Burning our money

BOM On Hold

2011-01-05T08:38:00.003Z

Hold on... it's time for some fresh thinking

As we enter 2011, BOM will be taking a break.

Partly it's a simple matter of time. I'm taking on some new projects, including writing a long-mooted book on the iniquities of our Big Government. There just won't be enough hours to do that alongside the sort of digging that's always supported BOM's best posts.

But it's more than that. After six years, I increasingly find myself repeating posts I've done before - often many times. MOD procurement disasters, mass welfare dependency, dumbed-down education, killer hospitals, egregious politicos, bungling bureaucrats, fat cats, rip-offs, cock-ups, debt and taxes... it all just goes round and round and round, apparently impervious to attack, world without end. And once you feel like that, daily blogging threatens to become a sentence rather than the release it once was.

You even start to ask if change is ever possible? Yes, we are shot of abysmal Labour (for the time being), and yes, the coalition has sounded far more radical than we'd ever imagined it could be. But radical action, well, that's something else altogether.

Action to break up state monopolies and bear down on welfare requires a government prepared to take on the BBC and the rest of the left-wing media. It means robustly rejecting the left's assertion that equality is more important than prosperity. It means confronting the politics of envy, by for example, abolishing the 50p tax rate on the good old fashioned grounds that it raises no revenue and will be catastrophic for growth.

Unfortunately, none of that seems likely to happen any time soon.

So what to do? We need to move forward.

One thing I can do is try a different approach - hence the book, and a couple of other projects. There has to be some way of getting where we need to be.

I'll still be posting from time to time over at the TaxPayers' Alliance, and the BOM back catalogue will remain here. But for now, thank you all for your interest, comments, and support over the years, and let's hope for a 2011 that at least sees us edging in the right direction.

A Christmas Riddle

2010-12-18T12:29:00.008Z

BOM is closing down for Christmas. But before we go let's leave you with a riddle to ponder over the mince pies.

Tyler has been doing some more work on the pay gap between the public and private sectors. As everyone surely knows by now, average public sector pay is considerably higher than private sector pay. When we last blogged it, we reckoned the public sector premium stands at an astonishing 50% - once we take account of the full cost of those gold plated pensions.

How did we reach that conclusion? We based it on the following analysis from the Office for National Statistics, which compares the public and private sectors in terms of both gross pay and total reward (ie including employers' pension contributions):

The conclusion is overwhelming - for both men and women, for both high and low earners, for incomes including and excluding pensions, public sector employees do much better than private sector. The median full-time employee in the public sector gets nearly 30% more than his/her counterpart in the private sector, once we take account of the employer's pension contribution.

And in truth, the public sector does even better than the ONS numbers suggest. That's because the ONS only takes account of the employers' explicit pension contribution, a contribution that hugely understates the true cost of public sector pensions.

As we blogged here, the true cost of public sector pensions as a percentage of salary averages around 25% more than current pension contributions. Which means that we need to gross up the public sector total reward numbers even further. At the median income level that takes the public sector premium up to a staggering 50%+.

All of which is pretty shocking.

But the public sector unions and their supporters have come up with an answer. They say that the public sector premium reflects the fact that public sector employees are on average better qualified than their private sector counterparts.

Here for example is what the TUC says:

"The obvious retort to the small-state brigade when they harp on about average pay [do they mean us?] is that the private and public sector workforces are different. As the private sector employs more unskilled workers on the minimum wage than the public sector, and the public sector has a high proportion of professional workers (such as teachers and doctors) it is not surprising that average pay is higher in the public sector...

...there has been a big growth in employment of graduates in the public sector over the last ten years – much bigger than in the private sector. Even in 1998 the public sector was already employing more graduates. Given that graduates are paid more than others, this in itself would tend to make average public sector pay higher. There are quite significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity) and those with other qualifications."

And the TUC is quite right - the proportion of public sector employees who are graduates is indeed much higher than it is in the private sector. In fact, at nearly 40%, it is twice as high.

Now, the TUC reckons that explains why public sector pay is higher. They're better qualified than the dolts working in the private sector, so naturally they get paid more.

Whether qualification and other differences really do explain the earnings gap is the very thing Tyler is currently attempting to bottom out. But it raises another perhaps even more critical question - in our current parlous economic state can it possibly make sense to have so many of our expensively educated graduates working in the public sector?

Because as the TUC highlights, although the public sector "only" employs just over 20% of Britain's manpower, it employs 40% of our graduates. 40%.

Can we afford to have 40% of our best brains working in the non-wealth producing public sector? Don't we need them in the private sector creating the prosperity that will power us out of Labour's economic crater?

That's a real Christmas riddle.

What's that?

Most of those supposed public sector grads are no such thing? Their growth merely reflects the "significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity)"? Many of those new public sector grads are merely redesignated diploma holders (like nurses)?

Hmm. You've probably got a point there.

Hmmm...

The mince pies are calling. Happy Christmas everyone.

New Cake Slicer Required

2010-12-16T21:32:00.005Z

That doesn't look fair somehow

When all else fails, look at the facts. Tyler has been spending so much time screaming at those free-loading students on the telly, that he temporarily forgot that vital insight.

As we blogged here, Lord Browne's recommendations on higher education funding were spot on, and we strongly support their swift implementation by the government. It simply isn't fair that taxpayers should pick up the tab for uni courses, when it's the students themselves who get the lion's share of the benefits. Why should we pay for them to schlep their way into higher income jobs?

As Browne's report shows, the average male graduate can currently expect to receive a boost to his lifetime income of around $200,000. And although the boost for female grads is less, it's still well worth having.

But the question we taxpayers need answering is how much do we get? Given that we've been paying the bulk of the costs, what have we had back?

Because although we keep hearing students and academics telling us that we'll all benefit from graduates "boosting the economy", there is a distinct lack of fact to go with such assertions. How much benefit, and how does it stack up against the costs?

So here are a few facts, taken from this paper produced for the European Commission.

The critical calculation goes by the snappy title "the public rate of return to tertiary education". No, don't switch off. All it means is we're comparing the extra income generated by these higher earning grads in future (as against the income they'd have generated without a degree), to the costs of putting them through uni (including the loss of income they'd have generated had they been out working). And we express that return as an annual percentage, just like the interest rate on your building society account.

Anyway, despite the explosion of M Mouse degrees and the general dumbing down we all know about, it turns out that this return is still quite respectable. According to the OECD, the average UK graduate currently generates a public rate of return of around 6.5% pa. In other words, by investing in his university education, society gets a return of 6.5% pa over the next 40 years*.

Now that's not bad in today's circs - much better than the 0.5% pa paid on a typical bank savings account. In fact, it's much better than Tyler assumed (hence the need for facts). So we really shouldn't knock it.

But the key question is how does that 6.5% return get divvied up? Who gets it - the individual student or society as a whole (aka the taxpayer)?

It turns out that here in the UK, the graduate does very well indeed. Although the overall public return is only 6.5%, the average graduate's return (according to the OECD) is 14.4% pa - well over twice as much.

How? How can the grad get so much? Simple - he doesn't have to pay anything like the full cost of his university education.

But if the grad gets much more than 6.5%, that means the rest of us must be getting less - we know the size of the cake, and if he gets a bigger slice, we get a smaller one.

So is that fair? Is that a fair division of the spoils?

I submit to you that it isn't. And when we look at other countries, we can see that the division is much less fair here than it is elsewhere. Here are the OECD figures for a range of European countries, showing how the gap between the private return (the slice going to students) and the social return (the fixed cake) is higher here than anywhere else, except the Czech Republic, Portugal, and Switzerland.

Looked at in that light, it seems pretty clear some rebalancing is required. We need to reallocate some of the return away from the students themselves back to society in general. And higher fees are an excellent way of achieving that.

There's one other interesting factual snippet in this EC paper, on the question of whacking students from poor backgrounds.

We've been hearing a lot about how the higher debts driven by higher fees will put off poor students from going to uni. And how that isn't fair.

But it turns out that from a financial standpoint - even when they can access higher edcuation - students from poorer backgrounds don't get nearly as much out of it as richer students. It seems that the return for richer UK students is getting on for three times that for poor students.

Why?

Here's the long version:

"Overall, the expansion of tertiary education in OECD appears to have had little impact on the relative prospects of young people from less advantaged backgrounds. This is hardly a surprising finding. Parental and school influences are extremely important determinants of participation at post-compulsory level. In most countries tertiary education requires prior qualifications -- generally at upper-secondary level – so that attainment in the compulsory phase of education, as much as anything which occurs subsequently, is a key to tertiary participation. Therefore, the expansion of capacity at the tertiary level will not, in itself, have much impact on these factors. The challenge to public policy of delivering equality of opportunity in tertiary education is sizeable, and falls not only on the system for tertiary education itself, but also on support for children and their families, reaching back to pre-schooling and into compulsory and upper-secondary schooling."

The short version? The damage is done long before university level. If we really want to help kids at the bottom, we need a radical improvement in our state schools.

Sounds familiar somehow.

*Footnote. Yes you're right - the OECD numbers are based on what yesterday's graduates of different ages are earning today. And actually that may not be a good guide to what today's grads will earn over their lifetimes tomorrow. So with dumbed down degrees etc, the OECD's numbers may very well overstate the prospective return to uni education today.

Cost Of Bank Bail-Outs

2010-12-15T10:32:00.006Z

A very rocky road, and still a mountain to climb

This morning's National Audit Office report on the cost of bank bail-outs is being headlined as saying taxpayers will likely escape without loss. But it actually says nothing of the kind.

True, the NAO tells us taxpayer exposure to the special guarantee and indeminity schemes (the Asset Protection Scheme, the Special Liquidity Scheme, and the Credit Guarantee Scheme) has halved to around £500bn. But:

"The Treasury retains the unquantifiable ultimate risk of supporting banks should they threaten the stability of the overall financial system. The outstanding £512 billion is only on the explicit support already provided. Further intensification of financial instability may require additional intervention."

That massive implicit guarantee is one we've blogged many times. And let's be under no illusions - at a time when there are still huge uncertainties surrounding the creditworthimess of banks right across Europe, the market reckons our two big nationalised banks remain pretty risky.

As the NAO highlights, the market price for insuring against default by RBS or Lloyds has remained right at the top of the range for similarly sized European banks (NB a 5 year Credit Default Swap cost of 200 basis points pa roughly means the market reckons there's at least a 2% chance of default within 1 year, implying at least a 1-in-10 chance of default within 5 years).

And with that level of risk, unsurprisingly our banks have underperformed other banks in the equity market:

In other words, we're still propping up two relatively high risk megabanks that the market doesn't much like the look of.

And there's another point the NAO highlights. In order to inject funds into the banks, the government has had to borrow more. And that costs. According to the NAO:

"...the Government is paying some £5 billion a year (£10 billion so far) in interest on the Government borrowing raised to finance the purchase of shares and loans to banks. This ongoing cost is material in terms of the overall public finances and deficit. This £5 billion a year was not included in the Treasury’s previous estimates of the loss to the taxpayer, because the Treasury does not consider them to be direct costs. The estimated £5 billion a year interest on this debt is 11 per cent of the total £44 billion forecast to be paid in interest on public sector debt in 2010-11."

Whatever it says in the headline, the bottom line is that we ain't out of jail yet. Not by a long chalk.

Proverbial Hawks

2010-12-14T18:10:00.004Z

No Proverbial Hawks listed

So Deputy Governor Bean says that he and his colleagues at the Bank of England are watching inflation "like proverbial hawks".

Hmm. You have to wonder whether Proverbial Hawks watch the right bit of the field.

Because today's inflation figures have yet again surprised on the upside. CPI inflation has moved back up to 3.3%, and RPI inflation is back up to 4.7%. Inflation has been above the official 2% target for 39 out of the last 48 months, and with VAT going up to 20% in January that record is set to get even worse. Some hawk.

In Tyler's experience what actually happens is this: the economics establishment lock themselves into a particular world view and find it incredibly difficult to admit they've got it wrong. Even when the numbers start telling a different story, people cling on to their world view and explain away the numbers as a temporary aberration.

OK, the facts are these.

In the two years since Lehman blew up and we were told we faced the unfathomable horrors of deflation, the overall price level has increased by 5.2% (CPI). Prices have not fallen. We have not had deflation.

The impetus - as we've blogged many times - has come from import prices. The combination of weak sterling and soaring world commodity prices has pushed up the cost of our imports by 10%.

The Bank and others have argued that we can live with that, because it hasn't fed through into wage increases. In other words, there is no 70s style wage-price spiral in the making.

But wages have certainly not been flat. Despite the rise in unemployment and widespread concern about job security, average earnings have still gone up by over 3%. And although the recovery has only just started, one-third of firms are already reporting skills shortages. As they say in labour market circles, watch this space.

Of course, there is that other explanation for the Bank's inaction - the not-so secret plan to inflate away the UK's debts.

Like we've said before - sell money.

PS A great shame that Mr Dale has pulled the plug on regular blogging. He was one of the original UK political bloggers and was always well worth worth reading. He'll be missed.

So Who Do You Want To Carry?

2010-12-13T18:13:00.005Z

I ♥ NY. Not.

Back in the 70s the Big Apple nearly went bust. After years of gross fiscal incontinence under Mayors of both parties, the City of New York was on the skids.

Naturally, they turned for help to their fellow Americans - the folk with whom they had been bonded for two whole centuries, one nation under God.

And you know what their fellow Americans said?

Drop Dead. That's what they said. You got yourselves into this mess, so you can get yourselves out of it. Besides which, we never liked you anyway.

Four decades on, and five little PIIGieS find themselves facing a very similar predicament. Because although the Greeks and the Irish have so far been bailed-out by Northern European taxpayers (including us), nobody seriously believes that's the end of the matter. The fiscal deficits and banking debts of the PIIGS are way beyond their own ability to fund, and way beyond the total European bail-out fund already established.

But will Northern Europe's taxpayers be prepared to shell out even more to rescue the PIIGS? Will they want to carry that weight for a bunch of spendthrift Latinos who spend half the day dossing around in the shade, and with whom historic relations are perhaps best described as troubled?

This morning Boris highlights the issue. Just like he and we Eurosceptics have always said, it turns out Northern Europe's taxpayers really don't want to pay for the profligacy of others. Your average German does not recognise a duty to support the Spaniard.

Quite rightly, Boris demands an apology from all those arrogant half-baked Europhiles who denied there was a problem and wanted us to join the Euro - the ones who wrote us all off as "xenophobic, garlic-hating defenders of the pint and the yard and the good old bread-filled British banger".

Ah yes, how right he is.

Yet there's one bit of Boris's argument that sent the Tyler eyebows twitching skywards. Contrasting the disparate tribes of Europe with the cohesive whole that is Albion, he says:

"London contributes massively in net tax revenues to the rest of the UK, and by and large Londoners accept that this is part of belonging to a single political entity."

By and large, hmmm? A nice phrase, and a nice way of reminding the rest of Britain that they'd better keep the Golden Goose of Londinium sweet. Because to our certain knowledge, there are increasing numbers of London taxpayers who most definitely do not accept that their taxes should be carted off to fund the Picts and the Celts.

We've blogged the regional unfairness of Britain's fiscal arrangements many times (eg here). But just as a reminder, here's the latest analysis from Oxford Economics. It shows that Londoners are made to contribute a net £2 grand pa per head. That is, the average Londoner pays £2 grand pa more in tax than he gets back in terms of public spending:

As we can see, the only regions that actually make a net contribution are London, the South East, and the Eastern region - together comprising the Greater South East. Every single other region takes more than they pay (and in Scotland's case, Oxford Economics have allocated to them all North Sea taxes).

It's been like this for as long as anyone can remember, and the obvious question is why do those living in the Greater South East put up with it? Without the fiscal drain to subsidise the other regions, the average family in the Greater South East would be getting on for £5000 pa better off. That's serious money, and you'd think most families would notice.

Which brings us to today's Localism Bill.

As regular readers will know, we're great fans of localism (eg see here). We absolutely believe that local councils should have greater authority over the services they provide, so they can respond both to local priorities, and to local cost conditions. So to that extent we welcome the Bill.

Unfortunately, as far as we can see, the Bill does not address the single most important requirement for localism to work - sorting out the money. What would really concentrate minds in local councils, and would make local electors really focus on the issue, would be if councils had to raise much more of their own money for themselves (aka fiscal decentralisation).

As things stand, they get the vast bulk of their cash from Whitehall, and they get it whether or not they satisfy local electors. Indeed, we have just about the most centralised system of local council finance anywhere in the developed world (eg see this blog).

It is a recipe for continued inefficiency at the local level, and a recipe for continued fiscal transfers from the productive to the less productive.

One day in the tough years to come, the Greater South East is going to wake up. One day, its families are going to look at that £5 grand pa being carted off elsewhere and ask why? One day, its taxpayers are going to tell the rest of the country to drop dead.

PS This morning's R4 Today gave us yet another example of BBC statism. According to them, the main problem with Pickles' localism is that it might result in mad-cap councils doing mad-cap things, and surely government has a responsibility to stop that. Like Whitehall has got everything taped.

