Saturday, October 31, 2009

Victims Of High Taxation

The Village Postmaster and his family are still recovering from their 1am encounter with the robbers who smashed into their shop. Needless to say, the police have yet to apprehend anyone.

The gang were after cigarettes, and it turns out this was one of a huge number of such robberies taking place right across the country. Just in the last few months, small shopkeepers have been hit in Croydon, Oxfordshire, Glasgow, Sussex, Devon, Gloucestershire, Liverpool, Yorkshire, and back in Sussex again. AND THAT'S JUST THE FIRST PAGE FROM HUNDREDS OF GOOGLE RESULTS.

This is a massive crime wave.

WTF is going on?

The VP has already blogged his own highly plausible theory. Just like back in the eighteenth century, extraordinarily high taxes on tobacco have nurtured an extensive black market. And as before, this market has been supplied principally by smugglers bringing in untaxed stock from overseas.

It is a highly organised business. As described here, it has progressed way beyond a few amateurs loading up their white vans in Calais. Indeed, it is no longer driven by the difference in duty between the UK and our EU "partners", such differences having been largely eliminated (tax now accounts for 70-80% or more of the retail price right across the EU).

No, what's driving this is that organised criminal gangs have found ways of obtaining large quantities of cigarettes and tobacco without paying duty at all.

Of course, some is counterfeit. But much is the genuine article, manufactured and branded by the big international tobacco companies, and reportedly sourced from their legitimate factories in countries such as Ukraine. Here's a graphic summarising one estimate:

Obviously, the customs authorities all over the EU are working to clamp down, and over the last few years, HM Revenue and Customs have stepped up their efforts significantly. Quite right too.

But every success means that black market distributors in pub carparks and bootsales across the country find themselves short of product. So as the VP points out, the market has come up with a neat solution - stealing from legitimate suppliers here in the UK.

We've blogged the black market in tobacco before (eg here and here). Fundamentally, with tax now accounting for three-quarters of the price of cigarettes, even normally law abiding folk like the parson and the clerk can convince themselves such taxes are onerous and unnatural, and that it's reasonable to resort to the black market. After all, it isn't as if the black market is real crime, like murder or something.

We have moved beyond the realms of workable taxation. High taxes become the excuse for criminality.

And tobacco is such a great product for criminals. It's both light and high value (cf the mobile phones used in VAT carousel fraud). In one recent case, customs officers "found 74,000 cigarettes in the luggage of a Newcastle couple travelling from the Canary Islands". Something that easy to smuggle is very difficult to stop.

So what to do?

Well, since Tyler doesn't himself smoke, he strongly supports taxing smokers to buggery. Let 'em pay, says Tyler - less taxes for the rest of us to stump up.

But as we can see, that approach has opened the gates to a crimewave. And whatever the buyers of black market ciggies may tell themselves, it's not a victimless crimewave - just ask the VP and his family.

Worse, the black market in tobacco is just one part of Britain's burgeoning black economy. As we blogged here, most serious estimates have put the size of our black economy at 10% of GDP or more. But those estimates were made pre-recession and pre-Polish plumbers. Our guess is that it's now much bigger, and our forthcoming tax hikes will make it bigger still.

Which is very worrying.

High taxes fuel the black economy.

And the black economy fuels crime.

Yet another reason why Cam and Oz need to get a lot more serious about cutting spending rather than raising taxes yet further.

Friday, October 30, 2009

Bubbling... Down The Plughole

The news that the US has emerged from recession has been welcomed around the world.

Well, not in Downing Street obviously, but certainly the financial markets liked it. The UK now seems to be the only major economy still mired in the slough.

So will we ever escape?

Last night Tyler attended a talk by an eminent and respected financial journalist. We won't identify him, because he seemed nervous of having his views reported. But we discussed bubbles in asset markets, and there was general agreement that we now seem to have entered yet another one. The recent recovery in asset prices is based entirely on the huge monetary stimulus that's been pumped out by the central banks, and it's unsustainable.

As we know, the stimulus was applied to head off the mooted Second Great Depression - in other words, to prevent output and employment (the real economy) collapsing. And in most economies outside the hopelessly overstretched UK, Ireland, and Iceland, it seems to have done the trick.

But the most pronounced effect has been in asset markets. Not only have equities soared by 50% since the lows, and not only have commodity prices pushed up by 20-40%, but even property prices have recovered: UK prices are now higher than a year ago.

Which is extraordinary, when you consider how overvalued UK property remains relative to incomes. As a reminder(see this blog), just before the crisis broke, the IMF said we had the third most overvalued property in the world. And less than half of that - 13% - has since been corrected (for comparison, Irish house prices are down 25%):

The fact is, we are still in the phoney war. At some stage quite soon, the real war will break out. Central banks in the recovering economies will start increasing interest rates, and clawing back their huge monetary stimulus. Norway's central bank has already moved, with Governor Svein Gjedrem noting that asset prices have "risen sharply and probably excessively".

When the other major economies follow suit, the first thing that will happen is that the global asset bubble will deflate, and fast. We will be reminded that wealth cannot be conjured out of nothing, and our past debts are still there to be paid for. We really are much poorer than we thought two years ago.

House prices will resume their downward trend, and to give you an idea, here's one we made earlier:

Then, if the Bank of England keeps our interest rates down while others are increasing theirs, sterling takes a further slide. Import prices rack up and we are poorer still.

Then the bond market remembers that HMG has the highest borrowing requirment of any developed country (see this blog), and panics. Despite the low Bank Rate, the cost of government borrowing ratchets up, and pretty soon UK taxpayers are shelling out more than the annual NHS budget just to pay interest.

WTF do we do?

Last night, a youthful member of the audience made the obvious suggestion. "It seems to me," he said, "that what we need is a bit of inflation. Yes, the bond market might exact some penalty in terms of higher interest rates, but overall a bit of inflation would erode our real debt burden and give us the chance to wipe the slate clean" (I paraphrase).

The journalist agreed, suggesting that is precisely what the Obama administration is working towards. However, he also reminded us that it's very difficult to stop at "a bit" of inflation - last time it was tried back in the 70s (to pay for the Vietnam War and Johnson's Great Society), the whole thing spiralled out of control, turning very nasty indeed for us here in Blighty:

And of course, there's another point: it's all very well for young people and other debtors to wish for inflation, but for old timers with savings, that's the last thing we want. As far as we're concerned, we depend on our bank and building society accounts to finance our old age. The last thing we need is to be thrown on the mercy of a bankrupt state.

Gah! I've gone and upset myself again.

Someone has been telling Tyler that Cyprus is now the place for oldies. Tax rates are very favourable for retired ex-pats (just 5% on pension income), their budget deficit is miles smaller than ours, there's sun, Marks and Spencer, frequent direct flights back to the UK (4 hours), and they've long ago forgotten all that unpleasantness during the 50s.

Where do we sign?

Thursday, October 29, 2009

Migration Update

Following the shocking revelation about Labour's secret plan to transform our culture through mass immigration (and "to rub the Right's nose in diversity"), we've taken a look at the latest migration statistics.

