Public sector ineptitude

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The DWP (Department for Work and Pensions) announced yesterday that the amount of five key income related benefits that went unclaimed rose to £10.5bn in 2007/08. While it is perhaps sobering to know that there are those out there who do not feel the need to rely on the government to survive, we also have to bear in mind that the unclaimed money won't be coming back to us anytime soon.

For many of those non-claimants, especially the pensioners, the money that is currently rotting in government hands is in fact their own that they lost through being forced to pay taxes. The government over the past 12 years has created a monster: a complicated tax system and an incomprehensible benefits system. The simple approach of setting free all of those who are low-earners by raising the allowance would of course render a huge number of civil servants redundant, but at least they'd understand the claims system. This is the approach that is needed to tighten up wasteful spending by government and to assist in lowering the burden of taxation.

The unclaimed benefits numbers are further compounded by the fact that the level of fraud/over-payment continues to remain around £2.7bn. There are also underpayments of around £1.2bn. All of these figures represent why the public sector should not be handed our money to dish out on the whims of politicians. And why the system as it currently stands is in serious need of a simplifying overhaul.

MP Expenses: Do two wrongs make a right?

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The MP expenses scandal dominated the headlines during much of my time at the Adam Smith Institute. Each day I watched with great interest as new stories unfolded. The one thing that struck me about the public’s response to the scandal was how genuinely surprised so many people appeared to be that the MPs would do such a thing. It was a stark contrast to what I perceive as very low expectations among Americans for the scruples of their elected representatives.

Beginning with Watergate, the American public’s confidence in government officials has been rocked by scandal after scandal. Hollywood and the news media only foment the discontent with sensationalized accounts of government corruption. Public opinion has spiraled downward to the point that there is almost an assumption that all politicians engage in some sort of clandestine impropriety. For example, what surprised the US public about the Monica Lewinski affair was not that Bill Clinton was messing around with an intern, but that he actually got caught doing it.

I believe that this deeply ingrained distrust of politicians is one reason why Americans resist increased state involvement in their lives: they do not trust government to do the right things for the right reasons.

Perhaps the MP expenses scandal will awaken the UK electorate to a similar sense of governmental skepticism. If such a nationwide mentality were to develop and lead the public to take matters into their own hands (i.e. tell the government that it has had its chance at managing the national infrastructure, and it is time for the citizenry and the markets to take over), then what is now a blight on the reputation of Parliament may eventually be celebrated as the first step towards freedom.

Jacqui Smith's expenses

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I’ve never been the biggest fan of Jacqui Smith, but her latest interview makes me wonder how and why she remained in one of the most crucial public jobs for so long. She seems genuinely unremorseful for her part in the expenses scandal and still fails to understand why the public are so angered.

She claims that she was treated unfairly by the media and the public, as she received a lot more criticism than other MPs who had made claims for much greater amounts. She sounds like a school playground excuse, ‘the other children are all misbehaving too!’

The fact is, one of the jobs of a Home Secretary is to combat crime, her position became untenable once she decided to start robbing us of our hard-earned money. Like many MPs she thought she had the ‘right; to whatever she wanted without any repercussions.

It is difficult to get into the mindset of an MP who fiddles their expenses but still tries to convince themselves and the public that they only ever went into politics to help society. They’re either still trying to pull the wool over our eyes, or they’re pulling it over their own. In the interview Jacqui Smith claims that she stepped down from politics because it was the right thing to do ‘for her’ and ’her family’ – well at least she’s not lying to us any more, she admits there was no consideration for the public in her decision to step down. She had simply milked the system for as much as she could.

The real kicker came when she admitted, with a ‘butter wouldn’t melt’ face, that she would probably still be in public office if the expenses had not been exposed. Yes Jacqui, it’s our fault you’re corrupt!

Monkey business

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Oh to be a monkey...

Journalism and the expenses scandal

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Sunday Telegraph editor Ian Macgregor (left) was our guest at a power lunch in Westminster this week. His topic was "The importance of journalism in modern society".