Spotted By BOM Correspondents

2010-12-11T20:26:00.010Z

BOM correspondents have spotted the following, including news of some real old favourites:

1. NHS Supercomputer still haemorrhaging cash

Were you by any chance under the impression that our new broom government had scrapped Blair's wildly expensive and wildly useless NHS Supercomputer (see many previous blogs)? Er, no. All they've actually done is attempt to renegotiate the contracts with the IT suppliers.

AMB highlights an interesting post on the latest position by Tony Collins, the former Editor of Computer Weekly and a man who did much to expose the lunacy in the first place. He tells us that the Department of Health are signing a new agreement with one of the main suppliers (CSC) to deploy a system (Lorenzo) that the hospitals themselves don't want and may never use. Collins writes:

"The deal will commit CSC to deploying the Lorenzo system to NHS trusts that have no intention of deploying it; and the deal commits the DoH to paying CSC for a minimum number of Lorenzo deployments even if NHS trusts don't actually deploy the system.

For some in the NHS, the deal will mark a new low in the history of the NHS IT programme. It may also show why central government is congenitally ill-suited to signing big IT contracts."

So WTF is Lansley's Health Department doing this?

Well, on the positive side, the new agreement will apparently save around £0.5bn compared to the previous contracts. But it will still leave this bit - that may well not ever be used - costing us £2.7bn. That aside, Collins suggests three other highly plausible explanations for the Department going ahead:

Pulling the plug might have led to CSC suing the Department, just as another main contractor (Fujitsu) is already doing
It "defers any day of reckoning within Whitehall over what many in the NHS regard as a failed programme"
It "relieves the health minister Simon Burns from taking any tough decisions about the future of the NPfIT, at least for the time being".

And the cost to us taxpayers? As always, it's virtually impossible to know. All we can say is that the Supercomputer has already cost us something like £6bn, for which we have got sweet FA in terms of value.

(PS This of course is not the first Labour contract our new government has tried and failed to get out of. The contract for those two new aircraft carriers had been so heavily tilted against taxpayers that it was actually cheaper to carry on rather than pull the plug. Even though we can't now afford the aircraft to go on them, and we will have the first navy ever to sail two carriers with nothing to carry. Nelson must be spinning - see this blog)

2. Student Loans Company still malfunctioning

Peter T highlights the fact that the Student Loans Company (SLC) is still not managing to pay loans on time when they are needed. In other words, despite all their promises to do better in 2010 after the shambles of 2009, the SLC still failed to pay 26% of students by the first day of term this year.

Which meant of course that many students were forced to look for emergency employment so they could eat. Bar-keeping and lap-dancing may well be good experience for later life, but that's not what we pay the SLC £94m pa in administration cost to deliver.

3. British Council still cocking-up

David Blackie reports on the latest cock-up by our old friends at the British Council.

The BC has a marketing arm for British education institutions seeking to sell courses to overseas students - Education UK. It was established a few years ago to provide a Big Government Solution in place of the private marketing operations that had existed previously. And yep, you guessed it - it's a disaster.

In fact, it's so shambolic, and its website is so dysfunctional, that the BC has now been forced to refund subscriptions to participating institutions. David writes:

"...the organisation has used taxpayers’ money and the machinery of government to send students to a site which is so bad that everyone gets their money back. Well, actually not everybody, because there will be no refund to the taxpayer for the extraordinary waste of public money, no refund to the schools and colleges who have lost business as students, parents and agents gave up trying to use a dysfunctional site, and – interest declared – no refund to the businesses compromised by the organisation using taxpayers’ money to divert monies into its own pockets."

As we've blogged many times, the hopeless BC should be abolished. And we're seriously disappointed that Cam has not only allowed it to survive, but reportedly clasped it to his bosom on those recent trips out East.

Gah.

4. International sports bunfights still losing money

Bobby Charlton (hmm... sounds familiar somehow) emailed to point out that South Africa didn't make nearly as much out of the 2010 World Cup as had been billed:

"South Africa made a return of just £323m on the £3bn it spent on building stadiums and infrastructure for this summer's tournament, according to official figures

Mike Schussler, director of consultants Economists.co.za, said: "The country made a bit of money but less than expected. We got a small part of the ticket sales and the foreign visitors' spending, but it's not as much as we expected."

Well, who'd have possibly guessed that?

Thank God we got shafted by that nice Mr Blatter.

Season Of Goodwill

2010-12-10T12:10:00.005Z

The Major has made his view very clear:

"Why the bloody hell should we law-abiding taxpayers tolerate a bunch of freeloading welfare scroungers smashing up London? We spend God knows how much on these revolting students - and will still do so even after the fees increase. But just look how they thank us! Why should we give them anything?! If they want to spend three years dossing around and rioting, let them pay for it themselves. And I'll bet half those scum desecrating the Cenotaph yesterday aren't even students at all - they'll be anarchists. And we'll be paying them! Housing benefit, child benefit, incapacity benefit... you name it.

It's time to draw the line - anybody convicted of violent disorder should go to jail - hard labour - and then lose all their welfare benefits for ever. Period. In future, if they want to eat they have to work like everyone else. And if they think they can rob instead, we'll lock them up somewhere where they will have to work. I'll get my mate Gomulka to organise something with the Soviets out East - that'll soon wipe the smile off their faces."

Now, of course, nobody objects to peaceful protest. No, indeed.

Well, that is, nobody objects to peaceful protest as long as it doesn't inconvenience us. And as long as it doesn't require us to pick up some huge tab for police overtime. So long as it takes place on a Sunday afternoon in say, a field somewhere outside Milton Keynes, and so long as the protesters pay for the policing, like in a football match, then everything's cool. In fact, under those circs, we might even allow a little recreational effigy burning - a weekly bonfire night for young people to let off steam. Kind of idea.

But who exactly are these rioters, and who is paying to keep them alive?

According to police hunting down those involved in the previous riot - the one last month at Tory HQ in Millbank - they are mainly teenage students of one kind or another. They say:

"We are finding that many of these people are young students who do not seem to have been in any trouble before. It appears they may have been provoked by more anarchist groups.

From a parent's point of view it must be very concerning. These are young people committing really serious offences which I suspect may result in prison sentences for some." (The maximum sentence for violent disorder is 5 years)

Provoked by anarchists? Certainly when you look at the wanted poster, one or two do look older than teenage:

.
But who are these anarchists exactly?

Google's anarchist UK trail leads straight to the Anarchist Federation. But can they be in any way credible? Are real anarchists allowed to participate in such a restrictive and preposterous construct as a federation? It sounds more like the Mothers' Union. Besides, there's something seriously hollow about an organisation that wants to abolish oppressive government on the one hand, while maintaining Big Government spending on the other.

Googling Operation Malone - the police man-hunt for November's rioters - gives some far more promising leads.

Ian Bone (great name) is a veteran anarchist of 63. During the 80s he ran a newspaper called Class War, featuring pix of beaten-up policemen. And here he is addressing a Class War meeting in 1985 (parental discretion advised - some of his opinions are seriously juvenile - precisely the kind of thing which might appeal to disaffected teenagers at the University of Neverpay):

Anyway, Bone has some blogposts on the current riots that simply blew the Major away. For example, under the headline What a magnificent inspiring day - the London mob is fucking back Mr B writes:

"I salute everyone who atacked the police, the treasury, the Supreme Court, the Royal family, the tax avoiders today – a quite heroic and brave acievement. Full report tomorrow – ALL HAIL – IT’S THE POLL TAX RIOT MARK 2 – ‘we come from the slums of London……"

Now that's more like it. According to his own autobiography, Bone is the son of a butler and a housemaid (no, really) and obviously carries deep psychological scars from his parents' life below stairs:

"It is fucking phenomenol. the rich are targets whether its the Bullingdon Club, the Royals or Sir Philip Green... Yesterday was reminiscent of both the poll Tax Riot and the Gordon riots as a rich hating mob stormed through the streets... Organise and celebrate yesterday comrades…but theres more coming the way of the fucking rich…..much more.’WE COME FROM THE SLUMS OF LONDON’

All of which is absolutely fine.

Well, fine except for any incitement to riot bits obviously.

But what we need to know is how does Bone support himself?

He has published three books, including the carefully nuanced "Bash the Rich". But given that B the R is currently standing at 76,361 in the Amazon best seller list, you'd have to guess he has some other source of income. And his website gives no other clues.

One of those oldies' jobs in B&Q? At 63 it's possible.

A family inheritance? Seems a tad unlikely.

Money from Putin? In the 80s, Class War and its ilk were widely thought to have been financed by the KGB, so that has to be a runner.

But the Major reckons Bone and his like must be on some kind of welfare deal.

Unfortunately we have no way of finding out.

In this season of goodwill to all men, let's hope someone round at the DWP is looking into the entire question right now.

****

Meanwhile on an altogether more seasonal level, we've just updated the TaxPayers' Alliance Tax on Christmas paper.

We reckon that taxes on Xmas spending this year will cost the average family £283. The overall bill will be £7.2bn, an astonishing 40% increase on 2008, when we last did the calc.

Part of the increase has been driven by the growth in Xmas spending, 2008 coming immediately after the Lehman crisis. But the majority of it reflects higher tax rates - the hike in VAT from 15% back up to 17.5%, plus increases in various fuel and excise duties.

And the really bad news is that VAT increases again on 4 Jan to 20%. According to Treasury forecasts, the rise will cost the average family nearly £500 pa, taking the average family VAT bill above £4000 pa for the very first time.

Happy Xmas everyone.

Are We Spending Too Much On Education?

2010-12-08T12:37:00.005Z

How more can be less

Education, education, education.

And sure enough, during Labour's time in office, they whacked up state education spending by an astonishing 73% in real inflation adjusted terms. By 2009-10 spending had increased to £88.3bn - around £8 grand pa for every pupil and student between 5 and 21.

But what precisely have we taxpayers had in return? Where's the pay-off?

You can forget all those fiddled tractor production stats - as everybody now understands, they're not worth the dumbed down exam papers they're written on.

Much more important is yesterday's report from the OECD - the 2009 results from their Programme for International Student Assessment (PISA). That is based on a consistent and regular set of tests sat by 15 year olds across over 60 developed countries. And what it shows is us sinking further down the international league tables with each year that passes.

The Mail has a useful summary:

What should we make of that?

Some argue that it's largely a question of race - we're simply not as bright as the superbrains out East, and we just need to accept that as they build up their education systems we will sink ever further behind.

But even if true, that doesn't explain why we're so much worse than European countries like Finland and, gulp, Estonia.

Immigrants then. Some argue that Finland and others do well because they have far fewer immigrants dragging down the overall scores.

But while with 10.6% immigrant pupils we are much higher than say Finland, other countries with high immigrant percentages also do much better than us. For example, Canada and Australia both have higher percentages, yet both beat us in the league tables.

No, the real problem seems to lie with our school system rather than the pupil mix per se. Despite a huge additional injection of cash, we still aren't getting the results we need - in fact, we seem to be going backwards.

Which raises the obvious question as to whether spending all that extra money was worth it? And whether in these straitened times we ought to cut some of it back?

Because what the OECD report also highlights is that although we are now among the world's top education spenders, others achieve similar or better results while spending much less:

"Only seven OECD countries spend more per student than the United Kingdom...

[but]... moderate spending per student cannot automatically be equated with poor performance by education systems. For example, Estonia and Poland, which spend around US$ 40 000 per student, perform at the same level as Norway and the United States, which spend over US$ 100 000 per student. Similarly, New Zealand, one of the highest performing countries in reading, spends well below the average per student. While the United Kingdom spends almost US$ 85 000, Germany or Hungary achieve a similar average performance and spend around US$ 63 000 and US$ 44 000 respectively."

So if we cut spending back to say German levels, then according to Tyler's fag packet we could save an average $22k over each pupil's 10 years of school education up to age 15. Which works out at an annual saving to taxpayers of around £10bn pa. Not bad.

And it isn't just schools. When last sighted (2006) we were spending 5.9% of our GDP on education as a whole, whereas Germany was spending only 4.8%. Which is equivalent to about £15bn pa - money British taxpayers could save if we cut back to German spending levels.

And remember this - in this post-bubble world, Germany is beating the pants off us. Jeremy Warner has the picture story here including this chart that shows how much lower is their youth unemployment:

It seems German companies actually want to employ the products of German schools.

So what does Germany do right and we do wrong?

Hmm... now, let me see... what could it be... ah yes, selection. That thing nobody is allowed to mention here any more.

It is surely time to ask ourselves a serious question - can we any longer afford an education system that is run by the social engineering commissariat? Prizes for all and A*s all round was a lovely way of spending the last days of summer, but winter's here now.

In this new and tougher world nobody owes us a living. We need an education system that prioritises academic excellence for those with the ability to generate our future wealth, and a strong grasp of basic skills for those at the bottom - it is shocking that the OECD finds that after a decade or more of schooling, 20% of our 15 year olds are functionally illiterate.

Germany shows it can be done. We can get over the fact that our school pupils are not all Chinese. We can cope with the fact that over 10% of our pupils are immigrants. And we can even save £10 - £15bn pa in the process.

We just need to grasp one nettle.

And this time, we should do it properly and fairly (see this blog).

PS And while we're on the subject, Tyler keeps swallowing his false teeth listening to those future politicos who "speak for" the revolting students. You see, English literature degrees are not essential to the future of the nation. There is no God-given right for 18 year olds to spend three years getting pissed at taxpayer expense. The Browne recommendations on university funding and student loans are fair to everyone - both taxpayers and students (see this blog). And the thought of these future Jack Straws ruling over us for the next 40 years makes Tyler gag.

PPS Talking of English Lit degrees, Mr and Mrs T saw Rory Kinnear's Hamlet last night. Stunning - possibly the best live Hamlet Tyler has ever seen. Fresh interpretation, strong performances all round. Mrs T thought they'd slightly overdone the modern instances, but Tyler was... well.. stunned. Highly recommended.

How Many Million Unemployables?

2010-12-06T18:15:00.009Z

Tyler has just attended a rather depressing event hosted by a normally rather upbeat think tank. It was a seminar on a question we've mulled many times - Where will all the new jobs come from?

The correct answer of course is that nobody knows.

Nobody knows because nobody ever knows ahead of time where the new jobs will come from. And as we've blogged before, the best thing government can do to assist is to cut taxes, cut regulation, cut working age welfare and the minimum wage, break up public sector monopolies, decentralise, and cap mass immigration.

And that's pretty well all we can say. Other than reminding people that in the three decades following the invigorating pro-market reforms of St Maggs, our "Sick Man Of Europe" economy managed to throw off its bedclothes and create 6 million new jobs - and that net of 4 million fewer jobs in manufacturing (see this blog).

To be fair, none of today's panel members disagreed with the St Maggs' prescription for private sector jobs growth (well, OK, a couple of panelists weren't keen on welfare cuts). But that's mainly because her prescription wasn't really mentioned at all.

Instead, there was much talk of difficulties with people whose "labour market characteristics" make them unappealing to potential employers.

Labour market characteristics?

Yes, that's things you will know better as motivation, work ethic, and previous employment record. Labour market characteristics turns out to be a euphemism for unemployable. And according to one of the panelists, such characteristics now cripple large swathes of the working age population in the old high unemployment blackspots we've blogged so often.

So how many people are affected? Just how many million unemployables have we now got? We've taken a quick look.

Overall, Britain has 40 million people aged between 16 and 64 (the age band the ONS counts as working age adults). Of those, 11.7 million are not in employment. So that's roughly 70% of the working age population working, and 30% not working.

Fortunately, not all of those 30% are people suffering from labour market characteristics. A big chunk of the younger ones are still in full-time education, and hopefully will find employment in due course. And a big chunk of the older ones either have working partners supporting them, or they're plutocrats who don't need to work.

Stripping out those groups, the hardcore unemployables are among the 5 million people of working age who are entirely dependent on welfare handouts - about 12% of the working age population.

So how many of those 5 million are unemployable?

In truth we don't know. But up until 2008 our economy had experienced the longest period of boom since records began. Between the beginning of 1997 and mid-2008, 2.8 million new jobs were created (net). It's surely reasonable to think that anyone who really wanted a job should have been able to get one.

Indeed, so keen were UK employers to fill those jobs that they actually imported new workers from overseas. Foreign workers flooded in, and as things stand today, 86% of the new jobs created since 1997 are filled by workers born overseas. 86%!

Even at the peak of the boom, we still had 4.3 million working age people dependent on welfare - over 10% of our working age population.

4.3 million apparently unemployable people.

Depressing.

Both for us and for them.

Who Has Our Children?

2010-12-04T18:51:00.002Z

The Major's very bad dream

Following yesterday's blog on the problem of bad parents, we've taken another look at who is actually having Britain's children.

The Major is constantly telling us (eg see here) that the welfare state has produced far too many children at the bottom of the heap. He reckons that by paying the poor and feckless to have children we've given ourselves a monstrous problem. Generation upon generation of feckless no-hopers, reproducing like Fibonacci's rabbits, and threatening to undermine a billion years of Darwinian progress.

And while the Major does tend to put things somewhat bluntly, round our way that is a very widely shared view.

