Tim Worstall
What austerity?
What austerity?
Tim Worstall
Renewables aren't so cheap then
Renewables aren't so cheap then
Tim Worstall
Well, yes, obviously, quite so
Well, yes, obviously, quite so
Tim Worstall
Another thing that's failed the market test
Another thing that's failed the market test
Tim Worstall
Perhaps price controls aren't all that good an ...
Perhaps price controls aren't all that good an idea then?

Public sector profligacy

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public-sector-profligacy

If the finance director of any private company issued a set of half-year figures like Alastair Darling’s pre-budget report, angry shareholders would be calling special general meetings to have the entire board sacked.

Since 1997 the government has spent, and borrowed, wildly. Its debts are about as large as they were after Waterloo and the Second World War. At least then we could see where the money went – saving ourselves and Europe from tyranny and fascism. Today we have no victories to show for it. All that it has bought us is bloated government and a collection of decrepit banks. Yet the borrowing continues to rise – by an amount equal to £3,000 for every man, woman and child in the UK this year, and about the same the next.

If that were a company, it would not be just the board getting fired. There would be massive cost-cutting all round. Over the last five years, public spending has grown nearly 7% a year. The Centre for Economic and Business Research figure that if our debt is ever to stop growing, we have to shrink that spending by at least 1% a year. With inflation at 2%, that means real cuts of at least 3%.

Of course, politicians hate cuts, particularly before an election. But private companies have to take a hit when times are bad. They already have. Ask all those people who are out of work – which I reckon could peak at 3.8 million – and the millions more who have had to take real pay cuts. The CBI says that half the UK’s companies plan to freeze pay this year. Two-thirds of them have already imposed recruitment freezes.

Yet the finance director of UK plc, in worse debt than any private company and any comparable country, is not proposing cuts or freezes at all. Indeed, he aims to pay his workers another 1% this year! If their productivity had grown by a quarter in the last decade, as private-sector productivity did, that might seem sensible. But in fact, public-sector productivity declined 3.4% in the same period.

Would you invest in a company like that? Many foreign investors are having doubts too, and three rating agencies are hinting that UK plc is a bad risk. Of course they know that there is an election coming up. The first budget after that will be crucial. But really, we should be taking action now. We do not need to lose front line services. But we need to cut back office costs, and reduce those gold-plated public-sector pensions, and bloated staff numbers and pay. The public are ready for it. After all, they have been tightening their own belts for a while. Is it not about time, for once, that our government sector did the same?

Dr Eamonn Butler is Director of the Adam Smith Institute and author of The Rotten State of Britain.

The effect of the NI rises

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Futher to my blog below on the coming rises in National Insurance Contributions (NICs), which Alistair Darling has penciled in for April 2011, it is worth emphasising the fact that these are not just rises in the rate paid by the employee. The employer rate set to go up as well, from 12.8 percent to 13.8 percent. I suppose the government must think that it is a sensible idea to announce an increased tax on jobs while unemployment continues to rise. I certainly wouldn't put that kind of stupidity past them.

Of course, the real reason that governments tend to like 'employer contributions' is that it allows them to pretend the 'workers' will be unaffected. In the long run though, this is a fantasy. Most firms will have a staff budget, out of which they pay the employee's wages, income tax, employee NICs, and employer NICs. So when governments hike employer contributions, it ultimately results in wages staying lower than they otherwise would have, and employees getting a worse deal.

Indeed, if we're going to be really honest about the income tax burden, we really ought to factor in both employee and employer NICs, and compare the total cost to the employer of an employee with that employee's take home pay. So, taking on the tax system as it will be in 2011 (assuming Darling gets his way):

  • Someone with a salary of £12,574 will cost their employer £13,613 per year. But their take home pay will only be £10,462. That means 23 percent of the total cost of employing them goes directly to the government.
  • Someone on £23,640 will cost their employer £26,206. Their take home pay will be £17,987. That means 31 percent of the total cost of employing them goes directly to the government.
  • Someone on £38,505 will cost their employer £43,122, but will only take home £28,095. That means 35 percent of the total cost of employing them goes directly to the government.
  • Someone on £72,581 will cost an employer £81,901, and take home just £48,395. That means 41 percent of the total cost of employing them goes directly to the government.

This gap between cost of employing a worker and what they actually receive is known as the 'tax wedge'. It is damaging to the economy because it makes many jobs uneconomic, as the gross cost for the employer of providing a reasonable after-tax wage becomes more than the work is worth. This particularly damages the unemployed and low skilled, as it reduces job opportunities. As such, a bigger tax wedge is the last thing we need as we come out of recession.

