Whitehall Waste

Every Chancellor, like every Cabinet Office minister, dreams of cutting waste and reducing bureaucracy. It is surprising how few of them succeed at it. That is because you need to know how to do it, and few ministers do.

Michael Heseltine MP did a reasonable job in the Thatcher and Major administration. Pretty soon the number of officials rose again. Francis Maude MP had a go for Cameron, but in that decade, officialdom grew by a quarter (conveniently put down to the problems of Covid and Brexit). Sir Jacob Rees-Mogg MP, Boris Johnson’s efficiency minister, thought axing 90,000 civil service jobs — about a fifth of the total — was quite reasonable, but time, Boris and he all moved on before anything happened. 

The result is that we still have over half a million civil servants in government departments, and even more public servants running museums, infrastructure and all the rest. It’s a nice earner, too: the proportion of civil servants in the ‘Senior’ grade has doubled in ten years. Whitehall has become a dense jungle of ministerial and non-ministerial departments, executive agencies, regulators, quangos, you name it, many of them with duplicated or overlapping functions. Ministers do not even know exactly how many civil servants there are. No wonder people complain about red tape.

The only significant reform since the civil service was created in 1854 came under the Thatcher era. Her adviser, Sir Robin Ibbs, proposed to reduce Whitehall to just a few hundred elite civil servants who would make policy. But senior civil servants are rarely good managers, so those policies, ran the plan, would then be delivered by separate ‘executive agencies’ — or even outsourced to the private sector. A bit of that happened, though Whitehall remained very far from the ‘few hundred’ target. And as soon as Thatcher had gone, the mandarins started to rebuild their empires once again.

Thatcher also culled a number of quangos, having learnt from an Adam Smith Institute report, Quango, Quango, Quango, that there were no fewer than 3,068 of them. But they again soon sprang back, until David Cameron cut a fifth of them. A waste-cutting minister might ask why we have quangos at all. (I’ve always advocated sending them home on full pay, waiting six months and seeing if we are actually missing any.) The quangos that execute policy should be turned into agencies. The advisory ones should be abolished: ministers can get advice whenever they like without maintaining permanent talking shops at public expense.

We need to return to the Ibbs strategy, and at the same time cut all the duplication that goes on. A streamlined civil service would mean the Cabinet Office, which is supposed to run the whole show, could lose 90% of its staffing, according to management consultant Tim Ambler in his 2023 Adam Smith Institute book Shrinking Whitehall. The rag-bag Department for Digital, Culture, Media and Sport could also lose 90% by turning its functions into charities or industry bodies, and cutting all the overlaps. Big reductions would come from similar rationalisations at Education, the Treasury, Transport and others. 

So if you are looking to cut waste in government, start at the top.

Sigh. Can we at least try to get the basics right?

As The Guardian reports:

The chancellor announced in his budget on Wednesday that businesses would no longer have to pay VAT if they had a turnover of less than £90,000, an increase from the previous threshold of £85,000.

That is, of course, 100% wrong, 180 degrees from the correct direction. A business of whatever size has to pay VAT on items that carry VAT. The VAT limit is upon businesses which do not need to charge, or collect, VAT.

This is, we would submit, a fairly important distinction.

In more detail. Some items in the economy have VAT charged upon their purchase. A business - of whatever size - which purchases these items then pays the VAT on the purchase of those items. Fully chocolate covered biscuits - those essentials for a meeting of the important HR people - have VAT charged upon them. The small business - under the £85k or £90k limit - and the large will pay that VAT on the chocco biccies. The not chocolate covered biscuits - that meagre type more suited to meetings of less important than HR people like main board directors - do not carry VAT. Therefore the small and large business does not pay VAT on the less than fully chocco biscuits.

The distinction on the payment of VAT on chocco or non-chocco biscuits is not the size of the business doing the paying, it’s the chocco or non-chocco.

However, if the business selling the biscuits has a turnover of less than this new £90k then it does not - cannot - charge VAT on the sales price of the chocco biccies, however important the HR people are. And obviously doesn’t upon the non-chocco either.

The VAT limit is about who gets to, has to, charge VAT, not who has to pay it.

It’s possible that it’s the Chancellor who has got this wrong, it’s obviously true that a major national newspaper has. Neither of which fills us with much confidence about the level of economic understanding in this country.

