The fifty percent fiction


Despite George Osborne's assertion that the next Conservative government will retain Labour's 50 percent top tax rate on incomes over £150,000, it is highly probable that this will not happen. It is not that Mr Osborne was misleading the Tory Conference, merely that events will change and force with them a change in policy.

In the first instance Mr Osborne has underestimated the opposition to this tax in both the City and within his own party. City people are united in a hostility to it that borders on contempt. They already have no respect for the government that introduced it, and will have none for a government that sustains it. The pressure of their opinion will cause the Shadow Chancellor to re-visit his plans. Nor have I met a single Conservative MP or candidate who supports the tax; and as their opinions are expressed privately to Mr Osborne, this, too, will influence his thinking.

The chief thing to change opinion will be the increasing chorus of expert opinion that this tax, far from raising additional revenue, will cost the nation dear and leave a big hole in the finances unless it is abandoned. Already the Adam Smith Institute and the Institute for Fiscal Studies, both using a dynamic interactive model of the economy, have concluded that a 50 percent rate will raise less than the current 40 percent rate as incentives decline and people choose to seek more tax-friendly regimes in which to base their activities. By the time this tax change takes effect in April, the scale of the exodus will be becoming clear, as will the loss to the Revenue caused by the departures.

Mr Osborne's point that the tax should stay in place throughout a public sector pay freeze is not a valid one. What he should have stressed is the importance of getting the rich to pay their fair share. In fact the proportion of tax paid by the rich declines when rates go up, and increases when they are lowered. Faced with united anger from the City, zero support among his backbenchers, and the evident fact of a loss in revenue, the 50 percent tax will be allowed a decent but hasty burial. On its grave they might inscribe "2010 – 2010. Killed by reality."

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Hammond’s way


Shadow Chancellor, George Osborne, has made a start in announcing some headline-grabbing public expenditure cuts, including a one-year freeze of many public sector salaries. But Shadow Chief Secretary, Philip Hammond, has apparently been charged with finding other cost savings.His priority should be delivering material cuts within a four-year time horizon, something that the raising of the pension age does not address.

The real risk is that a succession of failed gilt auctions to fund the staggering annual issuance requirement, perhaps accompanied – or even caused – by a downgrading of UK sovereign debt, pushes up borrowing costs substantially. Where should Hammond start? Instead of cherry-picking individual programmes, there is a strong case for imposing ongoing across-the-board real cuts averaging 3% per year – with a few exceptions.

Clearly, social security, with an expected £165 billion out-turn this year, is an obvious target. Reducing both individual payments or limiting eligibility are sensible starting-points. With an annual budget of over £100 billion, the NHS should not be exempt. Given its massive work-force, there must be potential for cost savings away from the front-line. Local Authority expenditure has seldom been properly controlled. Now is the time to clamp down on excessive local government expenditure, both in terms of job numbers and salaries.

Bearing down on some profligate Conservative-led local authorities would be a useful start - along with adopting Wandsworth Council as the Tory template. Furthermore, finding large savings within the MOD’s notorious procurement division should not be difficult, especially from the aircraft purchasing programme. In terms of capital expenditure savings, scrapping Crossrail would be a sensible decision. Given its vast cost, is there really a compelling case for Crossrail at a time of acute financial stringency?

If Philip Hammond adopted these policies, the Treasury numbers would stack up nicely and the PSBR would plummet. But how strong is the political will?

Tory regulation policy won't impress business


Tory regulation policies show they don't understand the burdens on business nor how to lift them

Regulation in the Post-Bureaucratic Age is the third Conservative policy paper on the subject in three years. Each bears little relation to the one before and no doubt another will be along before the general election.

The title is fantasy. Apparently, by next June, bureaucracies will no longer exist. For example, the Audit Commission will no longer audit local government; that will be done by a Whitehall department. At least the Audit Commission has some level of independence and accounting skills. Replacing it with a government department doing the same job hardly cuts bureaucracy.

