The Pin Factory Blog

This criticism seems entirely misplaced to me: we should no more be blaming Baroness Ashton for this behaviour than we should be for a tree whispering in the wind or a cockerel crowing at dawn:

EU foreign affairs chief Baroness Ashton has been criticised for seeking to "expand her empire" at a time when other EU agencies are having their budgets cut.

This is simply what bureaucracies do: the aim and point of all bureaucrats.

As the late great C. Northcote Parkinson pointed out a bureaucracy does not exist to actualy do anything. There are no tasks by which it can be measured, no metrics that allow us to decide whether they've all been good little diplomats or not. Therefore the only institutional goal of any such bureaucracy will be to increase the inputs available to it. More money allocated in the budget, more staff hired, these become the measures by which it definies its own success. This is how the Royal Navy ends up with more Admirals than ships, more desk bound pen pushers in their £1,000 chairs than soldiers or seamen who do the fighting.

To complain of this behaviour is no more effective than a parp in a thunderstorm. The only way that one can prevent a bureaucracy from doing this is not to have the bureaucracy in the first place.

The European External Action Service, the EU's much-criticised diplomatic corps, already has 141 embassies or delegations across the world.

Now that it has been invented, now that a budget has been allocated, I confidently look forward to the day when it has more ambassadors than there are countries to be an Ambassador to. It will inevitably happen, assuming that it hasn't already.

Parkinson really was correct: the only way to stop the metastatisation of a bureaucracy is to cut it out of the body politic entirely.

The fact that the American government is up and running again is very bad news. Not for the obvious reason that the American government is bloated, self-serving, unproductive, and completely incapable of spending the nation's money efficiently. But for the fact that the budget deal simply postpones problems that should be squared up to.

The fact is that, with a $17 trillion debt ceiling, the American government is really deep in debt. Britain's £1.2 trillion debt looks positively virtuous (which it isn't). But is Congress slicing up its credit card, reining back on its spending and cutting out luxuries, like everyone else has to do when we get into trouble? Not a bit of it. The American government is still living far beyond its means.

The deal hasn't even bought much time. It will keep the government running only until 15 January, and there will have to be more discussion (or horse-trading) on the debt ceiling from 7 February. It doesn't 'solve' anything.

If 'America' (notice how so many commentators say 'America' when they really mean its government) is determined to carry on spending as it does, then it will have to carry on adding to its debt. The only other option is to print the money it needs – in other words, more quantitative easing. And that, of course, is very good for markets – because the new money comes in through the financial institutions, and quite a bit of it tends to stick in the asset markets, inflating the prices of stocks, businesses, houses and the rest. So investors see the benefit even if the rest of us don't.

That might explain why the markets are so sanguine about something that is, in fact, a complete denial of financial prudence within the American government. The trouble is, as we discovered in 2008, you can put off the day of reckoning for quite a time, but eventually your imprudence catches up with you. You can carry on a bit longer by putting everything you can on the credit card, but eventually something messy is going to happen. Nobody knows when that might be. Perhaps a default in the New Year might not be such a disaster, but would make Congress realise that the books have to balance. For long-term American investors, that might actually be cheering news.

As the United Kingdom approaches its date with destiny and the 2014 Scottish independence referendum, the debate surrounding the possible shape of a post-Union Scotland are only going to get fiercer. What Scotland might look like outside the United Kingdom, whether Scandinavian utopia or isolated backwater, is one of the key fronts on which the battle for the hearts and minds of Scottish voters will be fought.

Alex Salmond’s vision, designed to maximise separation’s appeal, is of a Scotland with options: joining the Euro; membership of the Common Market without the single currency; keeping the pound. All intended to give the impression that an independent Scotland would be the master of its own economic destiny.

Yet there are good grounds for suspicion that this is not the case. For a start, it is unlikely that Scotland would be able to claim automatic membership of the European Union as the SNP often claim.

In the instance of Scottish independence, the continuity-UK would almost certainly qualify for ‘successor state’ status under international law, due to possessing (much) more than 50% of the territory and population of the United Kingdom as presently constituted.

Thus the UK would retain its identity and membership, leaving none for Scotland to inherit. Were Scotland to then apply for membership in its own right, there are further hurdles. The UK’s treasured opt-out from the single currency is not offered to new members; likewise the option of joining the European Economic Area without acceding to the EU.

