacy of supposing something to be in fixed supply when it is not.  Some suppose that if some countries are to grow richer, others must become poorer.  In fact wealth is not in fixed supply; it can be created.

Another fallacy I did not include is the inverse of this one, where people suppose an unlimited supply of something limited.  Given that countries will not allocate the whole of their GDP to foreign aid, a limited aid budget is available.  The question is “How can it be spent most effectively?”  One answer is that supplied by the Copenhagen Consensus established by Bjorn Lomborg.  Distinguished economists meet every 4 years to assess how to prioritize limited funds.  Its rigour has earned it a reputation for fairness.

In an article published a year ago, Matt Ridley described how Lomborg handed the UN Open Working Group slips of paper representing worthwhile projects and had them place them in order of priority.  They were startled, coming from a mindset that “everything is important.”  Lomborg then had 60 economists calculate the cost-effectiveness of different targets, and list their likely benefits:

1.  Every dollar spent on reducing malnutrition yields $59 in benefits.  Better fed, children’s learning improves and they become more productive members of society.

2.  A dollar spent combating malaria and tuberculosis brings $35 in gains.  These diseases cause sickness that reduces the ability to do productive work.

3.  A dollar spent fighting HIV brings $11 in returns, and so on.

By contrast, each dollar spent on programmes to limit global warming to 2 degrees Celsius brings only 2 cents in benefits.

In his article Ridley lists his own top priorities, adding boosting preprimary education, which he suggests might return $30 per dollar spent.  He suggests that universal access to sexual and reproductive health would save mothers’ lives and lower birthrates, yielding perhaps $150 per dollar spent on it.  Finally Ridley suggests that expanding free trade could deliver “phenomenal improvements to the welfare of the poor in surprisingly quick time.”  “A successful Doha Round of the WTO could deliver annual benefits of $3 trillion for the developing world by 2020, rising to $100 trillion by the end of the century.”

It is a rewarding discipline to compare the effectiveness of different projects, and to explore which ones would do most good with the limited funds.  It has the potential to make aid more effective at achieving worthwhile goals.

Time for a 40% top rate

Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget.  It is a timely call that echoes former times.  When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.  

Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%.  This was his trademark tax simplification.  From a myriad of rates and thresholds he now had reduced income tax to only two rates.

Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total.  From just over a third, their share rose to just under half of the total.  Again, this was what research had forecast would happen.  By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling.  And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.

To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic.  He should lower the top rate from 45% to 40% on a two-year trial basis.  If after that time two results had not been achieved, he should promise to revisit it.

The two results required would be:

1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and

2.  That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.

Lord Lawson is completely right.  Lowering the top rate to 40% would make Britain a more attractive place to do business.  It would attract talent and investment to boost our economy.  It would achieve growth at no cost to the Exchequer, and it would create jobs.  More to the point, it would send a signal to the world that the UK was once again achievement oriented.  Mr Osborne should be brave.

Sensible regulation

Regulation involves compliance costs that large businesses can afford more readily than can small firms.  Indeed, big business sometimes colludes with government and bureaucracy to have regulations that make market entry difficult for start-up and small competitors.

Regulation should be cost-effective, doing as little economic damage as possible, limiting competition or increasing prices as little as it can while achieving its objectives.  Above every regulator’s desk should be inscribed the words: “Competition is the best regulator,” for it is the ability of the customer to go elsewhere that compels firms to keep their quality high and their prices low.

Above all, regulation should be sensible.  Those who have no experience of business are unlikely to produce sensible regulations unless they consult with those who have.  Part of the problem is that things change.  New products and processes render old regulations irrelevant or inappropriate, and legislators struggle to add extra pages of detail to keep up with events.  The pile of regulatory requirements grows higher.

One possible solution might be to draw on the tradition of English Common Law, relying on precedent rather than on closely-written requirements.  For example, many pages of detail set out what toilet facilities employers have to provide for employees.  A general requirement that employers should have to provide ‘decent toilet facilities’ immediately begs the question of “What counts as decent?”  It could be determined by a series of decisions by juries and tribunals, so that an understanding of what was expected would soon emerge.

The advantage of this method is that it would incorporate the common sense of those sitting in judgement, and could adapt in response to changing times, just as Common Law does. 

This is not the Continental tradition of statute law.  Law there tends to be made by legislators and bureaucrats rather than by juries.  The rules are written down in advance and in detail, rather than emerging from a series of decisions dealing with circumstances.  EU regulations are made in this way, and there is little prospect of them changing.  

Mr Cameron might make part of his EU negotiating stance that the 95% of UK firms which do not export to the EU should not be subject to EU regulations.  A common law system of regulation could then be applied to them, making regulation more sympathetic and more flexible, lowering compliance costs and making it easier for new firms to start up.  It would give a significant boost to the economy.