The Pin Factory Blog

I can't wait. Tax Freedom Day is just three weeks away. Add up all the taxes paid by people in the UK – income tax, national insurance, VAT, fuel duty, taxes on alcohol and tobacco, council tax and all the rest. Then work out how long it takes us to earn enough to pay for all these taxes. Then you find that in 2013 the average UK citizen will be forced to hand over to the government everything they earn between New Year's Day and 30th May!

That's five months of the year working for the government, and only seven months of the year working for ourselves. Things don't seem to have moved on much from the feudal system, where the oppressed vassals were expected to work three days a week for the benefit of their lord. We have to work about the same for the benefit of the Chancellor.

The Adam Smith Institute has calculated Tax Freedom Day going back to the mid-1960s, and has published the figures annually since 1992. When England won the World Cup back in 1996, Tax Freedom Day fell on 2 May. That is a whole four weeks earlier than it will be this year. Another four weeks of indentured service to the state.

If you think that's bad, it gets worse. Governments spend everything they raise in taxes from us – and then borrow as much more as they can get away with. The trouble is that is it we taxpayers, or our children, who will have to pay back that debt. When you work out the total – what we call Cost of Government Day – we don't start enjoying the fruits ofour own labour until 13 July!

When people joke that they spend as much time working for the tax collector as they do working for themselves, they are spot on. They work slightly less than half their time to pay taxes, but slightly more in order to bail out the government's over-spending as well.

And it is no joke. High tax and government borrowing drains resources from productive uses, chokes off people's entrepreneurial spirit and reduces UK competitiveness. It really is time, Chancellor, to move Tax Freedom Day a lot earlier.

"What austerity?" asks the super-sound UK economic commentator Liam Halligan in the Telegraph.  GDP is down to be sure (6.2% below its pre-crisis peak), and we members of the public are indeed tightening our belts. Not so government. It's belt-tightening amounts to just 2.7% "cuts" over six years. That's after previous Chancellor/PM Gordon Brown expanded government spending by half, from 35% to 50% of GDP. Some "austerity" from our politicians!

The present government aimed to reduce its annual deficit to zero by 2015. In the wake of disappointing growth figures, that has now been expanded to 2018. Will it even be achieved? Most of the "cuts" were end-loaded, so the real complaints haven't even started yet.

Meanwhile, annual borrowing continues to add to the national debt. Even if that 2018 balanced-budget target is achieved, says Halligan, it still means that the national debt in 2017/18, at around £1.7 trillion, will be three times that in 2008. And the interest payments on that expanded debt all have to be met. It is money we could have used on something more useful, had we not been so profligate in the boom years.

Only virtual money-printing on a record scale has saved the government. How nice it is to have the monopoly on money, so you can just mint it to pay off your debts. But then your money loses its value, and lenders stop bailing you out again because they know they will be conned.

Investment, meanwhile, the one thing that might pull the UK out of its doldrums, has dried up. Private sector investment was just 1.2% of GDP in 2012, down from 5.8% in 2007. Businesses are sitting on cash, or paying off their debts, rather than risking money on an uncertain future.

As for the government, its "cuts" have fallen mostly on capital expenditure, nearly halved from £47bn in 2008/09 to just £27bn in 2014/15. That is the easy way to reduce your overspending – you don't have to fire anyone, or raise taxes too much, you just let the potholes get a bit bigger. But it does not tackle government's bloated spending appetite, nor lay down capital for tomorrow.

And now the IMF are joining the pleas to go steady on "austerity". As I said: "What austerity?"

Ministers are exploring various proposals to encourage local residents to accept fracking projects, reports the Financial Times. The ideas including offering people cheaper household energy.

This is exactly how planning should work, as the Adam Smith Institute explained in a conference and report back in the 1980s, and more recently in Planning in a Free Society. Developments such as airports, roads, quarries – and now fracking projects – may bring a wider benefit to the community but adversely impact local areas with noise, pollution, traffic congestion, and so on. The decision to give the go-ahead to such projects should not rest with some 'expert' planning bureaucrat. Instead, those proposing the development should compensate everyone affected by these 'spillover effects'  for their losses.

Although the physical spillover effects of fracking might be limited, there are psychological spillovers too. There may be a chance that fracking could disturb the underground geology in ways that could damage property or pollute water systems - though fracking supporters argue that these are very unlikely and that they will even then diminish over time as academics and the professionals understand the process better through experience. Still, people fear the possible effects – and those fears must be compensated if fracking enterprises are to proceed with the goodwill, or at least toleration, of the community.

We proposed that any new development, which produces a planning gain to its proposers, should compensate the local losers. One can imagine a supermarket, say, that leads to local traffic problems as roads become congested. Those near the congestion should be compensated, and those less affected compensated less. It is not an exact computation, but at least it is better than people whose lives are blighted by some development having no redress.