Most of the proposals are so old hat they already are in place. The proposals for enforcing regulations are near identical with the Hampton proposals now being implemented. The “Star Chamber" to challenge new regulations is exactly what Downing Street had under Blair. Gordon Brown announced the regulatory budgets idea, but withdrew it in March 2009 when shown it could not work. The idea of getting the public to identify poor regulations is equally old hat. The Better Regulation Executive has been imploring us to do that for the last five years.

The paper doesn’t even consider how to deal with EU regulation which is the source of most of the burden.

New but daft is the idea that we can replace regulations by “nudging". This comes from Professor Richard Thaler, a US behavioural economist (that is the dismal nonscience invented to cover the gap between what classical economics predicts we will do and what we actually do). Thaler has coined the idea that people are more likely to change habits if they are "nudged" than told what to do. So Professor Thaler – with no knowledge of EU or UK regulation or governance, will be parachuted in as adviser to the “Star Chamber".

But take heart: it is not all bad. The section on regulators, such as Ofwat, is encouraging. The paper suggests taking them back to the original plan, namely that they concentrate on economics and phase themselves out in favour of competition and consumer choice. Sunset clauses would mean that any regulator would have to justify its continued existence at least every seven years.

Regulation is a key topic for what remains of British business. Let’s hope the Tories can do better on it before they come to power.

Tories' alcohol taxes won't cure binge drinking


Shadow Home Secretary Chris Grayling wants to tax alcopops and curb pub hours. Neither will stop binge drinking.

When problems like binge drinking crop up, lots of people from 24-hour news channels thrust microphones under the noses of politicians and ask what they are going to do about it. Naturally, they say they're going to take 'tough' action, right away. But often their 'tough' action is only tough on the symptoms, not the disease. And quite often, the politicians' actions have exactly the opposite effect of the one intended.

Here's an example. As Fraser Nelson reported a year ago, when the Rudd government in Australia jacked up the price of pre-mixed drinks by 70%, consumption fell by 30% but spirit sales jumped by 46% as the kids mixed their own. And of course the kids poured themselves bigger measures than you got in the average alcopop. The result was a 10% rise in alcohol consumption.

Australia also used to have the ‘five o’clock swill’ as pub customers drank as much as they could before the official 5pm closing time. I remember the same happening in Scotland, where pubs were open a few hours at lunchtime, then from just 5pm-10pm in the evening. They didn't even open at all on Sundays. After Scotland deregulated in 1978, allowing 24-hour opening, everything improved – there was less drunkenness, less violence, an easier job for the police, and a fall in alcohol-related illnesses. Pubs were no longer just male drinking holes, but started selling food and becoming much more welcoming to families.

Politicians who want to seem ‘tough’ on binge drinking would be better focusing on the real, cultural cause. Alcohol is far cheaper in France and they drink at all hours, but they don’t have anything like our problems. Instead of an instant reaction for the microphones, our politicians would be better to understand why it is that young people go out binge drinking. Maybe it's because we have regulated our pubs so much that young people can't afford to drink in them. So they are no longer drinking under adult supervision, but go and get smashed on supermarket lager instead. Maybe the decline in the nuclear family, thanks to perverse welfare rules, also means that kids never learn to handle the joys and the dangers of alcohol as they do in France. Maybe it's bad state education or a nanny state that just picks up the mess with no come-back for kids or parents. Whatever the cause, slapping on new taxes and bringing in regulation isn't going to stop the effect.

Dr Butler's book The Rotten State of Britain is now in paperback.

Reducing burdens on small businesses


Shadow Chancellor George Osborne's promise to exempt new small firms from National Insurance is welcome news to the Adam Smith Institute. It has long been one of our central tenets that small businesses are more heavily burdened by taxes and regulations than are larger ones. A firm with hundreds or even thousands of employees can spread the cost of compliance, but to a small firm the expense and the time consumed can be crippling.