According to the ONS, a net 2.7m foreign migrants came here during Labour's first decade (1998-2007 inclusive). Which is getting on for 5% of the population.

Of those, just 270,000 comprised the famous influx of Polish plumbers and Czech waitresses following EU enlargement in 2004. A further 170,000 came from other members of the EU, so that the total EU influx totalled 440,000. In other words, well under 20% of the total immigration came from the EU - the people we've always been told we can't refuse.

The remaining 2.3m were split roughly 50/50 between those from the Commonwealth (1.2m) and elsewhere. Or at least, they split that way in the official statistics. But of course, the official stats take absolutely no account of the unknown number of migrants who've arrived illegally.

Meanwhile, British born citizens have left in droves: over the same ten years, a net 0.8m went. Which, in terms of cultural transformation, is a double whammy.

Now obviously Labour are going to deny that this was the reason they systematically encouraged mass immigration. But if not this, then what?

Sure, they used to tell us it would make us all richer. Until that is, we found out that it hasn't (eg see this blog).

And then they told us we couldn't stop it even if we wanted to, because we were in the EU. Until that is, it turned out the vast majority of migrants were coming from outside the EU, so EU membership was irrelevant.

And now we're told... well, I can't quite work out what we we're being told now, but I think we can safely assume it's self-serving nonsense.

Another issue Mr Cam needs to grip pdq.

PS See here for our full analysis of the immigration stats, although the cumulative inflow has increased by a further 400,000 since then.

The Real Lessons Of Nimrod

More victims of government failure

"We are working hard to ensure we capture lessons from incidents and inquiries to improve our safety. As an organisation the MOD is changing its culture and approach to put safety first."

So says the lamentable Bob Ainsworth.

How many times have we heard that? How many times have we heard some government minister telling us that lessons have been learned and changes made? And how many times have we been let down?

And before we go any further, just take a moment to imagine it was your partner, your son, your brother, or your father who went down with the plane.

I haven't read the whole of the 587 page Haddon-Cave Review of the 2006 Nimrod crash, but what I have read tells a familiar story of bungling, complacency, and denial:

"If the Nimrod Safety Case had been drawn up with proper skill, care and attention, the catastrophic fire risks to the Nimrod fleet... would have been identified and dealt with, and the loss of XV230 in September 2006 would have been avoided...

Unfortunately, the Nimrod Safety Case was a lamentable job from start to finish. It was riddled with errors. It missed the key dangers. Its production is a story of incompetence, complacency, and cynicism."

It is a shameful tale, and nobody emerges with credit. Unusually for such an enquiry, the Review names names, in the MOD, the RAF, and the private contractors involved - BAE and Qinetiq. They should all hang their heads - as well as getting sacked.

But the real lessons go much deeper. The real lessons relate to those fundamental flaws in government we blog so often.

To start with, the only reason fourteen of our servicemen were flying in that ancient clapped out plane at all, was because our politicians decided to overrule the advice of their frontline professionals.

As BOM readers will recall, back in 1996 the RAF and MOD procurement team wanted to replace the ancient Nimrod MR2 fleet with the Lockheed Orion, the world's most successful maritime reconnaisance aircraft. But the politicians effectively overruled them, opting instead for an updated version of the Nimrod.

Why? Well, we'll never know exactly, but we may presume it was to shore up BAE which depends critically on MOD orders. In other words, it was a decision made on industrial policy grounds rather than military needs (the Defence Secretary at the time was BBC TV pundit Michael Portillo, who subsequently became - yes, you guessed it - a non-executive director of BAE).

Second, the reason the Nimrod MR2 is still flying, rather than its replacement MR4, is that BAE has still not finished the new version. The MR4 was originally supposed to go into service in 2003, but the latest official estimate is 2011 - eight years late. Eight years in which our servicemen have been expected to go on flying in dangerous planes that are older than they are themselves (indeed, when you consider the Nimrod is basically a converted Comet airliner, these planes are actually even older than Tyler).

And of course, the delay is on top of a truly wild cost escalation. The project was originally supposed to cost £2bn for 21 planes- £95m each. But we're now paying £3.6bn for 12 aircraft- £300m each. That's a price increase of 216%.

Should we blame BAE for the overruns? Well, yes, of course. But it fits into a much broader pattern of government being incapable of managing its contractors effectively. We've blogged this issue many times, and it includes the inability to spec the job properly, the inability to draw up workable contracts, the inability to price jobs realistically, and a chronic inability to stick to the original spec. The all too predicatable result is delay and cost overruns, just as we see with Nimrod.

Third, the reason the MR2's known safety issues were not tackled - or better still, the plane grounded - was that the 2001-2005 safety review (the "Safety Case") was little more than a gigantic box-ticking exercise. Haddon-Cave says:

"... the task of drawing up the Safety Case became essentially a paperwork and ‘tickbox’ exercise...

... The Nimrod IPT [the MOD's own project team] inappropriately delegated project management... to a relatively junior person without adequate oversight or supervision; failed to ensure adequate operator involvement in BAE's work; failed to project manage properly, or to act as an ‘intelligent customer’ at any stage; failed to read the BAE System Reports carefully or otherwise check BAE Systems’ work; failed to follow its own Safety Management Plan; failed properly to appoint an Independent Safety Advisor to audit the Nimrod Safety Case; and signed-off BAE Systems’ work in circumstances where it was manifestly inappropriate to do so. Subsequently, the Nimrod IPT sentenced the outstanding risks on a manifestly inadequate, flawed and unrealistic basis, and in doing so mis-categorised the catastrophic fire risk... as ‘Tolerable’ when it plainly was not. The Nimrod IPT was sloppy and complacent and outsourced its thinking."

We encounter this kind of sloppiness in government all the time. Senior managers who delegate critical functions to juniors without proper supervision. Non-existent project management. Failure to act as "an intelligent customer". Failure to check contractors' work. Failure to follow their own procedures. Failure to audit results.

Government is very good at compiling massive codes of practice and rules both for itself and other people. But when it comes to practical execution in the real world, it is terminally hopeless. It simply isn't up to the job.

Fourth, the Nimrod disaster reflects the unintended consequences of this government's much-hyped "efficiency" programmes. Haddon-Cave describes how the cuts demanded by the 1998 Defence Review sent the MOD into "organisational trauma":

"Financial pressures and cuts drove a cascade of multifarious organisational changes, which led to a dilution of the airworthiness regime and culture within the MOD, and distraction from safety and airworthiness issues as the top priority. There was a shift in culture and priorities in the MOD towards ‘business’ and financial targets, at the expense of functional values such as safety and airworthiness."

As we've blogged many times, these so-called efficiency programmes may sound good on paper, but they almost always degenerate into farce (Gershon) or tragedy, as here. Government just doesn't do efficiency. To get better value we have to dismantle it.

But defence is a rather special case. Government has to do defence. And that being so, our first and overriding priority must be to support our servicemen and women, especially in the line of fire. It is completely unacceptable to put their lives at risk in an attempt to shave 20% off the logistics budget, as apparently happened here.

Yes, we should switch to buying off-the-shelf kit (like the Orion). But beyond that we should recognise that we will always end up paying over the odds - that's just the way government is (eg see this blog).

