The New Minister

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Much is being said about how we need to revise our constitution: we should change the voting system, actually have one for the second house, perhaps have primary elections, state funding of parties, maybe even give the whole liberty and freedom thing up and fall sobbing upon the shoulders of the European Commission. However, I've a simpler idea, one that has two benefits. Firstly, it would provide me with a well paid sinecure shouting at and making fun of politicians and secondly, it would actually be useful whatever else we did to the political or governance system.

I want to revive the post of Jester: in it's proper, medieval sense that is. Not just a funny looking man in odd clothes (I've got that part of the job description right at least) who told unfunny jokes (ditto) but one who was licenced, authorised, to shout out when someone was talking b?**?!cks. If the Minister for Equality started to say again that the gender pay gap is 24% or more then that stick with bells on gets waved. Repeat in Cabinet that ID cards will help to prevent identity theft and the bells on the silly hat are also tinkled.

Someone proposing that wind power can meet all our electricty needs would be greeted with the report showing that it is indeed possible for peak demand to coincide with not a breath of useable wind in the entire country and something unfunny from Shakespeare. The full capering and preening upon the table, boncing with the blown up pig bladder and provision of a whoopee cushion would be reserved for those who say something extraordinarily stupid: like stating that a 50% tax rate will increase revenues, or that the economy is well placed to weather the storm. Of course, no one would be silly enough to say such things, would they, so the full production would indeed be a rarity.

The sad thing is we shouldn't actually need a Jester, someone to perform this office. If we had emotionally and intellectually continent adults (or even ones who were intellectually coherent) in office then of course they would be able to manage things themselves. But while we've got the politicians we do there is indeed a need for someone to leap up and shout "B?**?!ks" at them when they're being, as they are all too often, stupid.

If I don't get the job then I nominate Roy "Chubby" Brown.

Railway franchises – the need for reform

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The effective re-nationalisation of the East Coast Main Line (ECML) is yet another setback for the railways privatisation policy of the mid-1990s.

National Express submitted a heroically optimistic bid for the ECML franchise, which was based on a £1.4 billion payment to the Government between 2007 and 2014.

This figure assumed annual revenue growth of over 9% - in the first half of 2009, growth was a meagre 1%.

Not surprisingly, National Express has now thrown in the towel. It remains unclear whether it will be allowed to retain its two other railway franchises.

Given the previous railway franchise setbacks, including the removal of Connex from the South Eastern network in 2003 and the enforced departure of GNER from the ECML, it is clear that reform is needed.

Assuming that the next Government retains the railways franchise system, two obvious improvements could be made.

First, some of the uncertainty relating to future revenues – the key financial driver – could be removed. Imposing a guaranteed minimum and maximum revenue figure within each franchise repayment contract could deter over-optimistic bids.

Secondly, correlating more closely franchise lengths with rolling-stock contracts would be beneficial. In particular, those franchises that compete directly with air services, such as the ECML, should be of much longer duration,

Whilst some argue that shorter franchises promote efficiency, the water sector operates with near-permanent licensees – and without undue problems.     

In time, and once the large Network Rail capital expenditure programme begins to wind down, the Government should allow some vertical integration - initially in rural areas or where the network operation is reasonably straightforward.

Eventually, there is no reason why integrated regional railway operators cannot be treated like regional water companies. With a substantial ongoing capital expenditure programme and decent operating revenues, they could also be price-regulated according to their Regulated Asset Valuation (RAV).

Hot, hot, hot

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Well, it's warm. The UK is apparently suffering from a prolonged bout of 'hot' weather and as per normal there are many who apparently aren't coping very well with it. Why as a populace have we become so useless at dealing with simple things? In cold weather the country grinds to a halt. In warm weather we continue about our business dripping with sweat and bemoaning our lack of air conditioning! Why are we so unable to adapt to our surroundings when extremes of weather occur? Or more to the point, why have we become so overly reliant on the government to aid us in slightly 'harder' times?

