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Government must abolish the cap on tuition fees – just raising it is not enough

Thursday 4 March 2010

Think tank calls for radical reforms to make UK the world leader in 21st Century higher education

The government must abolish the cap on university tuition fees, according to a new report from think tank the Adam Smith Institute. The Broken University, by academic and education expert James Stanfield, argues that if the UK is to be a world leader in the higher education in the 21st Century, all institutions must be free to sell their services at whatever price they choose.

Reforming higher education funding

In contrast to other recent proposals, Stanfield’s report emphatically rejects the idea of merely raising the cap on tuition fees, arguing that such a policy not only fails to recognize the independence of universities, but also completely overlooks the various malign consequences of the higher education sector not having a functioning price system. According to the report, capping tuition fees:

  • artificially increases the demand for university places
  • causes students to value their education less, and therefore choose inappropriate courses or not work as hard
  • results in less overall investment in higher education
  • encourages universities to be less responsive to student needs

Stanfield, who is also a fellow of the Adam Smith Institute, said:

“There is a lot of talk about the importance of the universities in our new ‘knowledge economy’. But how effectively can any market work when the government is distorting prices to such an extent?

What politicians don’t realize is that tuition fees ought to send important signals about the relative value of different university courses, and help to co-ordinate the interests of students, universities, and future employers. By dictating what fees may be charged, the government is severely retarding the natural development of higher education.”

The report goes on to propose reforms to public subsidy of higher education, calling for an end to the taxpayer subsidizing universities directly, with funding instead being channeled directly to students through an expanded student loans programme. Controversially, the report also suggests that loans be targeted at those students most in need of support, with loans to wealthier students limited to a set percentage of their university fees.

Tom Clougherty, the Executive Director of the Adam Smith Institute, added:

“The funding system outlined in the report would be a huge step forward. Ending the direct subsidy would empower students, because universities would be forced to treat them as paying customers. In the long run, it would also benefit universities since it would help them regain their independence from central government. And it would also benefit the taxpayer, by ensuring their money was used as effectively as possible.”

Stanfield, however, is open about his longer term plans for higher education, making it clear that he believes the government’s £14.3bn subsidy ultimately acts as a transfer of income from the poor to the better off – “taxing the poor to help the rich get richer”, as he puts it – with little economic benefit. He recommends that the government adopt a clear 10-15 year timetable for winding down the government’s support of higher education, so as to give ample opportunity for universities to attract philanthropic donations and corporate sponsorship.

Making Britain a world leader in higher education

Stanfield’s report, which runs to more than 100 pages, also goes beyond university funding to look at the broader question of how to make UK higher education – which he regards as one of our most significant service industries for the future – more dynamic, competitive and entrepreneurial. The report stresses a number of key points:

  • Firstly, the government must establish full freedom of entry into the higher education sector for fully private providers. This means ending the historic protection of the word ‘university’, as well as the role of the Privy Council in approving new institutions.
  • Secondly, the government should extend those tax benefits currently enjoyed by charitable non-profit institutions to for-profit higher education providers.
  • Thirdly, and most importantly, the government must restrict itself to a very limited role in higher education, promoting and stimulating competition rather planning or directing the sector, or using it to meet ‘national objectives’.

Stanfield concluded:

“It is clear to me that the government’s involvement in higher education is doing far more harm than good. Despite the best intentions, government attempts to subsidize and centrally plan industrial sectors like steel, automobiles and telecommunications all failed miserably. Higher education is no different. It has the potential to become our most successful service industry and provide a vital boost to our economy – but that won’t happen unless the government is prepared to back off.”

Banks' defenders win Enterprise Award

Tuesday 23 February 2010

Two influential policy thinkers who defended free-market capitalism in the teeth of the financial crisis will be presented with the National Free Enterprise Award today. Dr Madsen Pirie and Dr Eamonn Butler are President and Director of the Adam Smith Institute, the prominent think-tank which provided much of the intellectual support for the Thatcher government's privatisation and tax-reduction programmes.

