Time to Sell Some Assets

 

The Organisation for Economic Co-operation and Development (OECD) has said that the current government’s austerity programme will not be enough.

An additional and “sustained period of fiscal tightening” will be needed.

They predict that under current government plans, the national debt is to rise to 76% of GDP by the end of the parliament. They suggest that for the sake of “prudence” (remember her?) developed countries should reduce their debt to 50% of GDP.

In order to get down to that 50% level, Britain will need further tightening of 8% of GDP. The OECD says that should be done by spending cuts rather than tax increases, since tax increases lower economic growth and make the problem worse.

I certainly don’t disagree with any of that. But it doesn’t really go nearly far enough.

First, what about that 50% figure they want to aim for? Even that figure is a lot higher than the 40% that was Gordon Brown’s “golden rule” while he was Chancellor during the good times.

We ought to ask more fundamental questions. Why is there an orthodoxy that the government must have a permanent debt? Clearly, once you have a debt, it is enormously hard to get rid of it. But don’t forget that any debt at all carries interest payments.

Britain’s national income is very roughly £1.5 trillion. A national debt of 50% of our income would therefore be around £750 billion. At 3%, the interest payments on that debt would come to £22.5 billion. For comparison, that is about half what we spend on schools.

In order to keep the national debt at that figure, with an economy growing at a long term average of 2%, that would leave room for a deficit each year of £14 billion. So the government would be borrowing £14 billion to pay interest on existing debt, and taking a further £7.5 billion from taxpayers to cover the rest of the interest.

Consider what those interest payments represent. They are a transfer of wealth from taxpayers to people who hold government bonds.

In order for the new borrowing to be just enough to pay the interest on the existing borrowing, without making taxpayers pay for it, the debt would need to be cut much further.

To do that is not particularly hard of course. The government only ever looks at the debt side of its balance sheet, and ignores the asset side. We could get the national debt down easily by selling State assets, including the stakes in the nationalised banks.

Getting the deficit (the annual extra borrowing) down is hard, because it means tackling vested interests in the State sector. The current government is borrowing well over £100 billion this year. But getting the debt down to 50% of GDP is not enough, and the government needs to be a lot more ambitious on that front. Asset sales are the place to start.

Another Brick in the Wall

 

David Cameron at Queen Elizabeth Hospital Birmingham
Image by University Hospitals Birmingham via Flickr

 

David Cameron has a piece in the Telegraph today. It is headed:

Brick by brick, we are tearing down the big State.

It’s all quite laughable.

 I want truly open public services, where people can choose the hospitals and schools they go to, with the right information at their fingertips to make that choice; where different providers, from the private and voluntary sectors, can come in and offer new services that people can access free; where funding is directed to helping the most disadvantaged; and where these services are truly accountable to local people, not to politicians or bureaucrats in Whitehall.

People can choose hospitals and schools? Really? Is he planning education vouchers to give parents real choice in eductation? Nope. He is planning “free schools” – which means schools funded by central government rather than local. Is he planning health services where patients can choose hospitals for themselves, even private ones? Nope – he’s giving the choices to GPs. And what does he mean by “funding is directed to helping the most disadvantaged”? Who will decide who is disadvantaged then? Ah yes. Must be those bureaucrats.

To make that choice more meaningful, parents can now express a preference for any state-funded school, even when they live outside the catchment area – and local authorities have a duty to grant such requests if there is space.

He didn’t mention that this has been the law since Margaret Thatcher’s government made it so by the 1988 Education Reform Act. Nor did he explain why that choice has to be restricted to state-funded schools – after all, in the paragraph I quoted above, he mentioned private and voluntary providers coming in.

So today, as we publish our update to the White Paper, we are taking three new, radical steps. First, we are announcing an independent review that will specifically look at how we can extend choice to the most disadvantaged in our society. This means making sure that everyone has access to the information and support they need to make a choice, and that if they want to complain, they know how to go about it. Where we find this information and support is missing, we will act.

Oh my gosh! So radical! An independent review! And they will act. Definitely. Some time soon. Maybe.

Second, we are publishing draft legislation that would enshrine in law the right to choice. This means if your mother needs hospital treatment, or your child is about to start school, you will get a choice over where they go. And if that choice doesn’t exist, or you’re not happy with it, you will have a way to get your complaint listened to and resolved.

Obviously your mother isn’t allowed to choose for heerself then… But all pretty irrelevant really. He can pass all the laws he wants – if the school places aren’t there in the good schools, then you get a choice between rubbish or even worse. And his policy is to maintain the legal ban on setting up new grammar schools, so he obviously doesn’t care much about standards. But don’t worry. Your complaint WILL be listened to. By a bureaucrat. And resolved. To the bureaucrat’s satisfaction.

