The Pin Factory Blog

This week sees the 70th anniversary of the Report of the Inter-Departmental Committee on Social Insurance and Allied Services, commonly known as the Beveridge Report, which is often credited as the underpinning of the welfare state in the UK (and several other countries which emulated the UK approach). To some extent this is an exaggeration as several aspects of the welfare state existed before 1942, especially in the area of education. Thus Beveridge represents a major expansion of an already existing shift away from private and philanthropic welfare and towards state provision.

It is salutary to note the timing - in 1942 Britain was in the midst of the greatest expansion of state activity it has ever witnessed. Government reached into and controlled nearly every aspect of socio-economic activity, allocating and planning resources, prices and labour to a minute degree. This philosophy, which proved highly successful for fighting a total war, was retained in peace time and employed as a mechanism for providing goods and services which had hitherto been privately provided. Many industries were nationalised and those areas of the economy which were left 'private' were heavily controlled. It was this state of affairs which promoted Hayek to publish The Road to Serfdom in 1943.

Without tracing the history of the past 70 years, it is clear that whilst some aspects of the World War II legacy have been rolled back - for instance the denationalisation of many industries during the 1980s - much of the philosophy of the Beveridge Report remains essentially intact. Whilst the nature of the welfare state has evolved, the mechanisms for provision are broadly identical to those introduced in 1945. For instance, the NHS remains a 'free-at-the-point-of-delivery' system in contrast to the Netherlands which dropped this approach and switched to a 'Bismarckian' one (nonetheless retaining the third-party payer problems inherent in all major health systems including the US one).

Readers of this website will hopefully already be convinced that the Beveridge inspired welfare state has been an unmitigated disaster for the provision of welfare in the UK, so I won't rehearse the arguments and the evidence. For those wanting a good introduction, James Bartholomew's classic The Welfare State We're In is a sensible place to start. Suffice to say, and despite the pernicious prejudice of many statists, Classical Liberals like myself care deeply for the plight of the poor, sick and needy. However, instead of clinging to failed and bankrupt systems which do far more harm than good to both recipients of welfare and society as a whole and especially to those at the bottom of society, we seek a different approach. Of course, those opposed to the status quo adopt a variety of positions: from those who argue for different modes of provision (school vouchers for instance); to those who desire a much smaller welfare state which only offers aid to the very poorest in society; to those who wish to do away with state welfare altogether

On the one hand, it is quite clear that opponents of the welfare state have - for the most part - utterly failed to convince the majority of the case for radical reform and retrenchment. Some tentative steps have been made in the field of school and higher education reform but healthcare, pensions and social protection remain largely untouched and any genuine and far-reaching attempts to do so would be political suicide. The forces of vested interests so clearly described in Public Choice Theory indicate why this is so - nonetheless the only means to overcome the barrier of vested interests is via the dissemination of ideas and ideological support so we must continue this effort. Moreover, recent years have seen the resurgence of the regulatory and license state - an activity which grew popular with the denationalisations of the 1980s and has been compounded with the recent Banking Crisis into a widespread belief that markets cannot function properly without state intervention. Many of these interventions are logically underpinned by the existence of state welfare provision; e.g. alcoholism is creating a burden on the NHS so should be prevented. Strike at the welfare state and we strike at the root of this approach as well.

On the other hand, we must continue to propose sensible mechanisms for moving from the status quo and towards private provision. As I have argued before, this is probably best done piecemeal. Given that opposition to the welfare state spans a spectrum of opinion, it is also sensible to move from reform of provision towards much greater privatisation and then ask the question of whether we need any state provision of welfare at all. One major area to target would be universality. This was one of the key principles of Beveridge and is one of the most unnecessary and expensive aspects of welfare provision - witness pensioners donating their winter fuel payments to charity. Universality was also introduced in order to engender support for the welfare state amongst the better off, remove it and that plank may also disappear.

