The Pin Factory Blog

It's Budget day in Britain. We've a new Chancellor, but one under the shadow of his predecessor, Gordon Brown, who is now Prime Minister. That's a pity, because the public finances need repair. Spending and debt have both soared, to levels that the current economic climate makes unsustainable. It's not a problem that you can solve in one day – particularly with the markets so jittery. It needs maybe a five-year programme of reconstruction, at a pace that taxpayers and investors can afford. A new start. But we won't get it.

Ten years ago, UK public spending was lower than the (roughly) 40 percent of GDP that the OECD averages. Now it is much higher, at 45 percent. And as spending has grown, the government has consistently been on the over-optimistic side of prudence. Receipts have been overestimated, and spending underestimated, in almost every Budget.

And what has the extra money bought us? The NHS budget has almost doubled. Education spending is up by around 50 percent, as is policing. But our health, education, and crime figures just aren't keeping pace.

Many economists believe that countries prosper more when their public spending is less. And they certainly prosper more when business is not facing the constant assault of regulation and taxation – and of the uncertainty that goes with both. That's why we need a long-term programme to reduce the burdens, not fickle, headling-grabbing stunts like the assault on non-doms.

We need policies such as an annual phasing down of corporation tax, right down to the Irish level of 12.5 percent – which would create more investment, employment, and wealth. And getting a year-by-year better grip on spending by not replacing civil servants who retire. And a genuine strategy to reduce the cost of regulations – not just talking about it.

In the private sector, many people are now struggling to pay off the debts they accumulated in the good times. In the public sector, the government now faces exactly the same problem. Over the boom, when it should have been building up a cash chest that would help us all through the bust, it has carried on spending and borrowing. Like those private borrowers, it needs to take a long, hard look at its future finances and produce a long-term plan to get itself out of the hole. We need a new beginning. How sad it is that the political realities make that impossible.

According to the FT, Alistair Darling’s aides are "privately calling the April 22 statement a 'Budget for jobs'". Well, nice idea, but I'm sure they'll mess it all up by (a) coming up with some expensive and ludicrously complicated scheme for the private sector, while (b) boosting public sector employment at the unavoidable expense of lost jobs in the productive part of the economy.

Of course, if the Chancellor really wanted to do a 'budget for jobs' he could do so very simply by abolishing the employers' national insurance contribution. It's a perverse tax on jobs even at the best of times, but in a recession when unemployment is skyrocketing, it's just plain stupid.

In theory, of course, the abolition of employers' NIC would be a costly tax cut in terms of lost revenue. But in practice, I doubt the Treasury would lose very much at all. By effectively cutting labour costs by 12.8 percent, getting rid of employers' NIC would save countless jobs, and correspondingly reduce the amount being paid out in benefits. It would also make British companies far more competitive internationally, and in doing so help the economy to recover.

The cyclone in Burma reminds us of the misery inflicted by human disasters as much as natural ones. The (all too common) human disaster of totalitarian governments leaves people trapped under regimes which think that they know best. They know best how to plan and run the economy, they know best where people should live and what they should do, they know best how people should conduct their personal, cultural and spiritual lives, and they know best how to meet what nature throws at them.

Except they don't. They don't have a thriving economy because, as Hayek showed us, information is over-concentrated at the centre, and decisions are out of date or just inappropriate by the time they get out to the sticks. And they are unable to deal with natural disasters for much the same reason: information is slow to get to the decision-making centre, slow to be processed by the bureaucracy, and slow to get acted on. Economic backwardness, and the fact that capitalism is seen as a threat means that there is less capital – trucks, helicopters, cranes, hospitals, utilities – that can be focused on dealing with natural disasters.

Richer countries, by contrast, can build more strongly, defend themselves from storms, floods and earthquakes more effectively, and repair the damage more quickly. There is more capital to throw at the problem, more decisions are made locally, and more people are willing to get stuck in without waiting for the government to tell them what to do. If you want an example, remember the Hurricane Jeanne in 2004 that killed over 3000 people in poor Haiti but only 5 in rich Florida.

And yet, some people seem determined to compound the misery by keeping poor countries poor – refusing their imports in order to protect our own manufacturers, or demanding that they rein back industrial development in case it pollutes the atmosphere. If you really want to help the planet and the lives and welfare of all who live in it, my prescription would be liberal democracy and free trade. That's the best form of aid we could give to anyone.

After my optimistic blog this morning, this photo from India is a slightly less positive spin on how things are going in the developing world. (The image comes from a strike by jewelers over a proposed new tax. If only that was the sort of thing we striked about...)

The Economist reports on an interesting innovation in Singapore. To encourage more people to take the bus to work, travellers will be entered into a lottery every time they get the bus – and three times for every off-peak journey they take. The idea is that people are risk-taking when the stakes are small:

Offer individuals 20p to leave the house an hour earlier, and most will say no. But a 1-in-50 chance of winning £10 may seem more enticing.