Third, we are going to consult on making it easier to set up neighbourhood councils. It has been too difficult for people to come together and have a say in how services are designed, prioritised and delivered in their local community. In fact, some local authorities have been guilty of the same kind of top-down bureaucracy that has been the Achilles’ heel of central government.

Some local authorities have been guilty of top-down bureaucracy! Really? And remind me again which is the leading party in local government? Ah yes, that would be the Conservatives, wouldn’t it? And why, pray, Mr Cameron, is the answer to create a further level of bureaucracy?

You’ve had central bureaucracy. You’ve had local bureaucracy. That’s not enough. Under Mr Cameron you’ll get neighbourhood bureaucracy too.

…no one should doubt my determination to make our public services better, by opening them up. I will not rest until the job is done.

Oh please!

It would be hard to find a more vacuous piece of drivel than this article.

But most interesting of all are the comments from readers. The article has drawn a positive tirade of angry and hostile remarks – and this on the Telegraph site – supposedly the home of Tory voters.

Says one – just to give you a flavour:

LIAR. You are a pinko statist.

Hey ho. I think Mr Cameron’s goose is well and truly cooked.

Half a Cheer for George Osborne

 

George Osborne 0486am
Image by altogetherfool via Flickr

 

George Osborne is apparently going to send every taxpayer a breakdown of what their money is spent on.

The move, which will come into force in 2014, is expected to help ministers persuade voters of the need for public spending cuts, including welfare payments, the biggest source of government expenditure and which accounts for about a third of all tax revenues.

Maybe it will do that. And maybe the Government ought to be concentrating on cutting itself rather than cutting payments to its citizens.

But one thing’s for sure. The breakdown will be incredibly misleading.

Imagine your tax bill comes to say £15,000, and one third of government spending is spent on welfare.

Your statement will therefore tell you that the cost of the welfare system to you is £5,000.

Wow! Shock for people … except that the real cost is double that.

Why? Income tax brings in around 29% of government revenue, and national insurance another 19%, total 48% (figures from 2008/9). The total tax take is roughly double what is raised in income tax and national insurance. (The rest comes from VAT, employer’s national insurance, capital gains tax and a whole raft of other taxes.)

What this means is that the actual cost to each taxpayer of those government services will be roughly double what it says on Mr Osborne’s new statements.

The other issue, of course, is that the usefulness of the statements will depend on how the spending is broken down, and on the agenda of the people producing the figures.

The BBC, for example, has a breakdown that is says comes from HM Treasury.

That breakdown says that 0.5% goes on “European Union”. With total public spending at £697 billion (figure from the 2010 budget), that would imply EU contributions of £3.5 billion.

The true figure for our total EU contributions is about £13 billion (2007 figure). So where did that £3.5 billion come from? In 2007 our net contributions (i.e. what we pay minus what the EU spends in Britain) were about that, so most likely that “European Union” figure on the breakdown is the figure for our net contributions.

I would argue that is misleading, because the other £10 billion is spent on the priorities of the EU, not British priorities. Some of it is even spent within the UK on administering collection of the EU contributions! Therefore if I were doing the breakdown, I would have a figure of 1.9% for EU rather than 0.5%.

No doubt the Treasury would argue that the net figure is the appropriate one to use. The point is not which figure is right, but that there could be a huge disagreement here – and the decision you take on that has the potential to multiply that particular figure by four.

In general, there are lies, damned lies and statistics, and the civil service are past masters at misleading use of statistics to justify their empires. I suspect this will be no different.

So Mr Osborne’s breakdown is a tiny step in the direction of explaining to taxpayers the vast cost of the bloated British State, but only a tiny step.

Pensions and Roads – Hiding the Deficit

 

The BBC reports that the Government is about to take over the Royal Mail pension scheme.

Because the scheme has a £7 billion deficit, it is a huge obstacle to the Government’s plans to sell off the Royal Mail. For this reason, this deal is subject to approval by the European Commission (as it could be seen as unfair State aid to Royal Mail).

There is another aspect of this that is more interesting though.

The scheme has estimated liabilities of £35 billion. The Government will assume those liabilities – in other words, the pensions of Royal Mail workers will become unfunded pension liabilities, just like those of the NHS, for example. Those pensions will be paid out of future tax revenues.

The scheme’s assets, though, are another matter. They amount to £28 billion. Because of the way the Government accounts for such things, that £28 billion will be accounted for as an immediate windfall – a big reduction in the Government deficit this year.

