Human capital investment

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The OECD report Education at a Glance 2009 shows the disturbing fact that during the last 10 years it hasn't become more economically advantageous to undertake higher education in the UK. This has of course affected the number of people doing degrees at the university. During this period the number of people undertaking degrees has stayed about the same; however, this stability has been due to an increase in the intake of international students. Today about 10% of all postgraduate students undertaking advanced degrees at British Universities are from abroad. The OECD report also reveals that about half of all students graduating from their research degrees are not from the UK.

So what? Well the problem is that the British migration system has at the same time made it increasingly difficult for international students to stay in the UK after finishing their degree. The consequence is that the UK has had to  wave goodbye to more than 10% of this innovative raw material because of burdensome regulation.

As Martin Wolf argued in the Financial Times earlier this month, the UK government has failed to engage in a public discussion on migration policies. Now more than ever it is essential to argue the case that immigrants do have an important role in the UK economy. In the long run the UK cannot live without immigrants but it can’t cope with too many of the non working type either. It is therefore of great importance that the UK government starts to reform the system, positively encouraging people to settle down in the UK to work. As part of the process we should ensure that it is more affordable to work in the UK, that taxation is more competitive and overbearing administration reduced.

Schools Bill

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This is another missed opportunity to unclog Britain's sclerotic education system. Giving parents a right to request one-to-one tuition for failing children is a promise that is unlikely to see the light of day given the awful state of public finances. This might be a good thing, as the policy would be unworkable in practice. Deciding upon whether a child is failing would prove a bureaucratic nightmare. As children have marked differences in skills and abilities across subject areas, failing could not be determined by tests alone. This would lead a mammoth waste of resources, the misallocation of limited financial resources and a system even more confusing for parents than is currently the case.

Instead of instituting extra teaching for children outside the school day, the government would do better to consider why so many state run schools are failing them for the six or so hours they are under their care.

Creating five-yearly checks on teachers’ competence is another distraction from the imperatives of reform. In the same way that schools should compete with each other for places, schools also need to be able to compete with other sectors for talented individuals. The only way for this happen is to inject the workings of the market into the current system, with better teachers being paid for success and poor teachers losing their jobs.

Philip Salter is Programmes Director of the Adam Smith Institute.

A response to the Queen’s Speech

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With so much being leaked ahead of the Queen’s Speech, we have decided to offer a platform for a number of pre-responses:

  1. Richard Jeffrey: Financial Services Bill – to give the Financial Services Authority new powers over bankers’ pay and bonuses in crisis situations.
  2. Matthew Sinclair: Fiscal Responsibility Bill – to enshrine Labour’s plans to reduce the deficit in law.
  3. Dr Eamonn Butler : Draft Lords Reform Bill – to allow elections to the House of Lords for the first time.
  4. Dr Helen Evans: NHS Bill – to create maximum waiting times for some surgery and consultations.
  5. Philip Salter: Schools Bill – to create five-yearly checks on teachers’ competence and give parents a right to request one-to-one tuition for failing children.
  6. Kristian Niemietz: Social Care Bill – to offer free personal care at home for those with severe need.
  7. Philip Booth: Policing, Crime and Private Security Bill: to set new rules on the use and retention of DNA samples by police.

Social Care Bill

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The current, means-tested system of social care penalises thrift and foresight. However, extending eligibility for ‘free’ personal care to people who are not in need is a myopic proposal. These plans will surely be popular with the prospective heirs of care-dependant elderly people. But against the backdrop of an ageing society, they will either have to be accompanied by sizeable tax increases – with all the economic side-effects that entails – or they will increase the tendency towards rationed state care. These plans neither enable the long-term care system to cope with the demographic challenges, nor do they encourage savings or promote fairness.

We should take the bull by the horns and move towards a system of private long-term care insurance, based on the capital cover method. This means that people would take out long-term care insurance when entering the labour force, and pay modest but regular premiums. Private insurers would gradually build up a capital stock on behalf of each policyholder. People would have free choice between insurers (their old-age reserves would be fully portable), coverage levels, and models of care delivery. Apart from commercial insurers, friendly societies and trade union schemes could play a vital role in this market.

Kristian Niemietz is the Poverty Research Fellow at the IEA.

NHS Bill

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A new NHS bill which aims to stipulate maximum waiting times will eventually be consigned to the dustbin of history as it will no doubt produce an endless array of fiddles, anomalies and counterproductive unintended consequences.

That said, its eventual downfall might nevertheless contribute to some beneficial policy advancements in the short and medium term. For example, if linked to an extension of the patient choice agenda such an approach might eventually pave the way to a welcome step change in UK health provision. For while ministers recently talked about establishing a legal right so that NHS funded patients could automatically go private if they waited more than 18 weeks for treatment, the time is fast approaching when we should ask why any NHS funded patient should have to go into a state owned hospital or clinic?

Today, I believe no NHS funded patient should have to go into a state owned facility. All hospitals, clinics and care homes should be provided by a diverse and open independent sector that competes for patients and in so doing builds trusted brands. If the new bills further sets the NHS up to fail and therefore heralds the input of ever more private sector know how and expertise then I say bring it on.

Dr Helen Evans is Director of Nurses for Reform.

Policing, Crime and Private Security Bill

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The 'S' and Marper judgement in the European Court of Human Rights ruled 'blanket and indiscriminate' retention of DNA unlawful. The government's proposal to retain the DNA profiles of innocent people on a criminal database for 6 years fails to address the key legal principle: that any retention at all of DNA from those uncharged or unconvicted of a crime is a breach of privacy rights, and needs justification.

The proposals are calculated to change current practice as little as possible, and to keep building up the National DNA Database, already by far the largest in the world. But while Home Office figures suggest that testing more DNA from crime scenes has helped to solve more crimes, massively expanding the number of individuals with records on the database has not.

A far more proportionate and practical approach would be to adopt the Scottish system, where DNA profiles from a small number of innocent people are allowed to be retained for three years (or exceptionally five, on application to a sheriff, and with right of appeal) in cases where the person is arrested for a relevant sexual or violent crime, and proceedings are commenced and dropped or result in a not guilty verdict.

Just a few hundred individuals' DNA profiles are held under this legislation, as opposed to almost a million people in England and Wales.

Philip Booth is National Coordinator at NO2ID.

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.