So to summarise, the real lessons of the Nimrod killings are:

  1. Politicians should not override the operational judgements of frontline staff
  2. Government is hopeless at managing outside suppliers - and the end-customers become the victims
  3. Government is hopeless at project management - and indeed, at management more generally
  4. Government is hopeless at efficiency programmes - cuts are never the same as efficiency savings

But of course, we knew all that long ago. It really should not have taken 14 more service deaths to remind us.

PS BAE comes out of this even worse than the MOD. The Review says: "BAE Systems bears substantial responsibility for the failure of the Nimrod Safety Case. Phases 1and 2 were poorly planned, poorly managed and poorly executed, work was rushed and corners were cut. The end product was seriously defective... The work was riddled with errors of fact, analysis and risk categorisation... These matters raised question marks about the prevailing ethical culture at BAE Systems." BAE may claim that the cause of the crash “will never finally be determined”, but if I were a relative I'd be suing.

Wednesday, October 28, 2009

The Government Inspector

Ofsted are coming - we're doomed!

Autocratic regimes always employ legions of government inspectors. Their job is to tour round the various outposts of the centralised state and put the fear of God into local bureaucrats - to remind them who's boss.

It was back in 1836 that Nikolai Gogol wrote his classic comedy about how the Czar's inspectors terrorised the officials of provincial towns in Russia. The play's joke is that the government inspector actually turns out to be a conman, who finally scarpers with his bribes and the mayor's daughter. But its underlying truth is that the inspection regime does nothing to contain the endemic corruption and inefficiency of the Czar's local officials.

Gogol could write virtually the same play today in Brown's Britain. In councils and schools and hospitals throughout the land, bureaucrats and frontline staff quake at the prospect of a visitation from the inspectors. The inspectorates now cover all aspects of local services, employ many thousands of inspectors, and have budgets running into hundreds of millions (for more details, take a look through the excellent TPA quango report).

One of the most high profile inspectorates is Ofsted. It costs us £228m, has a staff of 2700 (2007-08), and is headed by the wife of disgraced Labour minister Tony McNulty (honestly, you couldn't make this stuff up).

According to Ofsted's website:

"We inspect and regulate to achieve excellence in the care of children and young people, and in education and skills for learners of all ages."
Which gives it an extraordinarily wide brief. It now inspects and regulates not only schools, but also "colleges, initial teacher education, work-based learning and skills training, adult and community learning, education and training in prisons and other secure establishments, and the Children and Family Court Advisory Support Service (Cafcass)". Not forgetting childcare services (aka prosecuting members of baby-sitting circles), and childrens' social care.

Ah yes, childrens' social care.

We blogged the appalling case of Baby P several times (eg see here). Ofsted was centrally implicated, having awarded Haringey childrens' social services excellent marks virtually at the same moment Baby P was dying.

It turned out their inspection had been little more than an elaborate box-ticking exercise, largely carried out by those actually being inspected. At the end of which, Ofsted praised the council for providing “a good service for children”, and improving their "life chances" - a sickening testimony to the uselessness of their inspections.

So how have they responded?

Well, by increasing the number of boxes that require ticking of course. According to those at the sharp-end (HTP HJ), since the Baby P case, social workers have been submerged in a deluge of new bureaucracy. The chief executive of the British Association of Social Workers says:
“What social workers are having to do 80 per cent of their time is serve a bureaucratic machine, which actually has nothing to do with good social work and has everything to do with keeping a really ineffective inspection regime operating in a way that does not support really effective work with children and families.”

Which sounds spot on. And note the response of Childrens' Commissar Balls, when asked if he would intervene to stop the lunacy:

"The answer to that is no. The idea that social workers who are dealing with complex cases of potential child abuse or neglect wouldn’t be making records or keeping track of what they do doesn’t seem to make much sense."

Yup. Yet another here-today-gone-tomorrow amateur who knows better than the frontline professionals how they should do the job.

And if by any chance some courageous council might consider ignoring the government inspectors, and backing the judgement of their own people instead, they should expect a visit from the Cossacks.

Already in the last few months, two previously well-rated shire counties have fallen foul of Ofsted's rage.

We already blogged the case of Surrey County Council, where the failure to tick all of Ofsted's child care boxes properly led to Whitehall intervention, mass sackings/resignations (including Surrey's Chief Exec), and a stinging critique of the entire council delivered publicly by the commissar parachuted in to conduct the purge.

Now a similar thing seems to have happened in Cornwall, where Ofsted has condemned local childrens' services for inadequate record keeping, and various other perceived organisational failures. Only this time, the Chief Exec immediately ran out into the market square to confess his council's shortcomings and promise they will obey all future orders without question. Local democracy it ain't.
Cam reckons he's going to take an axe to Labour's inspectorates. He needs to. We've already suggested axing the Audit Commission. Ofsted can join it. Total saving £450m pa.
PS Tyler used to do the odd spot of acting at school. And The Government Inspector was the first production he ever appeared in. No photos alas, but a quick Google produced the following cutting of another school performance at about the same time. It gives a pretty good idea of the kind of nuanced acting we're talking about, and it even seems to feature the same rented costumes:

Tuesday, October 27, 2009

Big And Stupid

According to a poll in this morning's Independent, two-thirds of voters now agree that "government has grown too big and needs a major overhaul to make it smaller" (see here for full poll results).

Well, hallelujah. After 12 grim years of rule by Socialist Commissars, British voters have once again shown they're not quite as dumb as the ruling class like to think.

Of course, that's not the way the Commissariat running dogs and lickspittles see it. The Independent itself claims we stupid voters have misunderstood the entire issue:

"The "big government" versus "small government" opposition is, in many respects, a false one. There are areas of British life where the state's activities are distorting and it should pull back. But there are other areas where government ought to be more activist in pursuit of the public good. Our political leaders need to decide where government has a role – and then concentrate on making it as effective and productive as possible in fulfilling that role. The true enemy is not "big government" but "stupid government".

So voters are confused. Instead of demanding a downsizing of government they should really be demanding that government stop being stupid. Apparently that's the real enemy of the people.

The "Independent" adds:
"[The] claim that all of society's ills can be laid at the door of an over-active states is too simplistic. There are also areas of public life where the state has plainly not been active enough. The Government has failed to do enough to stimulate investment in renewable energy technology and infrastructure. The result is that we lag far behind the likes of Germany in the development of solar energy and wind power."
So it doesn't matter that we the people remain deeply unconvinced by warmist theology (see Mr Booker's latest heretical tract here), or that we're aghast at the increasingly bonkers commandments from the warmist priesthood (such as today's injunction from Archbishop Stern to stop eating meat). As far as the Commissariat are concerned, we're being stupid. We must be prepared to sacrifice everything - our livestock, our prosperity, even our hypothermic lives - in order to placate the great God Gaia. Anything else would be... well... stupid.

The Independent also deploys the left's current killer argument against small government:
"One of the reasons we got into this economic mess was the prevalent political ideology that said financial markets were always self-correcting and should be left to their own devices. The banks blew up a destructive credit bubble without facing any meaningful controls from the regulator."
Financial markets are big and stupid, so government has to be big and strong. QED.