The Award, a large trophy in hand-crafted silver, will be handed over at the Institute of Economic Affairs annual conference on the state of the economy, held in the Institute of Directors near Westminster. It will be presented by Professor Stephen Littlechild, the former electricity regulator,who devised the RPI-X formula for regulating rises in regulated utility prices.

The National Free Enterprise Award has a 30-year history. Its lustrous past winners include the airline entrepreneurs Sir Freddie Laker and Sir Richard Branson, hotelier Lord Forte, Nobel economist Friedrich Hayek, politicians Sir Keith Joseph and Margaret Thatcher, Buckingham University Vice-Chancellor Dr Terence Kealey, and financial journalist Neil Collins.

The panel of judges included prominent supporters of free enterprise from various walks of life, and most made Pirie and Butler their first choice for the award. The pair have been much in the news recently for defending bankers during the recent crisis, and pinning the blame on what they see as inept central banks, spendthrift politicians, and incompetent regulators. As Eamonn Butler put it: "The cause of this crisis was the tsunami of paper money that the US and UK kept printing over fifteen years. At first, all of us who surfed on it enjoyed the ride. But inevitably, it crashed into reality and destroyed everything before it."

Pirie and Butler are also critical of the US and UK governments' responses to the crunch, saying that it just conceals the scale of the crisis underneath another wave of borrowing. "But you cannot borrow your way out of debt," they say.

It is a busy week for Eamonn Butler in particular. Total Politics magazine has just voted him one of the 30 Top Political Influencers in Britain, and his new book The Alternative Manifesto – "a twelve-step plan to cure government of its financial alcoholism" – is published on Thursday.

The pair are known for humour as dry as their politics. Butler described his three-decade professional partnership with Pirie as "one of the great double-acts, like Jekyll and Hyde", while Pirie assured journalists that "absolutely no bullying was used on the judges."

Digital Britain is mad and bad economics

4 December 2009

A new report from influential think tank the Adam Smith Institute (ASI) has attacked the government’s Digital Britain white paper – the inspiration for the Digital Economy Bill currently working its way through Parliament – describing plans to intervene in the digital communications industry as “both mad and bad economics”. The report’s author, digital media and communications expert Eben Wilson, put his case bluntly:

“Over the past twenty years, this thriving commercial sector has very rapidly created a vast engineering infrastructure at no cost to the taxpayer, and has generated large amounts of tax revenue in the process. It is hard to think of a better example of something the state should simply stay out of.”

The ASI’s report – Digital Dirigisme – covers the full range of issues addressed by the Digital Britain white paper, arguing throughout that the digital communications industry is characterized by rapid and unpredictable change, which governments and regulators simply can’t keep up with. As a result, their interventions will invariably do more harm than good.

The report goes on to criticize the government for not taking public concerns about the security of personal data seriously enough, describing their approach to this issue as “bland” and “disappointing”. The report suggests that personal identity and all data associated with it should be defined in law as private property owned by the individual. Any use of that personal data without the owner’s consent would thereby become unlawful.

The report also accuses the government of ignoring a “dinosaur in the room” by failing to address the taxpayer-funded BBC’s market dominance, which it says crowds out other commercial players. The report proposes a radical programme of phased privatization of the BBC, coupled with progressive cuts in the licence fee.


Digital Dirigisme – A response to Digital Britain is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. A PDF of the report can be downloaded for free at

Time to reform Parliament – or blow it up?

5 November 2009

If Guy Fawkes came back today and blew up Parliament, would we notice any difference? An influential Westminster think-tank is not so sure.

The EU writes our most important laws, says the Adam Smith Institute in a paper published today, and ministers are more accountable to the media than to MPs. New regulations, like those giving councils the power to search our homes and freeze our bank accounts, are never even debated. MPs vote as the party whips tell them, not as their constituents want.