The trouble is - as we saw here - actual facts are very thin on the ground.

But we've now taken a closer look at the latest Office for National Statistics data on income distribution across households of different types (see here). And we've extracted the number of children in households according to their income level.

Across the whole country there are 12.9 million dependent children spread across 19.1m non-retired households, an average of 0.67 children per household. But when you look at the distribution of children across each household income level, you find that households in the bottom 20% of incomes have an average of 1.03 children, while those in the top 20% have an average of 0.34.

What that means is that the poorest 20% of (non-retired) households have over 30% of Britain's children. Whereas the richest 20% only have 10% of the children. That is a pretty striking contrast - our economically least successful households have nearly one-third of our children.

Here's the complete picture (note - 20% income bands are known as quintiles):

And to put some more flesh on this, the gross income of the bottom 20% of households before taking account of welfare benefits averages just £7600 pa. Cash welfare benefits add a further £6300 pa.

So what should we make of this? Is the Major right?

Well, it's clearly the case that the poor have considerably more children in their households than the rich. Yes, some of that is because the rich tend to be a bit older, and their kids may have flown the nest. But even if we restrict the comparison just to households with children, those at the bottom have an average of 2 children, whereas those at the top top have just 1.5.

And it's also true that welfare constitutes a big chunk of household income for the poor - getting on for half their average gross income.

But does that mean it's welfare that's delivered all those poor kids?

In an age of readily available contraception where child labour has long since been abolished, simple economics suggests that the poor should have fewer children than those with higher incomes. That's surely straightforward.

And it's also straightforward that paying welfare based on a household's number of children, must increase the attraction of having children.

But does that prove the Major's right?

What if the poor comprise a whole bunch of people who are incapable of thinking and behaving according to economic rationality? It must be said none of us are always great at doing that.

What if we cut child welfare payments only to find ourselves with just as many poor kids, only now they're starving?

Well, it could happen - we can never answer these questions ahead of time, and in the abstract anything is possible.

But Tyler has seen enough to know there's a serious problem with our current welfare system. Nobody wants children starving in gutters, but it can't make sense to subsidise the 20% of our poorest households to produce 30% of our children.

First Choose Your Parents

2010-12-03T18:48:00.006Z

As regular readers will know, BOM has always had the highest regard for Frank "think the unthinkable" Field. So we were very pleased when Cam appointed him Poverty Czar with a brief to take a good hard look at what we can actually do about it. In particular, what can be done about child poverty?

Today we got his report, and it contains a giant helping of what the Major calls good old fashion common sense.

To begin with, Field wallops Labour's obsession with its meaningless child poverty target - ie the aim to ensure by 2020 that no child lives in a household below an arbitrary line drawn at 60% of median income. Field says:

"The anti-poverty agenda is driven along a single track of hunting down families who live below this line and then marking up a success as a family is moved across the line, no matter how marginal is the advance in their income. It does little to concentrate on those children who endure persistent poverty. Worse still, this approach has prevented a much more comprehensive strategy emerging on how best, in the longer run, to counter child poverty in a way that prevents poor children from becoming poor adults."

Spot on Frank. We have long believed that dishing out yet more cash to poor families is missing the point. In general, even the lowest incomes today have moved far above what most of us mean by poverty (eg see this blog). Here's what happened to incomes on that 60% benchmark over the last half century (in real terms, adjusted for inflation):

As we can see, income on Labour's definition of the Poverty Line more than doubled from around £6k pa to nearly £13k. That is not a meaningful definition of poverty.

What's more, taxpayers can no longer afford to fund poverty relief on that scale. As Field says:

"To meet a target of cutting child poverty to 5 per cent of all children by 2020 a further £37 billion per annum in tax credit transfers is required... an unthinkable sum in current conditions. Can anyone seriously maintain that sums of these sizes will be forthcoming over the decade, to 2020?"

Much more usefully, Field focuses on the real problem - what on earth can we do to prevent poor children from becoming poor adults?

And here, he spells out something we all know, but which PC squeamishness has for too long excluded from the public debate on child poverty:

"Even if the money were available to lift all children out of income poverty in the short term, it is far from clear that this move would in itself close the achievement gap.

... there is much more beyond just improving short-term family incomes in determining the life chances of poor children. A healthy pregnancy, positive but authoritative parenting, high quality childcare, a positive approach to learning at home and an improvement in parents’ qualifications together, can transform children’s life chances, and trump class background and parental income.

A child growing up in a family with these attributes, even if the family is poor, has every chance of succeeding in life."

That resonates so strongly with Tyler. As he's blogged many times, he had the great good fortune to grow up in a family with little money but absolutely outstanding parents. And when it comes to a choice between those two, there is no choice - first, choose your parents.

Fine. Common sense.

Except unfortunately, there just aren't enough good parents to go round. And there are especially not enough to go round down in the depths of welfare dependency.

So what to do? How do we get those problem parents we've blogged so often take their responsibilities seriously? And even if we manage that, how do we get them capable of discharging those responsibilities?

Frank's solution is to expand the support services available to help. He wants organised training for parents. He wants to refocus the floundering Sure Start programme on helping the weakest parents who really need the help. He wants pre-school foundation programmes to have resource priority ahead of more spending on Child Tax Credits. He wants to get charities and voluntary groups more involved. And he wants to formalise the responsibilities of local councils and schools for lifting the attainment levels of disadvantaged kids.

Now all of that sounds quite sensible - certainly the way Frank tells it. The whole thing is geared to breaking the dire intergenerational spiral of dependency and decline visited on us by the welfare state. And it has to be better than Labour's bone-headed pursuit of arbitrary income targets.

But what we don't want is to exchange Labour's socialist poverty disaster, with a different socialist poverty disaster.

Because although this report points in the right general direction - ie less reliance on ever-expanding welfare payments and more reliance on the poor taking back responsibility for their own lives - Frank is still a socialist. Deep down he may still believe that government can find technical solutions - ways of applying the very best brains to crack even the toughest problems.

And Tyler found himself shifting uncomfortably as he read the following (quoted approvingly by Frank from a couple of eminent education Profs):

"We seem to know as much in principle about how parental involvement and its impact on pupil achievement as Newton knew about the physics of motion in the seventeenth century. What we seem to lack is the ‘engineering science’ that helps us put our knowledge into practice. By 1650 Newton knew in theory how to put a missile on the moon. It took more than 300 years to learn how to do this in practice. The scientists who did this used Newton’s physics with modern engineering knowledge. We must not wait three hundred years to promote stellar advances in pupils’ achievement. We need urgently to learn how to apply the knowledge we already have in the field."

No, no, no.

You see, the problem with that is that physics is physics. Whereas pupil achievement is all about horribly messy human beings. Human beings who can't even manage their own behaviour, let alone manage the behaviour of other human beings.

Let's hope Frank doesn't really believe we can somehow engineer our way out of this.

Who's To Blame?

2010-12-02T16:42:00.005Z

You filthy English - we have brought you here to humiliate you

Here's the list of suspects identified by callers so far:

The BBC
Sepp Blatter
Deceitful FIFA bureaucrats on the take
Russian gangsters
Birmingham and Villa supporters
Foreigners

Tyler has already made his views clear, so he ought to be rejoicing.

Yet somehow he's not. It's one thing to believe we should never offer to host any of these tax-funded jamborees, but it's quite another to accept national humiliation at the hands of a bunch of jumped up council officials from countries that had never even heard of football until 30 years ago.

Why did it happen? Nobody seems to know, but the Major has come up with the following interesting fact. Of the 24 members of FIFA's Executive Committee - the guys who actually made the decision - no fewer than 15 represent countries which are either ex-colonies, or with which we have had at least one war in the last 200 years.

Hmm.

Everybody hates us and it turns out we do care.

Update - Some FIFA financials

I couldn't resist looking at FIFA's finances. In 2009 they had revenue of about $1bn. Of that, the vast bulk - $0.9bn - came from the World Cup (which only happens once every four years but the revenues are spread out across all years).

FIFA's world Cup revenues come from broadcast rights and marketing (mainly corporate sponsorship). World Cup ticket revenues go to the host organiser (which would be the FA here).

The biggest chunk is broadcasting rights which seem to have totalled well over $2bn for the last WC in South Africa. But the interesting thing is that the sources of this broadcasting revenue are highly concentrated. Well over 50% comes from Europe. Adding in Asia takes the total up to 80%. Yet despite this, Europe and Asia combined only get 50% of votes on the FIFA Executive Committee. And my bet is that if we could see a revenue breakdown within Europe and Asia, we'd find some even more startling concentrations.

The obvious question is why don't the footballing authorities in the major revenue generating countries get together and do a complete Premier League style breakaway from the sleazy dysfunctional FIFA? Organise their own World Cup, to be rotated between them. Of course, we'd expect the big Latin American countries to be included as well, but on my count, there'd be no more than ten in the core group. Which would give each of them the tournament once every 40 years.

Naturally every country in the world would be invited to compete, just as now. But the competition would always be held in one of the big footballing nations.

Oh, and the tournament would need to be entirely self-financing - no more taxpayer subs.

Taxpayer Funded Environmentalism

2010-12-02T10:56:00.002Z

The TPA has a new report out today on taxpayer funded environmentalism. That's the outrageous arrangement whereby we pay the hippies to campaign for more restrictions on our freedom to live in the 21st century. The TPA's Emma Boon explains it all in the vid.

Key points:

•A total of £10.1 million was given to a range of environmental groups by the UK Government and the European Union in 2009-10.

•The total includes £2.5 million from various UK local councils, departments and quangos.

•It also includes £7.6 million in European Commission grants to environmental NGOs.

•The Foreign and Commonwealth Office made the largest UK payment in 2009-10 of £342,929 to WWF UK.

•Hackney council made the largest payment in 2009-10 from a UK council at £141,246 to Global Action Plan.

Of course, nobody can object to the hippies' right to run their bonkers campaigns (well, nobody except the Major, that is). But we should all object to being forced to pay £10m pa of our friggin' money to fund those campaigns.

PS Humble apologies for getting the dates wrong yesterday on Pitt the younger. I reported that the Bank Governor had made highly disparaging Mervyn King style remarks about Pitt in 1780. However, as was pointed out by the inestimable William Norton in comments, Pitt "wasn't elected to the Commons until January 1781, and didn't become Chancellor until July 1782." Quite right Mr N - a correction has been made. It just goes to show you shouldn't believe everything you read in Google. Or in leaked US ambassadors' emails come to that.

That's Not Fair!

2010-12-01T17:58:00.005Z

You said it, Bro

The Treasury has just published the Hutton Report on Fair Pay in the Public Sector.

As BOM readers will recall, back in the summer Mr Cam commissioned Will Hutton "... to investigate pay scales across the public sector, and make recommendations on how to ensure that no public sector manager can earn more than twenty times the lowest paid person in the organisation."

In other words, Hutton's job was to address the scandal of fatcat pay in the public sector - a scandal that was first exposed in a series of reports from the TaxPayers' Alliance (eg see here). And to work out how to implement a 20-to-1 cap on top public sector remuneration.

But predictably enough, left-winger Hutton has found it impossible to stick to that very clear remit. Instead, much of his 128 page report is a polemic on top pay in the private sector, driven by 1970s-style politics of envy.

He kicks off by charting how the pay of the top 1% has pulled away from the average:

No matter that this relates to just 1% of the population, and most them are being paid by the market not taxpayers, for Hutton it's a serious problem:

"Substantial and growing pay inequality poses a serious challenge to society and Government. Do high earners deserve such large rewards? And is it fair that a wide and growing gap should exist between the pay of those at the very top of the income scale and the rest of the population?"

Fair? This is the market, Will. The thing that in just two millenia has lifted us from mud huts to plasma tellies. Sounds fair to us.

He goes on:

"...chief executive pay for Britain‟s leading listed companies rose by around eight times between 1986 and 2010... It is increasingly doubtful whether this has been proportional to increases in performance, or even reflects the real demand and supply for executive services. Chief executives have become treated as business super-stars drawn from an ever narrower potential pool... benchmarking between firms locks them into a kind of arms race... Any one company that tries to stand out against the trend risks losing its top people and inviting markets and investors to view it as second rate. Little... seems capable of creating more rationality or slowing the pace of increase... There is widespread scepticism whether this degree of increase in executive pay is fair."

Fair - there it is again. Look Will, we don't care what private sector chief execs get paid - especially when the figures relate just to the 100 FTSE100 CEOs. We only care about what they do for us as customers, whether they deliver good returns to us as shareholders, and whether they stay within the law. Everything else is so much envious wibble.

Now public sector pay, that's a different matter entirely. Because we have to fund that through compulsory taxation. We're very interested indeed in what those guys get paid because it comes straight out of our wallets. We can't choose to take our custom elsewhere, and we can't sell our shares in their companies.

So what does he say on top public sector pay - ie the job he was asked to do.

First, he tells us that there are now no fewer than 20,000 public sector employees in the top 1% of income earners (earning over £117,523 pa). Well, actually he doesn't tell us that - he merely rehashes some numbers given on a recent Panorama programme.

Anyway, most of those 20,000 turn out to be doctors employed by the NHS (ah, those brilliant Simple Shopper pay deals). But there are also 4,000 managers distributed across the various bits of the public sector as follows:

These findings are broadly consistent with what the TPA has previously published in its Public Sector Rich Lists (eg here) - if anything, Hutton's overall fatcat number is a shade higher than the TPA's.

In terms of pay growth under Labour, Hutton confirms that top public sector managers generally did outstandingly well. For example, between 2000 and 2009 chief execs of NHS hospital trusts got an average 50% increase in real terms:

The bottom line is that Hutton pretty well agrees with everything the TPA has been saying on public sector fatcats. So naturally he offers his thanks to the TPA for their outstanding service to taxpayers.

Except... just a cotton pickin' minute... he doesn't offer his thanks.. Actually he suggests the TPA has been misleading the public:

" Top pay in the public sector has come under greater media scrutiny in recent years... But public understanding remains divorced from the data set out in this[report]...

Limited understanding feeds through into the wider debate. Campaign groups such as the Taxpayer' Alliance argue that the public sector must get value for money – which they define as paying the lowest amount to secure a suitable candidate – but that it does not currently achieve this...

A media narrative which over-concentrates on public sector 'fat cats' while not offering the same proper scepticism and focus over what is happening at the top of the private sector does not lead to understanding, and can undermine the desirable move to greater transparency over pay."

Allow me to translate:

The TPA has been far too successful in focusing the public's attention on the cavalier way in which the public sector wastes their hard-earned cash. The spotlight on fatcat pay, and the number of bureaucrats who get paid more than the Prime Minister, has resonated with taxpayers in a way that has caused huge discomfort for the promotors of big government. People like Hutton need to hit back, and they aim to throw taxpayers off the scent by suggesting the real problem is excessive pay in the private sector. Welcome back 1970s incomes policy and the politics of envy.

And what about the job Mr Cam actually asked him to do? That 20-to-1 pay ratio cap for the public sector?

Well, Hutton likes the idea. He likes it for a number of reasons, but in particular:

"A pay ratio is an easily understandable reference point, and could give the public confidence that public sector pay is being kept in check. Defined appropriately, this can have more flexibility than merely using the Prime Minister's salary as a benchmark."

In other words, by accepting this ratio cap, public bosses could maybe get taxpayers off their back, while simultaneously getting round the current de facto pay cap of the PM's salary. The latter clearly has to go, since post Cam's self-imposed cut, it's down to a measily £142,500 pa.

Are you ready to be fooled?

PS So should Mervyn King be fired as Bank Governor? The preposterous lefty Blanchflower reckons so, because of King's supposed political bias. But in truth, there is no bias. Like most of his predecessors, King almost certainly reckons everyone down the Westminster end of town is rubbish. The WikiLeaks "revelation" that he thought Cam and George inexperienced and too political is what all previous Governors have thought about all inexperienced politicos ever since 1694 - you should have heard what Governor William Ewer said about Pitt the Younger in 1782. Cam would be mad to sack King - we'd be straight back to the final bunker days of Mad Murdo McMad.

World Cup Debacle - Win Win Win

2010-11-30T12:38:00.007Z

Is this what we pay our taxes for?

Let's agree one point straight away - bringing the 2018 World Cup to England would cost taxpayers a packet.

How much?

Frankly we have no idea. Just like with 2012 Olympics, nobody seems to have worked out anything as mundane as precise costings. All we can glean is:

"The cost of staging the tournament between now and 2018 is being put at just under £1 billion. The Government has already signed guarantees worth £300 million while the 12 host cities have guaranteed funding of £400 million. The bid itself has cost £15.5 million to finance. Manchester is one of the host cities with two of the chosen stadia. A recent report by its city council suggested the cost to local taxpayers would be up to £30 million."

£1bn, huh? And does anyone believe that?

Quite. We can all remember how the projected cost of the Olympics quadrupled - yes, quadrupled - once the bid had been won. All of it to be extracted from us taxpayers.

Yes, the England bid has just been rated as being likely to generate more revenue that many of the competing bids, but what we need to ask is who gets those revenues? Sure, Fifa will take a big slug, tax free, so they'll be well pleased. But how much will we schmuck British taxpayers get? I think we know the answer.