Reformers must be careful, however. I would argue that the creation of so-called 'internal markets' and use of private providers in such areas as PPI and the NHS may actually be harmful to the cause of privatisation. Government is a poor customer and its size means it prefers to deal with large, equally bureaucratic companies such as Capita and Serco rather than SMEs - this assists large companies in dominating market sectors and leads to monopolistic outcomes. Bad privatisations such as the railways lead to the discrediting of privatisation in general. Failures discredit attempts to privatise properly as the many PPI scandals and the G4S scandal show. Pseudo-markets are likely to lead to exploitation of consumers by entrenched market-occupants protected by state regulation and intervention - witness the energy market or banking.

Even if everyone suddenly saw sense and decided to tear down the features of the welfare state, it would still take many years of consistent reform to return to private provision in order to build up the necessary markets and charitable endowments which the original government interventions so comprehensively destroyed. There would also have to be sweeping reforms in other areas: radical reform of planning laws to allow housing to become more affordable, large scale tax cuts and endowments funded by sell-offs of state property and - perhaps most critically - a return to sound money to allow people to save sufficiently for their futures instead of being impoverished by government inflationism. The welfare state has taken 70 years to build into its present appalling and oppressive form and it may well take 70 years or more to repair the damage, even if that were the general consensus. Still, there is no time like the present... 

George Osborne's speech on tax yesterday, which he delivered at Policy Exchange, was structured around Adam Smith's four principles of taxation: efficiency, certainty, transparency and fairness.

On efficiency, Osborne said we needed to cut corporation tax in order to compete globally. On certainty, he said a Conservative government would think through tax policy properly, with an eye on the unintended consequences. So no more announcing a government policy (like the capital gains tax reforms, say, or the tax on non-domiciled residents) only to have to U-turn a few months later. On transparency, Osborne said he would not implement stealth taxes and would seek to simplify the tax system. On fairness, he repeated his pledge to abolish stamp duty on houses under £250,000 for first-time buyers and raise the inheritance tax threshold to £1 million.

All of which is welcome, sensible stuff. The overall message of the speech was: we want to cut taxes, and we will when we can – but politics means we can’t promise spending cuts, and the economic forecast means we can't be too radical about cutting taxes. From an electoral perspective, Osborne's probably got it right.

Of course, in the long term the best way of making the tax system efficient, certain, transparent and fair would be to implement a flat tax. How about aiming for the following by 2020: a personal allowance of £20,000, with a 20 percent flat tax on all personal income (whether from wages or capital gains, or whatever) above that. Abolish corporation tax and inheritance tax altogether – in fact, get rid of all the other taxes levied by central government. Then make local government self-financing with locally set (and thus competitive) property and sales taxes.

What could be more efficient, certain, transparent and fair than that?

Madsen sets out on his own site what should be the agenda for the second half of this coalition government.  In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:

The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them.  The second half should stress essential reforms and a pro-growth agenda.  I set out a programme that might just fall within the range of what the coalition might be able to put through.

You can read the whole thing here (and it's quite short).

As if the first day back at school wasn’t bad enough, children starting secondary school in England this week will be the first to be legally required to stay in education until they are 17. Next year, the mandatory school leaving age will rise again to 18 for next year's secondary school starters, with the aim of getting more young people into further education.

And while those filtering through the school gates in Scotland can look forward to leaving the clutches of the education system at 16, they may now find themselves restricted from enjoying a drink in the confines of their own home until they are 21. Under new proposals, under 21s in Scotland will be barred from buying alcohol from supermarkets and off-licenses in order to stem the binge-drinking epidemic sweeping the nation.

The state would argue that these measures will prevent youngsters from falling into a life of booze-fuelled crime – a noble aim. But, why is it simply not enough to advertise the benefits of staying in school or the dangers of alcohol and leave young adults to choose? Indeed, the moves appear to be symptomatic of a wider belief that young people do not have the capacity to make informed and sensible choices. It is these young people that are then chastised for lacking personal responsibility. If the state wants young people to shoulder their responsibilities then it stands to reason that they must be given the chance to learn to exercise them. And that includes making decisions that might not necessarily be in their best interests and learning from them.