The risk-seeking effect is amplified in small networks: regularly hearing about other winners leads individuals to overestimate their own chances of success. This worked particularly well in Bangalore, where Infosys commuters shared a workplace, and scheme winners were advertised through the company. The scheme in Singapore would aim to create a social network among users to produce a similar effect.

The hope is that the project will eventually be self-funding.

So, could a Singapore-like system work in London? I’m sceptical about how effective Singapore’s plan will be for them, but on the margin it might make things a bit better. The problem is that city bus companies are bad at innovating at the margin – picking the low-hanging fruit first – and usually end up wasting money on white elephant projects, like the new bus designs churned out every couple of years with great Mayoral fanfare.

TfL’s bus service is OK, but it gets around half a billion pounds worth of subsidies every year. Congestion in the capital is also crippling for the service: though many people do get the bus during rush hour, it goes incredibly slowly. Compared to the even more heavily subsidized Tube network, it’s a pretty unappealing option if you’re in a rush to work.

So, what’s the solution? Honestly, I’m not sure. A sophisticated road pricing scheme coupled with privatized roads might be the best option but, in cities at least, it’s a political fantasy right now. I think the next best solution would be to privatize the bus system and open it up to new competition. It’s happened in Manchester, with quite good results, and could happen here as well. I don’t know how to make buses nicer, but there’s no greater discovery process than the free market. If a Singapore-like lottery scheme works, great. If it’s something we haven’t thought of, even better. The great upshot of a private municipal bus system is that there will be “neighbourhood benefits” for everyone who doesn’t use the bus – a better, more competitive bus network would take cars off the road and reduce congestion in the capital for everyone.

On 3rd October David Cameron told the Sunday Telegraph that a Conservative government will "smash open the state education monopoly so that any qualified organisation can set up a new state schoo".

What sort of organisations will be able to qualify? Well, according to the Conservatives' two years old policy document, "The country which provides the closest model for what we wish to do is Sweden".

A major feature of the Swedish system is that profit-seeking enterprises, including PLCs, qualify. Indeed three-quarters of the new schools in the Swedish model are profit-seeking. Furthermore, an impeccable source wrote, in a recent article for the Spectator and the Daily Telegraph that "the Swedish model would not exist without the acceptance of profit-making organisations". Yet it has long been clear that Cameroons have no intention whatsoever of permitting such enterprises to "qualify". After all, that would be private enterprise; strictly passé for the Cameroons.

Or would it? During the conference week, part of the pro-Tory press was willing itself to believe otherwise. Thus on 8th October the Spectator editorial said “Crucially, it now looks likely that the new schools will be able to be run for profit" while in its Coffee House, Fraser Nelson wrote “Michael Gove’s new Swedish schools will, it seems, be allowed to make a profit".

This blog is some 3 weeks late while I have searched vainly for support of these notions.

I could be wrong, but if I am right, the Cameroons are guilty of serious misrepresentation of the "Swedish model". The same goes for another of their favourites – "the post-bureaucratic age" (largely via the internet and the information revolution). But the word "bureaucratic" refers to management in government and the public sector. The post-bureaucratic age is not a result of the internet as Dave the Vague likes to claim. It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none, whilst the internet is a mere side-show which enhances whatever market signals are allowed by the bureaucrats.

To reduce bureaucracy the Cameroons must slash taxes and allow private enterprise to flourish, rather than continue to tax us all and dish the funds out again to a few favoured voluntary groups. A good start would be to allow any entity, especially a profit-seeking institution, to create a school and charge fees directly, with a full tax rebate to those who thus reduce the cost of state education by moving their children out of it altogether. Don’t hold your breath.

Britain's immigration policy is wrong-headed and detrimental to its economy, as recent events have shown. (I should declare an interest as an immigrant from the Republic of Ireland now permanently resident in the UK.)

Many have followed the saga of X-Factor contestant Gamu Nhengu. A talented singer, Gamu was seen as having a good chance of winning the talent show until doubts over her immigration status meant that she was removed from the show. The issue was that her mother allegedly claimed benefits while working, and it now seems likely that she will be deported to her home country of Zimbabwe.

Harry Phibbs has already written on this topic over at ConservativeHome, and the case is an example of the problems in the British immigration system. Gamu is an adult – why should what her mother does be relevant to her immigration status? And isn’t it a clear loss to Britain to lose this entertainer to a potentially brutal fate in Zimbabwe? Obviously Gamu is getting special attention because she is in the public eye – how many others are deported in similar situations without any attention at all? It’s surprising that so many on the right are (correctly) sceptical about the effectiveness of government programmes, but forget this when considering the supposed need for immigration control.

More happily, the UK-based winners of both the Nobel Prize for Physics and Economics are immigrants from Russia and Cyprus respectively. Whatever the full benefits of scientific breakthroughs taking place in the UK, it’s undoubtedly good for students at British universities to be taught by people of this calibre. Plenty of entrepreneurs come to Britain to escape worse regulatory environments and set up wealth-creating businesses. Many others come to work here and, as Bryan Caplan has recently been arguing on his blog, even low-skilled immigrants increase the wages of native workers, if those immigrants are allowed to work.