And of course, that's a topic that Telegraph have earned a right to talk about in the last couple of months, with their brilliantly handled investigation into MPs expenses. There's no question the story has been good for the Telegraph's business, winning them many thousands of new readers. But I also think they have performed a genuine public service, by making people realize that you just can't trust politicians to be responsible with taxpayers' money.

Moreover, this precisely is the sort of thing that newspapers should be doing. My own view is that the media has been far too supine over the past decade, much too content to simply act as a broadcasting service for the government. The Telegraph's expenses splash is a welcome step in the right direction.

That said, I don't know whether it's going to mark a lasting change in the all-too-cosy relationship between politicians and journalists. It's one of the big problems with the way Westminster operates today – ministers leak stories to favoured journalists before making announcements to Parliament, journalists build their careers on these political connections, and then if they step out of line their supply of insider information gets cut off.

New House of Commons speaker John Bercow is making the right noises, saying he'll take a tough line on ministers who speak to the media before Parliament, but that alone won't be enough to change the spin culture. The real hope has to be that the media will see the success the Telegraph has had with its expenses revelations, and realize that the public wants to read proper, value-added journalism, and not just recycled press releases.

Ultimately, if they want to survive the competition from online news sources, I can't help thinking that's the way the press need to do it.

The recession – whodunit?

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A publication the Adam Smith Institute is particularly proud of is The Recession – Causes and Cures by Dr David Simpson. Dr Simpson was Economics professor at Strathclyde, and then economic advisor to Standard Life. His piece is short, eloquent, and utterly convincing. It forms a crucial part of our counter-attack on the facile but common notion that it was greedy bankers who brought about our downfall.

Not so. Dr Simpson methodically traces the bust's causes to the previous credit-fuelled boom instigated by governments and their central bankers. There were indeed bankers who made foolish (rather than greedy) decisions, and who read risks wrongly. But they did so amid a sea of cheap money which governments had flooded onto them. The asset-price bubbles (which are now bursting or deflating as markets correct the errors) resulted from interest rates deliberately kept too low for too long.

The best way to treat a bust is to avoid it altogether by not stoking up the antecedent boom, but given a bust, the treatment should be lower corporate and personal taxes. These should be financed by spending cuts, not by borrowing which signals future tax rises. And the policy-makers who oversaw this crisis should be replaced.

The book is a terrific read, and puts its whole case in fewer than 40 pages. It is both compelling and convincing. Do read it.

Political Economy, Concisely

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There are few public intellectuals with the wit and insight of Anthony de Jasay, so Booksmith is very much looking forward to an upcoming work from the great man.

Political Economy, Concisely will be a collection of essays examining the free society; it promises to attack head-on concepts such as property, equality and distributive justice, public goods, unemployment, opportunity costs, and welfare.

Booksmith has always found that Anthony de Jasay has been exceptionally skilled in conveying complicated ideas in a truly original way. His elegant writing style is rarely found in works on political economy, combining with verve a thorough knowledge of a first-rate philosopher and economist.

Click here to find out more about it.

Price fixing

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Dr Eamonn Butler over at Mises.

Government debt: That’ll be £2.2 trillion, please

An article by Dr Eamonn Butler on the cost of government and how to reduce it.

The amount of money owed by the Government is huge and rising, says Eamonn Butler, so why aren’t we pursuing simple, effective ways to reduce the burden?

Today is Cost of Government Day. Average taxpayers in Britain now have to work almost half the year – 176 days – to pay their share of the cost of running Gordon Brown’s administration. Every penny we have earned since January 1 has gone to feed the state leviathan. It is only from today that, at last, you have started working for yourselves and your families.