Tyler has no problem with us hosting the World Cup (he will tune out the inevitable national humiliation). But he does have a huge problem with being forced to pay for it.

Which is why he is absolutely delighted with the late intervention of our public service broadcaster. Panorama's allegations of Fifa executive committee members taking bribes has pissed off Fifa, and almost certainly stymied our bid.

Brilliant.

In fact it's win, win, win.

First, we win because we save ourselves a pile of cash (not to mention avoiding having our noses rubbed in a pile of national humiliation right here on our own doorstep).

Second, we win because we remind everyone of the corruption endemic in all of these big international bureaucracies (eg the UN). Putting big western money into the hands of people with third world fiduciary standards is asking for trouble.

And third, we win because everyone will blame the BBC. Our self-styled public service broadcaster has just denied the public the service of the greatest show on earth.

Delicious.

Facing Up To The Doomsday Machine

2010-11-29T21:51:00.003Z

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:

"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."

Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George (a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

All A Question Of Breeding

2010-11-28T21:51:00.005Z

Not everyone can have the Major's breeding

No sooner had the Tylers returned from the frozen wastes of Swindon, the Major came steaming round. He simply cannot believe the way Lord Flight was slapped down over his "perfectly sensible remarks re breeding".

"I mean everyone knows the socialists have landed us with a huge problem. Everyone knows it's insane to reward feckless teenage girls for having kids they can't afford to support, and won't bring up properly. Think of all the problems we're storing up - well, no, think of all the problems we already have! Hideous costs, disrupted classrooms, vandalism, drugs, muggings, obesity, yet more pregnant teenagers, prisons already full up... gah! It is mad, literally mad, to encourage breeding among the dregs of society. We should be working to prevent it - by all means possible!"

His reddened face had contorted alarmingly. "Down at the bottom, having kids has become a career option! Yet when anyone talks about it in public, they got taken out and shot!" A finger jabbed towards Tyler. "And that's because of people like you! Too squeamish to face the facts! Too namby-pamby to speak up. You make me sick!"

"Well, thank you, Major," Tyler ventured. "But according to the BBC, nobody goes out and has a child just so she can claim child support - it's hardly a king's ransom, you know. I'll bet you wouldn't get pregnant for that kind of money."

Spluttering, the Major charged on. "I want you to look out the numbers. I'll bet the lower orders are breeding like rabbits. Hopeless moronic girls dropping no-hope kids left right and centre. All paid for by us! US!!"

****

What we need here are a few facts.

And what we need to know before anything is whether the birth rate is higher among benefit dependents than among those who pay their own way?

Luckily the Office for National Statistics publishes an annual review of births in England and Wales, and the most recent one is entitled Who is having babies? Which sounds like it ought to answer our question straight away.

Except that it doesn't.

Yes, it tells us there were 708,711 babies born in 2008. And that over half were born to mothers aged between 25 and 35, with a quarter being born to younger women.

It also tells us that of those births registered jointly by two parents (either married or unmarried), the vast majority were to fathers who claimed to have some recognised occupation (ie something other than lying in bed all day drinking cut-price lager and procreating):

But those stats don't tell us what we need to know.

For one thing they only apply to births registered to couples. 43,000 births (6% of the total) were to single women not living with a partner. And the ONS report gives us no information on their socio-economic classification.

Moreover, there's another c40,000 registered to fathers who are "unclassified", and we can all imagine what sort of fathers they might be.

And then again, of the births registered jointly to couples, a stonking 70,000 of them were registered to couples who weren't actually living together at the time of registration. Now, does that sound like a viable benefit-free home background?

Unfortunately, that's all the info the ONS summary gives us.

In fact, that's pretty well all the hard info we've been able to uncover at the national level.

But there are some local stats which cast a very interesting light on how baby production incentives work in areas where alternative employment opportunities are limited. And they are the stats that show for each local authority area the percentage of births that are to unmarried mothers.

Across the country as a whole, that percentage is now 45% - ie nearly half of all births are now to unmarried mothers. But in some areas of the country that percentage is much higher.

In 2009, the highest was in Blackpool, where no fewer than 69% of babies were born outside marriage. In Blackpool to be born to married parents puts you in a minority of just 31% of your peers.

Joint second highest were Easington and Hartlepool on 68%. And here's the whole top 10 (the national average is 45% remember):

Spot the pattern?

Take a moment to study the list.

Yes, that's correct - all of these areas are in economic black spots up North and in South Wales. All have relatively high unemployment rates, relatively low wages, and rather limited alternative career options for girls at the bottom. All have relatively high welfare dependency.

Compare and contrast with the areas where the percentage of births outside marriage are lowest (ie where the vast majority of babies are born to married couples).

The very lowest, on just 27%, is the Royal Borough itself - leafy Windsor and Maidenhead. Then comes Wokingham (29%), Slough (32%), Surrey (32%), and the somewhat inappropriately named Rutland (33%).

And what have all those areas got in common?

Yes, right again - relatively low unemployment, relatively high wages, and relatively low welfare dependency. In other words, a career having kids has to be relatively less attractive.

OK. OK. Not very scientific.

True. That's because the government does not publish the data we really need to see, so we're driven to these alternatives.

But it does make you think.

Further investigation required. Preferably by the government.

PS If you haven't already done so you should read this excellent article by Dennis Sewell on eugenics and the welfare state. It recounts how the socialist founders of the welfare state believed it would need to be accompanied by the elimination of anti-social elements. As the sainted William Beveridge put it: ‘those men who through general defects are unable to fill such a whole place in industry, are to be recognised as “unemployable”. They must become the acknowledged dependents of the State... but with complete and permanent loss of all citizen rights — including not only the franchise but civil freedom and fatherhood.’ Pity he never got the chance to share his bracing ideas with the Major.

The Chattering Teeth Classes

2010-11-26T09:05:00.000Z

At age seven Tyler was scarred for life by his primary school teacher's tale of her great grandad being frozen to death on a stagecoach crossing Salisbury Plain. Now that was real weather.

And as it happens Mr and Mrs T will be spending tonight in Swindon. That is, if they make it through the weathergirl's promised whiteout hell.

Luckily the weathergirl's right hand girl in the Met Office global warming department has just been on R4 Today telling us that global warming is proceding at an even faster pace than she'd previously feared. Something to do with drifting boys being colder than ships apparently.

Well, in truth I'm not quite sure that is what she was saying. Just before the 7.57 weather forecast with its whiteout prediction for the weekend, she told us this could be the warmest year on record. And if it hadn't been for those pesky sunspots - the ones the Met Office never even mentioned to us before others pointed them out - we'd already be frying.

Hmm, yes.

In 2008-09 the Met Office cost us taxpayers £162m.

Of more importance to those of us in the teeth-chattering real world is Ofgem's newly announced probe into retail energy prices. Their latest analysis shows that the energy companies have indeed whacked up their profit margins for domestic consumers. In the last three months they've increased from £65 pa to £90 pa per dual fuel customer :

Now, they have to make a profit - we all need to understand that. But publicly raising their margins in the face of general austerity looks a tad on the dumb side. You wonder if we're getting the whole story.

So time to saddle up the stallions and hit the ice road.

Tally-ho.

Very Unhappy

2010-11-25T18:24:00.005Z

You're no happier than him - want to swap?

So WTF is Dave making us spend £2m measuring happiness?

To be honest I can't face blogging it. The whole business of so-called "happiness economics" makes me want to leave the tent and wander off alone into the blizzard.

We've blogged the dismal "science" of happiness several times (eg here and here). In brief, it is based on the ludicrous idea that happiness can be measured, and that you can compare happiness today with happiness yesterday. The "measurement" comprises asking people how happy they feel out of 5 (no, really).

OK - out of 5, how happy are you feeling right now?

I have no idea what you've said, but I do know that averaged across all of us, the answer will be around 2.2. That's because it always is. Come rain or shine, better or worse, richer or poorer, the average never changes much.

And to prove it, here's a picture we blogged earlier ("life satisfaction" is another term for happiness, and the new economics foundation - nef - are major promoters of the whole crackers concept):

What is Dave thinking of?

Hopefully it is just some kind of spin exercise, in which case it's just another £2m flushed down the bog.

But the real worry is that he hopes to use it somehow to guide policy. To accept the soppy left's argument that lower economic growth doesn't matter because more money doesn't make us any happier. That we were all just as happy back in 1973 with the Austin Allegro. Or back in 1473 with unglazed windows.

Back in 10000 BC, some lefty druid almost certainly used the same argument against the invention of fire.

Just How Scared Should We Be?

2010-11-24T21:08:00.005Z

Sorry kitty

Could it happen here? When the markets have finished their sport with Ireland, Portugal, Spain, etc, will they turn on us?

Let's compare our situation with Ireland's.

Both of us have governments that are currently borrowing far too much. Theirs is a bit worse than ours, but setting aside this year's extra binge to bail-out their banks (equivalent to an eye-watering 20% of GDP), they're not that much worse. According to the OECD, even before today's emergency cuts, they were already planning to cut their borrowing to 7.4% of GDP by 2012. Which compares to the 6.5% planned by George.

Both of us have governments that went into the Crash spending unsustainable tax revenues built on unsustainable debt-fueled booms. And both of us have governments that were already carrying far too much debt when the crisis broke - in fact at end-2008, HMG's debt at 57% of GDP was actually higher than Ireland's 48%.

But the most worrying parallel is that both of us have governments that have written open guarantees for banking systems that are big enough to take us all down.

The key risk - as we've blogged many times - is that the banks' assets may well be worth a lot less than it says on the tin. Everybody is now acutely aware of that possibility, so without a taxpayer guarantee (implicit though it may be), any of the banks could face a run on their deposits and other sources of funds at any time. Which would break them. And quite possibly us as well.

But as we've just seen with Ireland, taxpayer guarantees only work if the markets retain confidence in the government's ability to deliver on those guarantees. And when you have taxpayers guaranteeing bank debts that are a multiple of their own incomes, that confidence is not something anyone should depend on for very long.

You see, a key point to remember is that the very same taxpayers who are having to service the government's debts, and guarantee the banks' debts, are also having to service their own personal debts as well. Which is one hellavalotta debt.

One widely used measure of overall indebtedness is an economy's total gross external debt - ie all the debt owed by all domestic entities to foreigners.

When last sighted (June 2010), Ireland's gross external debt was $2.1 trillion. Now, that is a serious liability. It is getting on for 10 times Ireland's annual income. It's like you having a mortgage of ten times your income secured on a row of unfinished estate houses in the middle of a peat bog.

And our own external debt?

Well, actually it's only $9 trillion. Which comes in at a "mere" 4 times our annual income.

Phew. We can all relax.

Er, nooooo.

Ireland may be in much worse shape than us, but compared to our major league competitors we are still in pretty bad shape. Germany's external debt stands at 1.4 times annual income, and the US is on less than one times. Japan - the country that people are always telling us has much more debt than us - is on less than 0.5 times.

Even more shocking, we are in worse shape than either Portugal or Spain - the two piigy countries now in the market firing line.

Here's the chart:

And that's why we can't relax. We may be in better shape than the Irish, but compared to other major economies we are right out on the thin ice.

True, we're not in the Euro, so we're not completely stuffed (as today's encouraging export news underlines).

But we can't devalue our way out of this debt for one very simple reason - a large chunk of it is foreign currency debt (eg see this blog).

How scared should we be?

It's at least an 8.

Straightening Out Our Straitened Times

2010-11-22T18:47:00.010Z

Thanks to all those who spotted Tyler's deliberate (ahem) spelling errors in yesterday's post on the Royal Wedding.

The truth is that Tyler has never been much cop at spelling. His A Level history master was once driven to warn that T's poor spelling "betrayed a lack of scholarship". Even worse, Tyler has latterly slipped into the slovenly and entirely unacceptable habit of checking such matters on the internet rather than the OED.

So yesterday, before publishing the post, he actually checked "straightened times" on Google. And he was delighted to find that Google had no problem with it whatsoever. There were plenty of suggested links on that spelling, including links to articles in the Telegraph and Times. Surely they couldn't have got the spelling wrong. Could they?

And what about jewelry? Mrs T may have put her red pen through it, but Google was relaxed. In fact, the very first suggested link on jewelry is to Tiffany's. That's Tiffany's as in the guys who know all about such matters:

What's that? Tiffany's are a bunch of Yanks, and they don't know nuffink about spelling? Well yes, fair comment.

Maybe you can't depend on the internet to give you definitive information on spelling and grammar.

Which brings us to Gove's planned crack-down on pore spellurs lik Tyler:

"A-levels and GCSEs are to be toughened up with fewer but harder exams and a crackdown on poor grammar and spelling under sweeping reforms being unveiled next week...Candidates for all written GCSEs will be marked down for poor grammar, spelling and punctuation."

Now of course, we all think our dumbed down exams need toughening up. And we all know that employers say they'd much prefer to have staff who have mastered the 3Rs rather than a sheaf of irrelevant GCSEs gained by cut and pasting the internet. We all know that. But should Gove be laying down the content of exams?

The thing we've always liked about Gove's schools policy is that he wants to take the politicos out of the schooling business altogether. All they are then responsible for is funding the education vouchers. Everything else is down to the schools themselves and the power of parental choice. Excellent stuff that would soon have our schools rocketing back up the international league tables.

So how come Gove is right back where so many failed Education Secretaries have caused so much damage in the past? Why does he think he knows how to structure exams, even down to their marking systems? Why can't he leave it to the professionals, guided by his new schools market?

He was asked that very question by A Marr yesterday, and he didn't really answer it.

Come on Mr G, we understand it's tough. And we understand you are taking on the entire education establishment and the BBC.

But we're depending on you. We need you to keep the faith. We need you to redraw the boundary between government and our schools.

PS At least Gove has abolished Labour's ringfenced school sports budget. This has cost us £2.4bn and was supposed to turn out a new generation of kids who preferred sport to junk food. Yeah right. Naturally the school sports outreach industry is aghast, as is the BBC (it's been on all day). But what the Major wants to know is why can't we just go back to having competitive sport in state schools? "Why is it," he rants, "that the only international sports where we have winners are the ones played by the public schools? It's no coincidence that both our rugger and cricket teams have captains and vice captains from public schools. It's because those schools have made quite sure competitive sports have been kept alive and well - none of this namby-pamby rubbish, there, there, winning doesn't matter. Of course it matters! Compare that to those overpaid nancy boy losers in our clod-hopping football team... they all come from the Harold Bloody Wilson Community College, you know! It's a national disgrace." Etc.

BOM Royal Wedding Edition

2010-11-21T21:44:00.001Z

The cake decorations won't cost much

OK, we've held off for a few days, but what is it going to cost? And more to the point, who's going to pay?

By rights, it should be the bride's parents. We all know that. Plus of course, Kate's parents could save a few bob by using party products from the family company. Maybe they already have - as Mrs T points out, the plastic ring in the pirate party bag looks awfully familiar, and it's currently 10% off:

Chas and Di's wedding in 1981 cost a reported £30m, which in today's terms would be about £170m - a mind-boggling sum in these straightened times.

Supposedly it's not going to cost taxpayers anything like that because HMQ and Charles are going to pick up the tab.

Fine.

Except that it turns out they're only paying for the service, the champers, and the cake - a few tens of mills at most. The main cost - the cost of security - will still be down to us. And based on other recent bunfights, such as the G20, the security bill could run up to £80m.

So what do we think? A sawn-off austerity wedding behind closed doors inside the Tower of London?

Our present Queen got married back in the original Age of Austerity in 1947. She had to put up with recycled jewelry and a wedding breakfast limited to 150 guests. Plus:

"The two Royal kneelers, used during the service, were covered in rose pink silk. They were made from orange boxes, due to war time austerity, and date stamped 1946."

Wonder if they've still got those kneelers somewhere in the shed.

Dermot, Dermot, Helmut, and Helmut

2010-11-20T10:34:00.001Z

WARNING: CONTAINS GRATUITOUS AND JUVENILE STEREOTYPING OF OUR EUROPEAN PARTNERS

The prospective disintegration of the Eurozone highlights all the old problems with single currency areas.

For years the Euro's one-size-fits-all monetary policy set interest rates far too low for countries like Ireland and Spain, inflating monstrous property bubbles that have now exploded with such disastrous consequences.

And throughout the periphery, cheap credit financed massive consumption growth, generating totally unsustainable current account deficits. Going into the Crash, Zorba and Pedro were ramping up their consumption by 4-5% pa , producing current account deficits in excess of 10% of GDP. Dermot went absolutely bananas, jacking up his spending by a roaring 20% in just three crazy plastic-fueled years.

Meanwhile staid and steady Helmut barely increased his spending at all (up by just 0.4% pa over the 5 years pre-Crash). He kept his nose pressed firmly to the grindstone, and with peripheral Europe's consumers frantically upgrading to Mercs and BMWs, the German current account surplus ballooned to 8% of GDP (2007).

But now the music has stopped, Helmut finds himself facing a horrible HORRIBLE reality. All that money he deposited in his local bank was lent to Zorba, Pedro and Dermot to buy needless luxuries. And it now looks like the money will never ever be repaid. Even worse, he himself may need to prop up spendaholic Z, P and D for years to come.

