08 June 2010
• The Adam Smith Institute claims we need to completely re-think government in order to solve long term fiscal problems
• Its report proposes the creation of a powerful, cross-departmental Secretary of State for Public Service Reform to lead structural changes
• It also suggests dramatically cutting the number of government departments, and reducing the size of the cabinet to 12
The coalition government is right to take the public debt seriously but must look beyond short-term cuts and re-examine the whole structure of government, according to Dr Eamonn Butler, director of the Adam Smith Institute.
His latest report, Re-booting the Government: how to deal with the deficit without cutting vital services, draws on successful efforts to eliminate budget deficits in Canada and Sweden, and argues that the government must focus on ‘reform’ rather than just ‘cuts’ if deficit reduction is going to be sustainable in the long run.
Dr Butler’s report compares government to a computer that is overloaded and slowed down by unwanted files and unnecessary applications. The sensible approach is to save what needs to be saved, and then re-boot. In the case of government, we must work out what the state actually needs to do, and sweep away the rest – all those costly, politically driven initiatives that have been established over time and now clutter the budget.
The report goes on to argue that – like Canada in the 1990s – we need a powerful Secretary of State for Public Service Reform to lead a thorough review of the operations of government, working out which public services are valued and essential and which bring only marginal benefit, and oversee structural changes. This position should be regarded as one of the top jobs in politics, and failure has to be a career-breaker.
Dr Butler also suggests that we re-think public administration, reducing the size of the Cabinet to 12, in order to improve the collegiate working of government and make the ministers more recognizable and accountable. His plans would also involve the number of ministerial departments being reduced to 11: the Cabinet Office, the Treasury, the Home Office, the Ministry of Justice, the Foreign Office, and the Ministry of Defence, plus departments for Health, Education, Welfare, Infrastructure, and Local Affairs. Other departments would be closed down.
Dr Butler added:
“It is clear from the Canadian experience that the government should not just take a cheese-slicer approach to spending. Rather, we need to re-think the structure of government itself. We need to balance the budget, but the best way to do that is not by thinking of the whole things as a 'cuts' exercise. Think of it as a reform exercise. Focus government on what it really needs to do: re-engage with the public, stop creating new programmes and quangos just because they capture a day's headlines. Rethink the whole thing. Then re-boot, and you find your government running much more efficiently and cost-effectively.”
28 May 2010
Tax Freedom Day 2010 will fall on May 30, according to the Adam Smith Institute (ASI), which has been calculating Britain’s Tax Freedom Day since 1991.
That means that for 149 days of the year – from January 1 to May 29 – every penny earned by UK residents will be taken to pay for government spending.
This year’s Tax Freedom Day comes three days later than in 2009, when Tax Freedom Day was May 27. The most significant driver of this change was the rise in VAT which came into force on January 1: this alone pushed Tax Freedom Day one-and-a-half days further into the year.
But what about the deficit?
Tax Freedom Day is only based on tax receipts, and takes no account of the government’s budget deficit. According to the ASI’s executive director, Tom Clougherty, this can be misleading:
‘Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers.’
According to the Institute’s research, if all the government’s 2010 expenditure was financed by taxes rather than by loans, Tax Freedom Day would not come until July 8 – some 38 days later.
That gap points to Britain’s worst fiscal position since 1976 – when Britain had to be bailed out by the IMF – and suggests that Britons will face savage tax rises unless public spending is urgently brought under control by the next government.
Which taxes are the biggest?
The biggest part of the UK tax burden is income tax, which Britons will have to work 41 days to pay in 2010. They will work another 27 days to pay National Insurance Contributions, and 21 to pay VAT. Thereafter, various excise duties account for 13 days, corporation tax for 12, and council tax and business rates for another 7 days each. Britons will work for 3 days to pay stamp duties, and 18 more days to pay a range of miscellaneous taxes. This includes inheritance tax, which takes 15 hours to pay.
What might have been?
According to the Institute’s research, things could have been radically different if public spending had been kept under control since 2000, the last time the government managed to balance their books.
In 2000-1, three years into the Labour administration, government spending was £367.1bn. For 2010-11, the government is forecasting a figure of £704bn: nearly twice as much. If it had grown in line with inflation since 2000, public spending would now be £440.8bn – £263.2bn less than current estimates. That saving would be enough to wipe out the £163.8bn deficit, abolish all National Insurance contributions, and get rid of inheritance tax.
Dr Eamonn Butler, the Institute’s founder, said:
‘It really is pretty galling to think about. After all, if someone offered you a choice between today’s public services, today’s taxes, and government debt that will take generations to pay off, or 2000’s public services, with no debt and a massive tax cut, which one would you go for? Gordon Brown shouldn’t just be remembered for his irresponsibility, but also for a decade of squandered opportunities.’
22 May 2010
The increase in Capital Gains Tax proposed by the coalition government will not bring in the estimated extra revenue to the Treasury, according to a new paper from the Adam Smith Institute (ASI). Instead it will diminish funds coming in and widen the deficit rather than narrowing it.