More than five months of our servitude – from New Year until May 14 – were spent working to pay taxes, such as income tax, national insurance, council tax, VAT and many others including the notorious “stealth” taxes. But all that effort was still not enough to feed the monster, and when he had run out of our money, the Chancellor, Alistair Darling, had to borrow – at £20  million an hour – to pay his bills.So for the past six weeks, day in, day out, we have been working to fund that borrowing. No wonder Mervyn King, the governor of the Bank of England, warned yesterday of the “truly extraordinary” scale of deficits.

We have had to put in 10 days’ more work than last year in order to keep the Government afloat. It is not just the money that Brown and Darling borrowed to bail out the banks. It is the fact that every bit of public spending – national and local – is rising faster than taxpayers’ incomes. In 1999 – when Brown had finished with New Labour’s 1997 election pledge to match Conservative budgets – government spending was just 36 per cent of the nation’s income. Now it is a third more – 47.5 per cent this year – and rising.

Not that you can believe official figures. The International Monetary Fund thinks things will be far worse. Our national income will take a knock, and more people will be out of work and receiving benefits from the Government rather than paying it taxes. That makes it probable that public spending will be more than 50 per cent of our income – sending Cost of Government Day into July.

It amounts to a huge surge in the burden of government for those of us trying to earn a crust – twice that in France, and even more than when Britain was reeling from the oil-price shocks in the early 1970s. In fact, it’s not far off the 1940s, when at least we were paying off the cost of saving the world from Hitler.

But then Alistair Darling’s budget predictions have proved just as over-optimistic as his predecessor’s. In November 2008, despite all the drama in the banking industry, his forecasts seemed almost rosy. Now, he expects the Government’s budget shortfall this year and in 2010 to be four times that prediction, with 2011 and 2012 about five times bigger. The gap between what the Government expects to spend and what it actually brings in has risen five-fold, from £120 billion to £608 billion in the space of six months.

At that rate, according to the Institute for Fiscal Studies, it will take 23 years to return government borrowing to anything like normal levels – Gordon Brown’s famous “golden rule”.

And of course, every year you borrow keeps adding to what you owe. Right now, the Government calculates that it owes a total of £2.2 trillion – about £144,000 per household. The figure has trebled since the bank bail-outs. Some traders are beginning to wonder if Britain can actually pay its debts. If they start pulling out, then we really are bust.

And the real picture is worse, because the Government does not record all its debts on the official books. Take all those new schools and hospitals being built on tick at a future cost equal to £5,600 per household; Network Rail’s borrowing, another £1,000 per household; nuclear decommissioning, another £2,750; those generous civil service pensions – a future cost of almost £50,000 per household; not to mention the state pension. Add those in, and the real national debt is twice the official figure.

Do not imagine that all this extra spending and borrowing are the fault of the financial crisis and the need to counter recession – interest payments, social benefits and suchlike. A good half of it is simply feeding the Government’s pre-election spending splurge.

And do not believe the spin that the Conservatives would make 10 per cent cuts to balance the books. They have pledged not to cut education, the NHS, or overseas aid, and they are stuck with the debt repayments and the EU’s demands; even if they cut 10 per cent off everything else, it amounts to just 3 per cent overall. They would be shrinking next year’s spending bill from £717 million to £695 million. That is still more than Labour has ever spent.

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom,” wrote Adam Smith. If your family had debts as big as the Government’s, you would know what you had to do:spend less or earn more – and preferably both.

The Government won’t earn more by putting up taxes. The Centre for Economic and Business Research estimates that the proposed 50 per cent top tax rate will make 25,000 people leave the UK, costing 140,000 jobs and reducing revenues. Britain is already overtaxed.

And the private sector has borne nearly the whole burden of the economic downturn. Wages have fallen, and unemployment is heading up to 3 million. But the public sector has been largely unaffected. That is why people are so angry when they see how much of their 176 days’ effort is simply wasted – or abused, as with MPs’ expenses.

The task is to reduce public expenditure without it showing. A freeze on spending and recruitment for a couple of years, then pegging it to inflation, would be surprisingly effective at re-balancing the books. (If spending since 1997 had risen no faster than inflation, we would be spending a third less than we do now, and could abolish income tax, VAT, and council tax entirely.)