And, another thought (or three). First, if schools were forced to compete to attract pupils (as they would do under proposals to adopt a model of school choice in the UK) maybe they would do more to try to keep them there? Second, blaming cheap supermarket booze for our social ills ignores the deeper cultural issues that make British drinkers more susceptible to drinking too much. Countries with far less restrictive attitudes to alcohol tend to have fewer problems with youth alcohol abuse. Third, perhaps legislators need to consider that it is the existence of the welfare state that has promoted low levels of aspiration and personal responsibility among young people leading both to school dropouts and the existence of a binge-drinking culture?

According to Sir Paul Ennals, chief executive of the National Children's Bureau, England's education system is in danger of making pupils unhappy by pursuing exam success at all costs. His gripe is with the potential of certain schemes, such as school breakfast clubs and initiatives to make school meals healthier, being dropped as part of the package of cuts to public spending.

His criticism does make sense. If school budgets are cut, there will be less room around the edges to do the warm and fluffy things that could indeed making students happier. However, Sir Paul Ennals’ conclusion is largely inadequate. Rather than calling on government not to cut various schemes, this issue has to be seen in the larger perspectives of deficit and reform.

All sectors of public sector activity need to be cut. Although some items of spending have better claims to being saved than others (arts vs. cancer sufferers is a no-brainer), there should be no sacred cows. Education has areas in which savings can be made. In tough times most parents prioritise reading and counting over breakfast clubs and healthy meals.

Beyond the unpleasantness of cuts, reforms should continue to be the focus of Gove and all that he surveys. To put it bluntly, state schools need to function as any service industry, responding to the will of its customers. In the case of schooling, the customers are the parents. Despite the extension of academies and the hesitant free schools agenda, their local supermarket is still more accountable than their local state school.

The more government steps back from education, the more room there will be for the side orders that lead to a more balanced education. This could be along the lines of Anthony Seldon’s happiness philosophy or something else entirely. On the whole Independent schools manage to have a more balanced approach to educating children than state schools, so there is no reason why a voucher-based deregulated state system couldn’t compete, if that’s what parents want.

An American colleague sent me a recent speech by Governor Christie, New Jersey's new, conservative governor.

"By the time we got here," he say, "of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, and because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money. When I went into the treasurer's off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them."

Tough measures indeed, but necessary. Because nearly all US states have a balanced-budget provision. They have to balance their books, and there is little scope for fudging. That is why, just this week, Virginia – with a falling population and hard-hit by the credit crunch – has voted for spending cuts that would shrink spending to 2006 levels. Virginia legislators added plenty of spending when times were good: now they have to scale back again, and are trying to do so without cutting essential services.

A balanced-budget rule is something UK politicians should aspire to as well. All too often, government expenditure rises in the good times, but when there is a downturn we are told that it cannot be cut without damaging public services. Phooey. Governments just need to do what every family and business has been doing – identify the priorities, keep on with them, but cut out some of the inessentials. Spending has risen 50% under this government – but are our public services now 50% better? Hardly. We could lose all that spending without noticing the difference.

The incoming government will no doubt try to buy itself some time with public-sector wage and budget freezes. But that is no long-term solution. We need to re-think and prioritise what government actually does. And adopt a balanced-budget rule, so that the government sector's coat is cut according to the wealth-creating sector's cloth.

Ed Balls plans to give parents and pupils a list of legal rights, with guaranteed standards, and the right to challenge schools through an ombudsman, and in the courts, if the provision of this 'bill of rights' is not met.

This shows everything that's wrong in schools - and public services generally. They are centrally planned and uniform, and unless you have lots of money, customers (in this case, parents) cannot escape and go elsewhere. In competitive businesses, providers have to focus on customers and serving their needs. In monopoly state services, there is no need to bother. So as the complaints mount, ministers send out one central directive, then another – Stalin-style. None of it does much good, and the complaints continue. So then they move to give customers 'voice' – saying they are guaranteed this standard, that standard, this right and that right, and can have a say in how things are run.

