Keynesian infrastructure spending might not be the answer you know

This story of the Don Quijote airport in Spain is instructive about one of the delusions of our times.

Spain’s “ghost airport” – that cost hundreds of millions of euros to build and which became a notorious symbol of the excess of the country’s bonanza years has been sold to a group of British and Asian investors for just €10,000 (£7,000).
Ciudad Real airport airport, in the central Castilla-La Mancha region, has been closed since 2012, despite opening only four years prior to closure.
The regional authorities raised an estimated €1billion in private investment to build it. They had hoped it would draw millions of visitors each year to Ciudad Real and the surrounding area, which is known as the home of Miguel de Cervantes’s fictional knight Don Quixote.
But the airport itself soon became seen as a quixotic venture, drawing just 33,000 travellers in 2010.

This is of course a symbol of the investment excess in Spain in the boom years rather than of government infrastructure spending in a slump to boost the economy. But it faces exactly the same problem as all other such spending. Whether it is being done to boost the level of demand in the economy or not it is still necessary for the thing itself being built to add value. An airport (and this is not the only one in Spain) that no one wants to use is just a very expensive piece of tarmac with no other actual value. This thus makes all poorer.

Which produces a problem for those who would use infrastructure spending to boost the economy in recession. If the project itself would add value then it should be built, recession or no. And if it doesn’t add value then it shouldn’t be built, recession or no. There is no room left for the argument that it should be built because recession.

Kid’s Company seems to not quite get this idea we call “charity”

An amusing little tale from the third sector as we’re supposed to call these things these days:

The charity she founded, which specialises in therapeutic support for severely abused and traumatised children, is likely to halve in size, making £14m of cuts and sacking hundreds of staff in an attempt to survive a serious financial crisis.

On Thursday night, she said: “Some ugly games are being played. The facts are that the vulnerable children of this country remain largely unprotected. There’s no point in shooting the messenger if the message is uncomfortable. I am being silenced.”

Kids Company predicted that the proposed restructuring, which it said was triggered after the government signalled that it was to end £5m annual funding, will leave thousands of vulnerable youngsters without support.

That’s umm, interesting, isn’t it? A £5 million grant cut leads to a £14 million crisis? We can’t help but feel that there’s a little more, possibly even £9 million more, going on here that just the grant cut.

However, where the plot really seems to get lost is here:

Batmanghelidjh warned that without a regular source of state funding, Kids Company would be reliant on fundraising: “We are doing the most serious work [funded] by cupcake sales and cocktail parties, and I don’t think that is right or sustainable.”

As a result, the charity

Err, yes, that’s what charity means. Over here we have a series of things that both must be done and can only be done by government. It is righteous and just that the populace of the country chip in, perhaps in some portion related to their means, to pay for these things through taxation.

Then there’s another group of things over here. Which some to many of said populace would like to see done. Which require perhaps coordinated and collective action. But which do not require the power of government to achieve. And there’s many ways of organising those things. Corporations do some of them, mutuals others, charities yet another set. But the defining point about these forms of organisation is that they do not have the power of the State to demand, at gunpoint or threat of prison, the money to find them. They must be run in a manner able to persuade people to voluntarily cough up the cash. This is as true of Sainsbury’s trying to sell us a banana or two as it is of Ms. Batmanghelidjh suggesting that we might wish to aid deprived children.

This is one of the defining points of a charity, one of the things that differentiates it from said State. And if you’re running a charity and you’ve not quite grasped this point as yet then perhaps you should be doing something else?

If only Steve Hilton knew what he was talking about

It’s not looking good for the idea that Steve Hilton is well informed, is it?

My meeting with Luiz was arranged by Citizens UK, the brilliant community organisers who have been such a powerful force in campaigning for a living wage. But my real conversion to this cause was brought about years previously by an unlikely protagonist: Polly Toynbee.

Gaining your information from that source is never going to work out well, is it?