We have long advocated that small firms should be treated as a special sector, subject to lighter taxes and regulation. Of course, we want all firms to have those burdens reduced, but we think small firms are a good place to start. They generate most of the new jobs, and represent the future of employment. The biggest hurdle for a start-up firm is the stage when it first begins to take on paid employees. The nightmare of form-filling, compliance and charges begins, and is enough to keep many firms small in order to avoid it.

Osborne's move is a bold stroke because it establishes the principle that new and small firms require special treatment. Like tender shoots they need to be nourished and protected so that one day they might become big and sturdy. That principle, once established, can be extended. The next government should have ready a raft of proposals for selective application to small and new businesses. The aim must be to create the space of a light tax and regulatory regime in which they can grow at full speed to generate the future wealth and the jobs on which our prosperity will depend.

The encouraging thing about their new pledge is that it indicates the Conservatives are now beginning to look at the economy for ways to promote incentives, opportunity and enterprise. This is just what the ASI does.

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Gun control


The country's top judge has demanded an increase in penalties to those arrested in possession of firearms. The Lord Chief Justice stated that, “Guns kill and maim, terrorise and intimidate" and that public safety must be paramount above all else. The main argument used by Lord Judge is one of deterrence, stating “deterrent and punitive sentences are required and should be imposed" such as mandatory minimum sentences for offenders including life sentences for distributors even if there was no intent to endanger life. In the debate over gun control there are a two major issues people often find themselves divided over: Firstly, where to draw the line between public protection and public dominion, and second, the trade-off between public and private deterrence.

At what point does the government change from protecting its citizens to controlling them? This is not an easy question, and it is one too often ignored by both citizens and governments. Government has a duty to protect its citizens from enemies and at times from each other. However, it is a slippery slope that leads governments down the path to total social control in the interest of protecting everyone everywhere all the time. Although the government should indeed be able to police its own citizens it should never be allowed to absolutely remove any single right. Does the government have a right to outlaw the possession of firearms by its citizens in the interest of protection if it means that they are severely limited in their own ability to protect themselves? Absolutely not.

The other question is that of deterrence. Is public or private deterrence a more useful method in fighting crime? In many crimes the use of public deterrence by the government is most often the best means. The government can do things not available to ordinary citizens such as fines and jail time. But in cases dealing with public or personal safety many times the best deterrence is private. A gun wielding criminal will be more afraid of a gun wielding citizen than of the possibility of incarceration. Private citizens concerned only for their own safety and not held back by court proceedings, warrants, or properly reading someone their rights can be the biggest deterrent of violent crime available.

If you discount the use of air-guns and only count real firearms, the use of firearms in violent crimes has continued to increase in the UK despite them being illegal (as reported by the Home Office Statistical Report on Firearms Offenses, pg 34). In a knee jerk reaction to horrific crimes committed in the past, the government is now controlling people instead of allowing them to protect themselves. Although it may be more difficult for criminals to get guns many will still get them. The problem is that the biggest deterrent against gun crime is no longer available.

The FSA and bank reserves


The Financial Service Authority's new rules on bank reserves is bad news for business and mortgage borrowers

The Financial Services Authority is a menace, it really is. One reason we had a crash is that the FSA was more interested in how quickly banks picked up the phone to customers than whether their fundamental business model was sound. Then it decided that 'stronger' regulation was needed and that it should have more powers and more staff – at the banks' expense, of course (an approach criticised in a recent ASI report)

Now it says that the banks should keep more cash in their reserves, to make them stronger so they don't collapse again. What it means, of course, is that they should keep more government bonds in their vaults. Which is nice for the government, who will at least get someone to buy its rubbish IOUs. But it's bad for the banks, who will have to spend an extra £6bn doing so.

And that means another £6bn that won't be coming to customers in loans and mortgages, but which will be hitting them in additional charges. So in one stroke, the FSA has added to the problems of householders and businesses, who currently can't get loans, and for every other bank customer, who will now pay more for their banking. Just what you need in a recession, isn't it?

Dr Butler's book The Rotten State of Britain is now in paperback.