The Pin Factory Blog

The announcement in the Budget of a supplementary tax on North Sea oil and gas producers has gone down badly. Exploration and Production (E&P) businesses are distinctly unhappy, although the strong oil price provides some justification for the Treasury’s controversial decision. At a general level, the Government should be seeking to cut taxes rather than increasing them. Its efforts to deliver meaningful cuts in public expenditure, despite all the hype, remain disappointing – there are still billions of pounds of potential savings.

Hence, expenditure cuts should take priority over tax increases – unless there is a quite compelling case. Strangely perhaps, oil prices are currently strong – at around $117 per barrel of Brent crude – in apparent contrast to the severe weakness of many EU economies. But E & P investors have to assess their potential returns on a long-term basis, rather than on the prevailing spot price.

Such investors, given the inherent risks of E & P activities, also welcome consistency – rather than constant changes – on the tax front. Given that the comparative trading value of gas per unit is around halve that of oil, the case for higher gas taxation is much weaker. With North Sea gas supplies running down, there are real concerns about future gas investment, which is desperately needed as the UK’s electricity generation requirements, post Fukushima, become increasingly dependent on gas-fired plants.

Recently, Centrica, which supplies almost half of the domestic gas market under the British Gas brand, confirmed it is reassessing the future of its key Morecambe South gas-field. Following the supplementary charge imposed by the March Budget, the gas taxation percentage for this field has risen to a whopping 81%. No wonder, Centrica is baffled by the Treasury’s thinking, with such penal rates bringing back memories of the 83%/98% (earned/unearned) maximum income tax rates under the 1970s Labour Government. North Sea gas taxation needs an urgent re-think.

Now that the Scottish National Party (SNP) is in control of Scotland's Parliament, can we expect a referendum soon on whether Scotland should become independent and leave the United Kingdom? Well, no, we can't – but it might be good if we could.

The problem for SNP leader Alex Salmond is that actually, the Scots have a pretty good deal going for them right now. Under a decades-old settlement, Scotland is over-represented in the UK Parliament in Westminster. The Scottish Parliament at Holyrood decides its own policy in important areas like education and healthcare – though Scotland's MPs in Westminster can and do vote on how these same services are run in England and Wales. Financially too, the new Scotland Bill promises to give Holyrood over taxation and the management of Scotland's public finances. The number of people in Scotland who owe their living to the public sector is much higher than the UK average – and most of the tax that pays for that public sector is generated in England. Other covert subsidies mean that Scotland can scrap its university tuition fees and guarantee everyone free social care without worrying too much about the cost. And, of course, if Scotland's debts continue to mount up, England will have to bail the country out – this is a union, after all, and though Scotland is the much smaller country, it is still "too big to fail".

With all that going for Scotland within the Union, we should not expect Alex Salmond to rush into holding a referendum on independence. Why should any right-minded Scot vote for independence? Scotland presently has the best of both worlds – a fair measure of self-control, with English finance.

The former UK Secretary of State for Scotland, Michael Forsyth, says that it is time to call Salmond's bluff and let the Scottish people decide. The UK Prime Minister David Cameron seems to reckon that the decision about if and when to hold a referendum on independence is one for Holyrood and the Scots. But the fact is that it is of crucial interest for the rest of the UK, particularly England, whose taxpayers are picking up the bill for Scotland's socialist lifestyle. With the allegedly pro-independence SNP in power at Holyrood, it would be entirely reasonable for Westminster now to insist on a referendum. A Yes vote would force Scotland to face up to the facts and live within its means. A No vote would mean that Westminster could be far more assertive in limiting the extravagance which Scotland enjoys at England's expense. Either way, Scotland would have to become less introspective and more friendly to the private sector. And that would actually benefit the whole of the United Kingdom.

The NHS reforms ought to suit the Liberal Democrats just fine. After all, a key part of being a Liberal is belief in the market; and these reforms are trying to get an internal market to replace a state monopoly. And in the Orange Book, written by people like David Laws and Nick Clegg, Vince Cable and Chris Huhne, in 2004, an insurance-based NHS was proposed.

Then in last year’s election sentences like this appeared in their manifesto:

“Putting front line staff in charge of their ward or unit budget, and allowing staff to establish employee trusts giving them real involvement and say over how their service is run.”

“Giving local health boards the freedom to commission services for local people from a range of different types of provider.”