But it does aid in explaining why so many seem to have so little grasp of the subject. If The Guardian, the major newspaper on the left, gets something so basic wrong then is it any great surprise that its readership is all at sea on the subject?

An excellent argument against Pigou Taxes

We are prepared to agree that good economics is often not consistent with good politics. We would insist that, in such cases of a clash, it’s the politics that is wrong but there we are. The prime example is that the only economically rational approach to trade is unilateral free trade - we’ll buy what we want, whenever, you can do what the heck you like - but politics just so rarely does work out that way. Perhaps the UK 1846 to the late 1860s and Hong Kong all the time it was getting rich.

But we’ve now a new example. The vape tax. This is an idea of crushing stupidity. Taxing that substitute which leads to less smoking. That smoking that we’ve been trying to wipe out by ever higher taxes upon smoking. But, you know, politics.

But this gives us the why Pigou Taxes might not be all that great. As shown here.

OK, great, so smoking is Bad, M’Kay? So we’ll impose that Pigou Tax which will price people out of doing it. Great economics! But the problem then becomes that politics becomes hooked itself on those revenues from that Pigou Tax. We’ve changed who is addicted to what but not the addiction problem. So, as smoking does actually decline - the reason we imposed the Pigou Tax - politics is looking for its now mainline fix of the cash to micturate up against the wall.

At which point we get the tax on the substitute - recall, the tax was imposed in order to get people to substitute - imposed. Because there’s nothing as crazed and angry as a politician deprived of a revenue stream to micturate up that wall. Cold turkey simply is not to be thought of, no way.

As Dizzy points out this might not be quite logically sound, this tax upon vaping. But there we are. And just think, there are people who disagree with our idea that perhaps politics isn’t the best way to run a place or economy. Not all of whom are politicians mainlining on other peoples’ cash.

The cure for low prices is low prices

Much grumbling here:

A major Currys investor has hit out at the “absurdity” of valuations on the London Stock Exchange as two more companies prepare to quit.

JO Hambro Capital, a top 10 Currys shareholder, criticised the dismal valuations the London stock market attaches to businesses, saying Currys should be worth far more than what investors have valued it at.

The electronics retailer is subject to a possible bidding war between suitors Elliott Advisors and China’s JD.Com. Currys recently rejected a 67p per share bid from Elliott, which valued the business at about £756m.

Hambro’s veteran fund managers, James Lowen and Clive Beagles, said an “acceptable offer” for the tech retailer would be closer to 100p per share, which would value the company at close to £1bn.

Someone with something to sell complaining about the low price a potential buyer is willing to offer.

Ho Hum.

As ever, prices in markets are information. We may not like the information on offer but that is the information the real world is supplying us with.

Fortunately, the system itself contains the cure to what apparently ails it:

The gloom over the London market intensified on Tuesday after one of its oldest constituents was also snapped up by an American buyer for £1bn. Spirent Communications, which has been listed since 1955, agreed to an all-cash takeover by US rival Viavi Group.

The British tech company works with companies like Amazon and Meta, testing their equipment. Shares surged 58pc to 172 pence, just below the takeover price.

It marks the fourth foreign bid for a London listed company in the last few weeks, following the Currys offers and bids for Wincanton and Direct Line.

The cure for low prices is low prices. Potential buyers note low prices, buy, and this pushes up prices.

The rest of us need do nothing other than observe. Or, the particularly brave might note the claims of low prices and get in there before the others do. But in terms of the system, rather than our individual reactions to it, nothing need be done. For markets do contain their own stabilisers, high prices are the cure for high prices - encouraging greater supply - and low prices cure low prices, encouraging demand.

We’re done, sorted.

Spending less on climate to do better - sounds good to us

Greenpeace - and The Guardian, reporting on the claim - is outraged that Britain isn’t spending lots and lots of money on the sorts of things that interest Greenpeace (and The Guardian).

The UK spends less on low-carbon energy policy than any other major European economy, analysis has shown, despite evidence that such spending could lower household bills and increase economic growth more than the tax cuts the government has planned.

Spending on low-carbon measures for the three years from April 2020 to the end of April 2023 was about $33.3bn (£26.2bn) in total for the UK, the lowest out of the top five European economies, according to an analysis by Greenpeace of data from the International Energy Agency.