Except of course, governments themselves were heavily implicated in the financial bubble and its subsequent collapse: central banks that kept interest rates too low for too long, regulators who couldn't regulate a rice pudding, high spending politicos who luxuriated in the fiscal windfalls generated by the credit boom, etc etc.

Nobody of Tyler's acquaintance thinks government can stay out of financial markets altogether. For example, in a modern economy they have to be the ultimate guarantor of retail bank deposits, they have to ensure their own debt financing operations don't destabilise the currency, and they have to hold the ring against anti-competitive practices (just like in other markets). But that doesn't prove the case for big government more broadly.

The thing about big government is that it is stupid by nature. It truly is the nature of the beast.

And that's not to say that the people who work in government are stupid (Tyler met another very sharp civil servant just last week). And it's not to say that private sector operators are all smart.

No. Fundamentally, big government is stupid because it lacks direction from choice and competition.

Many private sector operations suffer from just as much stupidity. But they have a big advantage over government. Because in their case, if they are too stupid, and if they fail to improve pdq, they go out of business. Their behaviour gets shaped by choice and competition. Which means that unlike government, the private sector largely comprises winners - operations that have dealt with their stupidity (or at least, enough of it to survive out there in the jungle - eg see this blog).

Of course, the commissariat are never going to see it this way. Not only do their jobs depend on Big Government remaining big, many of them actually believe big government knows best. They believe that warmism is the one true faith, that a benevolent superstate headed by Commissar Bliar is A Good Thing, and that markets cannot be trusted.

So who is it that's stupid exactly?

Right now, the pressing issue is how we get Mr Cam to follow through on his fine words at the Tory conference. We completely agree that it was Big Gov wot done it - both to our economy and our society - but in six months time we're going to expect some action. As this poll highlights, we're ready for some serious downsizing.

Monday, October 26, 2009

Who Pays Our Taxes?

Following our post on whacking the middle class, we've refreshed our memory on who actually pays our taxes.

We can get some idea from the latest ONS analysis of taxes paid directly by households. They account for around three-quarters of total taxes, the remainder mainly being paid by businesses of one kind or another.

In 2007 (the latest data available), of the government's £500bn total tax revenue, £360bn was paid directly by households (including income tax, national insurance, VAT, duties, and council tax).

And of that £360bn, getting on for a quarter (£81bn) was paid by the richest 10% of households (meaning household incomes over about £60 grand pa). Which just goes to prove once again how very grateful we should be to the rich.

In contrast, the poorest 40% of households paid "only" £54bn between them.

Which means that the 50% of households in the middle - the people who probably think of themselves as middle class - ended up paying 63% of all the taxes paid by households.

PS I know what you're thinking. You're thinking that companies don't actually end up paying taxes at all because companies are just legal constructs. Any taxes they pay are passed onto their customers in the form of higher prices, or passed onto their shareholders in the form of lower earnings. So really we need to attribute the £140bn taxes they paid back to their customers and their owners. And you're quite right. Unfortunately we don't have the information to do it.

Whacking The Middle Class

The middle class isn't so docile everywhere

To paraphrase Willie Sutton, the reason Chancellors rob the middle class is because that's where the money is.

Sure, politicos like to wave their arms and pledge to tax the undeserving rich, but in reality that never raises enough cash. For one thing, there aren't enough undeserving rich to go round, and for another, the rich have an anti-social tendency to move their cash out of harm's way. For example, the new 50p tax on incomes over £150 grand may show we're all in this together, but in reality it's likely to reduce tax revenue (see this blog).

So as Darling/Osborne run through the options for closing our £100bn fiscal gap, the middle class finds itself right back in the crosshairs.

Much of the action will be on tax. The middle class can expect to see income tax allowances and thresholds frozen (just like Howe did in his famous 1981 budget), and you certainly wouldn't rule out Darling extending his 50p tax rate further down the income scale (nicely stitching up Cam and Oz in the process).

The middle class will also be whacked by the forthcoming increase in VAT to 20% (watch this space). The VAT net may even be extended: the National Institute calculate that abolishing the reduced rate of VAT on fuel, and extending VAT to cover everything except food and childrens' clothing would raise £28bn pa by 2015. True, VAT is highly regressive, so proportionate to income, the poor will suffer most. But it's the middle class who will pay most.

The same goes for the planned further increases in eco-taxes, which also tend to be highly regressive. However with a little hippy ingenuity, such taxes can be shaped to hit the middle class especially hard: today's proposal to impose a £3,300 tax on new cars (heavily promoted this morning on the good old BBC) shows the way.

And then there's the sharp hike in business rates facing many small business owners after the government's recent revaluation exercise.

But of course, it isn't just through higher taxes that the middle class can expect to see their incomes cut. There's also the thorny issue of cash benefits.

Last week Tyler attended an interesting session organised by the ever-excellent Reform to launch their new paper on welfare reform - The End of Entitlement. Its key proposals include handing benefit rules and operation to social enterprises and companies, flexible Personal Protection Accounts modelled on ISAs, and replacing social security benefits with private provision.

But the headline item was a further refinement of Reform's proposal to abolish middle class welfare.

According to Reform, £31bn pa is currently being spent on welfare benefits for people who are not in need. Which is a quarter of the entire cash welfare bill.

They define the need threshold on the basis of every adult having an income of £15,000 pa and every child £5,000 pa, so that for example, a two adult two child household needs an annual income of £40k. On that basis they identify the following benefits as being the least well targeted, with high percentages of the benefits spend going to those above the threshold:

As well as pushing up the state pension age to 68 more quickly than currently planned, they recommend eliminating a raft of benefits for those above the needs threshold, including:

  • Scrap Child Benefit and streamline the Child Tax Credit - net saving £7.2bn pa after increase in means tested child support
  • Scrap the Child Trust Fund, Employer Supported Childcare Schemes, Health in Pregnancy Grants, the Healthy Start Scheme and the Sure Start Maternity Grant - saving £1.3bn pa
  • Abolish winter fuel allowance and free TV licences for pensioners - saving £3.2bn pa
  • End concessionary bus fares - saving £1bn pa
  • Charge student loan borrowers at the market rate - saving £1.2bn pa
  • Abolish the Educational Maintenance Allowance - saving £0.5bn pa

In other words, Reform propose an end to Beveridge-style universal benefits, and a much greater reliance on means testing.

Now, whatever you think about more means testing - and several people in Reform's meeting were aghast at the idea - this proposal means a £31bn pa cut in middle class incomes.

As it happens we like Reform's idea. But that's because the state should not be in the business of churning money from tax to benefits for people who don't need the help. It should cut both benefits and taxes (eg see this blog where we estimated the deadweight cost of fiscal churn at £5-6bn pa). .

But unfortunately, that's not where we are today. We have a huge fiscal hole to fill, and while benefits will be cut, there is no immediate prospect of a corresponding tax cut. For the middle class, their benefits cut will come on top of all their tax increases.

So are they going to sit there and just pay up? Put country before themselves?