It's only a matter of time before the hot and bothered amongst us accuse the government of not tackling global warming and reason that that is why the weather is seemingly getting warmer and we have these mini-'heatwaves'. This will obviously lead the government to act, no doubt at the taxpayers' considerable expense. A better course of action is to do nothing. People who find this weather a little on the warm side for themselves can purchase air-conditioning, buy a fan, maybe a bottle of water, or a convertible car or one with a/c. And when it's cold a jumper, coat or matching hat and gloves.

The way things are going it's only a matter of time before Gordon Brown promises to tackle the sun and cool the population. After all, he is a man who listens to the people. He might even seek to introduce a bill establishing a government-controlled dish that has the ability to block those warming rays, if only so that he can borrow yet more money. But then there'll be people complaining it's too cold and he'll have to introduce legislation to purchase everyone jumpers. Such is life in Brown's barmy Britain.

More on public spending

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Further to my post below on public spending, there are of course many good reasons why ever-higher public spending is a bad thing. Chief among these is the deleterious effect it has on economic growth.

The obvious point here is that public spending requires either taxation or government borrowing (which is really just deferred taxation). Both of these take money away from the private sector, where it can be put to productive, wealth-creating use, and spends it in the public sector, where it isn't. Moreover, these taxes also affect behaviour – they blunt people's incentives to work and produce, to start businesses and create jobs. Put simply, the high taxes that the doctrine of 'ever-higher public spending' requires make as poorer as a nation than we otherwise would have been.

It isn't just about the taxes though. The under-appreciated flip-side of that coin is that public spending itself – regardless of the taxes needed to fund it – damages economic growth. The reason is crowding out. When the state spends money in a particular sector, it crowds out private businesses that would otherwise have been performing the same function, or providing the same services.

If we didn't have a nationalized healthcare system, for example, we could have a much more profitable, wealth-creating private healthcare sector. Rather than being a drain on the resources of the productive private sector economy, as it currently is, the provision of healthcare could itself contribute to the wealth of the nation. The same could be said of the universities – higher education being something in which Britain can and should have a commercial comparative advantage. And perhaps most obviously, this is true in Britain's creative and media industries – if it wasn't for the anachronistic dominance of the state broadcaster, the BBC, this industry would be very much vibrant and dynamic.

Politicians should be glad to cut public spending, and ought to be brave enough to make the arguments for it.

Higher spending is not a good thing

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I'm pleased that the Conservatives have – at least in part – woken up to the fact that they are going to be forced to cut public spending if they win the next election. As Nigel blogged yesterday, the dire state of the public finances means that whichever party forms the next government is going to little choice in the matter.

What still annoys me – although I can well understand it from a political perspective – is that so many Tories keep referring to the 'painful decisions' and 'terrible choices' they are going to have to make. It's as if, regardless of Gordon Brown's astonishing fiscal incontinence, they still regard ever-higher public spending as, ipso facto, a good thing, which they'd love to stick to if only circumstances would allow it.

And that, of course, is complete rubbish. Why should the government spend more each year than it ever had before? Surely, at some point, enough is simply enough? This year the government will spend twice what it did in 2000. What useful things does it do now that it didn't do then?

OK, that was a rhetorical question. It's pretty clear that we don't really get any more for our money now than we did 9 years ago. All that extra cash – about £250 billion once you adjust for inflation – has achieved more or less nothing. So why keep throwing it away?

Cutting spending is not a 'terrible' thing, as so many politicians clearly believe. On the contrary, I'd say it was a moral imperative. Taxpayers' work hard for their money, and deserve to keep as much of it as possible. Public spending ought to be regarded as a necessary evil, and kept to the bare minimum required to fund essential services.

The right sort of incentive

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Healthcare is understandably one of the most sensitive topics in public discourse. However, many suggestions at reform are brushed off for dogged ideological reasons - despite the admittedly inconspicuous presence of markets at play within the NHS and indeed government itself, all suggestions that more conspicuous market incentives can be used are readily dismissed, even when they maintain a system that is both free and universal to patients.

