Marriage and the welfare state

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There is a rather interesting debate between Peter Hoskin and Fraser Nelson over at the Coffee House blog on the value of Conservative Party plans to use the tax system to encourage the institution of marriage. Following the lead of the Centre for Social Justice, there are plans afoot to encourage marriage via a £20-a-week tax break for married couples.

The exchange can be viewed, here, here and here. With the original post inspired by an excellent article by Philip Collins in The Times. Central to the debate is the efficacy and morality of giving tax breaks to encourage marriage. Peter Hoskin and Philip Collins win the efficacy side of the argument. £20 per week really won’t make much of a difference. This in turn makes Fraser Nelson’s defence of the morality of the scheme mostly redundant. Yet without other reforms the poorest are nevertheless incentivised to stay unmarried or pretend to be apart. However, rather than introduce more incentives to mitigate the unintended consequences of current policies, the Conservatives need to deal with the original government interventions.

This of course involves radical welfare reform as well cutting tax for the poorest. Alongside a flat tax, we at the Adam Smith Institute have long argued for raising the personal allowance to £12,000. With only basic welfare and a fair tax system the effects of welfarism that rightly concern Fraser Nelson and the Centre for Social Justice will be dramatically reduced, without the need to rely upon the state to try (and fail) to correct its own mistakes.

Dealing with debt

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Currently, the public sector is swelling far beyond its means. The UK is forecast to suffer a budget deficit of £170 billion later this year. This equates to every man, woman and child being in nearly £3,000 of debt. Every year, our government pays £200 billion to public sector employees and this is not sustainable. The problem with this is that the increasing deficit needs to be funded somehow.

There are several ways that this can be done. One way would be to increase taxes; however an increase in tax rates reduces incentives and is therefore likely to have the adverse effect of reducing tax revenues. Alternatively, ‘quantative easing’ (glorified printing money) could be used to pay off debt. But this is highly inflationary, as resources are no less scarce, so it would reduce the value of our currency, thus making the UK less attractive for investors.

Surely the best way to deal with the deficit is to reduce government spending. Reducing state funded employment would be a good place to start. Making public sector employees redundant would not totally reduce the burden, as they would then become an added burden to the welfare system through social security. Instead, it would be more effective to incentivise them to join the private sector, become entrepreneurial, set up small businesses, and employ people. This could be carried out through a number of measures. For instance, tax holidays for start-up businesses.

You could also increase firms’ willingness to take on new employees by abolishing national insurance. National insurance is a disincentive for businesses to employ people. It would be far more sensible to remove this tax in its entirety, encouraging businesses to employ more people who will in turn pay income tax themselves. This is likely to generate more government revenue than national insurance did to begin with.

Antisocial policies

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Chris Grayling, Shadow Home Secretary, has given a snippet of the criminal justice strategy to be released by the Tories in the autumn. So far it’s not shaping up to be the most-hard hitting or persuasive of measures to tackle anti-social behaviour amongst young people.
 
The proposal is for the police to be given the power to confiscate bicycles and mobile phone SIM cards for up to a month if a young person is suspected of acting in an anti-social way. This is part of a plan to introduce ‘softer’ measures against teenagers to prevent them committing crimes and to save time and resources administering harsher punishments, such as the infamous ASBO. There are multiple problems with this approach, not least the policy-makers failure to understand the psyche of Britain’s teenagers.
 
This proposal is the latest in a long line of instances where politicians have sought to bypass some of the fundamental rights which we should enjoy as citizens, no matter what age. Police should not be given the jurisdiction to confiscate and punish ‘at their own discretion’. Giving such powers to police will only result in an abuse and overuse of state control over individuals.
 
I can see the logic behind Grayling's idea to confiscate bikes and SIM cards from troublesome youths as an intermediate punishment for lesser offences, but in reality it will never work. The type of young person who acts antisocially is probably not going to be put off by having their bike confiscated, they are just going to steal a new one. And by taking their mobile phones, they will no longer be texting one another from their bedrooms, but meeting in gangs in parks and on street corners. The way for authorities to forge productive and respectful relationships with young people is not by confiscating their property.
 
To tackle antisocial behaviour amongst young people, the Tories will have to attack the root of the problems. First they need to remove the disincentives endemic in the welfare system of modern Britain, rather than blacklisting and demonising them. Most teenagers make up a valuable part of our society, the Tories plans are well intentioned, but show they are still out of touch.

Sir David Walker: A response

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Sir David Walker's report will be widely welcomed as sensible and indeed it does have some good aspects, notably limiting bank directors on the number of boardroom tables they can grace. Unfortunately, the major part is a hollow reannouncement of powers the FSA already has but has shown itself incapable of applying. The FSA can already veto bank director appointments it deems to be wrong but the FSA lacks the skills to distinguish "good" from "bad" appointments as at least one recent appointment testifies. And even if it did have those skills, would it have the muscle to impose that opinion on a united board of a major bank that thought otherwise? Such opinions are subjective and hard to prove in a court of law. And the FSA is run by lawyers.