It just highlights what many, including the Taxpayers’ Alliance, have been drawing attention to for some time. The Government has huge liabilities stretching into the future that are not on its books.

Meanwhile, the Government has suggested it will introduce private finance for road-building.

Don’t think that necessarily means tolls though.

Alasdair Reisner, from the Civil Engineering Contractors’ Association, told BBC Radio 4’s Today programme that one option was a system of “shadow tolls”, whereby the motorist does not pay the cost but private firms are paid by the government depending on the amount of traffic using a road.

In other words, a private company borrows the money and gets paid back with interest by the Government over a period of several years. Because the Government itself doesn’t borrow the money, it never appears on the Government’s balance sheet as a debt.

Gordon Brown did that with hospitals. It was called the “Private Finance Initiative”. And in fact it was pioneered by the previous Conservative Government of John Major.

The Parliamentary Treasury Select Committee’s inquiry into that said:

Higher borrowing costs since the credit crisis mean that PFI is now an ‘extremely inefficient’ method of financing projects.

In fact

Analysis commissioned by the Committee suggests that paying off a PFI debt of £1bn may cost taxpayers the same as paying off a direct government debt of £1.7bn.

And that is not really surprising. Private companies pay a lot more (at least twice as much) to borrow than the Government itself does. And the additional bureaucracy and costs of tendering add more costs.

What these deals – Royal Mail pensions and PFI roads – have in common is that their real purpose is to hide the true extent of Government debt. In their keenness to do that, the Coalition are once again exactly the same as Labour.

Tax-and-Spend Osborne Rules Out Cutting Back the State

George Osborne
Image by altogetherfool via Flickr

The UK has run out of money.

Under this heading the Telegraph reports George Osborne saying:

“The British Government has run out of money because all the money was spent in the good years,” the Chancellor said. “The money and the investment and the jobs need to come from the private sector.”

On the face of it, this sounds so responsible. But delve a bit deeper, and it is symptomatic of the malaise afflicting our politics.

“The British Government has run out of money”. Well, how much did the British Government have in the first place? The answer, of course, is “none”. Every penny that the Government spends ultimately comes from taxpayers. Remember them?

“All the money was spent in the good years”. All what money? All the money the Government could extract from taxpayers? All the money the markets would let it borrow?

“The money and the investment and the jobs need to come from the private sector”. Like all the money the Government ever spends? Government spending takes money and investment and therefore jobs out of the private sector. All Government spending does that. Taxes are the flip side of Government spending.

This whole quote from Mr Osborne is just so revealing about the frame of mind of the tax-and-spend political class, including Mr Osborne. For him, the only reason to stop spending is because “the money has run out” – in other words, he can’t squeeze any more out of taxpayers or money markets. For him, the objective is to spend to the max. And he is now saying we have reached the max.

So we have. But only a socialist thinks the objective was to get there in the first place.

And here is Mr Osborne talking to Sky News:

“Any tax cut would have to be paid for,” Mr Osborne told Sky News. “In other words there would have to be a tax rise somewhere else or a spending reduction. In other words what we are not going to do in this Budget is borrow more money to either increase spending or cut taxes.”

A spending reduction! Goodness me, just imagine it. Unthinkable. The only way to cut taxes would be to borrow, and Mr Osborne is much too responsible for that.

Lest you should think it is just politicians trapped in this socialist mindset, the Telegraph follows that up in the piece with a reader poll:

What should George Osborne do to provide a tax cut?

  • Tax the rich more to allow the income tax rate to be lifted to £10,000
  • Borrow more and worry about reducing national debt in future years
  • We can’t afford any tax cuts

As many reader comments on the piece point out, there is an alternative missing from here, to cut spending. It just isn’t on the agenda of our political class, or indeed of our media – even the supposedly Right-leaning Telegraph.

Mr Osborne won’t cut taxes, because he is unable or unwilling to cut spending. It’s as simple as that.

More Socialism from David Cameron

 

The Coalition are embroiled in a row over University Admissions.

Vince Cable, the Business Secretary, has appointed Professor Les Ebdon of the “University of Bedfordshire” (sic) to be the new head of the “Office for Fair Access”. (OFFA is the quango that was set up by the Labour Government to ensure fair access to Universities for students from poorer families.)

Professor Ebdon is expected to be tough on elite Universities, especially the Russell Group of Britain’s 20 best Universities. He wants Universities to meet admissions targets for students from poorer backgrounds.

The Russell Group greeted Professor Ebdon’s appointment by attacking the concept of admissions targets.