It is surely obvious to everyone that the single currency has shackled poor industrious Helmut to a bunch of wastrel low-productivity ~~untermenschen~~ fellow Europeans. What a schmuck Helmut must be.

Yes, yes, we can all see that now. It's obvious.

Except...

Well, it turns out that not all Helmuts have done quite so badly out of the Euro as our Helmut.

For example, the Helmuts who produce those Mercs and Bimmers have done very well indeed. They have benefited from having a currency weighed down by inefficient free spending Zs, Ps and Ds, rather than being strapped into the ever-appreciating Deutschemark.

Because the Euro has done wonders for Germany's exporters. Since the Euro's launch back in 1999, Germany's competiveness has improved by around 10% - a huge relief after the worsening of competitiveness over the previous decade.

But in sharp contrast, the Euro has been a disaster for exporters from the PIIGS - their competiveness has worsened by over 15%. Indeed, relative to the German export powerhouse, their competiveness has worsened by more like 25% - in just 10 years.

Here's the chart (it shows relative unit labour costs, the standard measure of international competiveness; a higher figure denotes that a country's export costs have risen relative to its competitors, making the country less competitive):

So all those Helmuts who are in the export business have done pretty well out of the Euro. Whereas any exporters among the Zs Ps and Ds have been absolutely stuffed.

The picture in Ireland casts futher light on this. We posted the Irish Daily Star's yesterday, but it bears closer scrutiny:

It seems the real Irish winners from the Euro experiment were not the Dermots in the Limerick street at all (at all)*. Sure, they gorged themselves on flat screen tellies from Taiwan like the best of them, but they're now stuck in Limerick facing the the bill. No, if reports are to be believed, the real winners - the ones who made big money in the boom and have largely kept it - are the "gouger-politicians, their wanker-banker buddies and their dodgy developer chums".

Which highlights a very important point - one we have made on BOM before. When you hear people arguing for this or that economic or financial policy as being in "the national interest", you really do have to ask how they will benefit themselves? (Yes, that does include Tyler).

Because no policy is going to benefit everyone equally, and although economic theory says that the winners can be made to compensate the losers, political reality says that's rarely the case in practice.

The Euro is a classic case in point. The winners of this hare-brained experiment have been the federalism industry, German exporters, and cheap money speculators of one kind or another. The losers have been European taxpayers, and all those now living in peripheral areas that are now so uncompetitive they face years of wage cuts and falling living standards to put things right. If they ever can be.

Things would be even worse for the PIIGS if they pulled out?

Don't be daft. Even if the Germans and others do promise massive fiscal bailouts from here to eternity, shackling themselves to the Deutschemark will ensure they never ever become competitive. They will never ever stand on their own feet again.

A bit like say, the North East of England - shackled to the Pound and consigned to perpetual welfare dependency.

* Apologies for lame at all at all commentary on Ireland. Mrs T is half Irish and Tyler simply can't resist it.

Is Default Now The Only Real Option?

2010-11-19T11:56:00.006Z

Seemed like a lovely idea at the time... but who was going to pay?

As we've blogged many times, our real National Debt is far bigger than the government officially acknowledges. When we calculated the real debt for the TPA this year, we estimated the true overall total at around £8 trillion, nine times the official total, and over £300,000 for every single household in Britain. Here's the picture to remind us:

Our number picked up a fair amount of flak at the time for including things that are supposedly not real debt, such as pension liabilities. We answered the criticisms here, but one particular objection is worth picking up again in the light of the Irish crisis.

Our debt figure included the gross liabilities of our nationalised banks, amounting to £2.6 trillion. And the objection was that those liabilities are backed by the banks' assets, so just looking at the liabilities is scaremongering.

There is of course some truth in that point, but we argued that taxpayers need to know our total potential exposure. Because in these uncertain times, nobody can be at all sure what the banks' assets are actually worth.

And now we have a real live example of what happens when reality bites. As we noted here, the reason George has had to accept shoring up Ireland is that our banks' have lent the Irish well over £100bn - ie we can't afford to let them go down without risking a £100bn hole in our banks' balance sheets (£80 odd billion of which would be down to the nationalised RBS and Lloyds).

So how does George's decision impact on the National Debt?

An interesting question.

If we lend the cash directly, then it will likely add to the official National Debt. But if we lend it via a guarantee on one of those baffling Euro financing facilities, it will likely not add to the official National Debt at all - it will just be counted as a contingent liability, which the government habitually ignores. Even though in the real world, we are just as fully exposed to the liability either way.

And what about our Real National Debt (RND) calculation? That already includes the full liability supposedly backed by the banks' Irish "assets", so at first blush you might conclude that all we are doing is simply swapping one liability for another. Maybe the total RND doesn't change.

Alas, while that would be the case if the Irish were using HMG's new official loan to repay their existing loan from HMG's banks, that's not what's proposed. Instead, the new loan will simply add to the existing loan, so that the Irish can go on living day-to-day for a few more months. The Real National Debt just got even bigger.

Which is just a prelude to this morning's real question.

Prompted by some fascinating emails from longtime BOM correspondent NL, Tyler has been thinking further about how we can ever hope to escape from under this humongous debt burden.

Earlier in the week we reminded ourselves of the four traditional escape routes for indebted governments, and who ends up paying:

Repayment - ie the government runs budget surpluses. Taxpayers pay.
Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay.
Inflation tax - where debt is denominated in fixed money terms, governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay ( including anyone who has been foolish enough to save their nest egg in a building society account).
Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

NL emailed to object:

"Growth doesn't do anything for the debts. It's a bit of linguistic trickery. The only thing that pays debts in this way is growth in taxation. Politicians don't want to admit that they have to take more and more money in order to pay debts. So they use deceipt. If we take growing taxes and turn the adjective into a noun, who can complain about growth?

So when ever you see growth, it really means we are going to take more money from you in taxation to pay off our mistakes."

And of course, NL is quite correct - "the only thing that pays debts in this way is growth in taxation". It's the growth in tax revenues that floats the government free from the fiscal rocks. Taxpayers do end up paying more.

So how can it be seen as a fiscal get-out-of-jail-free card?

Because compared to an increase tax rates, an increase in tax revenues flowing from higher growth is a lot less painful for most people. They may be paying more tax in money terms, but relative to their incomes it will probably be less - the burden will feel lighter.

We can think of it in the same vein as the increase in tax revenues that we've often seen following cuts in tax rates, For example, when the Thatcher government cut the top rate of income tax, revenue from top rate taxpayers actually increased. And indeed Tyler believes cuts in tax rates now would generate actual increases in tax revenues within a very short period (eg we should cut the new top 50p income tax rate soonest).

But NL is not so easily convinced, and responded:

"There is also the other little calculation.

Lets take a million unemployed. 13K a year in benefits. They all get minimum wage jobs, so they pay 2.5K a year in taxes. However they will still get housing benefits. That's 5K a year. All relatively round numbers. Net increases in taxation / reduction in benefits comes to 13 - 5 - 2.5 = 5.5K per person.

So for each million that gives 5.5 billion. Even getting all those not in work, back to work, isn't going to close the deficit."

Tyler loves practical calculations like this - they really bring things into focus.

Let's take NL's assumptions as correct, although we reckon his arithmentic needs tweaking (ie by getting these unemployed back to work the government saves £8k pa in benefits - £13k minus £5k HB - plus it gets an extra £2.5k in tax revenue, equals £10.5k total improvement in the fiscal position). The overall saving from returning one million to work is £10.5k times one million, equals £10.5bn.

And given that there are currently well over 5m adults of working age living on benefits, that would suggest we could save over £50bn pa - if we could get them all into paid employment.

Now, a £50bn pa saving is not bad, not bad at all.

Except that we'll never get all 5 million back to work. And against a Real National Debt of £7.9 trillion, even a £50bn pa saving not really all that much. At £50bn pa it would take 158 years to pay off the debt. Tyler will have long since departed. The junior Tylers will have joined him. And the as yet unhatched junior junior junior Tylers will likely have gone too.

Hmmm. Maybe growth isn't quite such a get-of-jail free card after all.

Well, what about the good old inflation tax?

Unfortunately NL is pessimistic there too:

"On the inflation front, look at the £6.9 [7.9?] trillion number for true government debts.

What percentage is linked to inflation? Almost all of it. OK the CPI to RPI change cuts 15% off the debts linked to RPI. However, even the borrowing has a lot that is RPI linked. The PFI deals have RPI kickers. (Lender can convert to RPI at their choice).

ie. It's a myth that inflation deals with government debts."

You know what? He looks horribly right there too. As we ourselves have previously noted:

"Default via inflation only really works on the government's official debt. The much bigger £4 trillion unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments."

So that's £4 trillion of the indexed pension debt, plus a quarter trillion of index-linked gilts, plus those largely indexed PFI contracts. Which means well over half our Real National Debt cannot be inflated away.

Uggh.

So what were those other two escape routes again?

Ah yes, repayment - that must be it.

Except, hang on - that's not an escape route at all. That's just the harsh cold turkey of taxpayers handing over more in taxes than they get in public services for years. Years and years and YEARS. The Tylers, the junior Tylers, the junior junior junior Tylers, everybody. Yea, even unto the nth generation.

Wait. The Major - who has been reading this over Tyler's shoulder - has just loaded his service revolver and wandered off alone into the woods. Surely things can't be this bad!

Well, there is one other final escape route left - default.

And the more you think about it, the more you realise that default is now pretty well inevitable.

And here's how it will work.

First, and most important, HMG has to step back from those £4 trillion of pension liabilities. Yes, they are liabilities to actual and future public sector and state pensioners that have already been incurred against past pension contributions and service. And yes, HMG has made solemn promises.

But the plain fact is that taxpayers can't afford to honour those promises. The pension age must be raised to at least 70 right across the state and public sector board right now. Either that, or the indexation promise must be abandoned, which would be much less fair on the real elderly.

Second, HMG needs to restructure the banks soonest, split wholesale and retail banking (as blogged many times), and withdraw from all guarantees explicit or implicit on the banks' wholesale liabilities. RBS and Lloyds should be split and flogged off pronto. Yes, the banks' shareholders and wholesale creditors will scream, but that's too bad.

The inflation tax? Well, as we've blogged before, we fear that's already out of the traps, and doubtless it will play its usual part in eroding the real value of HMG's unindexed fixed money debt.

And despite what we've said above, we still think growth will help by generating higher tax revenues from given tax rates.

But when you sit down and do some arithmetic, it does look horribly like default is the only real way of cutting the debt as much as it needs to be cut. Default on all those grandiose pension promises made by successive generations of politicos since Lloyd George launched the state pension one hundred years ago.

Never ever trust politicians who claim they can give you something for nothing. Try to remember that in future.

PS And here's how it looks from Dublin:

Whose Debts Will We Take Over Next?

2010-11-17T10:53:00.001Z

PIIGS stuffing

It sounds like George has buckled and that we're now in for £7bn of the Irish bail-out:

“Ireland is our closest neighbour. And it's in Britain's national interest that the Irish economy is successful and we have a stable banking system. Britain stands ready to support Ireland.”

Did he have a choice?

In the circs, probably not.

Take a look at the handy chart above. It's taken from last week's IMF report on the UK economy, and it shows UK banks' exposure (aka loans) to Ireland along with their exposure to three of the other PIIGS. As we can see, they are in for well over £100bn to the Emerald Isle, and getting on for £300bn to the group as a whole (ex Italy).

In theory of course, we should be able to say to the banks, that's your problem mate - you lent the money on all those housing estates in the peat bogs, now you can reap the rewards.

But in practice, we're stuffed. Post-Crock, we rediscovered the fact that taxpayers have to protect retail bank depositors here at home. And that means guaranteeing retail banks. Which as things stand, means guaranteeing all UK banks.

But let's hope George is at least insisting on some pretty tough conditions - no backsliding on spending cuts and close IMF monitoring.

We've only got to look at Greece to understand what could lie ahead in Ireland. Their existing government is going down, and its successors will look for every opportunity to backtrack and obfuscate. We must not accept that.

Who's next?

Well, as the chart shows, UK banks have chunky exposure to Spain, and if you're going to do Spain you might as well chuck in Portugal. We Northern Europeans will soon be on the hook for the whole lot.

It doesn't bear thinking about, but here's a small suggestion - when it comes to the crunch (ie outright default) HMG should do a debt for villas swap. Hard-pressed UK taxpayers could then be offered cheap villa holidays in the sun to take their minds off their 70% tax rates.

Apart from that, Tyler can see no light in the Euro-gloom.

Ver Are You All Coming From?

2010-11-16T17:33:00.004Z

From Smurfland ver ve belong.

Spot the difference between these two entertainers from Belgium:

Many years ago, Mrs T took the junior Tylers and friends for a birthday treat to see the Smurfs Show. The show was bad. Very bad. In fact, it was so bad the theatre gave a full refund to the entire audience. The entire audience of about 30, that is.

The Herman van Rompuy Show is a very similar offering - amateurish, Belgian, and incomprehensible. The only difference is that there are no refunds.

There is a well rehearsed theory that the EU is the Fourth Reich in disguise. But just clock Herman's performance in the midst of the biggest EU crisis ever - he's making it up as he goes along.

The Euro is bust. The one-size-fits-all currency doesn't fit, and in one way or another it will have to be dismantled. The PIIGS will have to be cut lose and the Euro shrunk back to its Germanic core.

Even the Smurfs would have understood that.

The Real Question - Who Pays?

2010-11-16T10:09:00.011Z

A seriously bum rap

Here's what's supposed to happen: you borrow some money, and then you repay it. And the emphasis is on the word "you".

Now, what's so hard about that? The practice has been around for centuries, and nobody can honestly claim ignorance of the rules.

Yet somehow, when borrowers decide they can't make their repayments, it's rarely seen as their fault. Instead, the blame is landed on the lender, either for making it too easy to borrow in the first place, or for demanding repayment in times of difficulty. Tyler has never thought it fair that poor old Shylock loses his ducats because some smart-ass amateur lawyer gets the borrower off on a technicality, especially when Shylock would still have had to honour his own debts to his depositors. But you're meant to cheer.

And so to the current Irish crisis.

The Irish have borrowed A Lot of money. Their citizens borrowed a lot to buy property, their government borrowed a lot to... ummm... spend, and their banks borrowed a lot to punt around, largely on property loans. Their external debt is now a staggering 1300% of GDP, most of it now effectively nationalised through the government formally guaranteeing its banks' debts.

Here's how it ramped up during the go-go years to reach its current €1.74 trillion (chart is in millions of Euros, taken from the highly informative Ireland After NAMA):

So who's to blame?

Well, yes, the Irish of course. For borrowing so much. Obvious.

But Tyler is just listening to J Humphrys summarising the situation for BBC R4 Today: "...the vultures are circling Ireland... the country may be forced to hold out the begging bowl... the vultures may then turn their rapacious attention elsewhere..."

Those greedy flesh-ripping lenders - why does anyone put up with them?

But what's the real question beyond the tabloid emotion? The real question - as we all surely understand by now - is who's going to pay? Not just for Ireland's debts, but for Greece, Portugal, Spain, Italy, etc etc.

As regular BOM readers may recall from this blog, traditionally there have only ever been four options for governments with too much debt. Let's review them to see who actually ends up paying:

Repayment - ie the government runs budget surpluses. Taxpayers pay.
Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay.
Inflation tax - where debt is denominated in fixed money terms (as most is), governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay, including anyone who has been foolish enough to save their nest egg in a building society account.
Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

But this is where Ireland and the others have a problem. Because they're members of the Euro, and that pretty well nukes options 3 and 4. As everyone in the real world always understood, the Euro makes it impossible for individual members to crank their own printing presses. Ireland and the others can't impose an inflation tax, and can't depreciate their currencies to stimulate growth - they're locked in.

Which means the only options are either to repay - whatever the tax and spending implications - or to default.

Now, the average Irish/Greek/Portuguese/Spanish citizen is going to opt for default - no question. But sadly, the lenders aren't nearly so keen. And since the lenders largely comprise banks based in other member states of the EU (including Britain), those members are not keen either.

Which is why Ireland and the others' membership of the Euro has brought a fifth option into play - transfer the debt to taxpayers in other countries.

And that's precisely what is being done with the EU's €750bn bail-out package, agreed during the Greek crisis in May. Taxpayers elsewhere are being forced to guarantee up to €750bn of loans to basket cases like Ireland.

Fortunately, the UK's share of these guarantees is limited, because - thank God - we aren't members of the Euro (keeping us out was one of only two useful things G Brown ever achieved). But even so, it could still be well over £10bn (including both our €8bn share of the European Financial Stabilisation Mechanism and our €4bn share of increased IMF lending).

But spare a thought for the German taxpayer. They've always run a tight Lutheran ship in terms of their own borrowing, but now they're being called upon to guarantee tens of billions of Euros in loans to the wild free spending PIIGS. And they will note that the EU's announced €750bn bail-out fund only covers a fraction of the total external debt of the PIIGS, which comes in at over €5 trillion.