As if that wasn’t enough, Nick Clegg signed the White Paper, which was read and approved by Danny Alexander months later. Then it was voted for at first and second reading. But now Nick Clegg is going back on his promise. However, no one is going out to protest. No one is rioting in the streets. The unions are not up in arms. Why?

All parties have their split: Tories on Europe, Labour on AV. The Liberal Democrats are an odd amalgam of liberals and social democrats. And the people vocally opposing the bill are Shirley Williams and Norman Lamb (not exactly the loyal retainer): both are on the left wing of the party. And that is where the vote lies. They increased the number of seats they hold steadily under Ashdown and Kennedy – both social democrats. And Kennedy abstained on the vote in the commons. 

One can’t help feeling cynical about why all those protestors aren’t up in arms about this like they were with tuition fees. Then they thought Clegg was making them pay for something they didn’t want to pay for; now they think that he is trying to prevent Lansley making them pay for something they don’t want to pay for. Last time they were outraged at the betrayal, “A pestilence on him for a mad rogue!” This time they are placated by a betrayal.

Of course, there is a less cynical answer to this. There are no protestors about this broken promise because there are no Lib Dem voters left to protest. Nick Clegg has looked his voters in the eye and told them he’s going to break a promise (expecting, presumably, some moral grandstanding and flaming police vans in Whitehall) and all he sees is a skull to mock his own grinning.

Either way if Nick Clegg is serious when he says his party needs to learn lessons from last week's election, then he could start by keeping a promise that has passed through a book, manifesto, white paper, and commons vote. Last time he abandoned his voters; now he appeals to them, abandoning his colleagues. He needs to pick one and stick to it. Otherwise he might find that his political collapse will bear less resemblance to Hamlet’s indecisiveness, than to Yorick’s brief cameo; less the noble Dane than the fellow of infinite jest quite chap-fall'n.

All political lives end in failure. Clegg needs to realise, more and more as time passes, that past is prologue, and in the future he’ll need some allies.

The housing market is, almost certainly, a bubble. As the graph of inflation-adjusted house prices above (taken from HousePriceCrash.co.uk) shows, there has been a steady rise in the real cost of a home over the past fifteen years. Like most other bubbles, it is a product of sustained government policies designed to privilege a special interest group – in this case, homeowners.

Government after government has tried to keep the bubble inflated to avoid their wrath. The more people throw their life’s savings into housing, the more the pressure on government grows to protect these investments. The consequences for the rest of the country have been ruinous: increased cost of rents, urban sprawl, inflation and a shortage of affordable homes. The poor – who are also the least electorally engaged, and so less important to politicians of all stripes –have been especially hard-hit.

In an ordinary industry, the huge demand for housing would provoke a big increase in homebuilding, including at the lower end of the market. But the supply side of the housing sector is tightly bound by the planning system. The planning laws in this country are a classic case of NIMBYism. Increasing the supply of homes in an area will reduce the cost and value of homes already there, so local authorities have no incentive to ease regulations to increase supply. Such is the flaw in democracy – established groups can use government to restrict competition and enrich themselves.

So, rather than tackling the supply side of housing and trying to create more homes, the government throws money at the demand side. But this only makes the problem worse. Shared equity schemes and artificially-cheap credit, created by the Bank of England, all lead to increasing prices without a corresponding increase in supply. Home buyers depend heavily on borrowed money, so the political pressure on the government to keep the price of money low is enormous. And the higher prices grow, the greater the pressure is to make borrowing cheap. This whole mechanism entirely divorces interest rates from their true function, which is to reflect the supply and demand of money – ie, savings and borrowing. This disrupts relative prices (and thus the structure of production) across the whole economy, and fuels the bidding war over houses.

If government’s protection of house prices was removed – most importantly, the planning system that depresses supply and the artificially cheap credit that inflates demand – the supply of houses that people want to live in would rise and house prices would fall. Homeowners should not be able to use government to protect their investments at everybody else’s expense. With a looming housing crisis and house prices at an all-time high, it's time to let the bubble burst.

Today the ASI publishes a new report, Reflections on Regulation: Experience and the Future (PDF). The report features articles by five former regulators with diverse industry experience – Stephen Littlechild (electricity), Ian Byatt (water), Chris Bolt (railways), John Swift (railways) and Graham Corbett (post). Tim Ambler, an academic who has studied this area extensively, summarizes and offers a number of different paths that regulation may take in the future. ASI Director Eamonn Butler has a summary, outlining his own thoughts on the future of regulation.