Immigrants are good for everybody – they make Britons richer and they make better lives for themselves. If there is a danger of ‘welfare tourism’, an easy solution could be to charge for use of public services for a certain period of an immigrant’s time in the UK. But most immigrants who come to Britain don’t want to sponge off the country – like Gamu Nhengu and the Nobel-winning Russian physicists at Manchester, they want to be the best they can in a free and open society. We should let them.

Does the Bank of England’s bank rate of 0.5% inspire confidence? For savers and investors (two sides of the same coin), confidence means belief in an adequate rate of return in an economy that rewards hard work and innovation and a belief that stores of value won’t be eroded by a debauched currency.

Near-zero official interest rates send just the opposite signal – there is no faith amongst the economic cognoscenti that the economy can generate sound economic growth so rates are kept low that support otherwise bankrupt organisations and individuals.

Meanwhile, the presses are running fulltime, churning out new money out of thin air. And with inflation running consistently well above target, the Bank of England ignores its mandate to keep it under control. There’s always some special factor to be overcome first but, trust us, things will be fine in due course.

All this is terribly dispiriting for those wanting to do the right thing – save and invest.

Take savers first. Confronted with the officially pessimistic view, they hesitate to put their money to work in riskier assets, choosing instead to shelter in unproductive but seemingly safe assets like government bonds. They also choose to save more than they might otherwise if they have been convinced that the future is, indeed, bleak and unpromising. Stash cash away now before things get really bad!

Good savers are also probably dutiful taxpayers and are further discouraged by what has happened to the government’s finances over the past decade. Where on earth has all the money gone that they have faithfully and unquestionably handed over, day after day, year after year? No wonder there’s so much gloom about.

The story is similar for those who must consider real investment opportunities. If the official view is so pessimistic, who are they to be optimistic? And if failed enterprises and individuals are kept on life support with low interest rates, how can new investment get a fair bite of the cherry?

The good guys now feel like fools and faith in traditional virtues is gone. Is it any wonder that gold is at record highs? Maybe it’s time to try something new, like a modest rise in the bank rate to 0.75% as part of a gradual return to normalcy and faith in the future.

Remember when Her Majesty's Revenue & Customs lost disks containing information on 20,000 people, including their bank account numbers and health details? Of course you do. Remember all the other dozens of cases where people in authority have 'lost' the data that they collect on us? Probably not.

But fortunately the Open Rights Group have been cataloguing them here.

There is, for example, the 5,123 patients' medical records that were on a laptop stolen from a Black Country hospital. Though that pales into insignificance alongside the NHS warning last month that perhaps 1.7m records have been dumped in skips, lost in the mail, left on stolen computers, pinched from doctors' lockers, or forgotten in the pub.

Also last month, a laptop was stolen from a Royal Navy officer. It contained information on 600,000 people, including their passport numbers, National Insurance and bank details.

Then last November, the Department for Work and Pensions lost yet another computer disk containing personal and fnancial details of 40,000 Housing Benefit claimants.

I don't know about you, but I just don't trust officialdom to protect the information it holds about me and other people like me. If there was one knock-down argument against the national ID database, the Open Rights Group list of failures is it.

But I think I'll put the boot in anyway, because I'm nice like that. Richard Spring MP has given the details of his income as an MP on his blog here.

Firstly, my own monthly salary. After deductions it is exactly £3,250.53. Deductions include 10% of the gross figure of £5151.67 for the parliamentary pension scheme (£515.17).

Certainly that's an interesting example of average tax rates on a not especially large salary: adding back in the pension contribution, that's 27% off the top in taxes. Now while many around here disagree with me I'm of the opinion that the number of people clamouring to become MPs means that the wage paid should fall, but leave that aside for a moment. The point I really want to look at is this: 

By June next year I will have been an MP for 17 years. If I were to stand down as an MP then and elect to draw my pension, my pension would be £22,952.41 per annum, slightly above the average parliamentary pension.

Well, 17 years of £515.17 a month (clearly it would have been lower in earlier years, but bear with me) would be a pension fund of £105,000 ish or some £7,000 a year as a pension. Hmm, yes, getting a £23,000 a year pension off that fund would be rather an achievement, wouldn't it? Even if we compound the interest at 8% on the payments into the scheme it gives us a fund of only £225,000 (and that's being absurdly generous, assuming that the payments in have been at £515 a month for 17 years). Given current annuity rates for a 60 year old, that would give a pension of some £14,000 a year.

But whether readers of this blog feel that my own contributory pension is generous enough to be described as ‘platinum plated’ or a ‘goldmine’ is for them to decide. I simply state the facts.

Platinum plated or a goldmine is indeed in the eye of the beholder: but I think the stated facts would support such a description?