Of course, at the level of the entire Eurozone, there IS an alternative. As several commentators have argued over the last few days, the European Central Bank could fire up the presses. It could flood the world with Euros just as the Fed is flooding the world with dollars. It could do so until Euro inflation - currently around 2% - takes off.

But if you're a normal everyday punter in Germany, why would you feel any better about that? You almost certainly never wanted the Euro in the first place, and went along with it only because you were assured it would be the rock solid Deutschemark by another name. How are you going to react when your Euro savings are obliterated simply to shore up the PIIGS?

At the end of the day, a bout of Euro inflation looks increasingly likely - all the other options are simply too hard for Europe's rulers to swallow. German taxpayers are going to be left feeling just like these American furry animals feel about the Fed's antics on the dollar printing press (HTP JWK):

PS If by any slight chance anyone is reading this thinking the inflation storm won't affect us, today's re-acceleration of UK inflation to 3.2% - above market expectations - is an excellent reminder of reality.

Spending Your Money

2010-11-14T21:25:00.016Z

The short version

We assume everyone watched Martin Durkin's spirited assault on Big Government last week (clip above and you can watch again here).

But discussing it with various people since, Tyler has been struck by how few actually realised that government is now spending more of our money than it allows us to spend ourselves*.

Say it again - government is now spending more of our money than it allows us to spend ourselves.

According to the latest OECD stats, this year the UK government will spend an astonishing 53% of our national income. That's the figure quoted by Durkin in his film, and also the figure we show on BOM's sidebar (it relates to so-called General Government, comprising both central government and local authorities).

So - just to hammer home the point with an outsized mallet - for every pound we earn as a country, the government spends 53 pence of it, leaving us with just 47 pence.

And our government is spending more of our income than the government of virtually any other major economy, and way more than the OECD average:

Greece and Ireland, those notorious fiscal basket cases?

Yup, you guessed it - their governments are actually spending less than ours (48.8% in the case of Greece, and 46.9% in Ireland).

Now for some unfathomable reason, HMG does not admit to such a high percentage in its own figures. In fact, George's June budget reckoned the percentage of GDP spent by government this year will "only" be 47.3% (2010-11).

But as we've blogged before (eg here), there are some serious doubts about the official HMT figures. In particular, some of their spending figures are included net of receipts (eg spending on public sector pensions). We'd rather trust the OECD numbers which conform to an internationally agreed and monitored standard.

More fundamentally, the HMT figures calculate the government's share as a percentage of GDP at market prices, rather than the much more meaningful - and lower - GDP at factor cost.

Que?

In plain English, GDP at market prices is measured including the taxes government levies on goods and services, including VAT. Thus, the more government taxes our spending - by for example increasing VAT to 20% - the higher is GDP at market prices. Which means that government spending as a percentage of GDP is correspondingly reduced.

Or in other words, by increasing spending taxes, HMG can manipulate down its own share of GDP.

GDP at factor cost excludes such sales taxes and gives a much truer measure of our real national income, and the share taken up by government.

BOM's old friend Prof David Smith has spent his entire distinguished career monitoring Big Government (or Leviathan as he prefers to call it - see clip above). And he has calculated his own measure of government's share in GDP, measured at the more meaningful factor cost. Here's one of his charts showing what happened over the last century:

Take a moment to study that chart (click on image to enlarge).

A hundred years ago, before WW1, government spent 10 - 15% of our national income, and private citizens got to spend all the rest - ie the money they'd earned. But in the following 70 years, successive governments grabbed more and more, so that by the early 80s they were spending over half our national income.

There then ensued nearly two decades of real struggle under Thatcher, Major, and Prudence, to rein back. Even so, government's take never fell below 41.8% (touched briefly in 1999).

Over the last disastrous decade, of course, it's been one-way traffic. Nay More Boom 'n' Bust Brown let rip, we hit the inevitable bust, and once again we find ourselves with government spending more than half what we earn.

Now let's all remember that simple fact. And let's all try to make sure we tell others around us.

And next time some self-serving Big Gov type pops up on telly saying we could solve the fiscal problem by increasing taxes, feel free to shout at him/her.

The problem is not too little tax.

The problem is too much government spending.

*Footnote - It should be noted that the OECD's 53% figure covers all categories of government spending, including transfer payments (mainly welfare benefits and increasingly debt interest payments). That of course is normal fiscal accounting practice, as also applied by HMT. It shows the proportion of our national income spent by the government. Now, clearly we aren't saying it all goes on direct consumption by the government, because around one-third of it goes on those transfer payments, which the government routes into somebody else's pocket. But the key point is that the government is taking 53% of national income away from those who have actually generated it. For sure, the government then hands a chunk of it out to citizens it considers deserving, but that shouldn't detract from the essential point. The burden on those famous wealth creators (via current and future taxation) is 53%.

Inflation Squeeze

2010-11-13T09:47:00.002Z

Are your pips squeaking yet?

Much squawking over British Gas putting up its prices by 7% - surely they're profiteering at our expense.

As so often, it depends which hand you use to look at it. On the one hand, wholesale gas prices have risen by 25% since the spring, so British Gas is being perfectly reasonable in passing it on. But on the other hand, the previous fall in wholesale prices was not passed on so it's a bit rich to pass on this latest increase.

The truth is that the energy companies have to earn a crust - ie they have to make a profit. They set their prices to us on the basis of prices in the world wholesale market. But the latter fluctuate all the time, whereas we consumers expect tariffs that stick around for a while. So the companies have to smooth things out by taking a view on future wholesale prices.

And they don't always get it right. This chart from Ofgem shows how their net profit margin per customer has varied over the last few years, from a peak of about £75 pa right down to a loss of £150.

Tyler fully understands that the energy companies are not our friends, and given half a chance would rip our faces off without compunction. But we cannot expect them to protect us from cost increases on the world markets where they buy their supplies. All companies have to make profits to pay shareholders for the use of capital. They are not - nor can they ever be - charities.

Unfortunately, it isn't just energy prices - what's happening in the energy market today looks horribly like a portent of what's about to happen right across our economy.

Consider. A couple of weeks ago we blogged the alarming explosion in world commodity prices. At the time we noted that the Economist's commodity price index was up by 35% over the preceeding 12 months in sterling terms. That was bad enough, but the picture now - just two weeks later - is even worse. After a further 6% hike in the last week alone, the 12 month increase in commodity prices now stands at a 1970s apocalypse-style 44%.

44%!

In just one year.

And understand this - the bulk of that increase has not yet fed through to us in our homes and high streets.

Meanwhile the inflation rate in China has jumped by nearly one percentage point in just one month.

Frankly, we're scared. What can we do?

We turn to the appointed guardians of the Pound in Your Pocket - the Bank of England. How do they propose to protect us against the inflationary dragons rising in the East? What do they have to say in their latest Inflation Report?

Here's what:

"... recent increases in commodity and other world export prices could lead to renewed upward pressure on inflation. That upward pressure could be heightened if some companies need to rebuild their profit margins, which were compressed during the recession...

...there is a risk that commodity prices will continue to rise. That would cause further increases in companies’ costs, and lead to higher inflation over the forecast period... That would also exacerbate the risk that the prolonged period of above-target inflation might cause companies’ and households’ expectations of future inflation to increase. That could feed into price and wage-setting decisions, offsetting the downward pressure on prices from spare capacity."

Hmmm...

Could... would...?

Is and will, more likely.

The Bank must surely be getting embarrassed about these quarterly inflation reports. For as long as anyone can remember, their forecasts of inflation have almost always turned out to be too low - far too optimistic. We've blogged this many times (eg here), but just as a reminder, here is a selection of the Bank's forecasts, starting from February 2009 and ending with this week's. Focus hard and spot the pattern:

Chart 1 - Bank of England inflation forecast February 2009

Chart 2 - Bank of England inflation forecast February 2010

Chart 3 - Bank of England inflation forecast November 2010

Spot it?

Back in February 2009, the Bank forecast that the inflation rate today would most probably be between 0% and 1%. They reckoned there was a 1-in-4 chance that prices would actually be falling (ie the Dreaded Deflation), and the chance of inflation being over 2% was put at well under 1-in-10.

Crank forward to February 2010 (just 9 months ago), and the Bank had nudged up their forecasts a bit - they now said inflation would most likely be between 0.5% and 1.5% by now. But they still thought there was a good chance of lower inflation, and still a 1-in-5 chance of deflation (despite the fact that the printing presses had been running in overdrive for a year).

And now? Well, today's CPI inflation has actually turned out to be over 3%. And even the Bank's own November forecast acknowledges it's back on a rising track.

And yet - despite their obvious inflation optimism in the past, despite their massive money printing, despite the further weakening of sterling, and despite the world commodity price boom - they still reckon that inflation will fall back below 2% pa within a year. It's almost as if they start all their forecasts from already knowing the answer - ie inflation will somehow soon be back below the 2% target.

Look, can we all agree on what's really going on here?

For years Britain has been consuming beyond its means, and in future we'll have to consume less. We're going to be squeezed. The real question is who's going to be squeezed the most?

Here's the abbrieviated list of squeeze options:

Squeeze the rich - aka raise the top rate of tax and execute tax avoiders - popular with the Grun, the BBC, and the Bishop, but the rich simply up sticks and leave
Squeeze the poor - aka means tested welfare cuts - very unpopular with the poor, the Grun, the BBC, and the Bishop, and looks like the same old Tories
Squeeze the middle class - aka general tax rises and universal welfare cuts - very unpopular with the middle class, the Mail and the Telegraph... oh, and the Grun, the BBC, and the Bishop as well
Squeeze the public sector - very unpopular with the public sector, the unions, the Grun, the BBC, etc etc

Now, if you're at the controls, you look at that and decide none of it looks altogether appealing - the losers are far too obvious.

But inflation, well, that's different.

You see, inflation is one of those things that not only spreads the misery far and wide, but you can also blame it on someone else. Ah yes, you say, those fiendish Orientals with their monstrous appetite for commodities... I gave them a damned good talking to in Seoul, but what can you do? They've made our lives a misery! And what about those crazy Yanks?! I haven't the faintest idea what they thought they were playing at with that huge printing press - it was sheer madness! All out of our hands though - we are victims of global circumstance (we'll conveniently overlook the fact that much of the inflation reflects sterling's 25% depreciation).

The Bank of England makes much of the fact that higher price inflation has not fed though to higher pay rises in the manner of a 70s wage-price spiral. And that is perfectly true - so far.

But while that may give some comfort on the prospects for inflation, it does nothing for those who are currently being squeezed by inflation itself. Obviously that includes pensioners and others whose savings income has plummeted, but it also includes those still at work. Because since the crisis broke back in 2008, inflation has already exceeded average pay growth by 2%, implying a 2% cut in real living standards (even before taking account of higher taxes).

This squeeze is set to get worse as inflation ticks up. Those with inflation linked incomes (such as public sector pensioners) will be protected. Everyone else - including those still in work - will be squeezed.

So next time you get whacked in the wallet by some headline grabbing price rise, don't blame British Gas and don't blame Mr Sainsbury.

This is being done to you quite deliberately by those at the very top. Somebody has to pay, and they've decided it should be you.

Making Work Pay

2010-11-11T18:04:00.001Z

So much for Labour's jobs boom

All credit to IDS for pressing on with his welfare reform package in the face of a bare fiscal cupboard.

He hasn't been able to achieve quite as much as we'd hoped and proposed back in the summer (see here), but he has managed to hold on to the crucial central feature of any meaningful reform of working age welfare - that work should always pay.

Under his planned Universal Credit the poor will no longer face effective marginal tax rates in excess of 80% (ie they will no longer lose 80 or 90 pence or more of every extra pound they earn). Instead, the maximum any of them will lose is 76%.

Yes, that is still far to high - much higher than the 55% fixed maximum we incorporated in our own proposal. But the Universal Credit is much simpler than the current impenetrable morass, and that will eventually save administration costs and cut the losses from fraud and error. And at last it offers the poor some certainty - certainty that they will always be better off working than not working.

Here's how it looks for two key groups - single people, and couples with two children. The charts show how their net incomes increase according to how many hours they work, assuming they are earning the minimum wage. We can see how both groups are almost always better off under the new system compared to the existing arrangements, and that they are always better off working more hours:

Moreover, IDS has pledged something our proposal did not offer - that nobody will be any worse off under his plan than under the current system.

Clearly that is a very reassuring promise, but it is also very expensive. Which is why we didn't propose it, and why, despite the additional £2bn IDS has set aside to smooth implementation, there is not enough money to fund lower effective tax rates.

As we have discussed many times, there are some extremely difficult choices here. Everyone wants to cut those high effective marginal tax rates in order to provide a compelling reward for working. But it is hideously expensive - our own calculations suggested that to cut the effective tax rate by 10 percentage points would cost £10 - 20 bn pa.

So in these tough fiscal times where are we to find the money? Our answer was to cut the official definition of the poverty line from 60% to 50% of median income, which we reckoned would save £20 - 30bn pa. And that would fund a substantial cut in marginal tax rates, making work much more attractive to the poor.

IDS has shied away from such a dramatic change. The White Paper reports that DWP have studied our proposal but they don't like the prospect of "substantial numbers of people in vulnerable situations losing entitlement".

And that is the nub of the problem.

We find ourselves with a welfare system that has rewarded poor people for not working. 6 million of our working age poor are now dependent on welfare rather than their own earnings. And we all agree that we must rebalance the incentives so that work is always going to be the more attractive option.

But we simply don't have the cash to focus the entire shift on increasing the reward from work. The horrible truth is that in one way or another we will have to find some way of cutting the current level of welfare provision for the able bodied poor.

We certainly welcome the IDS reforms, which undoubtedly point us in the right direction. But we should be under no illusions - some even more difficult decisions still lie ahead.

Britain's Trillion Pound Horror Story

2010-11-11T09:13:00.001Z

Durkin's the one on the left... physically, that is

Essential viewing at 9pm tonight on C4.

The latest film by Martin "Great Climate Warming Swindle" Durkin is on one of BOM's core subjects - our huge national debt.

It's called Britain's Trillion Pound Horror Story, and the blurb says:

"Film maker Martin Durkin explains the full extent of the financial mess we are in: an estimated £4.8 trillion of national debt and counting. It's so big that even if every home in the UK was sold it wouldn't raise enough cash to pay it off.

Durkin argues that to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name and introduce, among other measures, flat taxes to make Britain's economy boom again."

If it's anything like Durkin's climate film, it should be a rattling good view.

And yes, congratulations to C4 for giving us a rare prime time chance to hear just why we must stop politicians spending money in our name. Can't imagine the BBC ever doing that.

PS I presume we are going to have proper prosecutions and punishment for the screaming rabble who smashed up Millbank yesterday. We have stacks of video, and identification looks pretty straightforward. So no wimping - we need proper action against these people, including an end to any further taxpayer support for those convicted. We cannot have taxpayers robbed by violent mobs, and we need to make that clear right now.

IMF Slams The Pink 'Un

2010-11-10T16:12:00.003Z

And to think it used to be the voice of finance

Yesterday the IMF published its latest assessment of the UK economy. It is a ringing endorsement of the coalition's tough fiscal measures and a clear rejection of the crass Keynesianism practised by the late Mr G Brown and his scary apprentice Mr Balls.

In one particularly interesting section the IMF specifically takes on the Financial Times, which has been right at the forefront of the Ballsian calls for postponing the cuts (see numerous articles such as “Why the Balls critique is correct,” September 2, 2010, and “The IMF’s foolish praise for austerity,” September 30, 2010). Having considered the FT's various arguments for delay, the IMF rejects them all, saying:

"...a significant fiscal tightening with frontloading in 2011/12 is appropriate to secure confidence in the UK’s debt sustainability."

Which in IMFspeak is saying to the FT - and to all those who take its Ballsian line - that they really have lost the market plot. So much for the FT being the authoritative voice of finance and business*.

In terms of the overall score, the IMF gives the coalition's fiscal plans pretty well a perfect 10:

"Although this consolidation effort involves painful decisions and dampens shortrun growth, it is necessary to enhance credibility and ensure fiscal sustainability" - without it the UK would have been exposed to a potentially devastating loss of market confidence
"The budget contains an appropriate mix of concrete spending and revenue measures, lending credibility to the government’s consolidation plan" - "The focus on spending measures is appropriate in light of the significant run-up in spending over the last decade and international experience showing that expenditure-based consolidations lead to longer-lasting budgetary improvements"
The focus on welfare reform - especially pension entitlements - is absolutely correct
The establishment of the OBR as an independent fiscal monitor is also welcome

The one area where they call for further action is in the establishment of clear fiscal rules - just like we have repeatedly called for.

As always, the IMF's report contains a host of interesting charts. And here's one that shows how the total fiscal squeeze over the next few years breaks down between what George has announced and what was already in the pipeline from Darling's last budget:

As we can see, the bulk of the planned squeeze in all years was already planned by Darling. Cumulative over the period to 2014-15, George's squeeze amounts to 8% of GDP compared to 6% planned by Darling. Although of course, Darling never told us quite how he intended to deliver it - ie what he was actually going to cut.

