Balancing the budget

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balancing-the-budget

Apparently the Tories are going to cut public spending by 10%. But are they really? Assuming a May 2010 election, and a bit of time to get organised, that should mean cutting Darling’s proposed spending for 2011/12 from £717 billion to £645 billion.

Except that they aren’t going to cut education, or health, or overseas aid. And they can’t cut debt interest or payments to the EU. And they are only proposing to cut departmental expenditure, not benefits, pensions or tax credits. So in fact the Tories’ supposed 10% cut is actually barely 3%, from £717 billion to £695 billion.

That leaves the Tories’ spending more than Labour’s record £671 billion this year. Even allowing for inflation, the Tories propose to spend more than Labour ever spent. You call that a cut? Pathetic.

So what can be done to balance the Budget?

The Treasury estimates that taxes will bring in £577 billion in 2011/12, but frankly no-one else does. Lets assume that we’re not going to get any more than 2008/9’s £530 billion. So what would we have to do to balance the Budget at that level, instead of Darling’s insane plan to borrow £111 billion?

Well, four years ago (2005/6), government spending was £523 billion. Take spending back to that level, and we would have a surplus. Remind me, who was the Chancellor who thought that £523 billion was a generous level of public spending just four years ago?

OK, those calculations don’t allow for inflation. So let’s go all the way back to 2002/3 – five years into the Labour government. Then the government’s total spending was £425 billion. Add on inflation, and that would cost about £515 billion by 2011/12, leaving a £15 billion surplus.

So balancing the Budget, without any tax increases, means the government just has to do what it did in 2003. Is that really so difficult?

A response to Digital Britian

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a-response-to-digital-britian

The government has announced "plans to help secure Britain's place at the head of a new media age". We should be cautious whenever we see governments combining future visions with the word "plan".

Not surprisingly, the headline measures involve the use of force to construct a "transformation" - in Gordon Browns words - of the distribution of digital broadband, comparing it with what he calls "essential services such as electricity, gas and water".

This is an upside-down policy approach. Technology, delivery methods and service product innovations are changing rapidly under private initiative, individual traders are juggling for profitable commercial position and the industry is moving on fast. Now leviathan wants in on the act to re-invent a commanding height in the economy that they control. That's mad.

If ever there was the case for getting out of the way, this is it. The dangers of larger players getting into bed with government using new legislation as an excuse are huge. Producers and service providers are bound to follow market incentives and the government appears about to create incentives to cartelise the industry in the name of equality for old ladies and slow-witted shopkeepers who do not have broadband, and an unknown method of curtailing individuals engaging in file-sharing.

We should not forget that it is possible to get your granny on the internet for essentially zero cost if she can cope with a computer, and as the part owner of a specialist jazz download site I happen to know that it is within the scope of even small companies to develop fullproof watermarking of music. These innovations will strengthen through market incentives through time.

The tangle web the government is weaving is made complicated by their interest in what happens in digitalised television, now under threat from broadband internet. But the threat is a chimera, created by the ossified structures of a quasi-nationalised television industry. We are likely to see a carve up of bandwidth use rights decided on by government which guarantees various incumbent players a secure channel to broadcast audiences. But this horsetrading negates what the market actually does; i.e. fine tune audience preferences through the creative innovation which the internet makes happen. It is time that some old things failed so that new things can take their place. For example, why should local news always be delivered on television? Would it not do local internet services some good it it migrated to the internet? Hey, they could even compete with the tax subsidised BBC online service.

Over the next few weeks, we are going to have a feast of purported details about the "plan" to develop "digital Britain". Listen, but keep looking at the wider picture, these are dinosaurs stumbling around in Jurassic Park, digitally focussed mammals have been through the fence and out in the new world for a long time and are creating new ways of doing things that governments haven't even thought about yet.

The problem with Parliament

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In the wake of the MP expenses scandal, much attention is being given to the way in which our elected representatives are remunerated. Many people think they are paid too much, or at least that their allowances are too generous. On the other hand, there seem to be plenty of people (particularly those involved in politics and the media) who believe that MPs are not paid enough. The argument goes that if we want to attract decent MPs, we need to pay them more.

Well, I'd say Jim Hacker deals with that one fairly well in the video above (fast-forward to 2 minutes). You could fill every seat in Parliament twenty times over, even if people had to pay for the privilege. And it wouldn't make any real difference to the quality of the policies produced in Westminster.

The simple fact is that MPs these days don't have much of a job. The House of Commons is now so dominated by the Government that it's barely a legislature at all. In fact, it's more like an electoral college: we elect them and then they (indirectly) determine who the prime minister (and government) will be. Then they're stuck to doing social work for their constituents until the next general election, unless they can suck up to the government enough to get a ministerial position.

Perhaps that's an oversimplification. There are some backbench MPs – John Redwood, for instance – who do excellent policy work. But they're the exception rather than the rule. And, ultimately, that suggests a very unhealthy political system.

The Left in 1999

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the-left-in-1999

They had no ideas then either.

Blog Review 997

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Another wonderful green scheme appears to be no more than a perpetual motion machine: or, of course, theft.

How fascinating. A judge upholds the law and so we're all going to see whether the Obama proposals for the car companies are in fact better than simple bankruptcy.

The banning of repugnant transactions leads to even more repugnant outcomes. This is as true of organ donations as it is of drugs or prostitution.

Just because the BNP wins a couple of seats doesn't mean we should tighten up on immigration.

A detailed look at just how many parts of Magna Carta the current government is breaking.

Technology changes the calculus of political repression (just as it changes the calculus of pretty much everything else).

And finally, technology changes what we tell the kids about divorce.