No wonder, say the Institute's authors, Professor Tim Ambler and consultant Keith Boyfield, that 80% of us think that Parliament has – er – lost the plot.

According to their paper, Knaves and Fawkes, MPs keep themselves busy – and not just on fiddling their expenses. But much of their time is wasted on trivia, leaving them overwhelmed by the deluge of new law coming from Brussels and Downing Street. Parliament's founding purposes – to make laws, restrain public spending, hold ministers to account, and represent the public – now exist only in name.

Tempting as it is to blow up Parliament and sell the land to reduce the National Debt, Ambler and Boyfield say we should put aside the gunpowder, because these are vital democratic protections that need to be re-asserted.

However, nobody will trust MPs until they clean up their expenses act, and streamline their operation. Britain has 646 MPs while the United States, with five times the population, has 435 Members in the House of Representatives. David Cameron's proposed 10% cut in MP numbers does not go far enough, believe the authors, who suggest a far more radical reduction.

And instead of spending hours discussing road closures and drains, the time devoted to both UK and EU legislation should be proportionate to its importance, says the paper. EU regulations should be more effectively scrutinised, and MPs should be told which of the annual 3,500 'statutory instruments' that currently go through on the nod embody serious legislative changes rather than trivial amendments, so that they can be discussed and voted on.

Ambler and Boyfield would strengthen accountability by making regulators like Ofwat, which sets gas and electricity prices, answerable to MPs, and MPs should be able to question civil-servants directly, rather than having to go through ministers. And Opposition MPs should chair the main parliamentary committees to ensure close scrutiny of ministers and officials.

"Parliament today has lost its power and significance. It should reform itself and not wait to be told what to do by Whitehall, Downing Street, or Brussels – none of whom would be sorry to see it go," says the Institute's Director, Dr Eamonn Butler. "Otherwise, they might find the electorate putting a large keg of gunpowder under them all."

Britain's financial crisis was 100% home grown, says leading Tory

Tuesday, 6 October 2009

One year on from the part-nationalizations of Lloyds-HBOS and RBS, a new report by leading Tory John Redwood MP has pinned the blame for the financial crisis squarely on the government and the Bank of England.
In Credit Crunch: The Anatomy of a Crisis, published today by the Adam Smith Institute, Redwood attacks the notion that the UK economy was well run, and that its problems were imported from the US. He blames bad monetary policy from the Bank of England, bad regulation from the Financial Services Authority, and bad fiscal policy and crisis management by the British government for the severity of the crash. Britain's crisis may have had much in common with America's, Redwood says, but it was very much home grown.

Britain's fake boom
The report traces the roots of the banking crisis to the "false boom" of 2001-2007. A boom fuelled by ultra low interest rates, lax credit controls, and an explosion of lending, rather than real, sustainable growth. These economic conditions encouraged banks, like Northern Rock, to pursue an aggressive growth strategy based on selling securitized mortgages and borrowing short-term from the money markets to finance new lending. As well as driving a house price bubble, this approach sowed the seeds of later disaster.
Blame the Bank of England
The Monetary Policy Committee of the Bank of England must take a major share of the blame for the crash. Redwood explains that having first kept interest rates too low for too long, it then raised them too far and too fast in 2007. They starved the money markets of cash and triggered the first phase of the financial crisis, as Bradford & Bingley, Alliance & Leicester and HBOS had to be bailed out, and Northern Rock, ultimately, nationalized. Incredibly, Redwood points out, in the year that followed the run on Northern Rock, the Bank of England acted as though nothing serious had happened, keeping interest rates relatively high when they should have been cutting them.

The government got it wrong
The report argues that the worst policy mistake of the crisis was the government's. In autumn 2008, just as world markets were showing serious signs of strain, they suddenly decided to insist that the banks hold more cash and capital than they had required during the boom years. As Redwood points out:

"That was the worst possible moment to make such a request, and the worst possible thing to do when markets needed reassurance from the authorities that the banks would survive. As soon as the regulators' demands became public, confidence in the major financial institutions was undermined, and RBS and Lloyds-HBOS were forced into semi-nationalization, at huge taxpayer risk."