A key point that the IMF stresses throughout is that the fiscal squeeze is not expected to stymie the recovery. It is true that they're a little less bullish on GDP growth than either the Treasury or the Bank of England (and more on the Bank's latest Inflation Report tomorrow), but they still expect growth close to 2% both this year and next. And they go out of their way to say it could be higher as well as lower - unlike what some commentators say, the IMF assessment is that the risks are evenly balanced:

So should we be cheered?

Yes certainly.

The IMF may have it wrong - nobody has yet found that fully functioning crystal ball - but this is their best objective assessment, It is not a forecast conditioned by some ideological desire to bash the evil Tories.

Update (12/11/10) - The FT's Martin Wolf (who wrote every one of the FT articles singled out for attack by the IMF) responds here. Wolf is always worth reading, but he is a full-on Keynesian, highly dismissive of BOM-style concerns about our ballooning national debt. Unsurpisingly, he describes the IMF position as "penny wise and pound foolish". Goodness only knows how much debt we'd run up with him at the controls.

*Footnote - It has never been entirely clear what happened to the FT. Back in the day, it was the City's paper, sound on finance, sound on business, and sound on world affairs. But then in the early 90s for some extraordinary reason, it lurched to the left, backing Kinnock in 1992. Kinnock! And then it proceded to back Labour in every single election right up to 2010, when they finally and reluctantly switched back. Sure, it is still the UK's definitive business newspaper. But Tyler knows a number of City types who consign the pink front end - the FT's editorialising end - straight into the WPB unread.

Never Mind The Quality Feel The Quantity

2010-11-09T22:17:00.004Z

Don't worry comrades - we'll sort out the quality later

Let's see if we can work out what connects the following.

1. Hampstead demands more welfare

OK, we know these people were only put on earth to wind us up, but sometimes they still manage to hit the spot.

First, His Grace the Archbishop says that making the unemployed work for their welfare benefits would be "unfair", and that such reforms could drive people "into a downward spiral of uncertainty, even despair".

No mention of the unfairness to hard-pressed taxpayers who currently have to support these people, or indeed of the unfairness to the people themselves in failing to help them back into the work habit.

And of course no alternative solutions - other than continuing to pour yet more of that evil money stuff over the problem in the vague hand-wringing hope of divine intervention.

You and I may understand that we've already tried money, and it doesn't work. But His Grace clearly hasn't spotted that his government literally doubled the amount spent on so-called "social protection" to well over £200bn pa, the major part of which goes to working age households (even in real inflation adjusted terms the spend increased by nearly 50%). And yet he doesn't think it odd that we have more working age welfare dependents today than we had back in 1997 - despite the intervening boom. To him, more welfare money is Good, so less must be Bad.

Then this morning the DT's Mary Riddell joined his attack on IDS's reforms:

"IDS believes that dysfunctional lives are the root cause of poverty, while the centre Left thinks, correctly, that the reverse is true...

The shift towards a US-style punitive system, under which the recalcitrant are left to starve, is also ill-starred... The US precedent does not augur well for compelling Britons to get the work habit by enforced manual labour, such as litter-picking and graffiti-scrubbing. But for an orange jacket, those unemployed through no fault of their own will be indistinguishable from criminals. With youth unemployment already running at 17 per cent, the Government risks creating a class of chain-gang conscripts."

Yes, poverty is the root cause of dysfunctional lives, so more welfare is the solution. QED.

2. One teacher good; one thousand teachers better

The excellent Reform have just published a report on teaching. They highlight Labour's huge increase in the number teachers and classroom assistants, such that the ratio of staff to pupils fell dramatically:

The programme was driven by Labour's belief that more teachers had to be A Good Thing.

But as Reform shows, studies of pupil performance find that it's not the number of teachers that matters but their quality. And that's a much more difficult thing to achieve than simply adding more bodies and reducing class sizes.

True, Labour poured money into teacher training and improvement programmes as well (a cool £1.5bn pa), but without any obvious results in terms of quality.

Connection

What connects both of these things is the socialist obsession with quantity ahead of quality. From Stalin's famous tractor factories, to the calibration of compassion in terms of welfare spending, the left thinks that Big is always best.

Gah!

As we've blogged many times (eg here), today's British poor are not poor in any historically meaningful sense of the word. Whereas if you need to see how welfare dependency drives dysfunction you need look no further than Dewsbury (see this blog). If there's any causal link at all, IDS is much closer to reality than dear sweet Mary.

Of course, both the Druid and Riddell are unreconstructed left-wingers of the Hampstead variety, so we shouldn't be overly alarmed. The vast bulk of the population agrees with the IDS reforms - work must be made to pay, and no able bodied person of working age should be able to live on unconditional welfare indefinitely. IDS just needs to ignore the shocked gasps from Hampstead and press on.

At the same time you can't help getting a bit angry. Comfortable middle class people like His Grace and Riddell have inflicted more damage on the poor than any number of profiteering City fatcats. They're the ones who've promoted state welfare over individual responsibility, and they're the ones who've all but destroyed the ladder of educational opportunity up which people like Tyler once scrambled.

Their obsession with quantity has left us with the lethal combination of welfare dependency right alongside dumbed down education.

Sick Up To Here

2010-11-08T21:59:00.007Z

Lost Nurse has been an active commenter on BOM posts for a long time, and he/she's had more than enough of our Tesco worship:

"I'm just bored of hearing the Tesco worship. Antibiotic resistance? No problems, Tesco will sort it. Paediatric cardic surgery? It's just like running a cheese counter, you know. MRSA, C.Diff? All this will vanish under private ownership. Even the mounting demographic challenge of elderly care will be eased by two-for-one offers. Apparently."

Now unlike most of us, Lost Nurse is on the frontline. He deserves a properly considered response. Especially since Tyler suspects, at root, we probably agree on the broad thrust of NHS reform.

The first thing is for Tyler to admit that he may be prone to the odd bit of simplification here and there. So yes, Tesco can build a store in 13 days, but no, we don't really think they could build a fully functioning hospital on anything like that timescale. The Tesco vid is brilliant testimony to just what can be achieved, but when it comes to major construction projects we're not really comparing apples and apples. Fair comment.

The second thing is that Tyler's criticisms of the NHS are not meant to be criticisms of everyone employed therein. As we've blogged many times, Tyler's mum was a nurse and he has the utmost respect for the difficult and often stomach-churning work healthcare workers undertake.

It's the NHS Tyler has a problem with - the outdated state monopoly approach to healthcare that delivers Stalinist disasters like Mid-Staffs, where at least 400 people died (back in the news this week with the opening of the public inquiry). Or the Kent and Snuff It where another 300+ died.

For most of Tyler's life, the NHS has been projected as the envy of the world - a shining British success story that brought modern healthcare to all, irrespective of income. There's always been room for improvement of course, but fundamentally we should all thank our lucky stars we weren't struggling with the kind of patchy overpriced healthcare available to Johnny Foreigner.

It's only more recently that we've come to understand how misleading that image is. For one thing, there was healthcare available before the NHS - indeed, Tyler's mum worked in a flagship pre-NHS hospital largely funded by local ratepayers and charitable donations.

More seriously, it turns out that the NHS achieves significantly inferior results to most healthcare systems in other developed countries. Take cancer treatment. Until a few years ago, Tyler had no idea your chances of survival after diagnosis were so much lower in the UK than elsewhere. But they are. Here's a recent summary of the proportion of patients surviving at least 5 years after an intial diagnosis of cancer:

As we can see, the UK has the worst overall survival rate in Western Europe, and is only just a bit better than Eastern European countries, which spend much less than us on healthcare.

Ah, yes, spending.

The traditional NHS defence to criticisms like these is to say that our health outcomes are worse because we don't spend as much money. And in truth, even after the big expansion in NHS spending over the last decade, we still seem to be a tad below the OECD average. When last sighted (2007 figures), average spending on healthcare across the OECD was running at 8.9%, against 8.4% in the UK. And even if we discount the US (on an astonishing 16%), all of the major Western European countries still spend more than us.

So you'd have to say that money could well play a part in our worse health outcomes.

But what does that actually tell us?

It tells us that if you leave healthcare in the hands of national government, you get a system that's resourced not according to what the customers want, but according to what the commissars decree.

Which means the kind of thing we've had for the last 50 years - a destructive stop-go cycle, with alternating periods of feast and famine. Obviously the famines are difficult, but even the feasts are not that great, with vast swathes of cash getting wasted on cost escalation and declining efficiency.

That clearly happened during the Blair/Brown NHS splurge. As we blogged here:

"In Labour's first 11 years, they increased health spending by 138%. But 43% of that disappeared immediately in ludicrous pay deals and other cost increases, and the ONS reckons the volume of inputs only actually increased by 67%. Against that, the volume of outputs only increased by 55%. So excluding those mooted quality improvements, productivity (ie outputs divided by inputs) fell by 7%, or 0.7% pa."

Look, we all accept that in healthcare there is no magic bullet. We all accept that.

But as we've blogged many times, the European social insurance systems do seem to deliver consistently better health outcomes than the NHS. Yes, in the past they have cost more, but what they also offer is choice and competition - the best driver of efficiency yet devised.

Take the highly regarded Dutch system. There, everyone is obliged to purchase health insurance, covering primary care and most hospital care (the poor are state subsidised). The private insurance companies providing the cover cannot refuse to insure anyone on health grounds, and must offer a defined minimum standard package. But they can compete on price, giving them a strong incentive to drive good deals with healthcare providers, and to keep costs low.

But what about Dutch emergency care? As Lost Nurse points out, there's not much profit in that, so how does it work? The answer is that Dutch emergency care is essentially tax-funded. So on that LN is right - emergency care probably has to stay with the taxpayer. Similarly, long-term care of the elderly probably has to remain funded by taxpayers - nobody has really cracked that one yet.

But for everything else, the Dutch system seems to offer a compelling way forward. Choice, competition, and efficiency on the one hand, but universal coverage on the other (ie no US-style dropping through the net).

And our guess is that there are far fewer lost nurses in Holland. Far fewer victims of commissariat blunders and middle management bullying. And there are certainly far fewer inquiries into deaths from hospital acquired infections.

PS In deference to LN we intend to lay off the Tesco comparisons for a while. But we can't promise to stay away for good.

Tesco Worship

2010-11-06T13:07:00.001Z

It's no miracle - Tesco rescues Cumbria's Xmas

A couple of days ago we blogged the public sector's poor record at eliminating waste, and not for the first time, compared it unfavourably with Tesco. Judging from some of your comments not everyone buys the comparison. In fact, it seems some of you reckon Tyler has become a blind Tesco worshipper.

So we thought you'd be interested in the above vid. It shows how Tesco rode to the rescue of those poor Cumbrians who got hit by the floods last winter.

A collapsed bridge meant that thousands of people were cut off from their regular Tesco store in Workington and faced a detour of 40 miles to get their shopping. So Tesco simply built a new one - a new 13,000 square feet store built from scratch on a brownfield site and operating in just 13 days. Not rain, nor wind, nor local planners could stand in their way - they just got on and did it. Watch the vid and clock the happy customers.

Now - hand on heart - can anyone honestly say the public sector would ever be capable of such a feat? Yes, OK, in May 1940, with the hun at the door, maybe. But that aside, the public sector hardly ever brings its investment projects in on the original schedule, and history says that 90% of public projects blow their original budgets (eg see this blog).

Say what? Retailing is a much simpler business than running a school or a hospital?

Hmm. Maybe. But it's very interesting that Tesco and other large employers have to run remedial classes in the 3Rs for employees failed by our marvellous state education factories.

Anyway, Tesco is just our shorthand for the power of the market. Nobody is literally suggesting Tesco is going to take over our hospitals. But BUPA and the like could. And having personally sampled both NHS and private hospitals, Tyler is very sure which he prefers.

Off out now, but we'll return to this fascinating question when we have a bit more time.

Mysteries Of The Orient

2010-11-05T22:40:00.008Z

A lot quicker than reading the book

[NB This is a bit tangential to the main business, and it's definitely in the thinking aloud category, but Tyler finds it interesting]

Tyler's bookshelves are crammed with unread books. Books that he always meant to read but somehow never got round to.

Quite a few of those books are on matters of huge economic, political, or social importance. They are books that demand to be read by anyone with pretentions to understanding the world around us.

But the funny thing is, if you leave them to mature for a few years, you find that even the most critical finger-on-the-pulse books don't actually need to be read at all.

An excellent example is in Tyler's sightline right now. It's called Nippon: New Superpower and it was penned by the BBC's "bureau chief" in Tokyo, William Horsley. Published by the BBC in 1990 (on the back of a "landmark" documentary series), it rode the then fashionable view that the Japanese were set to dominate and destroy the West's effete economies, and that we'd better shape up and adopt Japanese practices pdq.

Back in 1990, Tyler certainly needed to know about that - it was clearly vital to our very existence. Except that within weeks of publication, the book's central thesis was shot to pieces. Instead of becoming a superpower, Japan collapsed into its famous Lost Decade. The 80s asset bubble went pop, Japan's banks became zombies, and its miracle economy slumped into a jibbering heap.

These days, far from being portrayed as that unstoppable bogeyman coming to get us, Japan is held up by the BBC and many others as a terrible warning. A terrible warning of what happens when the government doesn't do enough to prop up the economy, and the central bank doesn't run the printing presses 24/7.

So what actually happened in Japan? Let's look at a few facts.

Here's what the OECD says happened to Japanese GDP over the last 30 years (we've made 1991 = 100 because that's when the lost decade kicked off):

As we can see, Japanese GDP growth did indeed slow sharply around 1991. In the previous 11 years it averaged around 4% pa, and in the subsequent 11 years it averaged just under 1% pa.

But the economy hardly fell into a Black Hole. It certainly wasn't a repeat of the 30s depression or anything like it. What the Japanese experienced was a slow-down from the very fast growth during the asset bubble years of the 80s to something more sustainable over the longer term. Over the last 30 years as a whole, Japanese growth has averaged 2% pa (around an 80% increase over the period as a whole).

And there's something else about Japan that isn't always pointed out: for most of the post-WW2 period, they were catching up with the West. Starting with the advantage of hunger (aka lower labour costs), they were able to copy Western technology and apply fiendish oriental improvements to it, often producing more reliable products than say Coventry into the bargain. During that period of catch-up their economy grew very rapidly.

And yes, their catch-up was certainly boosted by an undervalued currency which artificially improved their competitiveness.

But once they'd caught up - which they'd done by the 80s - it got much tougher. Now they were in the same position as their Western competitors had been in the 50s, 60s, and 70s. Other hungry countries, especially other oriental countries, were pulling the same catch-up stunt on the Japanese. Moreover, with their own undervalued currencies, they were undercutting the Japanese in the very same export markets that had fueled Japanese growth from the 50s to the 80s.

Take a look at the following chart. It shows how Japanese average income has stacked up against ours since WW2.

Coming out of WW2 we were far ahead of Japan, with GDP per capita five times theirs. But by the 70s, we were already riding their motorbikes, and starting to ditch our Austin Allegros for their Datsun Cherries - they had caught up.

In the 80s - despite the best efforts of Mrs T - they actually surpassed us. But that was really a reflection of their bubble, and couldn't last. Their "lost decade" simply brought them back into line with the kind of GDP we have here in the UK - ie around the average for leading western economies outside the US.

And now it's China's turn. No end of predictions that they will bury us. No end of charges that their currency is hugely undervalued. And no end of books for Tyler to add to his unread pile.

Yet at the end of the day, they are really doing no more than catching us up.

Yes, they have battered volume manufacturing in the West. Yes, they are holding their currency down too low. And yes, they have accumulated huge foreign currency assets in the process.

But just like the Japanese, they are going to find that reliance on foreign consumers can lead to serious problems.

For one thing, catch-up technology is ultimately transferable to even cheaper producers elsewhere. And those even cheaper producers are quite prepared to run even more undervalued currencies to boost competitiveness even further.

Moreover, surplus countries accumulating huge foreign currency assets to depress their exchange rate, have always eventually incurred huge foreign currency losses. We don't know quite how much the Japanese have lost on theirs, but we do know the Dollar has fallen by nearly 80% against the Yen over the last 40 years - which sounds like one helluva whack.

So what does this all mean for us here today?

Ummm... actually, that's a bit of an oriental mystery.

But we certainly shouldn't accept wholesale the line that Japan in the 90s shows we need to print more money than they did - their slow-down wasn't nearly as bad as is sometimes claimed, and anyway it reflected much more than just a shortage of cash.

And we should try not to panic about China. Just like Japan back in the 70s and 80s, they have given us lucky western consumers a wealth of cheap quality products. And just like Japan in the 90s, they are going to find that they cannot prosper for ever on underpriced exports and catch-up.

Lending us money to buy their underpriced goods, and then seeing that money slashed in value, is not a sustainable plan for long-term Chinese prosperity. The ultimate goal of all this growth is not to provide us with cheap computers, but to improve the material living standards of the Chinese people (if only so they don't kick out the ruling elite).

And these are not dumb people. They must know which way their bread is finally buttered.

Well, they would if they ate buttered bread, anyway.