Or are they going to shout and scream and demand that government cuts its own spending first? Like our middle class American cousins have long done.

Your call.

But you can join the TaxPayers' Alliance here.

And unlike Big Government, it's free.

PS Talking of the TPA, their latest research report is published this morning. Snappily entitled ACA-to-YJB: A Guide to the UK Semi-Autonomous Public Bodies, it's a comprehensive guide to what you and I know as Britain's 1,152 quangos. Here are the key facts:

  • Direct cost to taxpayers - £90bn pa (2007-08)
  • Additional fees and charges levied by quangos - £32bn pa
  • Staff - 534,000, which is more than the entire civil service

It is a fantastically useful survey - everything you ever wanted to know about the cost of these unaccountable, crony-stuffed excrescences. Well done to Ben, John, Katherine, and James for wrestling the facts to the ground. We'll be keeping a copy at our bedside for easy reference.

Sunday, October 25, 2009

More Cost Ineffective Justice

Violent crime now even worse than unthinkably thought in 2000*

Returning from a couple of days sans broadband, we've been catching up with the Village Postmaster.

He and his family have suffered what's officially categorised as a high trauma crime - robbery in their own home. But we're pleased to see they're back up and running, and they've clearly had huge support from their customers and the local community. After 50 years of soft criminal justice and corrosive welfare dependency, it's reassuring to know some bits of Britain remain unbroken.

At least the police do seem to be taking it seriously. They told the VP that the raid on his store was one of many - the night after his own raid, three more retailers in the county suffered the same fate, quite likely at the hands of the same gang. They really do need to hunt down these scum before somebody gets hurt.

But then what? We return to the same question we asked initially - why do we have to tolerate people like this among us? Why can't we just lock them away for good?

As we've blogged many times, the Home Office has previously estimated* that half of all serious crime is committed by around 100,000 persistent offenders. Each one commits an average of 90 serious crimes every year. Yes, that's right - 90 (see here).

But of those 100,000, only 20,000 are in prison at any one time. The rest are out among us, free to crack on - robbing the VP in his own home, raping, pillaging, whatever takes their fancy.

The obvious solution is to build another 80,000 prison places (doubling the current number) and keep these persistent offenders inside. Permanently.

At the current average £40 grand per place, that would cost us £3.2bn pa, £1bn of which we could get by abolishing the useless probation service (eg see this blog). And by using a little imagination, we could substantially reduce the cost (Tyler Senior favours doing a deal with the Russians for some of their underutilised correctional facilities).

It all seems so obvious to Tyler, the Major, and a host of ordinary people out here in the real world. So why don't we do it?

We know why: our wibbly Prog Con elite - who rarely experience serious high trauma crime themselves - persistently block any such moves. People like Aaronovitch, Finkelstein, and Easton, are forever telling us we are Daily Mail moral panickers, and we are in denial about the true facts (eg see here and here). For is it not the case that the government's official crime statistics show a continuing fall in serious crime?

To which our response has always been that the published official crime stats are so massaged and manipulated that they're not worth the eco-friendly recycled paper they're printed on. And in the last couple of days we've had yet more proof.

First, Denis O’Connor, Her Majesty’s Chief Inspector of Constabulary, has confirmed something we've blogged before - namely that the police are systematically under-recording crimes of violence:

"The plight of battered wives and other incidences of violence are being ignored by police. A third of the violent offences which were not recorded as crimes should have been...

Among the cases was that of one force which recorded that “no crime” had taken place when a woman’s partner slapped her, grabbed her by the neck and threw her on the floor, leaving her battered and bruised. The officers wrote that the victim would say that she had injured herself and that her partner’s account was “more accurate”...

In another incident, a man was knocked to the ground by a blow behind his ear. He was then kicked in the body. He needed six stitches in his head. The officer said he found the circumstances unusual and that the man might have been under the influence of alcohol when he fell. Mr O’Connor’s report said the incident should have been recorded as grievous bodily harm."

According to O’Connor, "the drive to meet government targets could be one reason why officers were failing to record offences".

You don't say.

Second, Policy Exchange have unearthed some unpublished Home Office research showing that the number of hardened offenders has increased alarmingly since the data summarised above:

This new study identifies 350,000 high-rate persistent criminals, who each commit around 260 crimes a year on average. That compares to the 155,000 identified in the earlier Home Office report* - a massive increase. And the number of active offenders overall now stands at an estimated 1.6 million (compared to 1.2 million earlier).

Alarmingly, it is in crimes of violence that the situation has deteriorated most.

The chart above is taken from a confidential crime report produced by Lord Birt for Tony Bliar in 2000. It shows what Birt thought would happen to violent crime by 2010 if the historic trend continued.

But although the chart was designed to shock, Birt was too optimistic. Even though we haven't yet reached 2010, according to the latest HO stats, recorded offences of violence against the person are already running well above the three-quarters of a million extrapolated by Birt. And that's despite the police fiddling the numbers.

But forget hopeless Labour - despite their neat slogans, they've always been useless on crime, and surely we all knew that really. The key question now is what is hug-a-hoodie Cam going to do about it?

I'm afraid I know. And it's not good news.

He's going to say, yes all this crime is a terrible indictment of 13 years of Labour misrule. Yes, indeed. And I'd like to help - I really would. But unfortunately there's no money. Cuh! What can you do?

Which is simply not good enough.

Because quite apart from the high trauma regularly inflicted on innocent hard-working families like the VP's, the Home Office itself reckons the loss and damage to property is now running at well over £100bn pa. Which makes the prison bill look like peanuts.

It's time. Broken Britain or not, we demand some proper cost effective justice.

*Footnote The earlier Home Office research was summarised in Lord Birt's thinking the unthinkable 2000 report for Bliar's Strategy Unit "A new vision for the Criminal Justice System" (see here). Including those 100,000 active persistent offenders who commit 50% of all serious crime, it said there were 1.2 million "active offenders". 155,000 of them were "high rate" offenders each carrying out an average of 250 - yes, 250 - crimes a year.

Wednesday, October 21, 2009

Village Postmaster Meets The Scumbags

We still need a lot more of these

As we know, sub-postmasters are in the frontline against violent crime.

Last January, we blogged the shocking murder of Craig Hodson-Walker during an armed robbery on his family's post office/general store in the Midlands. Later the same month we blogged another armed robbery on a post office in Berkshire during which the postmaster was badly beaten.

Now today, BOM's old friend the Village Postmaster has been robbed by three thugs who broke into his shop in the early hours of this morning. He and his wife were woken by the shop's alarm system and actually interrupted the raid. But far from fleeing, the robbers responded with threats and violence.

The VP will doubtless blog this grim experience himself, once he's got his shop back in operation (itself no small matter), but we are feeling very angry.

Why should responsible law-abiding citizens have to tolerate violent scumbags smashing down the door and helping themselves? Why should they have to accept being threatened in their own homes?

We demand a criminal justice system that protects us against this. We demand a justice system where punishment for serious crime is far more severe.

The reason is very simple: with low detection rates (25% or less), unless the punishment for those who do get caught is severe, there is no deterrence.