And yet he does get close, only to reject the correct solution:

Some might say that the minimum wage was deliberately set so low that it wouldn’t affect business very much. An increase to the living wage would be a completely different proposition. It is to counter this argument that in my book, More Human, I advocate what I describe as “business-friendly living wage” that requires companies to pay a living wage but cuts their employers’ national insurance by roughly the same amount to neutralise the overall impact. But to be honest, this is letting businesses off the hook. There are plenty that could perfectly well afford to pay the living wage. It’s a choice.

The actual answer is to, as we have been saying here for near a decade now, reduce the amount of tax charged to those on low incomes. We will have more on this later in the week but seriously, what is so difficult to understand about the following? If you want the working poor to have more cash then just stop taxing them so damn much.

Well of course companies dictate corporate tax rates

How else does anyone think this happens? The point being not that the head of the CBI phones George up and dictates what the corporate tax rate would be (not that George would give much mind to the CBI anyway), but that the rate of tax that can be charged depends upon the reaction to it of those the tax is being levied upon. All of which makes the vapours that people are having over this comment somewhat mysterious:

The UK’s tax policy is effectively dictated by companies and not ministers, according to a leading barrister and adviser to the treasury on its recent “Google tax”.

Philip Baker QC said policymakers and tax experts had learned over recent decades that the mobility of companies and jobs meant there was “no question [countries] have to be competitive to survive”. As a consequence, governments had to provide the tax policies that international corporations wanted.

So, why do we not have 100% income tax rates on pay over £7.00 an hour? Because we know that just about everyone would bugger off out of the country making being the politicians running it really no fun at all. why don’t we have VAT at 100% on everything? Because that storm for the ferries would be just the same as most fled such an extortionate tax regime. If, of course, we didn’t all just ignore it and deal in cash.

so, why do we have a reasonably reasonable corporate tax system and rate? Because it’s easy enough for a company to leave the country and go and try to make a profit elsewhere. Therefore their mobility really does tax our ability, dictate to the government, to tax them.

There’s really nothing mysterious about this at all. We all realise that a restaurant where they ceremonially spat on the soup at each and every table would get very little customs (not none as there’s nowt so strange as folk) for we would be dictating our rejection of the practice by staying away.

Why would anyone think that taxation would be different?

Six thoughts about the tax credit cuts

  1. Working tax credits are a good idea in principle. Low pay is a big problem, and shifting the welfare system away from being a safety net towards topping up the incomes of low-skilled people who are in work is probably the right approach.
  2. It doesn’t make sense to both tax people and pay them benefits. Cutting income tax and, especially, raising the National Insurance threshold on low-income workers is less complicated than making them apply for tax credits, and probably would incentivise work by getting rid of the tax credit withdrawal ‘tax’, without removing their incentive to join the work force (as ditching tax credits alone might do).
  3. That isn’t what’s happening here, though. These cuts are meant to reduce the deficit, so they won’t be offset entirely by tax cuts. That might disincentivise work (reducing people’s incentive to enter the work force) and will clearly make some poor people worse off.
  4. Lowering the child tax credits threshold and increasing the withdrawal rate would be one of the least harmful ways to cut tax credits, because these are not tied to work and because they are paid to couples earning up to £41,000/year, which is quite high.
  5. Housing benefit and pensions would probably be better things to cut. The £26bn housing benefit bill could be reduced significantly by reforming planning to allow more houses to be built. Abolishing the pensions triple-lock and increasing pensions in line with inflation only would produce major year-on-year savings – this year, the £92 billion pensions budget would be essentially frozen.
  6. Deregulations that cut the cost of living would offset some of these cuts. Housing and, for people with children, childcare are the biggest costs for people on low incomes, and payments for childcare in particular are built in to the tax credits system. The UK has some of the harshest regulations in Europe on both of these things, driving up costs. If the government made it easier for the private sector to build more houses and relaxed regulations about staff:child ratios in crèches for children, the cost of living for poor people would fall significantly.