Fiscal Responsibility Bill

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The idea of this government locking in Fiscal Responsibility with a new law would be laughable if their current irresponsibility wasn’t mortgaging our future. At the moment, Britain has the second highest structural deficit in the developed world. The OECD estimates that, to put our debt back on a sustainable basis, we would need a fiscal tightening of 12.8 per cent of our national income. That is a nearly unthinkable £150 billion of spending cuts or tax rises just to get debt as a percentage of GDP down to 60 per cent, still much higher than just a few years ago.

That massive structural deficit exists despite taxes rising over the last ten years, with increases in stamp duty and national insurance for example. And, despite the Government having fiscal rules that they claimed were rock solid at the time. There were two problems that drove the failure to properly control spending. First, spending was conflated with commitment to delivering quality services, when more sustainable improvements could have been delivered by focusing on getting the best value with scarce resources. Second, with the Government purporting to have abolished “boom and bust" the windfall from an unsustainable boom was treated as a permanent improvement in our economic fortunes and that meant fiscal policy was formed in an utter fantasy land with no provision made for harder times.

If this Government or any future government are serious about fiscal responsibility they should do two things. They should first make serious cuts in public spending: a report we produced with the IoD set out £50 billion of potential cuts. That would be a good start. After that, they should put in place explicit expenditure targets, as the OECD recommends, so that spending can be further brought down to a sustainable level. Studies by both the EU Commission and the IMF have shown that reducing expenditure leads to more sustainable results in stabilising debt.

The ultimate control on excessive spending can’t come from rules and laws, though. It has to come from parliament. That’s why a complete plan to permanently address the current crisis in the public finances and prevent it recurring has to address the need for broader democratic renewal. A series of changes – like primaries to select and reselect party candidates – to make MPs more accountable to their constituents than their party leaders would mean a more meaningful check on policy and reduce wasteful spending.

Serious, credible action is needed to forestall a further crisis in the public finances. But this new law is nothing of the kind.

Matthew Sinclair is Research Director of the Taxpayers’ Alliance.

Financial Services Bill

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It is undoubtedly sensible that any employee's remuneration is aligned to the longer-term interests of the business that employs him or her. Therefore, it goes without saying that remuneration policies that encourage excessive risk taking should be avoided. It is also likely that from time to time, companies, themselves, will get it wrong - that they will institute remuneration regimes that, with the benefit of hindsight, turn out to be inappropriate. But it is wrong to believe that the financial crisis was brought about by a relatively small number of people who, again with the benefit of hindsight, were paid bonuses that were excessive, on the basis of remuneration regimes that seemed to encourage undue risk taking.

The real problem is that the authorities (and we can include in this generic term an unholy alliance of finance ministries, central banks and regulators) fostered an environment prior to the crisis that encouraged the whole financial system to under-price risk. At the core of this was the decision by the Federal Reserve in the US and the Bank of England in the UK (following the inflation remit set by the Treasury) to set interest rates that were too low for the economic circumstances of the time, for a prolonged period. Crucially, they did this in order to encourage borrowing - that, after all, is how interest rates influence activity. And, by definition, the lower interest rates are set, the more risky will be the lending. Had interest rates been higher, banks would have assessed the risk of lending, and the subsequent securitisations, in a different light. So the process that encouraged risk to be misidentified started with the authorities, and we should look through the smokescreen that they are trying to put up, and identify the true problems of poor policy decisions and poor supervision.

Ironically, if the authorities are now to get involved in pay and bonuses, in a way that might be seen in a command economy, they will be in danger of creating an even greater disconnect between remuneration and business performance. In this context, we have to beware the law of unintended consequences. For instance, the action taken to restrict bonus payments has already put huge upwards pressure on basic salaries, raising the cost bases of many financial companies. Inevitably, this reduces the flexibility of costs to different financial circumstances.

Richard Jeffrey is Chief Investment Officer of Cazenove Capital.

Draft Lords Reform Bill

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The Lords Reform Bill envisages an 80% elected House of Lords – the Church of England bishops will remain, but the remaining 92 hereditary peers will go. There is the option of moving to a 100% elected chamber at some future time.

Piecemeal reform is the sad lot of the Lords, since nobody has ever been able to agree how it might be reformed. For all the many faults of the hereditaries, they did bring to the chamber more women, more people with disabilities, more young people, more communists, more non-lawyers and non-careerists than ever inhabited the Commons. And although the present life-peer system sends far too many superannuated political hacks to the Lords, it also puts in experts with real experience in science, medicine, academe, charities and much else. An elected Lords is very unlikely to attract independent-minded and expert people such as Lord Winston and the Chief Rabbi, though they bring something important to our legislative process.