And we also want three-strikes-and-you're-out. As we blogged here, the evidence is that, once anyone has been convicted three times, there's a greater than 50% chance of him reoffending within two years of release. Indeed, for released prisoners, the reoffending rate is 65%. It is outrageous that the law-abiding majority have to accept a risk like that in the name of... well, what?

We'll be following the police investigation into the Postmaster's robbery very closely, and let's hope the police can track down those responsible before they do it again (you can bet this was not a first offence).

Also, the trial of those accused of murdering Craig Hodson-Walker is currently underway. If there are convictions, we will expect these people to be locked away for ever.

No ifs, no buts.

PS The latest outburst by Keir Starmer, the Director of Public Prosecutions, precisely illustrates why we've got into this mess. He reckons the Tories' plan to replace the notorious European Human Rights Act with a British Bill of Rights will bring "shame" on Britain. WTF? We'd always imagined the DPP's job was banging up bad guys, not politicking for "human rights". Anyone would think Starmer was a former Human Rights Lawyer of the Year. Why can't we have prosecutors who actually want to prosecute?

Splitting The Megabanks

The idea of splitting our megabanks between their high street and casino components is fast becoming mainstream.

We've blogged this many times of course (eg here), and last night the Governor of the Bank of England amplified his own call for such a split. Calling our open-ended taxpayer guarantees "the biggest moral hazard in history", he says:

"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are...

The aim of policy should be to minimise or eliminate that subsidy. Separation of activities helps not hinders that objective, not least because it is the mixture of activities that reduces the robustness of the system."

And we need to get on with it. As we blogged here, zero interest rates and QE mean that the next bubble is already well on the way. This morning the FT's Martin Wolf - labeling our international megabanks cuckoos in the nest - says:

"We must focus on the core issue. Trying to make financial systems safer has made them more perilous... There is a danger that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future.

Either we impose a credible threat of bankruptcy, or institutions we have to support are made safer, or, better, we have both of these. Open-ended insurance of weakly regulated institutions that take complex gambles is intolerable. We dare not return to business as usual. It is as simple – and brutal – as that."

Yes, the G20 and the international banking establishment want us to focus on better regulation (such as so-called macro-prudential regulation). And that certainly has a role to play. But we are fooling ourselves if we think our regulators will ever be clever enough to cover all the necessary bases. Governor King is someone who's seen the difficulties of regulation up close and personal, and he says:

"The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the “too important to fail” question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

Naturally the megabankers don't want to be broken up - which is why their own economists and pundits issue all those dire warnings about how break-up would undermine the British economy.

But we taxpayers simply can't afford to go on as we are. Relative to GDP, the financial crash hit us harder than any other major economy. As Wolf reminds us, the IMF says UK banks are facing writedowns on bad loans of around $600bn, which is 60% of the US total in an economy that is well under 20% of the size. Bearing risks of that magnitude is not sustainable either for taxpayers or our economy.

So if we're all clear about that, the next question is why are our politicos still in the dark?

Well, of course, they're not really in the dark at all. The reason they don't want to split the banks is that for the last 30 years the financial sector has been the UK's big success story. Broadly defined, it has created 6 million jobs (see this blog), and generated huge amounts of tax revenue. Given our rocky future, politicos of both main parties don't want to accept the Golden Goose may have turned into a cuckoo.

But that just won't do. Yes, there are risks in splitting the banks - especially if we do it unilaterally - but inaction runs the very real risk of an even bigger catastrophe just down the road.

Moreover, we don't reckon a split would lose us the entire investment banking industry. We'd still have the skilled labour force and infrastructure (including the English language) most other European countries lack.

And we could substantially soften the move with some accompanying measures designed to keep the bankers here - eg rescind the new 50p tax rate (see this blog), pledge to end retrospective bank windfall taxes, and promise to continue light touch regulation for non-high street banks. We should have no problem with bankers getting rich - as long as they don't do it at our expense.

Come on George. Think of us taxpayers. Surely you can't be that dependent on megabanker subs?

Tuesday, October 20, 2009

Pol Makes A Good Point

So bad, it's fallen off the official chart

Today's horrific public borrowing figures underline the need for drastic action. So far in 2009-10, Brown's government has borrowed £77bn, which puts us well on course for busting through £200bn over the year as a whole (the budget forecast was £175bn).

Even setting aside Brown's much hyped capital spending programme, the current deficit year-to-date is £61.5bn - so big, it can no longer be accommodated on the official ONS chart (see above). And our net debt now stands at £825bn - which means the latest estimate of our real national debt we blogged yesterday already needs increasing by £20bn.

The dials are spinning, my friends, and unless someone grabs the controls soon, I'm very much afraid we're going down.

As luck would have it, the CBI has just published its "blueprint" for getting a grip. Like us, it wants spending cuts rather than tax increases, and says:

" extra £120bn will need to be taken out of current spending to achieve budget balance by 2015-16. Such savings cannot be achieved by tinkering at the edges, but will require radical public sector reform.

We have identified how the required savings might be achieved by re-engineering the ways in which public services are delivered. By introducing new technology and competition, eliminating waste and inefficiency, and tackling unaffordable pensions and pay head on, we can avoid crude cuts to frontline staff and the vital services on which we all depend."

Their £120bn spending reduction is a cumulative total spread over three years, and it breaks down like this:
  • £63bn from "radically re-designing the way public services are delivered, including making use of new and proven technologies, as well as increasing competition"

  • £27bn from "improving workforce management" - specifically, a two year pay freeze, tackling the sickie problem, and gripping public sector pensions

  • £30bn from more outsourcing to private sector suppliers

  • £16bn (mimimum) from "cutting waste from within government"

63+27+30+16... umm... that's 136 isn't it? Oh well, what's the odd £16bn in a crisis?

Anyway, Pol doesn't like it one little bit. Warning us to "beware the zealots selling miracle cures", she accuses the CBI of fiddling the figures and "licking its lips as it eyes up public services cuts". Anyone would think she was talking about the TaxPayers' Alliance again.

But wait... what's this? Polly actually goes on to make a very good point. Homing in on the CBI's enthusiasm for more outsourcing, she says:

"The CBI claims private contractors can process arrested people through custody suites more cheaply by freeing up police from paperwork, and that private civilian companies can provide basic logistics for the forces more efficiently than using trained soldiers, which sounds convincing.

Or at least it sounds convincing until you consider the forces' abysmal record for striking good contracts with commerce. That's just the problem. Weak public managers are often even worse at drawing up private finance initiative, public-private partnership or even bog-standard procurement deals with the private sector. The danger is that canny companies will run rings round civil servants with neither the knowledge not the greedy motivation to squeeze out every penny's worth."

Spot on Pol. As we've highlighted over and over again on BOM, whether because he's naive, or stupid, or lacks your greedy motivation, the Simple Shopper is absolutely pants at driving deals with the private sector. He cannot be trusted to do it. Which is a serious flaw in the CBI "blueprint".

So if outsourcing is out, what should we do instead?

Pol's solution is pretty well to keep everything in-house, and hope that the public sector can somehow get more efficient by rolling out best practice. Kind of idea.