Eminent as Sir David is, he is part of a system which has resisted all outside calls for major behavioural change so far, with the sole exception of switching short term cash bonuses to long term paper ones. Internally, banks have rediscovered conservatism not because of any government or FSA regulation but because the market has delivered a major shock. The same will apply to the future behaviour of bank directors. Until today's junior managers are taking their pensions, that is.

Re-energizing Britain

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According to our latest reportRe-energizing Britain by Nigel Hawkins – there could be blackouts in Britain unless the government spends less time producing energy policy documents and more time trying to get the six major energy companies to invest.

The UK's energy fate depends upon this sextet, and unless they invest enough in new generation plant, power cuts are not just possible, but probable. But – faced with tougher lending conditions from the banks and better investment opportunities overseas – two of the six are actually cutting back their investment plans.

In particular, the government needs to be more pro-active in driving through planning approvals for new nuclear power stations, and helping the companies put together nuclear investment funds, so that new nuclear plant is ready to fill the gap caused by decommissioning older stations.

The report's author, energy analyst Nigel Hawkins, says that nuclear power should be helped further by replacing the existing Renewables Obligation – which requires electricity suppliers to buy from wind, wave, biomass and other 'green' energy sources – with a new Low Carbon Obligation – which would include nuclear power.

Hawkins says that the three key aims of energy policy – security of supply, reduced carbon emissions, and lower prices – would all benefit from this change, since nuclear energy is both low-carbon and less expensive than many other ways of generating electricity, and does not depend on risky supplies of gas from Russia.

The report also argues that we need fewer words and more action on promoting investment in gas storage, where our capacity is just a tenth of that of Germany. This, it says, is "a very exposed position", since an increasing proportion of our gas now comes from abroad, much of it from Eastern Europe and Central Asia. The government needs to work with the energy companies to make sure that they have both planning approval and access to finance to increase Britain's gas storage facilities substantially.

Divorcing Gordon's ugly model economy

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We have already seen tax receipts fall this year, noted by Tax Freedom Day's move to May 14th and the latest news is that they are set to continue to fall. McDonalds have decided to kick Gordon Brown where it hurts. They announced their move to Switzerland on Monday so to avoid being punished twice for being successful. They are not the first to move and it would be a surprise if they were last. But this also means with the companies go their high salaried directors thus making it a double hit upon the UK government's tax fund. As well as the wider economy where they would spend their money.

The Prime Minister has been successful in only one thing during his time at both Number 10 and 11 Downing Street: destroying the UK economy. The list of companies that have moved abroad in the past eighteen months include, "...WPP, Shire, Regus, Henderson, Charter, Beazley, Brit Insurance and UBM." They have moved because the UK has failed to remain competitive. These failings are the fault of Mr Brown entirely and his limited knowledge of the real world.

When governments seek to raise funds through higher taxes they should first consider whether their business environment is conducive to growth. If there is no chance of economic growth then taxes have to remain the same or be cut to attract businesses. What current governments are undertaking is a mass suicide pact: attempting to keep their spending levels at the pre-crisis levels through higher levels of taxation, greater borrowing and increased enforcement. As seen above, all detrimental as companies give up and move to places more conducive for their business to survive and grow.

When will governments wake up and recognise what works to make a successful economy?

A modern tale

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It is the month of August, on the shores of the Black Sea. It is raining and the little town looks totally deserted. It is tough times, everybody is in debt and everybody lives on credit.

A rich tourist comes to town.

He enters the only hotel, lays a 100 Euro note on the reception counter and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The butcher takes the 100 Euro note and runs to pay his debt to the pig farmer.

The pig farmer takes the 100 Euro note and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute who in these hard times, gave her "services" on credit.

The hooker runs to the hotel and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms and takes his 100 Euro note, after saying that he did not like any of the rooms and leaves town.

No one earned anything. However, the whole town is now without debt and looks to the future with a lot of optimism..

And that, ladies and gentlemen, is how Europe and North America are doing business today.

Matthew Anisfeld joins the ASI

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Having just completed my penultimate year at Haberdashers' in Elstree, I have the summer to await my AS level results. I wrote exams in Music, Economics, Mathematics and Further Mathematics. I hope to continue all of these subjects into my final year at HABS. Results permitting, I will apply at the end of this year, to Cambridge University to study either music or economics, two of my great passions.

I would describe myself as a free market devotee; so I anticipate that this week of work experience will provide further depth to my beliefs. In these economically fascinating times, it is easy to take the view that this is the fall of the free-market. I would argue quite the opposite. To quote Eamonn Butler “If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn't call it a ‘failure of swimming'." It is therefore obscene to suggest that this financial collapse is a failure of the free-market.