Italy topped the table for western European economies, having spent $111bn in the period. Germany spent $92.7bn, France $64.5bn and Spain about $51.3bn.

The data includes spending on electricity networks, energy efficiency, innovation on fuels and technology, low-carbon and efficient transport and low-carbon electricity.

Tsk, eh?

One obvious point to make is that they’re not, in fact, measuring what Britain spends. Their source database is:

Clean energy investment support includes all government spending that directly underpins increasing levels of clean energy investment.

Imagine that a place noted - as is so often claimed - that renewables are cheaper than any other form of energy generation. So, and therefore, that place simply let people be to install that cheapest form of generation, with no subsidy. Given that renewables are that cheapest form - they are, aren’t they? - then that place would have soaring renewables installation, falling emissions and also, by the standards of this database, be spending absolutely nothing, not a single bean, on doing so.

This measure is therefore a measure of the percentage of the tax take that Greenpeace (and The Guardian) get to influence rather than one of how well climate change is being addressed.

But that’s just to read the footnotes, the more important issue is OK, so, spending. To what effect?

EU emissions seem to have fallen by 4% or so over the past three years. UK emissions:

In 2022, net territorial greenhouse gas emissions in the UK were estimated to be 406.2 million tonnes carbon dioxide equivalent (MtCO2e), a decrease of 3.5% from the 2021 figure of 421.1 million tonnes, and 9.3% lower when compared to 2019, the most recent pre-pandemic year.

Now true, those aren’t exactly the same time periods. Nor even the same measurement basis - territorial or consumption. Anyone who wants to rebase either or both of those numbers to gain an entire and wholly correct comparison is entirely welcome to do so - even to tell us of their results.

It is not, to be very mild indeed, obvious that the UK is doing worse in the Great Decarbonisation Game than places spending very much more tax money upon said Great Game. But Greenpeace (and The Guardian) are measuring success by how much tax money is spent, not by the results thereof, or that more important point, overall results.

Which is the point where we tell Greenpeace (and The Guardian) to go boil their heads. For that is the correct reaction to exhortations that we must spend more to less effect, right?

It's OK everyone, William Keegan's got the solution

Amazin’ now one else thought of this really:

The problems facing the country do evoke parallels with the immediate post-1945 situation. Moreover, they demand an Attlee-style grasp of the need for bold measures, starting with a vast investment programme founded not on the kind of fiscal rules that imply continued austerity, but on the assumption that sensible investment pays dividends if you take the long view, and are not hidebound by annual budgets and arbitrarily chosen fiscal rules.

The Attlee government knew about the need for regional policy, well described in the memoirs of Douglas Jay, a prominent member of Attlee’s cabinet. Regional policy is now known as “devolution”. Under the auspices of Harvard University and King’s College London, a new report examining the UK’s feeble growth performance argues in favour of a more equitable regional balance, with more power given to local leaders throughout the regions.

It is possible, just, to quibble slightly with this.

As we’ve noted just recently when those local leaders got access to cheap money from the Treasury they spent it on buying commercial real estate at the top of the market and are now all going bust for having done so. National government doing the investing has given us HS2.

That is, getting politics to do the investing seems to violate that “sensible” caveat.

Of course, there are things that can be done:

Lower Thames Crossing planning application becomes UK’s longest ever – at more than 350,000 pages, and costing almost £300m

If we had less idiot government - that is, less government that was idiot and also less government because it is idiot - then we could have more investment and also more productive investment. Which does sound like an excellent idea.

The bold idea we need being, therefore, that we slash government and so free up the economy and investment in it. All of which sounds, to us at least, like a much better plan.

The rent's too damn high

Let us attempt, at least, to make the argument for technocracy. There really are problems that government should be trying to solve. We all also know that politics itself is not driven by anything so mundane as facts and or logic. So, there’s a case for taking the really bright people and putting them into those technocratic offices. The ones where we all agree there’s a problem to be solved. We can then insulate them from those political winds and leave them be to, well, solve those specific problems.

We all agree that unaearned concentrations of economic power are a bad thing, monopolies can be turned to ripping off consumers and so on. So, let’s put the Rolls Royce minds into the anti-monopoly body.

OK, sounds like a plan.