P.S. In case you were wondering why I used such strange income figures, the salaries above correspond to the average, pre-tax incomes of the 2nd, 3rd, 4th and 5th quintile of UK households.

UPDATE: I'm grateful to a reader who wrote in correcting my fourth bullet point. I had mistakenly put £113,103 as the total cost to the employer and £64,262 for take home pay. These are in fact the figures for somone with a salary of £100,000, not £72,581. The post has now been corrected.

Planned tax rises

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In his Pre-Budget Report yesterday, Alistair Darling announced that national insurance contributions for employees, employers, and the self-employed would rise by 0.5 percent from April 2011 onwards. That's on top of the 0.5 percent rise he had already announced, so the total increase will be 1 percent extra on all earnings over the Lower Earnings Limit (LEL), which is currently £4,940 but will rise to £5,044 for 2011/12.

National Insurance is not actually 'insurance', of course. Its proceeds are not hypothecated to fund benefits or pensions. It is just a tax levied on personal income to fund general government expenditure. So to all intents and purposes, this is an across-the-board, 1 percent rise in income tax. It would be far more honest for the government to bill it as such, and to merge income tax and national insurance into a single, unified structure. But then again, honesty isn't really the government's thing, is it?

Below, I've done a few tables showing how combined income tax and national insurance rates are going to change over the next few years, according to the government's plans. It's a real mess: we're going to go from having five tax bands in 2009/10, to nine in 2010/11, and ten in 2011/12. The progression of the rates is not consistent either – thanks to gimmicks like gradually withdrawing the personal allowance for people earning over £100,000, and having different thresholds for income tax and NI, they jump about all over the place, creating pointless confusion for no reason other than to conceal from people the amount of tax they are really paying.

I hope that the next government will undertake a programme of serious tax reform, aiming for clarity, simplicity, and lower, flatter rates all round. The ASI will be publishing a major new report on this subject in the run up to the general election, so they'll have no excuse for not knowing what to do.

2009/10

£ 0 – 4,940 0%
£ 4,940 – 6,475 11%
£ 6,475 – 43,875 31 %
£ 43,875 + 41 %

 2010/11

£ 0 – 4,940 0%
£ 4,940 – 6,475 11%
£ 6,475 – 43,875 31%
£ 43,875 – 100,000 41%
£ 100,000 – 106,475 61%
£ 106,475 – 140,000 41%
£ 140,000 – 146,475 61%
£ 146,475 – 150,000 41%
£ 150,000 + 51%

 2011/12

£ 0 – 5,044 0%
£ 5,044 – 6,535 12%
£ 6,535 – 43,875 32%
£ 43,875 – 43,888 52%
£ 43,888 – 100,000 42%
£ 100,000 – 106,535 62%
£ 106,535 – 140,000 42%
£ 140,000 – 146,535 62%
£ 146,535 – 150,000 42%
£ 150,000 + 52%

 

The wide gaps in the pre-Budget report

Alistair Darling had a chance to start to repair the nation’s finances for the future. But he blew it, writes Madsen Pirie.

Alistair Darling’s pre-Budget report revealed several huge gaps. For a start, the gap between what the government takes in and what it puts out has widened to £178bn. The Chancellor’s optimistic forecasts for growth after next year are not shared by City experts, some of whom put the future gap as a further £70bn higher than Darling says he expects.

There is another significant gap – between what the government says it is doing, and what will actually happen. This was very evident on the hot-button item of the one-off super-tax on bonuses. It sounds like bringing, what Labour call, the ‘greedy’ bankers to heel, but the small print indicates that it will not apply to any bonuses written into contracts, and will be limited to discretionary ones. Given that the effective tax rate would be above 100 per cent if the banks paid out the new 50 per cent surcharge, and the recipients paid out top rate income tax and National Insurance on top, it looks much more likely that many discretionary bonuses will be foregone for a year, with larger bonuses written into subsequent contracts to make up for it. This is political rhetoric largely empty of substance.

The biggest gap of all is between the government’s strategic response to the crisis and what most expert opinion, here and abroad, thinks it should be doing. The government is obsessed with keeping up spending, thinking that a Keynesian-style stimulus is needed to prevent any recovery from being stillborn. The money raised from the middle classes in extra taxes is not being used to bring down the horrendous debts the government has incurred. It is being used to fund yet more spending, with increases announced in popular areas calculated to appeal to Labour voters.