The ASI's research looks at the experience of other countries, notably the United States and Australia, and shows that increases in the rates of capital gains taxes there have led to reductions in revenue. Conversely, it has been decreases in the tax that have led to rises in revenue.
The effect will be even sharper in the UK, claim the Institute. Unlike income tax, capital gains tax can be voluntary - people can decide when to cash in their gains and may postpone this. As the proposed increases are widely seen as temporary and are likely to be lowered later, many people will leave their assets to await a more benign tax rate. The normal annual flow will diminish, leading to a sharp drop in revenues, and reinforcing the experience of other countries.
The Institute also disputes the suggestion that when capital gains tax levels are below those of income tax, people will switch from one to the other to escape taxation. It quotes figures from several countries, which suggests that this does not happen in practice.
The government should not impose an across-the-board increase in Capital Gains Tax, but should instead distinguish between short-term speculative gains and long-term asset appreciation. Without that distinction, the proposed tax increase will do serious harm to the economy. Madsen Pirie, president of the Adam Smith Institute, says:
"In intending to tax the rich, politicians, without understanding the effects of their actions, are proposing measures which will decrease the Treasury's tax take and make the deficit even worse This is hardly qualifies as sensible economic policy."
Thursday 8 April 2010
According to a new briefing from the Adam Smith Institute (ASI), proposals to introduce a new ‘bank levy’ would do little to correct the problems in the banking sector, and act as a distraction from other, more pressing reforms.
The briefing also expresses skepticism that governments would ring-fence the proceeds of such a levy for future crises, suggesting that they would soon become just another tax to finance current expenditure.
Indeed, it has already been reported that Alistair Darling favours national discretion to use the proceeds of a proposed EU-wide levy as the government sees fit, rather than reserving funds for the future.
According to Miles Saltiel, the author of the ASI’s briefing and a City financial expert, imposing such a levy is also likely to prevent banks from rebuilding their reserves – a key economic priority, in his opinion – as well as holding up lending.
Saltiel, who is a senior fellow of the Institute, also dismisses the ill-thought out populism behind ideas such as the ‘Tobin tax’, punitive regulation of hedge funds, and swingeing tax increases on bankers.
Instead he argues that policymakers should focus on six key issues:
(1) The government should abolish future expectations of “too big to fail” and encourage competition by breaking up the nationalized banks. The Williams & Glynn Bank, ABN-AMBRO and NatWest should all be filleted out of RBS, while HBOS and TBS should be split out of Lloyds.
(2) The government should also ensure that failed banks can be run down in an orderly way, by requiring so-called ‘living wills’.
(3) The UK should campaign for derivative contracts to be moved onto regulated exchanges, rather than being traded over-the-counter. As well as reducing counter-party risk, this would be good business for the City of London.
(4) The British government should take the lead in advocating tougher international capital and liquidity ratios. They should also press for stricter rules on what counts as capital.
(5) The UK should restrict how much its banks trade on their own account in capital markets by requiring higher capital reserves to be held against such activity.
(6) Legislation should require honest accounting and transparency. Governments – whose off-balance-sheet obligations dwarf those of the private sector – must not be exempt from such rules.
Tom Clougherty, the executive director of the ASI, added:
“Banking reform is one of the most pressing policy challenges facing the UK, but too often our politicians resort to crude populism rather than grappling with the real issues. This needs to change – having a more stable, more competitive banking sector is vital to our future economic well-being.”
The Lesson of a Levy on Banks is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. A PDF can be downloaded free of charge at www.adamsmith.org/files/a-levy-on-banks.pdf
April Fool's Day 2010
A Westminster think-tank has had to scrap its annual Honest Politician Of The Year Award because no qualifying candidates could be found.
The influential Adam Smith Institute, which organises the annual Award, said that it had considered a number of promising nominees, but found insufficient evidence to prove their honesty to the Award jury.
Anthony Steen MP was nominated for his frank view that people were “jealous” of his Balmoral-type second home. However, the jury ruled this untruthful because Balmoral lacks a taxpayer-funded duck house.
Nicholas Winterton MP also reached the shortlist for so truthfully expressing his opinion of standard-class travellers as “a totally different type of people.” But he was disqualified for falsely claiming that his views had been “misrepresented”.
Next year the Adam Smith Institute will give its award instead to the Corrupt Politician Of The Year. “This should give us many more candidates, said Institute director Dr Eamonn Butler. “Indeed, I can think of 646 already.”
“Corrupt politicians are actually the most honest. They have to do what they are bribed to do in order to stay in business. So when bought, they stay bought.”
Another problem for the Awards is that the trophy, depicting a golden hand in a back pocket, and sponsored by Lord Mandelson’s mortgage broker, has been lost. Stephen Byers held it in recognition of his sincere contempt for Railtrack shareholders, but somehow managed to leave it in a cab for hire. Geoff Hoon and Patricia Hewitt have been hired to ask questions, for the usual consultancy fee.
G Brown 020 7930 4433
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:
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:
“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.”
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."
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 http://adamsmith.org/images/stories/digital-dirigisme.pdf