The result:

Today, the FTC and Department of Justice took action to fight algorithmic collusion in the residential housing market. The agencies filed a joint legal brief explaining that price fixing through an algorithm is still price fixing. The brief highlights key aspects of competition law important for businesses in every industry: (1) you can’t use an algorithm to evade the law banning price-fixing agreements, and (2) an agreement to use shared pricing recommendations, lists, calculations, or algorithms can still be unlawful even where co-conspirators retain some pricing discretion or cheat on the agreement.

The agencies’ work in this space is especially important given rising residential housing rental prices. Rent is up nearly 20% since 2020, with the largest increases concentrated on lower- and middle-tier apartments rented by lower-income consumers. About half of renters now pay more than 30% of their income in rent and utilities, and rising shelter costs were responsible for over two-thirds of January inflation.

Well, hmm. Landlords using a computer program to work out what the rent should be doesn’t sound like collusion to us. Sounds like the gathering of market information rather. You know, bringing clarity and information to that market.

But, you know, Rolls Royce minds and all that and we’ve never been picked to be in the FTC so obviously they’re brighter than we are.

Except this has been a piece of political agitation in the US for some time now. Progressive activists have been banging the drum about it. Rents are going up and of course it cannot, possibly, be that progressive policy is wrong in any manner and therefore it must be capitalist collusion. QED.

That is, this investigation into, reminder about, algorithmic collusion is an intensely political act. The very thing we were insisting we were going to protect the technocrats from, right?

Something we can prove too. The inflation claim of 20%. OK, but how’s that compared with general ubran inflation over the same time period? Oh, it’s a couple of percentage points lower you say? Really?

Real rents have fallen but the FTC is having an investigation as a result of political whining. So, doesn’t that just kill the idea that we’ve a technocracy doing technocratic stuff rather than bowing to the winds of politics. Which gives us our lesson. That technocracy isn’t even possible, it will always be subject to those political winds. So if it’s not a system that is even possible let’s not try to do it then, right?

A Brit ISA - a truly stupid idea

Adam Smith’s Wealth of Nations came out 248 years ago. Which should be, we think, long enough for people, even those who rule us, to grasp the ideas therein. Apparently not, a quarter of a millennium is not enough time.

There is a suggestion floating around that ISAs should be limited to purchases of British investments. This is a truly stupid idea. Sam Bowman, lately of here, points out that US stock market returns have been 10x UK ones over the past decade.

But to that two and a half century old wisdom, Adam Smith himself:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

All of economics is either footnotes to Smith or wrong. This Brit ISA idea is therefore wrong,

Clearly, it’s a folly and a presumption.

We can also add that footnote. It is possible to go with that invisible hand and agree that domestic employment of said capital benefits the domestic economy - at cost to the returns to the capital being employed. That’s what that home bias against the higher profits of the foreign trade means. If you were some sort of nationalist and socialist you might therefore think that government should force domestic capital to be invested domestically.

But that fails at the fence of it not being “British” capital which is being invested. Nor is it the government’s capital that is being invested. It is the capital of individual Britons being invested and the decision upon the investment is righteously for those individual Britons. What do property rights mean if you cannot decide upon the disposal of your property?

The nett effect of a Brit ISA would be to make individual Britons poorer as well as being a folly and a presumption. Or, as we’ve said, a truly stupid idea.

We do just so love this Meta argument

Facebook and Instagram’s parent company, Meta, has set itself on a collision course with the Albanese government after announcing it will stop paying Australian publishers for news, and plans to shut down its news tab in Australia and the United States.

Meta informed publishers on Friday that it would not enter new deals when the current contracts expire this year.

The news tab – a dedicated tab for news in the bookmarks section of Facebook – will also shut down in April, after a similar shut down in the UK, Germany and France last year.

The answer from Australian politics is that they will do such things etc.

As we’ve pointed out before there’s a certain tension in the arguments used here.

One claim is that Facebook (and Google and so on) steal the news content from the producers of it, thereby taking the crusts out of the mouths of journalists. Well, OK, possibly.

Another claim is that Facebook and Google (and so on) must carry news because that’s a significant source of traffic to the news sites themselves, from which they make ad revenue with which to provide crusts for journalists. Well, OK, possibly.

But there’s clearly that tension with trying to insist upon both at the same time. That Facebook steals the news content and therefore must pay for it but also that it’s entirely vital that Facebook must run the news as it’s essential to the incomes of the news sites.

We might even call that cakeism.