This has never worked. Most parents, patients, and public service users do not want to sit on a governing board or have to bother with constant public meetings and elections (I sat on a school board for four years, and became an elector for my local hospital, and I must say that both were a complete waste of time). Public service users certainly don't want to be bothered complaining to an ombudsman or spend the nervous energy going to court if their treatment is poor. They just want a decent service. In a competitive sector, like supermarkets or filling stations, they can just take their custom elsewhere. They don't need to sit on the board of Tesco or Asda – they just go elsewhere, and that sends a vital signal to the providers about what customers actually want. Exit is far stronger, and easier, than voice.

It really does give the impression of beleaguered government strategists pushing phantom armies across the map. In a statement that shows the system's complete contempt for customers, school heads have said it will be a 'whingers charter'. Well, we need more people to whinge at bad service. But we also need to give them the power to go somewhere else. That is why a Swedish-style state-money-follows-the- child voucher system, which the Tories are considering, looks so attractive.

Dr Butler's book The Rotten State of Britain is now in paperback.

If your best mates clubbed together and gave you £103,000 when you needed it, you'd remember it, wouldn't you? Remarkable, then, that UK Work and Pensions Secretary Peter Hain didn't. He's accused of not registering seventeen donations towards his campaign for the Deputy Leadership of the Labour Party, totaling this amount. His forgetfulness is all the more astonishing when you consider that his campaign far outspent those of his rivals. So this was a large wodge of cash that public standards watchdogs weren't told about. Even Tony Blair, with his £500,000 salary from J P Morgan, his book deals and the rest couldn't simply miss £103,000.

Until Peter Hain went into Parliament, I always though him honourable. I opposed many of his views - and his abrasive ways of promoting them - but you can disagree with people and still think them principled. Politics of course forces people to compromise on their principles, so I've less respect for party politicians - but that's still no reason to accuse them of being crooked.

No, what's going on here is more subtle, and even more worrying. It's not that Peter Hain is a single rotten apple that can be ejected from the barrel and all will be well. No, they're all at it. Millionaire supporters funnel funds to the Labour Party through third parties who don't even know about it: half of Peter Hain's missing thousands is routed through some supposed think-tank; donors are attracted by the suggestion, however faint, that there might be a peerage in the pipeline.

What's wrong is that people in politics, both politicians and perhaps even more so their staff, think that they are above the rules. That their mission is more important than some tedious bit of book-keeping. That they can shuffle large sums around and nobody will notice. That how they raise and spend their cash is of little concern to the public.

Unfortunately, we live in an age of transparency, where every move that political folk make can come under the media spotlight. It means they have to be completely straight in how they conduct their business. The legislation to clean up party funding has been in place since 2000. It's truly alarming that so many politicians think it shouldn't apply to them.

Our latest publication – A Beginner’s Guide to Liberty, edited by Richard Wellings – is now available to buy and download from the publications section. This is a project I’m very proud of. It’s a short book, only about 100 paperback pages in total, but it provides an extremely good introduction to some of the most important ideas in political and economic theory. The guide consists of the following ten chapters, all of which are jargon-free and written in clear, simple language:

• The importance of liberty by JC Lester
• How markets work by Eamonn Butler
• Free Trade by Daniel Griswold
• Taxation and government spending by Daniel J. Mitchell
• Property rights by Karol Boudreaux
• Why government fails by Peter J. Boettke & Douglas B. Rogers
• Sex, drugs and liberty by John Meadowcroft
• Welfare without the state by Kristian Niemietz
• Banking, inflation and recessions by Anthony J. Evans
• The role of government by Stephen Davies

The original idea behind this book was to produce an easy-to-read guide to the things people need to know about free markets and individual liberty, and I really think that A Beginner’s Guide to Liberty fulfils that ambition. Enormous credit must go to Richard Wellings for this – he has assembled an exceptional team of authors, and done a great job editing the book into a cohesive whole. His remit was to produce something that was accessible to sixth-formers but interesting for everyone, and I’d say he has succeeded.

Our main ambition is that this book is read as widely as possible, so we are making it available to download for free. However, please also consider buying a hard copy – whether for yourself, or a friend or relative who would benefit from reading it! You can buy them directly from us for £10, including postage and packaging, and in doing so make a small contribution towards our future work.