We don't need a bill to introduce elections for the House of Lords. We need a national debate on how the House of Lords should be elected. It definitely should not be elected on anything like the same grounds as the House of Commons – or it will be packed full of the same party-political, media-driven careerists. For a start, the term of office should be just one stint – of maybe seven years – so that people cannot make a political career out of it. Second, it needs to have a chance of attracting serious experts rather than fame-seeking celebrities or campaigners. Maybe a limit of zero on election expenses could achieve that, perhaps coupled with a ban on using party labels. The Lords should also reflect diverse national interests more than the Commons: perhaps we should have half the seats reserved for women, or a proportion of the seats reserved for people in each different generation. I don't know what will work: I just know that something cooked up by a discredited political establishment between now and a general election won't.

Dr Eamonn Butler is Director of the Adam Smith Institute.

Why Philip Hammond MP should resign

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Conservatives need a reform minister, not a Scrooge.

That ol' pre-budget announcement time is here again, where the UK government tells us all the things it would like to spend money on, before telling us in the spring how it is going to raise the money from us to pay for them. It's no way to run the public finances, and it is one of the reasons why we are in such a financial mire. Even on the government's own figures, the public debt will reach a figure equal to three-quarters of our income. But many economists reckon it may even end up bigger. The government is, after all, borrowing a further £175 billion this year – equivalent to £3,000 for every man, woman, child and infant – and still more next.

So I have a new job for Philip Hammond MP. Currently he if the Conservatives' spending spokesman, and what he doesn't know about public spending isn't worth knowing. But he needs to become instead the spokesman on public service renewal – and minister for that if the Conservatives win the election.

You will never streamline the public sector by Treasury ministers bullying departments over money. Instead, you need a complete review of what government does, what it has to do, what it can do better, and what can be done better by other people and by the public. All departments need to buy into that, and it needs a reform, not a finance minister in charge if everyone is going to trust the process and be a part of it. After all, the process may find that spending in some areas should be increased, even if other departments are found to be doing a lot of pointless stuff.

The good news is that this reforming approach worked for Canada, which reduced annual borrowing from 9.1% of GDP in 1993 to zero just five years later – and has been running surpluses for most years since. Our black hole this year, at 12.4% of GDP, is deeper, but I reckon Philip Hammond is up to that job. He should resign his Treasury brief and instead demand to become Shadow Secretary for Public Service Renewal.

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

Taxation, growth, and the bishop

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Dr Rowan Williams, Archbishop of Canterbury, has called for higher taxes and limits on economic growth. He says economics should be about good housekeeping, and should be about “creating a habitat that we can actually live in". He wants a Tobin tax on financial transactions, such as Gordon Brown recently floated, and taxes on carbon emissions.

I beg to differ with His Grace on most of his points. I take the view that the Tobin tax is unworkable and unjustified. Currency traders perform a service by generally bringing forward the likely effect of what they see as future trends. And a tax on transactions in one jurisdiction would simply move trade elsewhere.

I disagree with him on growth. I think it is hugely positive, lifting more millions out of poverty and starvation than ever before in human history. The Good Book exhorts us to help the poor, and growth has been the best way ever found of doing this. We should be promoting more of it, trying to spread across Africa the benefits it has been bringing to parts of China and India.

Even on carbon emission taxes, I disagree. If we want to make a difference, it will almost certainly be by using wealth to apply new technologies, rather than by using taxes to limit our lifestyle. The combination of creativity and wealth has a track record of solving problems. It has given rich countries cleaner air and water; it has conquered some diseases and is conquering others; it has fed more people than has ever been managed before.

His Grace talks of us over-using "limited energy and raw materials", but it is technology that enables us to create new sources of energy, and to develop substitutes for scarce resources. And it is the market he criticizes so much which sends the signals that encourage us to do these things.

The good bishop might back Tobin and carbon taxes, and oppose growth and markets, but the lot of humanity is more likely to be enhanced by rejecting the first pair and endorsing the second two instead.

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

National socialism in action

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The UK government wants internet service providers to keep records of our email and web visits. Really, I am sure that it would love to collect that information on some new custom-designed, multi-billion-pound central database of its own – but it's been getting a lot of flack recently that it is a 'database state'. How very much more convenient to tell private companies they have to keep this information – and hand it over, on a daily basis, as and when the state demands.

In political science terms, this is national socialism: the state doesn't actually run businesses (or in this case, databases), it just forces private companies to behave as it chooses. Private companies become agents of the state. When you hand over personal information to your credit card provider, your phone company, your bank or any number of retailers, you are effectively giving that information to the state.

Given the number of terrorists and paedophiles we are led to believe are out there, perhaps we do want to give our law enforcement agencies the power to see what people are saying and doing on the net. Well, we might, if they used it only for that purpose, and if our state authorities were competent and focused only on public safety. Sadly, they regularly lose our data on the train. The civil service and the police see politicians, not the public, as their bosses. And huge numbers of officials have access to our data. When HMRC lost 2 million child benefit records in the mail, they revealed that it had been copied by a 'junior official'. Junior doctors were caught illicitly sharing juicy patient records of celebrities coming into their hospital. And so it goes on.