But that is what this insistence is. That Facebook must run the news, that Facebook must pay for running the news, because the follow on income to the news sites of Facebook running the news is vital.

We do tend to think that there would be more logical clarity here in politics if the news sites were not such a significant influence upon who gets elected to those political positions where such decisions are taken. But perhaps that’s just us being cynics.

Say no to neo-mercantilism!

The Treasury, high on pre-budget coffee fumes, has floated the idea of removing tax relief on foreign investments on international ISAs. To the Treasury, this would increase investment in British companies, reviving our ailing capital markets and support equities. To everyone else, this would decimate wealth and growth opportunities. We hope that this is the Treasury launching kites and seeing what does not fly - without a doubt, this policy would slam straight back into the ground.

Not only is this an unpleasant return to mercantilism, the idea that we get wealthier by just keeping our money in the economy rather than from consumption and trade, but it would wallop households at a time of acute financial uncertainty.

Let’s step back and look at why this policy should be consigned to the shredder.

Individual Savings Accounts (ISAs) provide a tax-free account of up to £20,000 in tax savings for equity, bonds, and fund shares, and they have proved immensely popular. In 2022, ISAs had a market value of £741.6bn, with £459.8bn of that being in stocks and shares ISAs. This forms a solid base for participation in British capitalism and a core component of our financial and relatively high wealth.

No wonder the Treasury is hungry to divert a lot of this money into Britain’s markets.

However, by essentially tariffing international investment and outward FDI, British ISA holders will be left much worse off. As HMRC data shows, it’s everyday Brits who would be most affected. Over 6 million holders of ISAs are in the £10,000 to £20,000 income bracket, and a further 4.8m are in the £20,000 to £30,000 bracket, too. Those on low salaries, who use their ISAs as safety net pools of cash, or the almost £1bn a year withdrawn to buy a house, will be hit hardest.

Additionally, the scheme would create yet another barrier to the efficient allocation of capital. By removing tax relief on foreign investments ISA holders would be artificially incentivised to invest into less efficient UK firms.

This would be reasonable in a world without international trade, but when the UK imports 33 percent of all its goods consumed, it’s a bad idea. Investment in German cars, French wine and American oil will bring far greater gains, in terms of quality of product and price to UK consumers than investment into UK based alternatives. But this is exactly what such a policy would encourage. Free trade, allowing for the efficient allocation of capital not only within but across nations, has improved standards of living across the globe, it's what made Britain rich in the first place. Policy today should be encouraging this process, not restricting it to score political points. 

If the Treasury wanted a more British focussed financial product, they would do well to listen to UKFinance’s call for a British ISA, and advertise it widely. With UK households only holding around 11% of their assets in equities, compared to much higher percentages in the G7, this would be a fantastic opportunity for British savers. However, a tariff led approach to investment simply will not work. As ASI Senior Fellow Sam Bowman has pointed out, “The FTSE 350 is up 6% over the past five years. The S&P 500 is up 80%.” Why invest in Britain, when the world is giving much better returns?

The Treasury’s intention misses the fundamental causes for the lack of investment in UK equities markets, and instead looks for a quick fix which is destined to calamitously explode. We know that there isn’t enough liquidity in the system for firms to list in UK markets. Placing a tariff on outward FDI would only temporarily address this. Shortly after coming into effect, we would see a substantial bubble, inevitably set to burst when this capital floods the market and is poorly allocated.

What the UK needs to do to address weak equity market performance is to take a serious look at reforming the supply side of the economy, addressing cumbersome planning regulations that stop real business growth, sky-high energy bills which push ever larger bills through post boxes and then SMEs into bankruptcy, and the loathsome salaries that skilled workers can expect.

Liquidity is only one spoke of Britain’s mangled wheels. Indeed, liquidity is the result of well-functioning markets, not the other way around. Fixing our capital markets will take more than one poorly-thought out policy.

Finally, the big question is, how would this be enforced? It sounds, in the words of one financial stakeholder I spoke to, like a complete nightmare to manage. Whether retrospective, or going forward, the enforcement mechanisms would be byzantine, full of loopholes, and ultimately too expensive and ineffective.

As Adam Smith himself said: "The proprietor of stock is properly a citizen of the world and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition in order to be assessed to a burdensome tax and would remove his stock to some other country where he could either carry on his business or enjoy his fortune more at his ease."​​