Local authorities do, of course, try to tax developers of some of their 'planning gain'. But the system is totally corrupt. Petty officials bully people who want to extend their house or build a new house in their garden, implying that they must pay thousands to the council if there is any chance of their proposals being passed. Larger developers can find themselves being invited to pay for swimming pools or other large 'community' projects. Of course, it is local councillors and officials who benefit from this corrupt system, not the residents who are actually affected.

Today Britain gets a new welfare system. Well, one tiny part of Britain near Manchester, focused around a single job centre. It is the new Universal Credit system, the brainchild of Welfare Secretary Iain Duncan Smith, who has been thinking about such moves for over a decade.

Britain's welfare system is a patchwork quilt of benefits of different kinds, going to different people, with different qualification rules and different tax implications. Benefits have sprung up under successive governments, all determined to show their credentials in terms of helping 'poor families', often with scant regard for what is already there or what the effects might be. The result is this patchwork quilt – which is altogether too cosy in some places but full of holes in others.

The idea of Universal Credit is to shoehorn around 54 different benefits into just one. Proponents reckon that will be a lot easier all round – easier for claimants to understand, easier for the authorities to administer, and cheaper for taxpayers. Critics argue that there will be losers, and that some people will be unable to cope with the new system. Mind you, whenever you move from an irrational hotchpotch of policies to a more rational one, there will be losers. There will be well-deserving winners too, though you won't hear any objections from them, so every such change is greeted with plenty of outrage and little support. Politicians have to get used to that.

And sure, the new system basically gives people cash rather than spoon-feeding them with cash benefits here and practical benefits there, and some people may find that hard to manage. Most won't, though, and we can deal (and should) with the exceptions separately.

Critics also argue that the computer system behind the new benefit is over-complex and unreliable. That's probably a fair point, if previous government IT projects are anything to go by. Remember the NHS IT project? For what it cost not to deliver a joined-up NHS, we could have given all 1.4 million NHS workers nineteen web-enabled laptops, plus a spare for them to forget and leave on the train.

This tiny roll-out of Universal credit reflects something that PM Ted Heath tried to achieve back in the 1970s with Family Income Supplement and which the Nobel economist Milton Friedman proposed in his 1962 Capitalism And Freedom - that is, a negative income tax. Above the line, you pay tax, below the line, you get cash. Simples! And probably very efficient and effective. We will see.

Our 1984 paper Airports for Sale, by the noted transport economist (and now Irish Senator) Sean Barrett, put airport privatisation on the agenda in the UK. Dr Barrett showed why the six airports of the then British Aviation Authority (Heathrow, Gatwick and Stansted around London, and Glasgow, Edinburgh and Aberdeen in Scotland) should be sold separately rather than as a unit, so that competition and fresh thinking could come in to the UK's state-run airport sector.

Sadly, the Thatcher government – rarely as radical as people on either side suggest it was – thought it much easier to privatise BAA as a unit. A company of that size could be sold easily to the public through the stock market, a monopoly provider would bring in a higher price, there would be none of the legal or accounting problems that might be caused by a break-up, and the sale could go through much faster. Competition, they told us, could come later.

So the state airports monopoly (or near-monopoly: there were other notable local-government owned airports such as Manchester, East Midlands, Bournemouth and Luton) was turned into BAA plc and sold as a block. It has taken nearly thirty years, though, for the first prospect of competition cracking that block, and the cracks aren't all that deep.

Spanish-owned company Ferrovia took over BAA a few years back, but the Competition Commission later ruled that it should sell three of its airports – Gatwick and Stansted and one of either Glasgow or Edinburgh - to help create competition.

Gatwick was at least sold to a private consortium, the US-based investment fund Global Infrastructure Partners. Though GIP also owns London City Airport, so you could argue that there is still a monopoly element in that. And as I explained in January, Stansted has been sold too - but to Manchester Airports Group, which is entirely owned by local authorities. So that is hardly an injection of dynamic private-sector thinking. And what are local authorities doing running airports anyway?

The most promising sign is that Gatwick is now pushing the regulatory, the Civil Aviation Authority, for more operating freedom. It is demanding freedom to expand, and wants to be allowed to offer discounts to Far Eastern airlines. It sees a niche in attracting more flights from China, Indonesia, Korea and Vietnam. Current CAA regulation insists that all airlines should be charged the same, around £8.80 per passenger. Why? Steven Wingate, chief executive of Gatwick, says his plan would be a victory for competition over regulation. He's right.

The Newspaper Society, representing a large wodge of UK newspapers, have rejected the Leveson Report plans to regulate them and are publishing their own proposals for self-regulation - backed by a Royal Charter. All power to them.