Reforming Britain's banks
The result of this disastrous intervention, Redwood says, is that Britain has been left with a banking sector with too few competitors and too many weak balance sheets. He argues that the prime task facing the next government will be to remodel the state owned banks, splitting them up into smaller institutions to encourage domestic competition, and return them to the private sector as soon as possible. The report also suggests that banking regulation should be returned to the Bank of England, who would in future focus on the 'big picture' and set counter-cyclical cash and capital reserve requirements for the banks.

Click here to read the report.

Next Government given shopping list

Monday, 14th September 2009

The Adam Smith Institute gives the next government a "shopping list" of policies needed to rescue Britain. In a report "Zero Base Policy", released today, the Institute's President, Dr Madsen Pirie, says minor change to existing policies is no longer an option, given Britain's dire economic and social fabric. Instead the need is for "zero base" policies to provide new and effective ways of achieving policy objectives.

Topping the agenda is economic change. The ASI sets out measures to turn Britain from a high tax, high debt economy into one on the virtuous circle of low taxes and increasing growth and revenues. The ASI calls for rejection of the Treasury's 'static' model of the economy in favour of a 'dynamic' one which factors in the growth impact of lower taxes.

The ASI proposes to lift the low paid out of income tax by raising its starting threshold to £12,000 p.a., corresponding to the minimum wage, or about half the average wage. This eliminates the need for vast welfare transfers to low earners by letting them instead keep what they earn. At the top end the ASI proposes to expand the tax base by successively raising the threshold for the 40% rate until no-one pays it.

They propose overhauling local finance, replacing Council Tax by local sales taxes as in the USA, and setting business rates locally. A radical innovation is their call for local budgets to require popular vote approval before coming into effect.

Civil liberties are to be addressed by the ASI's call for a one-year judicial commission to review them and make recommendations. Meanwhile the ASI report calls for public body CCTV surveillance to be limited to police and security services, and for anti-terror powers to be restricted to cases of suspected terrorism.

Controversially, Dr Pirie describes government policy on drugs as a failure, and calls for a total rethink, under which most narcotics would be made available at medical centres, and the production and sale of recreational drugs legalized under controlled conditions.

The ASI sees the biggest opportunity for reform in education, and calls for parents to be permitted to use their child's education allowance at any school which is non-selective and requires no additional top-up fees.

Regulation is to be addressed by the use of 'sunset' clauses under which regulations expire unless specifically renewed, and for regulation to be implemented by case law, with the findings of tribunals and juries filling in the details of broad statutes.

The shopping list contains 33 radical objectives which it calls upon the next government to pursue, including the abolition of regional tiers of government and agencies, and the phasing out of most capital taxes. It closes with a call for the MPs representing English constituencies to be constituted in Westminster as the English Parliament, with powers similar to those enjoyed by the Scottish Assembly.

"The list," says Dr Pirie, "sets out the objectives which could turn Britain around. While they could not all be implemented within a single term, they should constitute the goals to be aimed at."

Forget Tobin taxes – we need more competition in the banking sector

4 September 2009

As G20 finance ministers meet in London to discuss the economy, a new briefing paper from leading think-tank the Adam Smith Institute has attacked Financial Services Authority chairman Lord Turner for suggesting of a new tax on financial institutions, calling his plan "misguided", "unfounded" and "incoherent".

Miles Saltiel, author of the paper and the Institute's senior fellow in finance, accused Turner of playing politics, and said he was attempting to harness anti-City populism to shore up his position, as well as that of the FSA – which the Tories now say they will abolish.