Thus Scotland would either have to join the EU, single currency and all, or not at all. Even assuming the SNP retained their former enthusiasm for the single currency and took the plunge, there’s no guarantee they’d be accepted. Spain, Italy and Belgium are all wrestling with their own separatist movements and will not want to establish the precedent of secessionists gaining EU membership – see Spain’s position vis-à-vis Kosovo.

If not Europe, then what? In an effort to soften the blow for soft-unionist Scots, the SNP are keen to stress the links that they would seek to retain with the UK. Scotland could, the nationalists argue, keep the pound, and British submarines could still be stationed at Faslane to fend off the fear of defence cuts.

Assuming all this was true (and in the case of defence it almost certainly isn’t), Scotland on the pound would be tied to the British economy without having a say in the governance of it, while trying to keep whole communities going via sustaining now-foreign military bases.

The SNP thus risk locking Scotland out of the UK without breaking free from it. As the pro-Union campaign put it, there are polities outside the UK with similar relationships. Until recently, they were called ‘dependencies’.

The Department for Transport has stated that without new runways, London’s airports will be at capacity by 2030. This could put Britain at a disadvantage from not being able to deal internationally at its full potential, especially with fast-growing markets in the Far East. Heathrow, as Britain’s only hub airport, is almost at capacity already and there has been pressure on the PM from businesses, media and backbenchers supporting the building of a third runway there. It is important that government does not prevent international businesses from operating in Britain, yet it is equally important that it allows investment decisions and funding to come from private interests and that it does not encroach on the rights it is designated to protect.

The building of a third runway is all very well if BAA Ltd (or a consortium of businesses and airlines) can afford to do so itself, but it is quite another if the £10bn funding required is going to come from the taxpayer. Against the official line of his party, George Osborne said on Sunday on the Andrew Marr show that a third runway at Heathrow is an option for government funding through the Infrastructure (Financial Assistance) Bill. This Bill will come into effect in October and promises £40-50bn of state finance to go to private schemes approved by the government, can start within 12 months and, supposedly, offer good value for the taxpayer (in other words, more government welfare for private companies that offer ‘good value for the taxpayer’).

If it is decided that a third runway is to go ahead, even if it is privately funded by BAA, additional costs may hit the taxpayer. The Free Enterprise Group, made up of Conservative MPs, has supported a move to give up to £40,000 compensation to those who would be affected by noise created by the new runway. This presumably would come out of government pockets rather than being enforced on BAA.

The best solution would be to grant a private company permission to build an airport around existing transport links and infrastructure located in an area where no or minimal noise compensation would be needed. The Mayor of London has stated his support for a new hub built in the Thames Estuary. One such proposal by Foster and Partners is to build a £20bn four runway airport on an artificial island near the Isle of Grain. It would be entirely privately funded, allocating £4bn towards improving existing infrastructure. Arguably, however, demand in the area isn’t high enough and the government would end up diverting much more infrastructural spending to this to increase demand, by creating transport links and provide public services for new workers. For the same reason, building a hub airport in the north when demand is predominantly centred around London may be good politics, but would be a great risk economically. The ‘build it and they will come’ strategy is a risk that should not be taken on something as crucial as international transport links, especially if the public purse is involved.

Another possibility arises from the currently anonymous ‘world-leading infrastructure firm’ made up of a consortium of British businesses, who are currently scouting sites for a new four runway airport that they hope could rival and perhaps even replace Heathrow as Britain’s key link between domestic regions and international airports, especially in the Far East. The firm has been looking at sites to the west and north-west of London and is now in talks with Chinese sovereign wealth funds over raising the necessary capital.

With a self-appointed monopoly on the decision of where something as crucial as an airport can be built, the government has a responsibility to make a decision that will involve minimal public expenditure, follow demand and protect the citizens who elected it from having their property devalued without compensation, whichever option that may be.

Trying to discover the government’s procedures for forecasting the impact of new regulation, I recently googled “regulatory risk assessment."

The number one result is this. Entitled “The framework for regulatory risk assessment in the Department of Trade and Industry", it’s found on the website of the Department for Business, Enterprise and Regulatory Reform, and topped by the logo of the Department for Business Innovation and Skills.