After the phone hacking scandal, which brought down the News Of The World, the government and the opposition in the UK came to endorse the idea of an official press regulator, set up by Royal Charter, with powers to fine newspapers and demand they print prominent apologies. Trouble was, these discussions deliberately excluded the newspaper industry.

They point out that phone hacking is a crime, and that there are perfectly good laws to deal with it, without having some lumbering press regulator. Indeed, we haven't had press regulation in the UK for three hundred years, and with good reason – once government officials are put in charge of the press, there is very little hope left for free speech, as a number of international media bodies have already pointed out. It might take time, but gradually the press would become agents of the prevailing government. Indeed, it would not even take specific interventions to do so. All the regulator has to do is raise an eyebrow - and a press that could be fined very heavily, or told what to print, would quickly take the hint.

The Newspaper Society's proposals would deny Parliament free rein to change newspaper regulation as it pleased – an important safeguard of free speech. Instead, the regulator and the media would have to agree. They also call for members of the regulation panel to be appointed by retired judges, with various interests (including the press) represented. Former editors could sit on the panel (the government's plan would ban them), which is important in order to have a proper discussion, after all. Media customers would have a say too – and let's face it, this is all about them. And there would be limits on what the regulator could demand newspapers to print by way of apologies. Which is good. One can think of a point in the future where some newspaper exposes government wrongdoing and is then forced to publish a two-page endorsement of everything the government does.

If anything, the Newspaper Society should have been tougher with these proposals. Their proposals would still allow for fines of up to £1m, and strong investigative powers from the regulator. And let's face it, there are already plenty of laws out there to protect people's privacy (where this whole thing began) and who break the law should be punished. But our newspapers have a vital role in exposing the shortcomings of the establishment: they need to be free to do so. We don't need a new regulator to do these things. The trouble with regulation, in any case, is that it usually has the opposite effect of that intended. Competition between different media is probably a surer way to keep them clean.

Easter in Britain is one of the busiest shopping days of the year, with garden centres and DIY stores in particular full of people stimulated by the spring weather – well, when we are not having an Arctic spell – to bring a bit of a new look into their homes and gardens.

But larger stores, like those same garden centres and DIY stores, will be able to open only six hours on Easter Sunday – like every Sunday. Convenience stores can stay open longer, but retail premises larger than 280 square metres are allowed only six hours.

That alone should make us question the Sunday trading hours. It is a completely arbitrary number: why not 250 or 300 or 350 square metres? Laws should apply to everyone, or to nobody.

Since limited Sunday trading was introduced, Sunday has become an important shopping day. It gives families in particular a little more time at the weekend for those large purchases that they want to make together. It used to be hard to do that and get in the weekend food shopping at the same time. It has actually made things more relaxed.

Remember too that other important shopping days often fall on a Sunday – Christmas Eve and Boxing Day, for example. Retailers right now could really use the boost of a proper day's trading at these times, especially those who are  losing trade to online alternatives.

The Sunday trading laws were relaxed for the Olympics and the world did not come to an end. Subject to reasonable planning restrictions to prevent local nuisance, we should relax them entirely. Why should the government decide whether people can and cannot shop, or can and cannot open for business?

The law states that employees can refuse to work on a Sunday without fear of retribution. That should really apply to other days too – not everyone has Sunday as their religious day of rest. And of course, nobody has to shop, or open their shop, on Sunday if they do not want to. Why should those who do not want to be able to force the rest of us to comply with their choices?

Members of the European Parliament on the Economic Affairs Committee have agreed to introduce legislation to extend the bonus cap on bankers to fund managers as well. This is an indication of the envy, ignorance and economic illiteracy that drives much European policy.

The supposed purpose of the bonus cap on bankers is to make banks safer by reducing banks' ability to reward people for taking risks. It will have the opposite effect (as nearly all regulation does). Remember when Gordon Brown and the authorities in the United States were flooding the world with cash and a boom was raging? Then, certainly, the banks did reward people for simply doing deals because every deal succeeded. We are far from that situation now, and banks are no longer taking such risks. So why limit bonuses? Pure envy at the thought of bankers earning £1m bonuses.

Well, I know the feeling. But bonuses are how businesses in volatile sectors keep their salary costs under control. In bad years people earn less, in good years they earn more. If firms cannot manage those costs because of politically-imposed caps, and have to raise basic salaries instead in order to retain staff, the policy actually increases the risks that the banking sector takes.

But what about fund managers? They do not actually take the same risks as the banks at all. So why introduce a bonus cap on them? Again, it is just envy, not logic, that motivates the new move. The customers of fund managers are savvy, large-scale, well-heeled investors. Funds played absolutely no role in creating the financial crisis: they actually took much lower risks than the banks. Wealthy customers tend to want to conserve the fortunes they have built up over a lifetime, rather than gamble with them.