The Daily Telegraph is presenting the appointment of Professor Ebden as the Liberal Democrat Business Secretary defying his Tory critics. And indeed the Fair Access to University Group of Tory MPs criticised Government plans over University access as “social engineering”. David Cameron has apparently “expressed doubts” about Professor Ebdon.

Not enough doubts to actually intervene however. David Willetts, the Conservative Universities Minister

said Professor Ebdon’s appointment would help the government’s drive to improve access to degree courses to students from all backgrounds.

All this phoney row within the Coalition is missing the point really. The issue is not whether Dr Cable has picked the right person to lead OFFA. The issue is that OFFA exists at all. Taxpayers’ money is being spent by this Conservative-led Government, on this useless and dangerous quango that was the invention of Tony Blair’s government. A real Conservative Government would have scrapped it long ago.

The real problem here is not biassed entry requirements. The real problem is that the State schooling system is failing to educate pupils sufficiently to make them ready for serious Universities. The Government are continuing Labour’s policy of covering up for their own failures on education by trashing real Universities.

The Tories once used to believe in sorting out Britain’s schools. They don’t any more. Like the Lib Dems and Labour (and unlike UKIP by the way) they are now against grammar schools. It continues to be illegal to open new grammar schools, and the policy of the Conservative-led Government is to leave it that way. Parents are in despair up and down Britain, as they scramble to try and find places for their kids at the few good State schools that are available. (Unless of course, like most of our leading politicians, they have enough money to send their children to private schools.)

This is the poison of Socialism, being continued by David Cameron and his Liberal Democrat friends. This is David Cameron’s “modern” Conservative Party in its true colours.

The only mystery for me, is how the decent Tories who are still supporting Mr Cameron and his bastardised “Conservative” Party can live with themselves.

Economists, Freedom and Prosperity

John Maynard Keynes
Image via Wikipedia

John Maynard Keynes

The Institute for Fiscal Studies has called for a £20 billion “stimulus package” to be ready in the case of a breakup of the Eurozone.

The package would consist of VAT or National Insurance cuts, or increases in “investment”. (By “investment” they seem to mean government spending that actually creates something, a hospital for example, rather than disappearing in a puff of smoke – they certainly do not mean private-sector style investment that generates a return.)

They themselves only claim that the package would add 0.1-0.2% to national output.

Anyone not in thrall to the Keynesian dogma of “stimulus” and demand management would question even that.

The extra deficit would have to be financed by borrowing, or alternatively by printing money.

So what if the money was borrowed?

The IFS themselves mention the possible risk of increasing gilt yields, i.e. government borrowing costs, if the markets cease to believe the government has a deficit reduction strategy. They fail however to mention the certainty that interest would have to be paid in perpetuity on the extra debt. Even at 3%, that would mean £300 million of extra taxes levied on us and our descendants for … well, for ever, actually.

There would also be an adverse effect on the private sector. There is already a credit shortage. If the government borrowed more, it would drive up interest rates not just for the government, but for everybody else.

In short, it would be government spending replacing private spending – with a profit taken off the top by the buyers of the gilts.

OK then, what if the government simply printed the money?

That would of course reduce the value of the money already in circulation. It would, in short, create inflation, and be a hidden tax on everybody. All that would represent would be government spending replacing private spending. The same result, in other words, as borrowing the money.

Borrow or print – the result would be the State growing at the expense of the private sector.

Would that be a price worth paying? Economists tell us that additional spending creates demand, which in turn creates output. But the ONLY mechanism by which it could do that is by increasing prices. Additional demand raises prices, which in turn creates incentives to produce more.

But if the higher prices are economy-wide (which they would be in the case of government spending) then there would be no additional incentive to produce at all. Companies’ costs would be inflated at the same rate as their outputs, and the value of their profits would be inflated away by the same amount, leaving their real profits unchanged.

Now it is true that the IFS mention tax cuts as well as spending increases. Tax cuts would of course be better. But the effects I have just outlined still apply. The government would have to borrow the money or print it, leading either to higher interest rates for everybody or inflation.

Keynesian demand management is just smoke and mirrors. It is pure hokum. It does not work. We KNOW it does not work. It has no theoretical basis, and there is no practical evidence for its efficacy.

Why then do economists like the IFS continue plugging away at it?

It has become a religious dogma rather then an economic theory. Its results are not prosperity but an ever bigger and more powerful State. And the State is generally less efficient than the private sector – meaning that an increase in the size of the State means a decrease in our prosperity.

In other words, the Keynesian nostrums of the IFS and others are an attack on our freedom and prosperity. They are about as scientific as the Victorian idea of letting the blood of patients to make them better.