The rise of utilities regulation took place in the 1980s, as the Thatcher government’s attempt to ease the teething troubles of newly-privatized sectors. It was the most politically feasible way of implementing widespread reform – fears that a privatized state monopoly would simply be a private monopoly abounded, and the promise of some state oversight to prevent abuse soothed many troubles. My own feeling is that, while regulated capitalism was a definite step up from state socialism, we have moved past this and it is time to start disassembling the government’s regulatory framework and encouraging self-regulation, one of the paths that Tim Ambler suggests.

Self-regulation isn’t as toothless as it sounds. Many firms rely on their reputation for their success – think about how generous food companies are when you find a hair in a tin of baked beans – and there is every reason to think that, in the absence of a state regulator, firms would set up an independent regulator to monitor their activities and vouch for them to consumers. And any companies acting fraudulently or otherwise illegally could still be met with the full force of the law – the idea that getting rid of regulators would mean that companies would be allowed to lie to consumers is, simply, wrong.

Today’s report offers insider perspectives on the regulatory industry, with an interesting discussion of the roads that the government could take as it tries to reform the sector. What needs to be removed is the attempt to plan or engineer competition: competition can’t be designed, it can only happen organically and spontaneously.

City AM in London reports on the ongoing financial crisis in the weaker economies of the eurozone. Greece has a €110bn bailout, but it faces a €27bn funding shortfall next year. Yields on Greece's two-year debt are over 25 percent (yes, 25 percent), and 15.7 percent on its 10-year notes. Still there are high-level meetings and renegotiations, and new packages hastily put together. Ireland and Portugal are less bad, but still bad. The formula of making taxpayers bear the burden of bank losses only goes so far in democracies, as the Icelandic electorate has twice shown. There is little chance that the Greek, Irish or Portuguese voters will accept the years of poverty and indebtedness which are the conditions of their bailout terms.

The markets have pretty well decided that the only way out is for defaults, leaving bond-holders out of pocket, and for some countries to quit the euro so their currency can find a market level compatible with their real status. Yet the politicians are desperately holding out, offering patch after patch to a problem that is clearly going to burst sometime. They have invested political capital in the euro as a political, rather than an economic entity. It was always absurd that some countries were allowed to join it, and now that absurdity stands exposed.

At some stage reality will out. There will be defaults, accompanied by exits from the euro. Then the battered economies can start to recover. Getting rid of the debt and devaluing their currencies will enable them to rebuild their economies and start the upward climb again. It is time to stop pretending and to take the hard decisions that will get it over with.

So now it’s official: of the 323 free school proposals received by the DfE as of 11th February, 282 were turned down. Less than 50 were given an amber light. It looks likely that roughly ten will open their gates in September. The century of civil servants seconded to process applications can breathe a sigh of relief and go back to whatever it was they were doing before they were so rudely interrupted, for it’s unlikely under the strictures of the new applications process that for 2012 there will be anything like the volume of the first tranche.

With the programme’s capital allocation for the first two years long since exhausted, and the government reluctant to enlist the help of SMBs and private equity backed chains, fewer of these proposals for 2012 can realistically be expected to make it through its new competitive tendering stage. While the Chancellor’s Budget Day announcement that the proposed reforms to local planning process weren’t quite dead in the water offers a glimmer of hope on the horizon, the free school initiative nevertheless seems already to have become the ‘niche programme’ that Rachel Wolf feared it might.

Much as we might wish to think otherwise, this has serious implications for the government’s wider schools reform platform: most especially in respect of its hopes of efficiency gains through school closure. The idea was that by freeing up new school supply, while at the same time rationalising existing management structures through Academy expansion, the government might also be enabled to tackle more proactively the problem of persistent under-performance, at its most acute in areas where deprivation is greatest. But without new schools coming on stream in numbers, the threat of closure rings hollow, and one of the most important mechanisms for turning around these schools doesn’t work as it should. [Continue reading]

Britain's Conservative / Liberal Democrat coalition government is a year old. So how is it doing? Not very well right now, one has to admit. But then this period after the national referendum on electoral reform – demanded by the Lib Dems as part of the price for their partnership with the Conservatives – was never going to be happy, whichever way it went. Humiliated in the referendum and in the local government polls last week, leading Lib Dems have hit out at their coalition partners – and demanded more say on policy in order to placate their own rank and file – many of whom are deeply unhappy about what the coalition is doing, particularly its rush to cut public spending in order to stem Britain's ever-burgeoning debt.