It is plain that MEPs do not understand the financial industry, which is largely based in London – much to the irritation of those in Paris, Frankfurt and Amsterdam, who seem to think that if they hobble London, the business would transfer to them. It wouldn't, of course: it would probably go to New York, Hong Kong, Singapore, Shanghai or at best Zurich.

The British government should read Tim Ambler's new ASI paper on financial regulation – and follow his advice to resist this latest, spite-inspired regulation and instead get the EU and other regulators to endorse proper competition in banking and financial services.

I’ve been working recently on the regulation of banks, insurers and financial advisers. I’ve concluded that these industries are over-regulated, and regulated in the wrong way – which causes more problems than it solves.

There is a strong case for financial services regulation. With many products you can see plainly what you are buying. But buy a pension or an insurance policy and you don’t know if you’ve been sold a pup until it’s time for it to pay out.

Kitemarking – by independent agencies – could probably solve that. And you want to make sure that the banks and insurers stay honest, get the Bank of England to do that – they are close to the market. Then let the Financial Ombudsman Service deal with consumer protection.

We should be regulating the products, not how they are sold. That makes regulation so complicated, with so many tick-boxes, that it strangles the life out of the market. It’s fine to insist that client money must be held in a separate account and suchlike. That’s a simple rule of honesty and probity. But you don’t need much more.

We should recognise that competition is the best regulator. And that brands offer consumers an important guarantee of quality. Trouble, is, if sellers are minutely regulated, then brands make no difference and customers are done a mis-service.

Problems like Libor-fixing and PPI-misselling were caused by regulation. Bank regulation has raised the costs of market entry and killed competition – it’s so hard to start a new retail bank that only one has been created in the UK in 130 years. If there were proper competition, cartels wouldn’t stick. And PPI was caused by the Financial Services Authority demanding it be offered to mortgage and loan customers, then not checking how it was actually being sold.

Regulators expand their empires by creating more and more rules for themselves to police. If they can pass the cost straight on to the regulatees, as in financial services, there is no cost control at all. And regulations make people feel safe, even when they are not, so people take more risks in what they buy. Regulations undermine competition and brands and everything else that might actually protect customers.

George Osborne wanted to scrap the FSA, which was so mesmerized by its own tick-boxes that it didn’t see the banking crash coming. But as of 1 April we will have two regulators instead of one. That’s bureaucracy for you.

The Parliamentary Commission on Banking Standards, headed by Andrew Tyrie, wants to electrify the proposed ring fence between retail and investment banking. Regulators should be able to force a complete split of retail and investment banking operations if a bank tries to resist the ring-fencing rules, it says.

We need smaller banks and more competition in banking, yes. But this proposal is a bad idea.

In the first place, the Vickers Commission ring-fencing proposals are the answer to the wrong question. The idea is to separate the 'risky' investment banking (or as the Business Secretary Vince Cable calls it, 'casino banking') from the supposedly less risky retail element (the 'Captain Mainwairing' business). However, it was not the investment banks that crashed back in 2007-08. As our report by Miles Saltiel explains, it was the mortgage banks and former building societies like Northern Rock that came to grief. Ring-fencing could actually increase risk. And it will certainly raise costs for retail bank customers, as their banks will not be able to pass on the savings from the savvy management of pooled funds by their investment arms.

Second, regulators are the last people you want telling the banks how to run their businesses. if they were empowered forcibly to split up banks, they would undoubtedly make a hog's ear of it. They would, in the process, damage UK banking and drive yet more banking business out of the UK. If you want to break up the banks, use the market: simply have more onerous capital ratios on the larger banks. That reflects the fact that the larger a bank is, the more damage its failure would do: small bank failures are manageable. It is the huge cost of regulation that has actually caused the elephantiasis of our banks: with smaller banks we would have more competition and we would need less regulation.

Third, the proposal is typical of politicians' belief that they can manage markets. In fact they are hopeless at it. A decade ago they were telling us how well they were managing the banking sector, and the Financial Services Authority had more than two thousand people on the job. They failed, miserably. Politicians and regulators don't know what is happening in markets. They wouldn't know whether a bank was getting round the ring-fencing rules or not. And they certainly wouldn't know what to do about it.

Fourth, our banking system is broken, but the politicians and regulators have done nothing to expose its problems. Nor would this proposal. The banks are still loaded with toxic obligations, but nobody outside the banks themselves knows how much. Banking depends on trust, but how can you trust them, if you don't know how many skeletons are in their cupboards?

A better solution would be to make the banks fess up and reveal their toxic 'assets'. Then put those assets into an isolation ward and let the healthy parts of their business get on with life. Then encourage more competition in banking by making market entry easier, reducing the regulations on smaller banks and raising the capital (and – see our forthcoming report by Robert Miller on this – their cash requirements). In other words, return banking to the real world of market competition. Job done.