Another useful move would be to publish online every cheque the Government signs, so we can see what it is spending and where. Private firms would be able to show what they could do more cheaply. And citizens could point out where they think their money is being scandalously wasted, as with the £300 million on departments’ service contracts, wasted through bad management, or the £200 million lost through bad procurement of hospital buildings.

Then there are the IT projects, such as the NHS records system, that are billions over budget and months or years late (the Department of Employment alone spent £59 million on a computer system that did not work). Exposing such wasteful incompetence would help eliminate it. And do we really need to spend tens of billions on ID cards?

Along with the Royal Mail, we can privatise the Tote, Channel 4, BBC Worldwide, air traffic control and various utilities, which would bring in a handy £20 billion. And we can get rid of central bureaucracy by measures like simply handing head teachers their bit of the budget and telling them to get on and spend it as they see fit, rather than as Whitehall bureaucrats think they should. The same could go for health – give the budget to patients or their doctors, not to layers of bureaucracy such as the strategic health authorities. And the quangos need to be culled again: they have grown in number, cost and power under Brown. For what gain?

Meanwhile, dozens of local government officers are now paid more than £100,000 and retire on generous index-linked pensions – something now almost unknown among the private-sector employees that work to support them. As this newspaper reported yesterday, PricewaterhouseCoopers claims that 96 per cent of companies regard final salary schemes as unsustainable.

About a third of Child Benefit is little more than pin-money for the middle classes. It should be given to the poorest. By taking everyone on the minimum wage out of tax entirely, we would see a stampede into work by those who we presently make better off on benefits.

Another huge saving would be to speed up the plans to raise the pension age, reflecting improvements in health and longevity. This is by far the largest spending change one could make. Yes, many people would not like it – though others would be delighted to avoid forced retirement at 65. But it would be hugely symbolic – a return to honesty in the public finances, and an end of the idea that we can all live at someone else’s expense. If this recession has taught us anything, it should have taught the politicians that.

Dr Eamonn Butler is director of the Adam Smith Institute and author of ‘The Rotten State of Britain’ (Gibson Square Books)

Published in The Telegraph here

Railways – the impact of the recession

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Today’s figures from Stagecoach, the holder of the South West and East Midlands railways franchises, were reassuring. Despite the recession, Stagecoach reported like-for-like revenue growth of 6.2% in its UK railways business – figures that compare favorably with the lacklustre growth reported recently by National Express from its East Coast main-line franchise. More generally, UK railways privatisation in the mid-1990s undoubtedly had many flaws. Arguments persist about the policy of separating the ownership of the railways network from the train-operating companies. After all, any new competition on the crowded UK network – the rationale for creating Railtrack - was always going to be minimal.

Greater focus on the burgeoning capital expenditure programme would have been far more sensible – a priority that was only accorded post the Hatfield disaster in 2000. Looking forward, changes are needed. In the short term, reforming the franchise system – partly to prevent over-bidding – is a priority. Some franchises have built in revenue protection measures; some don’t. Applying a revenue ‘cap and collar’ for all franchises would reduce the risk element. Furthermore, over-bidders – most obviously, National Express’ bid for the East Coast main-line - should not be allowed simply to walk away: if they do, other franchises held should be rescinded. Moreover, in awarding franchises, a greater priority should be accorded to deliverability.

In the medium term, Network Rail needs major reform. Its net debt now exceeds £22 billion. Whilst it has delivered much of its investment programme, including the notorious £9 billion West Coast main-line scheme, this has come at a heavy financial price. Efficiency levels within Network Rail remain unimpressive and its governance regime resembles that of the 1960s water boards. Re-privatising Network Rail should be a long-term aim. Eventually, some re-instatement of vertical integration of the network is desirable – only the Isle of Wight’s network is currently integrated.