The DTI was abolished in 2007, and BERR in June this year. Brown’s endless bureaucratic rejigging has clearly proved too much for the governmental webmasters…

So now it's proposed that we should tax the banking system to destruction – the same one that we spent billions bailing out. This is a ruinously destructive course of action that will plunge us all into penury.

Tim Worstall, 'A flaw in the TUC masterplan', guardian.co.uk.

Saturday: On corporate capture

Sunday: And now it's the World Bank on financial transactions taxes

Saturday: The Great Flying Banana

Sunday: On the unnecessary nature of much regulation

Like many countries, the government offers advice to new and would-be exporters. If the advice is sub-standard, it may be worse than no advice at all.

The organisation charged with this function is called UK Trade & Investment (UKTI) and is a combination of civil servants from the Business (BIS) department, Foreign and Commonwealth Office and staff “volunteered” by their companies. It is about 2,500 strong, half overseas and half in the UK. UKTI’s Annual Report is a challenge to the reader as they are preoccupied with whether these are FCO or BIS staff and confused between the very distinct roles of helping export as and helping overseas investment in the UK.

Most of the overseas staff are locals who know little or nothing about the new and would-be UK exporters. Only about 10% of the total are actually engaged, on the ground, in advising UK exporters. They are far outnumbered by their colleagues drinking tea in Whitehall meetings.

Should we look at the quality rather than the quantity of advice?

Firstly there is no sign in the UKTI that they benchmark there advice against academic studies or the advice given by other countries. How do we know how the UK advice rates if we have no idea of the quality of our competitors’ advice? In fact the Australian advice, for one, is much better.

20 years ago Chris Styles, then working on his doctoral thesis and now Dean of the Australian Graduate School of Management, and I researched, for the then Department of Trade and Industry, what did and did not work for new exporters. The research conclusively showed that the government’s standard advice that one should choose the market through formal market research and then oneself draw up a marketing plan was comprehensively wrong. Numbers only reveal the state of play, not what a market could become, still less what it will become since that depends on what the exporter will do. Were Iceland, for example, to have no fridges, would that imply a potential demand for fridges or simply a dislike of, or no need for, fridges?

Relationship with the importer proved to be the crucial thing: the better and stronger that relationship, the better was the performance.

This blog does not have space for all the detail. Suffice it to say that the DTI accepted all our findings both empirical and theoretical. Checking current UKTI advice, however, shows that they has reverted to the same old rubbish we disproved 20 years ago. It was wrong then, it is wrong now and British exporters are being misled. 

In today's Times (no link, £) we're told that tax evasion costs the Treasury £100 billion in lost revenue. We're told the same thing in The Guardian as well: and these numbers come from the research of Richard Murphy, of Tax Research.

There's a couple of minor points we might make about this. Whether the numbers are reliable for example (evidence from Mr. Murphy's estimation of the losses from tax avoidance by companies doesn't inspire confidence). Whether we can actually do very much about it all and still remain a free society: there will be some level of grey, untaxed, economy whatever we do and there's a trade off between the size of it and how repressive we wish the government to be. Finally, whether closing said tax gap at present would be a good idea: which for most of those proposing we do it wouldn't be. For those who complain the most about the tax gap are also those shouting the loudest for Keynesian demand expansion. And collecting more taxes is just as much fiscal contraction, the opposite of what they're shouting for, as cutting spending is. At least it is according to the Keynesian theories they say inspires their economic pronouncements.

But let's leave aside those minor points and look to the major one. For I too am worried about the size of the tax gap, just as you should be. And just to be entirely fair, let's draw on more of Mr. Murphy's research as we express that concern. Here is his chart of the size of the grey (ie, legal but untaxed) economy:

As you can see, as the tax burden rose, as marginal tax rates rose, as the tax system became more complex, over the years of Gordon Brown, the size of that grey or shadow economy rose. And of course there is more than mere correlation here: incentives matter in economics after all and as the rewards of dodging taxes rise then so do the temptations to do so.

Which is why we here at the Adam Smith Institute have always argued for a low tax burden, low marginal tax rates and a simple taxation system. For we too are worried about the tax gap: it's just that we put forward solid plans to reduce it rather than just worrying about it, by having low, light and simple taxes.