Our solution is to go way beyond what the CBI suggests. We don't want yet more cack-handed outsourcing arrangements - everything from hospital cleaning to IT shows that the public sector cannot manage them. What we need instead is for government to divest itself of its intermediating role between customer and supplier.

We need... yes, you've heard it all before... choice and competition. We need the spending power put directly into the hands of customers, and we need competing suppliers. So school vouchers, competing social health insurers, directly elected sheriffs, fiscal decentralisation, etc etc. Except for the core functions of the state (law and war, and in this day and age, some minimum welfare safety net), we need to take our bungling Big Government out of the equation.

Such radical reform would not only solve the problem of Simple Shopper outsourcing, it is actually the only way of driving the efficiency savings that comprise the bulk of the CBI's £120bn. Disembodied managerialist efficiency drives just don't deliver such savings: we've had no end of failed attempts over the years, most recently the Gershon farce.

And just be clear about this - the money has run out. Spending cuts are unavoidable.

If we make the choice and competition leap, there's just a chance we can get through by driving out waste rather than hobbling our frontline services.

If we don't, we'll get cuts in frontline services. It's started already: the Crown Prosecution Service is going to save money by letting offenders off.

Your call.

Monday, October 19, 2009

No Safe Way Down

Recently, Mr and Mrs T nearly traded up to a new house. It came on to the market in early summer and the Tylers made what they considered to be a most reasonable offer in these post-apocalypse days - to wit, 16% below the asking price.

The offer was rejected outright. The owners said at that price, they'd rather not sell at all.

Several months went by, and no other offers emerged. To show willing, the Tylers even nudged up their own offer a few percent. But the sellers remained adamant - our price or no price.

Which was really rather odd, given the property's price history. Because our researches on Mouseprice had immediately revealed that the owners had pitched their price 35% above what they themselves had paid just four years ago. Whereas the overall price increase for the general area had been less than 5% (a BIG UP followed by a BIG DOWN). Sure, they'd made one or two improvements, but nothing like enough to account for the difference.

So the Tylers decided to sit tight and let the mortgage famine do its work on the sellers.

Then, guess what - all of a sudden, another offer appeared, very close to the asking price. "Are they good for the money?" asked Tyler of the agent. "Oh yes, that's not going to be a problem - they're currently in a rental and he's in the City", the agent smirked. The Tylers politely declined the invitation to counterbid.

So there we are. The City is back in bonusland, and the housing market is back on the razz.

According to Rightmove, property asking prices are surging again. Fueled by bonus talk, London prices are now actually higher than they were during the 2007 peak. Which sounds absolutely stark raving.

WTF's going on?

You don't really need me to tell you, but I will anyway.

The lowest interest rates since the dawn of creation is what's going on. There is zero incentive to hold savings in cash and the money is rushing back into property.

And not just property of course. Money is also scrabbling back into the equity markets (eg unit trust sales are right back up). The FTSE is up 50% from its lowpoint and back to pre-crash levels.

Now, as regular readers will know, we are very concerned about all this - and not just because the Tylers lost their new house. It's all very well slashing interest rates and printing money in the immediate face of a meltdown, but how is the Bank of England going to get us back onto a sustainable footing? How is it going to find a safe exit? And how do we avoid a return to 70s style inflation?

In this morning's FT there's an excellent article by Wolfgang Münchau asking the same questions. Noting that the current run-up in asset prices has all the hallmarks of another bubble, he says:

"Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down."

No safe way down.


Don't like the sound of that.

Although we do take some comfort from the fact that whichever of Münchau's two precipices we plunge down, the Tylers will be better off without their new house. May the Lord have mercy on its new winner's-cursed owners.

Stay solvent.

Latest On Real National Debt

And they thought things were bad then...

The last time we calculated the real national debt - including all those off-balance sheet Enron items - we got to a figure of £1.8 trillion. But that was last year, and things have moved on since then.

Now Brooks Newmark has updated the numbers in a pamphlet for the CPS. He calculates the current figure at £2.2 trillion, or £86 grand for every single British household.

Here's how he gets there:

So the next time some soothsayer tells us our national debt is still low by international standards, we should remember that - our true debt is nearly 160% of GDP, much higher than most competitors on less than 100%.

Except of course, as beady-eyed readers will have spotted, Newmark's figure still excludes a few of the debts we've blogged so often.

First, although most of the Crock and Bradford & Bingley debts are now included in our official national debt, Newmark has excluded the liabilities of our two big semi-nationalised banks - RBS and Lloyds. Adding them in would increase our debt by £2.4 trillion, more than doubling the total. To be sure, those liabilities are backed by the banks' assets, which are supposedly enough to cover us. But how lucky do you feel?

Second, he omits the costs of decommissioning our old nuclear power stations, which are a direct liability on taxpayers. When last sighted, we reckoned that amounted to £73 billion.

Third, he (and we) omit the scariest liability of them all - the cost of future state pension payments - ie the old age pension. When we crunched the numbers on that (based on the Turner Report's projections) we came to a nerve-shredding liability of £7 trillion. In truth, the current number is only around half that because the relevant discounting factor for future payments has increased (ie the yield on government index-linked bonds has gone from around 1.5% pa to around 3% pa). So let's call it £3 trillion.

Which means that if we wanted to be cautious - admittedly not something our present rulers have been much good at - we'd say our real national debt is now in the range £7-8 trillion. Or around £300 grand for every single household.


Sunday, October 18, 2009

Breaking The Bank

The original bank breaker was 91 when he filmed this

What about those bankers, eh? What are they thinking of? No sooner do we bail them out, then they're stuffing their pockets again.

As we've blogged before, we have no problem with highly paid bankers.

Highly paid bankers, we like. As far as we're concerned, they can pay themselves as much as they can stagger home with.

It's just their huge subsidy we don't like. We don't see why we should subsidise them to make a fortune at our expense.

To reiterate (see here for fuller version), our bankers have always got a whacking great subsidy from the rest of us via the explicit and implicit guarantees we provide on their debts. Which, as long as they were laying all those lovely golden tax revenue eggs, we were prepared to turn a blind eye to.

But when a whole batch of those eggs smashed open and we saw they weren't real gold, we naturally got somewhat pissed. Especially when the IMF told us it would likely cost UK taxpayers $200bn.

So given that, and given the fact that some of these banks are now in direct public ownership, and given the fact that their profit surge reflects the extraordinarily low interest rates implemented to shore up the banking system, you might have thought they'd go easy on the old bonus bonanza for a while.

Wouldn't you?


No chance.

So what should we do?

As we've said many times before, the obvious and necessary step is to break retail high street banking away from investment casino banking (a new Glass-Steagall). We continue to guarantee (and heavily regulate*) high street banks, but investment banks are on their own. Granny's high street bank deposit is safe, but the Bastard Corporation's super-enhanced Teir 2 capital notes are not.

And we announce it loudly to the world. We say: "London remains the global centre of casino operations, and we will do everything to enhance its position, including light touch regulation. We celebrate and embrace its high rolling players. They can snuffle up as much as they like; they can buy up Holland Park and Oxfordshire; we will never impose punitive personal taxation upon them. But... and this is an important but... nobody should assume we are guaranteeing them at the tables, because we are not. If they lose your family fortune, it stays lost. Buyer beware."