How many 'junior' officials are going to be able to demand our email information off my ISP? And if they come across something nicely embarrassing about someone, how many might just be tempted to sell it to the News of the World? Frankly, I would prefer my data to be held nice and secure by the private companies I choose to deal with, against whom I can take action against breach of trust. When governments breach our trust, there is no recourse to any justice.

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

F2T: Petition against green protectionism

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We call upon the World’s leaders to resist calls for green protectionism. Trade enables specialisation, which results in the development of new technologies and leads to the creation of wealth. In the past two decades, trade has enabled over a billion people to escape poverty. Trade is the most powerful weapon in humanity’s armoury to fight poverty and environmental ills, including climate change. Trade restrictions are not desirable, nor are they an effective means of addressing climate change.

Click here to find out more.

Chris Mounsey on Friendly Societies

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The first thing to be pointed out is that libertarianism is not about leaving people in the street to die. Libertarianism is, first and foremost, a philosophy based on personal liberty—the central crux of which is the non-aggression axiom...

And so begins an expansion of the excellent speech given at the ASI's recent TNG meeting. Click here to read the full text.

East Coast nationalised

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altCompared to the banks, it's pretty small beer, but now the government has nationalised the east coast rail franchise, National Express has given up on it, and it has been excitingly re-named East Coast, and the equally excitingly, the transport minister Lord Adonis is now running it. Otherwise, it's the same timetable, prices and routes.

This is, of course, exactly how rail franchising is supposed to work. Services are put out to tender, and are run by private companies, but if one of them comes a cropper, the government steps in until another provider can be found. The only trouble is that the government has been stepping in rather a lot lately. Not because the private sector is inherently flaky, but for a couple of other reasons. First, the government screwed the operators down too hard on price. Many of them already had made considerable investment in the rail industry and were not prepared simply to write it off. So they paid over the odds. Then boom turned to bust (thanks, Gordon) and their figures started to look a bit sick. Second, the government drew up its franchise agreement so ineptly that when the chips are down, it is far cheaper for an operator to fold than continue operating a service. Step forward, the taxpayer. Frankly, it's no way to run a railroad.

Also in this weekend's news, Stephen Byers, the transport minister who bankrupted the private rail infrastructure company Railtrack, saying it was too inefficient and expensive – only to replace it with Network Rail, which is even less efficient, completely unaccountable, and forty times as expensive – is stepping down at the next election. Thank goodness. There are very, very few people I take a dislike to, even if I disagree with them politically. But this over-promoted polytechnic teacher and political careerist is one. Roll on the next election, I say.

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

Just what it is that this capitalism thing is good at?

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Putting aside my usual insistence that capitalism and markets are very different things, a quick question on what is it that the system we commonly call capitalism is so good at? What, really, is the benefit that it brings to us all?

For $70,000 (£42,000), it may not seem like a very good deal: all you get is a polished silver box containing a USB drive on a black velvet tray.

What you get is your personal genome. So, is capitalism simply good to provide exclusive trinkets for billionaires? There are those who say that it is of course, but that would be to grievously misread what is happening here.

The cost of the procedure is dropping fast, and while $70,000 is a significant expense by even a Wall Street banker’s standards, it seems inconsequential when compared with the $3 billion cost of decoding the very first genome — a project that was completed in 2003, after 13 years. Today the same process takes six to eight weeks. By 2015, says Mr Conde, personalised sequencing is likely to cost under $1,000, and take only days.

From $3 billion to $1,000 in only 12 years: yes, the thing which capitalism is so good at is making things cheap.

This is why it works as a socio-economic system. Leave aside all the morality plays of exploitation and the like for a moment and think purely as an entirely hard hearted pragmatist. We've got cheap food now, we can all fill our bellies at the expenditure of trivial, by historical standards, amounts of labour. Cheap clothing: it's within the memory of those alive that Sunday Best really did mean one's second and only other set of clothing. Even housing which seems so expensive has increased in quality so much that it is cheap by any long term comparison. Add medicine, transport, heating, alomst any sector of the eonomy or consumption that you wish to mention. All are incredibly cheap by the only standard that really matters: how long and how hard must we labour to get them.

As that hard headed pragmatist you would note that the capitalism/markets thing is the only system which has managed to achieve this. No other system that we've ever tried has done that truly remarkable thing, offer a sustained, long lasting and general rise in the standard of living: the reason being that no other system comes remotely close to capitalism's ability to make things cheap.

Not bad for a system derided (wrongly) for being based upon nothing but greed, is it?