Looking at the mess that Ireland, Portugal and Greece are in, the fact that the coalition is aggressively pursuing a deficit reduction programme must be a positive move. So is its plan to take people on incomes below £10,000 out of tax entirely, which will encourage people off state benefits and into work. That idea, interestingly, was pushed on the coalition by the Lib Dems, who got it from 'flat tax' enthusiasts like the Adam Smith Institute. And the Conservative side of the coalition has plans to introduce something like a negative income tax. Meanwhile, some state benefits and higher rates of civil-service pay have been frozen, quangos have been scrapped, students face higher university fees, the extravagant school building programme has been reined in, corporation tax is being cut. To economists, and to the international markets, this financial prudence all looks very positive too.

However, deficit reduction has come at the cost of higher taxes, such as a rise in Value Added Tax, a 50% tax on higher earners, and a rise in capital gains tax – demanded by Lib Dem Business Secretary Vince Cable – that most Conservatives think will damage business and prove counter-productive. A new windfall tax on oil exploration has had oil and gas firms threatening to close down production – further evidence that to grow its way out of debt, Britain needs to compete on the basis of lower taxes, rather than higher.

One of the coalition's most interesting moves – very much a Conservative idea – is to transform Britain's state schools into a Swedish-style system, where private companies or charities can set up and run schools, so getting choice, competition and innovation into education. The finance would still come from taxpayers, but it would follow parents' choices, rather than being directed by officials. If Sweden is anything to go by, this could bring real and positive reform into state education.

But a similar 'internal market' structure in healthcare – allowing private providers to take over services presently run by the state National Health Service medical monopoly, and having family doctors rather than central officials decide where the money goes – may fall victim to the unhappiness of the LibDem rank and file. The NHS may be an unmanageable 1.4 million workers strong, but the British public have a strong attachment to its principle of free (at the point of use) healthcare and the LibDems in particular don't want to touch it. This would be a sad loss; monopolies are never efficient, and a break-up of this vast state monopoly is long overdue.

Perhaps the most positive and remarkable thing about the coalition, though, is that, despite all the bickering, it has so far held together. Both Conservative and Liberal Democrat sides have committed themselves to stabilising the public finances, seeing that as the only way to provide a sound basis for business and economic growth. They have committed themselves – unusually – to a five-year government, by which time they think those policies will be working demonstrably. At the same time, the LibDems are bringing in a more liberal attitude on social issues, with less nannying and intrusion in everyday life. If the coalition partners can get through their present spat, which they probably soon will, it could turn out to be one of Britain's most reforming and most successful governments.

The good, the bad, and the ugly (Click to read)

The government has been criticised for its new "idea" for universities, to allow rich students to buy places at university. Students will be able to pay the fees that foreign students pay in order to guarantee a place in the course they want. Isn’t this just a sop to the rich that will further harm social mobility? Well, yes and no. It will benefit rich students, but it will open a great many other doors as well.

We are living through a crisis in university education. Last year, 188,697 university applicants failed to get a place after clearing, an increase of around 40% on the year before. This kind of shortage is all too predictable – when you set a price ceiling for something, you should expect shortages. For an example of this, look at the 1973 oil crisis. The US and UK imposed price controls and experienced fuel queues and shortages; Japan and Germany allowed prices to rise and consumption dropped in reaction, with fuel going to the places it was most in demand. So it is with university places – there is more demand than supply, so many people will be left unsatisfied. While this is true of the sector in general, it’s also true for specific universities. Demand for Oxbridge and Russell Group universities is far higher than the supply of places.

The government’s proposals would allow some applicants to pay their own way – creating a place that would otherwise not have existed. This is the crucial point to remember. If a girl's parents pay the extra price for her to go to Oxford, nobody else is deprived of a place. And the place is only available if she has the grades that would qualify her for it anyway. Because the sector is operating under capacity (thanks to the fees price ceiling), paying full fees for a place will create an entirely new place. It’s a positive-sum game.

Some say this is unfair because it offers the rich more options than the poor. But to stop people from being able to pay for places just to bring them down to the level of the poor is completely backwards – we should be trying to see how we can raise the poor up to that level. Equality for its own sake shouldn’t be the objective; what we want is to improve people’s lives. So how could we do this? Quite simply: by making sure that student loans are available to everybody with the grades needed for these places, and allowing universities to raise their fees to reflect the supply and demand for places.

More places would be created and the places lottery would be done away with – if you want to do medicine at Oxford, you’d better be prepared to make the same sacrifices that your competitors are willing to make. The proposals announced today will only entrench priviledge if people continue to insist on artificial depressing place numbers through the fees cap.