In fact the biggest crisis facing Britain now is that overhang of debt. There is a real possibility that the UK could lose its top credit rating and be forced to pay much more to service its existing debt and future borrowing. The Conservatives, to their credit, recognize this. There have to be cuts – big cuts in spending – especially in the fripperies of politically correct but unproductive public sector activities. In place of spending increases there should be huge reductions, and in place of tax increases on jobs and enterprise, there should be targeted reductions to boost both growth and the tax revenues which follow in its wake. The government had a chance in the PBR to start to repair the nation’s finances for the future. Instead one is left with the suspicion that they looked only six months ahead to the election, and left the hard decisions for afterwards.

Published on Telegraph.co.uk here.

What the PBR should have said

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I’ve written before about how dramatic the deterioration of Britain’s public finances has been over the last ten years, but it is worth underlining again in the wake of yesterday’s Pre-Budget Report. According to OECD figures:

  • In 2000, we had the 7th lowest public spending among the 30 OECD countries at 36.6 percent of GDP. In 2010, we will have the 6th highest at 54.1 percent of GDP.
  • In 2000, we were the 16th most indebted country in the OECD. In 2010, we will be the 8th most indebted country.
  • In 2000, we had the 7th lowest deficit in the OECD (in fact, we had a surplus). Next year, the UK will have a 14 percent deficit (10.4 percent of which is structural. That’s the most unbalanced budget of any OECD country.

What Alistair Darling should have done in the PBR was unveil a 5-year fiscal plan to return to 2000 levels of spending, adjusted for inflation and population growth. That would mean cutting spending from £661bn to £457bn, a reduction of some £204.4bn, or almost 30 percent. That would eliminate the £178bn budget deficit with enough left over for some pro-growth tax cuts.

Impossible, people say. But is it really? If management consultants can go into profitable, private-sector organizations and cut operating expenses by 20 percent – I’m told that’s the ‘magic number’ – then surely 30 percent cuts in the government sector should be more than feasible. After all, even factoring in inflation and population growth, public spending has risen by 45 percent in ten years, without corresponding rises in output.

Ultimately the problem is not an economic but a political one. With so many people on the government payroll – whether as direct employees, or as people who get more in benefits than they pay in tax – the client state has become enormous. That will be Gordon Brown’s most lasting legacy, and the next government’s biggest headache.

Cameron on health and safety

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cameron-on-health-and-safety-

David Cameron’s speech on health and safety at Policy Exchange was on the whole rather refreshing and worthy perhaps of a modicum of praise. The central message was right: that the health and safety bureaucracy “treats adults like children, encouraging them to think that others have considered the risks for them, are taking responsibility for them, so they don’t have to think or take responsibility for themselves".

As such, Cameron has asked Lord Young to lead an extensive review to determine the clear principles of any health and safety legislation and to look into curbing the compensation culture built around it. As both are at route the fault of government, it is well within Cameron’s power to effect change if elected.

Despite this praise, the falsities in Cameron’s speech should not go unnoticed. Though critical of health and safety legislation, he argues there are three reasons why people still need protecting. These being a lack of information, the abuse of power by employers and market failures.

In a free market economy a lack of information is not a problem. The reputation of companies rises and falls upon the health and safety of what they are offering, through the feedback mechanisms of purchases and publicity. So customer is king and reputation and branding become everything. This best explains why Coca Cola is not poisoning its customers.

The power dissymmetry and market failure arguments are also unconvincing. The reason workers are better protected than in the past is the result and luxury of economic growth. Health and safety regulations that are in force do one of three things: all are bad. Firstly and most benignly, they are a waste of resources to administer standards that the market would otherwise provide. Secondly, they are a distraction from safety measures that are not regulated, but could otherwise be attended to if it wasn’t for the costs of administering unnecessary regulations. And finally and most perniciously, regulations can stop economic activity that would otherwise take place between two consenting parties. As Cameron stated in his speech “Excessive rules have given the impression that we have a right to a risk-free life… The consequence has been spiralling costs and a slow death of discretion, judgement and social responsibility".

I'll conclude with the words of John Blundell: "Socialism survives, by transmuting itself into new forms. State-run enterprises are now frowned upon, but the ever-expanding volume of regulation-financial, environmental, health and safety-serves to empower the state by other means". It is time to turn the tide.