Time to cut public spending

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Here's a letter I had published in the Evening Standard yesterday:

The voters are ahead of the politicians in recognising that whichever party wins the next election is going to have to cut public spending - in a poll for Politicshome in March, 72 per cent thought spending had risen too high.

Belatedly, the Conservatives are saying the right things. But they are not yet going nearly far enough. Research by European Central Bank economists has suggested Britain could save £96 billion a year if our public sector was as efficient as Japan’s or Australia’s. That works out as a 16 per cent spending cut. If we want to restore sanity to the UK’s public finances, these are the sorts of numbers we need to be contemplating.

Local government and public procurement might be the easiest targets but – whatever the Tories say – the NHS must not be spared from this process. It now consumes more than £100 billion of taxpayers’ money every year, and is notoriously unproductive. Without radical reform, things are only going to get worse.

Tom Clougherty, executive director, Adam Smith Institute

The BBC: Under threat from competition

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There's a proposal in the air to take about £130m out of the TV Licence Fee and use it for promoting broadband access in Britain. From the flurry of interviews and debates on the BBC's radio and TV channels, you would think this is the end of civilization as we know it. But it's just £130m out of a licence fee revenue that is twenty times that. So why the fuss?

The answer is that the BBC knows this is the thin edge of a fatal wedge. Already, money from the TV Licence Fee has been used to help the general conversion to digital television. Now here's another proposal which will also take some of it for other means of communication. If the BBC can't hold the pass now, it's slaughtered. Once the principle is broken, that the Licence Fee exists to fund the BBC, it will be open season on it. Scores of broadcasters will be pointing out that they too provide 'public service' broadcasting, so why should the BBC alone get a free ride.

And they're right. TV and radio channels should support themselves, through advertising or subscriptions, without imposing a regressive communication poll tax on the public. If you really believe that we need 'public service' broadcasting funded out of taxation, then fair enough – but it should go to the providers of that broadcasting on the basis of cost and quality, and should not be doled out exclusively to just one, particularly one that is so large and powerful, a real monopolist on the communications scene.

To be honest, I think that 'public service' broadcasting is mostly just a chance for politicians to preen themselves in public, so I wouldn't give it a penny. But if we're going to have it, let's buy it in from a range of suppliers and at least get the benefit of competition.

Defined benefit pension schemes

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For many years, the gap between public and private sector pension provision has been widening considerably – the sense of manifest injustice is certainly becoming stronger. Recent developments in the private sector with regard to the financial viability of defined benefit pension schemes are particularly relevant. With falling returns – due to a weak stock market and low gilt yields - many pension fund deficits have spiraled.

The share price ratings of both British Telecom and British Airways are being seriously damaged by their ongoing pension fund liabilities - accounting standard changes now require companies to report their pension fund liabilities in their balance sheets. Few FTSE 100 companies now offer a defined benefit pension scheme to new employees. Even BP has recently announced that it was withdrawing this option. More seriously for the future of such schemes, Barclays has confirmed that its defined benefit pension scheme will be closed to existing employees. In the longer term, few defined benefit pension schemes are expected to survive in the private sector as companies recognize their many drawbacks.

But in the public sector, defined benefit pension schemes are continuing to rack up massive liabilities for taxpayers –a figure of close to £1 trillion has been cited by the Institute of Economic Affairs. Action to stem these vast pay-as-you-go liabilities is vital. Options include levying higher pension contributions on public sector employees, a requirement for them to work longer to secure such benefits and a paring back of pension-related entitlements. Apart from removing the attraction of a defined benefit pension scheme for most new recruits, the Government could also introduce a far more radical option – the phasing-out of its defined benefit pension schemes for most existing public sector employees.

The potential savings would be massive, but such a policy would be controversial. Very controversial.

Failings of the points-based migration system

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Students are not the only people hurt by the UK’s points-based visa application system. Non-EU citizens who seek employment in the UK are also disadvantaged. The government intends to accomplish three objectives with the new migration control system. First, Gordon Brown’s government wants to curtail the number and type of non-EU citizens working in the UK. Second, the government wants to keep visa holders off the dole. The third government objective is to raise money from visa applications.

The first objective has been publicly stated by the Home Office. The second objective is revealed through a review of the new visa application forms. The points-based system requires all visa applicants to have sufficient funds to support themselves, and any dependants, throughout their stay. Applicants also certify that they will not receive welfare benefits whilst in the UK. The third objective is manifest by hike in visa application fees. For example, unsponsored visa applicants must now pay between £675 and £1020 for the application fee. Sponsored applicants must pay a £265 fee. Even students are required to pay £145 to apply for a visa. Applicants in these three categories who have dependents must pay the same application fee for each dependent. Visa application statistics are sparse for the period since the points-based system was launched, but in the 2006–2007 financial year, the UK government received 2.7 million visa applications. That translates into millions of pounds of revenue for the government.

The concerns underlying the government’s objectives can all be traced to the maladies of the welfare state. Welfare states attract people who are content to live on the dole. The new points-based system cracks down on would-be social loafers from non-EU nations, but European freeloaders are left undeterred. This is especially problematic due to the combination of the UK’s high standard of living and relatively generous welfare benefits. Welfare states are also expensive to run, which explains the high taxes and government fees.

The easy way to eliminate the government’s welfare-based concerns is to do away with the welfare system. That may not be politically practicable at the moment, but an effective compromise would be to pare down welfare benefits to the point that the UK’s dole is much less desirable than welfare programs in other EU nations. This will encourage net negative residents to look elsewhere for government handouts. With fewer freeloaders, many of the government’s immigration concerns will be allayed. The Home Office could then relax its points based system rules to make it easier for industrious, innovative applicants to make positive contributions to the UK economy.

Chuck on economics

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chuck-on-economics

Why we shouldn't learn economics from Charles Dickens.