The paper takes apart Turner's case for the so-called 'Tobin tax', arguing that there is no objective way of knowing whether the UK financial services sector has become disproportionately large. Since it operates internationally, comparisons with UK GDP are irrelevant. On a practical level, moreover, Turner's scheme is a no-go: such a tax could not be implemented domestically without driving business overseas, and reaching any international agreement would take a generation.

However, Saltiel's most damning criticism of the 'Tobin tax' is that it is a lazy alternative to undertaking the reforms the financial sector really needs. By guaranteeing them a bigger slice of the profits, it would encourage politicians to accept the too-big-to-fail, near-monopolies that have emerged in the banking sector over the last economic cycle. "This is nothing less than a corporatist Faustian pact", Saltiel added.

Tom Clougherty, the executive director of the Institute, said: "Turner is advocating precisely the wrong approach. What we need are smaller banks and more competition in the banking sector. That would reduce systemic risk and help prevent future crises, but it would also be good news for consumers. The government ought to start by breaking up RBS and Lloyds TSB - HBOS, before returning them to the private sector."

A PDF of Regulatory Corporatism: Lord Turner and the Tobin Tax can be downloaded here.

Cut business taxes and public spending to stave off UK bankruptcy

Tuesday 4 August 209

Across-the-board cuts in government spending and reductions in business taxes are essential if the UK is to balance its books and stave off bankruptcy, according to a think-tank report published today. The Adam Smith Institute says that an incoming Conservative government will have to draw up a 'Medium Term Financial Strategy' to convince investors that it is serious about bringing the public finances under control and being able to pay off the country's mountain of debt.

Balance the books

The report, by the City analyst Nigel Hawkins, says that the public finances are out of control. The government aims to borrow £175 billion this year, and to continue borrowing, until its total debt reaches £1,370 billion in 2013/14 – some 76% of the nation's income.

But the reality is worse. The government's figures ignore the £37 billion capital injection into the banks, and the £585 billion of bank liabilities now underwritten by taxpayers. And the IMF and other leading economists say the government's growth forecasts are far too optimistic.

The Institute concludes that it is quite possible that Britain could go broke. This year the it hopes to issue an unprecedented £220 billion of gilt-edged securities, and to treble Treasury IOUs up to £65.5 billion. If investors get worried, this financing plan will fail and Britain would be forced to ask the IMF for a bail-out.

The next government should admit that borrowing is far too high, draw up a Medium Term Financial Strategy to restore stability, and focus on retaining the UK's Triple-A credit rating.

Cut public spending

Hawkins points out that the level of public spending has soared, to £671 billion this year. Extra welfare payment because of the recession may push the figure up even more. If the government's books are to be brought back into balance, public spending must be cut. Private-sector employees, who have seen their own wages and pensions cut, resent the privileged position of civil servants, creating political pressure for government thrift.

The next government should aim for real reductions of 3% or more over the medium term. Across-the-board cuts over an extended period would gradually return the public finances to balance.

Commit to lower taxes

Taxes have also risen substantially, and need to be reduced and simplified in order to generate economic growth, says the report. Across-the-board tax cuts will not be feasible until expenditure cuts begin to stabilize the public finances. However, swift cuts in corporate taxes, and reductions in other business burdens, are essential in order to boost the UK's competitiveness.

The next government should pledge to cut taxes once the public finances are under control, reduce corporate taxes in order to promote investment, and reduce and simplify income tax and NI to promote employment.

Other priorities

The next government should also:

  • Closely control the money supply and commit to sound money.
  • Privatize functions such as water utilities, broadcasting, the postal service, and transport.
  • Reduce public sector pension liabilities by closing over-generous schemes to new members.
  • Restore honesty into PFI deals, which are currently not counted on the government's balance sheet.
  • Radically improve the management of public procurement to reduce cost and time over-runs.
  • Overhaul bank supervision, and stress-test the large banks to forestall a future crisis.
  • Progressively reduce government guarantees to the banks and sell its bank shareholdings.


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