Ah, you say, that's all fine and large. But Lehman was already a pure investment bank, yet when it went down it brought down the roof. So would a new Glass-Steagall actually work?

Sure, Lehman was a pure investment bank, so in theory its collapse should not have brought the world down. But the problem was that everyone had assumed the US government would stand by it. Nobody had ever said what we're proposing is said now, so when Paulson pulled the plug, it came as a huge shock. Nobody was any longer sure of anything.

If the rules were spelled out clearly in advance, we wouldn't have that problem. And because their cost of capital would increase, investment banks would find it much harder to grow so big they could never be allowed to fail.

Focusing on bankers' bonuses is focusing on entirely the wrong issue.

*Footnote - We've heard it argued that experience with the Crock shows that splitting investment and retail banking isn't the real issue - after all, the Crock was a pure retail bank. But actually, all the Crock proves is that our retail bank regulator was incompetent. The FSA did a truly shocking job of regulating Northern Rock, as the subsequent enquiries showed. And that experience ought to make us even more wary of assuming those same stumbling regulators are somehow capable of regulating global megabanks which incorporate both retail and investment banking under one roof. It's pure fantasy.

Saturday, October 17, 2009

Tesco Government Ahead?

The Saint's chosen Treasury team leave for work - all experts - none elected

As regular readers will know, we have long advocated Tesco government.

Tesco government works like this:
  • every four or five years, we punters peruse the sales brochures put out by various competing firms of politicos

  • based on their offers and the relative standing of each brand we award one of them our business

  • the winner then has to deliver what was promised, harnessing the massive resources at their disposal as best they can

  • as long as it's legal, we punters don't really care how the winner does that, any more than we care how Terry Leahy organises Tesco to deliver our weekly groceries

Under Tesco government, the buck ultimately stops with the Prime Minister, as Chief Exec. If there's a failure to deliver, it's his failure. And no amount of bleating about how his subordinates are all pants can change that - he's the boss, and he should have bulleted anyone not up to the job. He should especially have bulleted and replaced any senior executives who were not likely to deliver his plans.

Now, Tesco government is not what we have at present. What we have today is still much closer to Sir Humphrey government.

Under Sir Humphrey government, responsibilities for delivery are fuzzy - very fuzzy indeed. The PM may be the Chief Exec on paper, but in reality, he must work through several layers of incumbent senior managers, many of whom are too amateurish to run a whelk stall (see copious previous blogs eg here). Worse, many of them will actively oppose the PM's policies, especially if they involve any of the four ings - privatisating, decentralising, downsizing, and outsourcing.

Which brings us to the Tories' plans for managing the civil service. According to the Times:

"Francis Maude, the Shadow Cabinet Office minister, has drafted proposals to let ministers, rather than the 28 permanent secretaries, chair boards in Whitehall departments if the Tories win power. Mr Maude is planning to fill these boards with non-executive members from the private sector and, for the first time, give them powers to recommend firing permanent secretaries. The most senior civil servants would be put on fixed-term contracts and the salaries of the top 35,000 officials would be published online.

The reforms, designed to hold officials to account and improve performance, represent the first direct threat to the powerbase built up over decades by permanent secretaries."

Unsuprisingly, the mandarins don't like this one little bit. But if it means what it says, it could be an important step in the direction of Tescos.

Or to put it another way, an important step in the direction of US-style government, where the elected President appoints between 500 and 1000 of his own people to the senior posts across the main departments of state. He picks experts in the field whom he trusts to deliver on his promises. And he is directly accountable for their performance.

What's that?

We don't want to be like the ghastly yanks, and our civil service has to remain above politics, otherwise the politicos could do untold damage to the fabric of the nation?

Unfortunately, while our our current arrangements may stop politicos achieving what they want (ie what they've promised us), they do so only at the cost of delivering a huge wasteful mess. The mandarins may include some very smart cookies, but they ain't much good at management and delivery. Not only are they not interested in such tedious affairs, they are absolutely rubbish at it.

You may recall that when the Commons Public Administration Committee looked at whether our major government departments were fit for purpose in 2007, they came out with an average departmental score of just 35%. Overall, they found the civil service inhabiting world of poor professionalism, poor management, poor delivery, and poor commitment.

As a reminder, here's their summary table listing all the main departments (scores out of 10):

Something has to change, and Tesco government has to be the way to go.

PS There's already too much power in the hands of the executive? Yes, indeed. But that's because government is just too big, and we have absolutely no divsision of power between executive and our whipped legislature. We should tackle those issues directly, not via the supposed independence of the civil service, which just results in nothing getting done properly.

Friday, October 16, 2009

Localism - Follow The Money

Local decisions for local people

As we all understand by now, the UK has just about the most centralised system of government of any developed country. Our once proudly independent local councils have become little more than an arm of the state, with all kinds of dire consequences for local services, local accountability, and the stewardship of taxpayers' money.

Now the Tories have pledged to reverse this. They pledged it again at last week's Conference.

To which we say hurrah!

Except of course, rhetoric is one thing - action is something else entirely. This morning, Steve Richards highlighted a key point:

"The problem with localism is that governments like to keep hold of the levers even if in theory they want to let go. As an added twist quite often the case for holding on to a lever or two is compelling...

How does central government give away powers when it is responsible for raising most of the money spent by local providers?"

Yes, when it comes to localism - as with everything else - we must follow the money. As long as local councils continue to depend on central government grants for the bulk of their cash, localism is never going to be more than a sham - probably an expensive one.

Now, it just so happens that Tyler is working on a paper for the TPA on precisely this issue. So he's been having a deeper delve into the figures.

First, relative to other developed economies we really are out on a limb in terms of fiscal centralisation. The following chart is taken from a recent OECD working paper, and it shows the variation in how local authorities raise their cash, as between local taxes and transfers (grants) from central government (click on image to enlarge):

As we can see, the UK is at the extreme end in terms of how reliant our local authorities are on central government grants - only Ireland, Greece and the Netherlands are (slightly) more extreme. Even in traditionally centralised states like France, local authorities raise much more of their own funds from local taxpayers, rather than relying on central government.

Second, it really wasn't like this in the past. Traditionally, our councils raised most of their own funds. Right up until the 1960s, their receipts from local taxes were roughly in line with their central government grants.

But as government got bigger, central government crushed local control. They massively boosted their grants to local councils, but only on condition that councils complied with Whitehall directives (recalcitrant councillors could even find themselves banged up). In the 80s, the Thatcher government introduced rate capping, directly limiting council's power to raise local tax. Finally, in 1990 local authorities lost their ability to tax local businesses altogether.

These measures transformed councils' funding mix. And they correspondingly transformed who got to call the shots:

So here we are, with more than 80% of our local councils' spending funded by Whitehall.

And unless Cam changes that, all his talk of localism is so much hot air.

We'll be watching this space very carefully.

PS Simon Jenkins can sometimes be very irritating. But his 2004 paper, Big Bang Localism, turns out to be a pretty good overview of the whole issue. Worth an hour or two.