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.

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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altToday’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.

Forcing schools to merge

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Ed Balls has announced that successful and failing schools could be forced to merge in an attempt to improve the standards of state education.

Most of the focus of this announcement ahead of a report to be released next week is upon the decision by Balls to override the £120,000 salary cap, yet this is clearly not the story. More importantly, this is another move in the centralization of power to Westminster. The Department for Children, Schools and Families (DCSF) is clearly usurping the power of schools and local authorities.

The pressure on bad schools to acquiesce to mergers is perhaps understandable, but Balls is facing up to the few state schools that are successful. He will bring pressure to bear in making them merge, stating: “If you are a school that has got the potential to do this but chooses not to, you’re not making a contribution to other schools in your area. Therefore Ofsted will recognise you aren’t being as ambitious as you could be." A not so veiled threat.

Whether people realise it or not, the education system is a market; it just happens to be a very bad one that is controlled through force by a wasteful and inefficient state. Now Balls wants more control, which can only lead to less control and choice at the level of the consumer. Parents and children suffer from these power grabs, taxpayers pick up the bill, while politicians sit in their ivory towers, packing their children off to some of the best private schools in the country.

Conflict of interest

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In a truly free society people can worship anything: images, fictional or non-fictional publication or even a lump of rock if they so choose, permitted that they do so whilst not interfering with others. In the secular states of the Western world the practices of certain religions have called into question what is right and justifiable in the public realm. President Sarkozy yesterday spoke to the French Parliament and raised the issue of the 'burqa'. He stated that:

In our country, we cannot accept that women be prisoners behind a screen, cut off from all social life, deprived of all identity. The burqa is not a religious sign, it's a sign of subservience, a sign of debasement...It will not be welcome on the territory of the French Republic.

Following on from the feminist driven emancipation of women in the 20th century there came those that apparently freely chose to hide themselves away and revel in subservience to a misogynistic interpretation of a revered text. And this is the crux of the matter. Religion is a wholly private matter (admittedly in France, adherence to the state is the primary religion) and the people should be free to choose. If the consequence of this decision is that they end up dressing as a ninja (or halloween ghost) there is little the government can do to stop them unless the government seeks your genuflection to be directed towards them.

On occasion the pope wears a funny hat, yet we do not seek to stop him from dressing in such a way when he appears in public. Sarkozy's words are rebutting a perceived threat to the power of the centralized state by couching it in terms of individualist, feminist freedom. While also drawing upon a perceived undertow of public distrust that is directed against Muslims: a truly populist move. If Muslim women choose to disavow their religion they have at their disposal, in the Western world, at least, the tools that will support their decision and protect them from harm. But if they live in France upon disavowal they are required to convert to state worship.

PEGI: Pan-European Game Information

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No its not the newest cute character for the "family friendly" Wii, PEGI is the new censorship system for games. Instead of having PEGI competing with Britain's BBFC, the Labour government has surrendered yet more power to Brussels.

MCV reports that Tanya Byron, author of last year's Byron Review: Safer Children In A Digital World, has welcomed the adoption of this new system. The Byron review was not exactly welcomed by many in the gaming world including me. It should be a bit worrying that a "TV expert" with no experience with the gaming industry has had her recommendations made into policy by the government.

In the light of the moves in Germany and Europe to ban "violent" video games it remains to be seen if this is good news for computer games companies in the UK like Rockstar (Grand Theft Auto etc) and others.

Amend the smoking ban

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I joined TV chef Antony Worrall Thompson and other celebs in pulling pints at the Duke of Buckingham pub near Buckingham Palace yesterday, to celebrate the launch of a new campaign – Save our Pubs and Clubs.

It seems that pubs are closing at the rate of 50 a week, and one of the things that is doing in this normally recession-proof industry is the smoking ban that has been in place for two years. People who would once go out to the pub for a drink and a cigarette now load up at the supermarket, it seems, and go home and fill the family home with fumes. I'd have thought it would have been better all round for them to be out of sight of the kids, in an air-conditioned pub, with a landlord telling them if they're a bit the worse for wear. The very worst thing is to drive smokers out on to the streets, where the local authority has to clear up the cigarette butts, and where kids can see them happily smoking. Those are the daft, unintended consequences of the blanket ban.

The new campaign's leaders say we should have something more like Spain. Smoking there is allowed in designated smoking rooms, or landlords can opt to have their whole premises made 'smoking' or 'non-smoking', so you know what you're in for. I'd certainly have no problem going into a pub with a designated smoking room and the latest high-tech air filtration. Quite probably, in our city centres at least, the air would be cleaner inside than it would be on the street.

The campaign has cross-party support, with Greg Knight (Conservative),  David Clelland (Labour), and even Nigel Farage (UKIP) all there at the launch event. They've got cool things like beermats and t-shirts declaring the message. Visit www.amendthesmokingban.com to find out more.