The agents of these protestations neglect the fact that by merit of doctors being paid, or by hospitals having budgets allocated, a market already exists. The assumption goes that we must pay healthcare trusts, hospitals and even entire governmental departments according to what they 'need'. However, this results in those performing the worst being paid the most. The fact that the state is made up of people, often after power, influence, and larger budgets, appears to often be conveniently forgotten. The prevailing incentive is therefore for public bodies to allow bad outcomes, presumably up to the point where they would be penalised if the situation were to worsen any more. Despite the presence of excellent public servants, the market incentive to waste and run down a service is likely to be very strong.

The seemingly obvious solution would be to reverse the incentive, allocating larger budgets to those doing better, but this induces equally obvious problems - denying funding to those in genuine need of monies for improvement could have catastrophic consequences. There would at least have to be a minimum amount allocated to all public bodies upon which extra funding could then be procured according to better results.

The preferable option may be to continue with the existing system, but put in place countervailing incentives to achieve more specific desired outcomes. Sweden for example, after years of fruitless increases in funding aimed at decreasing hospital waiting times, recently set up a fund to pay those authorities able to cut queues below a certain level. The powers of market incentives were very quickly demonstrated, with all local authorities achieving the cuts within a mere nine months.

Anton Howes blogs regularly here.

Poverty, charity and the state

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Brown will reduce child poverty by making all families equally poor, while Cameron will take politics out of social action by putting the Conservatives at the centre of it. Where can one turn to for some logical thinking on poverty, charity and the state?

Certainly not to What are the implications of attitudes to economic inequality?, a report from the Joseph Rowntree Foundation that gives voice to a number of think tanks discussing economic inequality. Take the Fabian’s contribution for example. They cannot decipher the following facts: most people are not keen on an unequal society, but people do not want income to be redistributed and they certainly don’t want the government involved in this.

This for the Fabians is a political paradox. But it is only their paradox. Many people are not keen on inequality because people have sympathy for others and do not want to see fellow humans having a tough time of things. However, they don’t want to redistribute money because they prefer to look after their family and do not think simply giving money and resources to others is a real solution. The reason people don’t want the government involved is because they realize how inefficient it will be and because it has a bad record on this.

When will politicians follow the public’s instinct on this one? Gordon will bankrupt us to end poverty, while Cameron will destroy honest charities with the stink of politics. It is the choice between dumb and dumber.

YouTube: Amend the smoking ban

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A sign of the times?

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A very interesting article in The Times here, on stripping the Bank of England of its power and letting the market set interest rates.

Public expenditure – Cutting to the chase

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The horrific public borrowing forecast for this year of £175 billion – and the consequential £220 billion of projected gilts issuance – are certainly concentrating minds, especially those of credit rating agencies. The reality is that, irrespective of whichever party wins the next General Election, major public expenditure cuts will be obligatory; various percentages are currently being bandied about.

The key figure is the projected £671 billion of Total Managed Expenditure (TME) for 2009/10 - prior to interest payments. Future public finance policies should be based on implementing real cuts to that number. This £671 billion total is the sum of two key elements – Departmental Expenditure Limits (DEL) of £387 billion and Annually Managed Expenditure (AME) of £284 billion. Hence, any credible public expenditure cost-cutting strategy has to address how these two components can be sensibly reduced.

Imposing a top-down figure of projected cuts, say 2% in real terms per year for the next five years, would make sizeable inroads into public borrowing levels. In applying this top-down approach, it is clear that few exceptions should be permitted; otherwise, the cuts have to be higher elsewhere. Obvious targets for above-average cuts are parts of the massive social security budget - projected to cost £165 billion in 2009/10 - and local government expenditure, where efficiency levels are low and financial discipline is weak.

Given the grave state of the UK’s public finances, capital expenditure budgets will also need to be addressed, especially at the MOD, where cost over-runs - inevitably - continue. But experience shows that cutting public expenditure needs real political drive and determination. Since 1990, TME has risen from £360 billion to £583 billion in 2007/08 (based on constant 2007/08 prices). After all, even during the fierce assault on public expenditure during the 11-year Thatcher era, TME actually rose by just over 10%.