The Message From Margaret

2010-11-04T18:06:00.002Z

You'll need to speak up Mags

Margaret Hodge is the new chair of the Public Accounts Committee and she has concluded that government departments are incapable of eliminating waste. Her Committee has found that £35bn of efficiency savings ordered by Labour in 2007 were nowhere near achieved:

"Departments were in general unable to make real value-for-money savings of 3% a year following the 2007 Comprehensive Spending Review - and that was at a time of increasing budgets.

Now that much more radical cost-cutting measures are required across government, my committee is gravely concerned about the ability of government to make efficiency improvements on the scale needed."

The PAC report itself gives some chapter and verse.

To start with, none of the departments have come anywhere near their target savings. Halfway through the three year programme, declared savings came to just 31% of the target, with some key departments way short of even that:

Worse, nearly two-thirds of these supposedly achieved savings were not provable in any meaningful sense. As for relating them to departmental budgets:

"Departments were generally unable to reconcile their reported savings to either their financial accounts or to their spending agreements with the Treasury."

Shocking.

We are still in the complete and utter fantasy world of Gershon delusion and the Marx Brothers - the idea that you can make huge efficiency savings without saving any actual money, or making anything any more efficient.

Of course, regular BOM readers will be fully familiar with the lunacies that define this world (see many previous blogs eg here). But for poor Margaret Hodge it's probably come as a bit of a shock.

The question is what should we do about it?

The response from the BBC and the left is that it means the coalition's spending cuts are unachievable without massive damage to our public services. Departments cannot do efficiency and to assume they can will consign schools and hospitals to a new dark age. Stop the cuts. QED.

In fairness to the PAC, their report (as opposed to the headlines based thereon) doesn't say that. Instead, they argue for more transparency on efficiency savings, with more explicit reporting of inputs and outputs so everyone can see whether important services are being cut. They also want the Treasury to take a much larger role in guiding and verifying the savings. Which all sounds kind of sensible in a marginal improvement kind of way.

But the real message from the report - the real message from Margaret - is much more radical.

The real message is that to make real efficiency savings - the kind private business is constantly making - we need radical reform in the way our public services get delivered.

In particular - and I do apologise if you've heard this before - we must break up our big state monoplies in areas like health and education. We must have choice and competition across the public services.

Because the key reason that businesses like Tesco are so good at driving efficiency is not because they are inherently much smarter than public sector managers. It's because they face a completely different set of incentives. They know that they must deliver what their customers want or perish. And a large part of that delivery comprises value for money. If they get fat and inefficient, they can't deliver value and they lose their customers.

Tyler has never believed we can make monopolistic public sector elephants dance. And whether she understands it or not, that is precisely what Margaret Hodge has told us today.

Margaret's message is that we must learn from her party's failure. To make cuts without destroying the delivery of public services, the coalition must tackle the underlying problem. They must break up the public sector and unleash the power of choice and competition.

Nurse!

2010-11-03T12:10:00.007Z

American pie - now worse even than the clothes in Don's vid

[Warning - contains scenes of US monetary growth that some viewers may find distressing]

On the day of the US election results and the latest round of Fed dollar printing, Tyler was intending to do another of his "just like the 70s" retro-posts. You know - an incompetent discredited President wildly out of his depth in a busted economy, a central bank deliberately debasing the currency, and a frightened demoralised populace looking for scapegoats. Kind of idea.

But once he sat down to start typing, Tyler realised it's actually worse than the 70s.

Let's consider US monetary policy. Back in the 70s the US Federal Reserve Board was far too lax in the face of rising inflation, an inflation that spilled over to the rest of the world and brought huge increases in the world price of oil and other commodities. Following the de-linking of the dollar from gold in 1971, the US currency was soggy throughout, falling by about 20% overall (in trade-weighted terms).

Eventually of course there was a day of reckoning. Inflation was threatening to get seriously out of control - like it always does after such monetary laxity - and the legendary Paul Volcker was appointed as Fed Chairman to sort it out. Which he did, but only at the cost of sky high interest rates and two recessions in three years.

Now here's the thing - the Very Scary Thing. Compared to today's Fed, the high inflation, weak dollar, pre-Volcker 70s Fed was an absolute model of monetary rectitude.

We need to look at the so called monetary base. No, don't skip forward to the end - the monetary base is really quite simple (at least in theory). It comprises the money issued directly by a country's central bank - the Fed in this case. That's all the notes and coin in circulation, plus the money commercial banks hold on deposit with the central bank.

And what's the significance of this monetary base?

Well, most of what you and I think of as money comprises not the notes and coins we have in our wallets, but what we have sitting in our own bank accounts. The bank is where we keep our money, and we spend it by writing cheques or flashing a plastic card. In other words most of our money is merely an entry in our bank's accounting ledger - it is not a direct obligation of the central bank.

What that means of course is that most of our money depends not on the central bank, but on the commercial banks being able to honour our cheques and plastic (which can sometimes get a little scary, as we recently rediscovered on the pavement outside Northern Rock).

However, modern banks are not allowed to create this accounting entry money willy nilly ad infinitum. Against every extra bit of money they create, they have to hold a fraction of its value as reserves with the central bank - those central bank deposits we already mentioned as part of the monetary base (this is called the fractional reserve system).

That places an upper limit on how much money the commercial banks can create relative to how much money the central bank has issued in the form of the monetary base. And it means that the size of the monetary base is crucial in determining how much money can get created in the economy overall.

That's why the monetary base is sometimes called "high powered money". It is very high octane, and it needs to be handled with great care.

Still with this?

Good.

Because over the last two years the Federal Reserve has increased the supply of this high octane monetary base by an astonishing amount. It's Quantitative Easing programme has more than doubled the monetary base. In two years they have printed more high powered money than had been printed in the whole of previous US history:

Take a good hard look at that chart. Scary or what? It makes the high inflation 70s Fed look like a bunch of puritan tight wads. It is a monstrous historic act of monetary irreponsibility.

And even worse - even worse - the Fed are reportedly about to do even more. Even more!

Now of course, what they say is that they are having to do this to stave off depression, or at least, the dreaded double-dip. That although they've stoked up the supply of high powered money, the overall money supply - the stuff that US citizens have in their own bank accounts and which they can actually spend - has barely moved. And indeed it hasn't (M2, the most widely used measure, is up barely 3% year-on-year).

But that is only what's happened so far. There is now a superabundance of the Fed's high octane fuel sloshing around, and sooner or later there's going to be a spark. An inflation spark.

Maybe it will be the current lift-off in world commodity prices. Or maybe it will be a collapse of the dollar. Or more likely it will be both, feeding into a vicious spiral just like back in the 70s.

And what happens then?

I'll tell you.

Accelerating inflation means money is worth less. You need more of it just to stand still. The real world money supply starts to grow. And because of all that high powered money in the reserve accounts of the commercial banks, and because they have every incentive to exploit excess reserves, the money supply can grow quite fast.

Higher prices will feed higher money growth, higher money growth will feed a weaker dollar and yet higher prices, which will feed yet higher monetary growth.

It could all happen very quickly. Suddenly the Fed is facing an inflationary conflagration with no off-switch.

Reverse the printing presses pdq?

Yeah, sure. And you honestly think the Obama/Bernanke combo is capable of doing that.

No. The horrible truth is that the US has embarked on a 70s style inflation, only with even more fuel on board.

And the even more horrible truth is that it may well be deliberate. Faced with the prospect of a US economy weighed down for decades by the huge debt burden it's built up, its current rulers have decided they'd rather take the escape hatch labelled inflation. Who cares if the rentier Chinese get burned?

There will of course, be consequences down the line. But they'll be for someone else to sort out.

Bye bye Miss American Pie.

Meanwhile, we've said before and we'll say it again - sell money.

Fast.

PS We don't usually do this, but Rob has suggested in the comments that we should redraw the graph with a log scale. Good suggestion so here it is:

Conclusion? The rate of increase under Bernanke really has been higher than at any time since 1918 (ie the line is steeper than it has ever been before). As we say in the main post, the monetary base has more than doubled in the last two years, something that took five years during that last ramping up you can see in the late-30s/early-40s (and you know, at that point there was a war on).

PPS It's not quite a Chevy to the levy, but we must mark the sad passing of 84-year old Pontiac - the original all-American muscle car. And the reason we care is that Mrs T's Dad owned a Pontiac back in 50s London. No, he wasn't rich but he did work in a garage, and this car had clearly been brought over originally for some rich yank stationed here. A pic is in order (not that said Dad is in this particular pic):

Going Batty

2010-11-02T09:28:00.000Z

Anyone got one of these?

Tyler is thinking of having some building work done. You know, support the construction industry in these difficult times etc.

But it turns out there could be a problem - a serious problem. With bats.

Bats? Yep. These days, if you're going to do any building that involves disturbing a possible bat roost - like your loft, or the Major's head - you're going to need permission. And that's going to cost.

To start with, you'll need a bat survey from a qualified bat surveyor. At a cost of up to £2 grand, the surveyor comes round to your house in the early hours of the morning, crouches down behind the bins, and looks for bats. Well, not so much looks as detects. Using a bat detector. No, really.

You then get a written report which you have to append to your planning application. Increasingly, planners won't even consider the app without a survey.

And if bats have been found - as they almost certainly will have been - you are going to have to pay some more.

You'll have to apply to quango Natural England for a licence to proceed, spelling out in detail how you propose to mitigate the damage caused to the bats. The application will need to be written by a bat expert at goodness what further cost.

You'll have to lay on alternative bat accommodation, initially at a temporary bat residence (such as the Holiday Bat Inn), and longer-term in your new loft space. Yes, if you're say converting your existing loft, the remodelling will have to incorporate new bat access and a centrally heated roost - right alongside your new bedroom.

What's that? Bats carry rabies?

Well, yes they do. And your point? Under EU habitats directives, bats are protected. You are not.

And it isn't just bats. Great crested newts, TB badgers, and the famous Dartford Warbler are all protected. As is Mrs T's personal favourite the Great Raft Spider.

And trees. Don't even think of assaulting a tree during your building work. Not only can you not fell it, you must also ensure its quality of life isn't harmed. Yes, its quality of life:

"...special conditions may be applied regarding the design of the foundations, or the method of construction. Such conditions should ensure that the tree continues to have a quality of life comparable to that experienced prior to the development." (Swindon Council Tree Protection guidelines).

A tree experiences life? It will be grass next. Grass has been downtrodden for far too long. How can it possibly be acceptable that grass is denied the right to vote?

Now of course, EU rules and planning licences are one thing, the Real World quite another. Out in the Real World what seems to happen is that people planning to apply for planning permission now take scorched earth measures before ever contacting the local council.

Take the discussion on the UK Farming Forum, where one farmer has just been told by local council planners he can't build any new barns today without first getting a £2 grand rare species survey. A fellow farmer advises:

"If you want anything these days then you have to beat them at their silly game. The only way to get it is to first kill off all the vegetation to do away with any rare orchids etc. Then concentrate on the wildlife by finding up some old can of lethal stuff you have hidden away in the garage knowing you might need it one day. Reason you didnt keep it locked in the spray shed was if its found when the b..g.rs come round to inspect then you end up doing time."

Other farmers agree. Whereas they'd once have left those rare orchids in place, these days they're a real liability. Best practice these days is to eradicate them so they can never cause a problem. Same with anything else on an EU list (which may be why the EU now pays billions of OUR FRIGGIN' MONEY to farmers not to farm at all).

On the home front, best advice is to fell all trees within 100 feet of any planned building work before approaching the planners (or clear your entire garden if smaller). And hunt down and destroy any badgers, newts, or warblers within warbling distance.

As for bats, they seem to be a bit trickier. Ultrasonic bat scares don't seem to work. Ditto mothballs. Really bright lights left on 24/7 may work, but then again they may not (plus they can set fire to your loft, which is somewhat less than ideal).

Owls. They may work. They're reportedly the bat's biggest natural predators. But then again, Amazon don't seem to list Owls. And neither do they list racoons or possums.

Which only leaves something promisingly called the Bat Hawk (see pic).

Or snakes. Snakes in the loft. Maybe that's it.

Mrs T thinks I'm going batty. She thinks this has finally tipped me over the edge.

She may be right.

Why do we need EU directives again?

PS Yes, I know - bats are endangered and Tyler should be more responsible. Yes, yes. But in reality not all bats are endangered. The bats most likely to be found in our Surrey loft are pipistrelles, which are very common, with a population that seems to have increased by around two-thirds just in the last decade (see the annual bat survey from the Bat Conservation Trust). The tax-funded Euro-bat industry has got totally out of control, and is now in the process of destroying many of our fine old country churches - see here. Sorry, but in the worng place, bats are a pest.

Ripping Your Face Off

2010-10-31T12:06:00.005Z

This could soon be you

One of Tyler's favourite financial market memoirs is Frank Partnoy's FIASCO, his account of life as a Morgan Stanley derivatives salesman during the 1990s:

"The derivatives group received its marching orders from the firm's leader, John Mack. Following Mack's lead, my ingenious bosses became feral multimillionaires: half geek, half wolf. When they weren't performing complex computer calculations, they were screaming about how they were going to "rip someone's face off” or "blow someone up.” Outside of work they honed their killer instincts at private skeet-shooting clubs, on safaris and dove hunts in Africa and South America, and at the most important and appropriately named competitive event at Morgan Stanley: the Fixed Income Annual Sporting Clays Outing, F.I.A.S.C.O. for short. This annual skeet-shoot tournament set the mood for the firm's barbarous approach to its clients' increasing derivatives losses. After April 1994, when these losses began to increase, John Mack's instructions were clear: "there's blood in the water. Lets go kill someone.” We were prepared to kill someone, and we did. The battlefields of the derivatives world are littered with our victims." (and see here for a longer excerpt)

Marvellous. The raw beating heart of capitalism - the very thing that's driven economic progress for at least the last three centuries. And thank God for it (terms and conditions apply - like staying within the criminal law).

There's just one thing - don't ask me to pay for any losses these dove hunters incur when they accidentally blow their own heads off.

Which brings us back to the key question of HTF can we let busted banks go bust without destroying Mom and Pop's savings and wrecking the economy?

Because two years on from the Crash, and despite all the brave talk, our politicos and regulators have still not agreed how to do it. There's been no serious discussion of the obvious step - splitting the high street "utility" banks from the casino banks down on the Wharf (aka a new Glass-Steagall - eg see this blog). Instead, energy is wasted on chasing headlines over bankers' bonuses and bank levies.

This morning Liam Halligan has another excellent article on real bank reform, highlighting a speech made this week by Bank of England Governor King:

"King has now gone as far as he can in calling for the committee to recommend a radical bank split, without publicly ordering them to do so.

"In the end, clarity about the regulatory perimeter is both desirable and unavoidable," said the Governor of the Bank. "Radical solutions offer the hope of avoiding the seemingly inevitable drift to ever more complex and costly regulation."

According to King, City big-wigs are now making "dubious claims to resist reforms that might limit the public subsidies they have enjoyed in the past".

The Governor is taking on one of the world's most powerful lobbies. Among those at the top table, he is doing it almost alone. That's why the rest of us need to get squarely behind him."

Hear hear.

As we've blogged many times, we urgently need to break up the banks. They should not be allowed to exploit the unavoidable taxpayer guarantee on high street deposits in order to raise cheap funding for playing the tables. And as we saw all too clearly in the Crash, our regulators are simply not smart enough to manage institutions that cover both high street and casino activities. Splitting is the only serious option.

But among those City big-wigs, there's hardly an acknowledgement the issue even exists. Indeed, when at the recent Tory Conference Tyler put the question to a City panel chaired by FT editor Lionel Barber, Barber immediately moved on to the next question. Nobody on the panel (including Treasury minister Mark Hoban) was even prepared to acknowledge the question, let alone attempt an answer. Pathetic and worrying.

So let's remember precisely what's going on.

The losses of the banks have been passed on to us taxpayers. We are now holding the baby, courtesy of effective bank nationalisations and continuing blanket guarantees covering all banks. At the same time the printing press has been slammed into overdrive, driving interest rates for savers down close to zero, and well below the inflation rate. The banks are being encouraged to fund their losses and recapitalise themselves by ripping the face off savers.

And on the subject of inflation, we are all quite aware that UK inflation continues to run well above the supposed 2% target - RPI inflation is up at nearly 5% pa, and even the government's preferred (and sytematically lower) CPI measure is over 3%. But do we all understand how bad the international picture looks?

Commodity prices in dollar terms are up 50% from the post-Crash lows, and still increasing:

And things have got even worse since September (the last month shown in the IMF chart). According to the Economist Index, dollar prices have risen by a further 8%, taking the 12 month increase to 31%.

Deflation it ain't, and in sterling terms the picture is even more alarming. The Economist says sterling commodity prices have risen by 35% just in the last year.

Against that background, the US Treasury was last week able to sell a bunch of its index-linked bonds (TIPS) for an extraordinarily high price. For the first time ever, it was able to issue these bonds on terms that guarantee their holders will lose money in real inflation adjusted terms.

Why would anyone buy such things? Because they're scared stiff about future inflation and would rather lock in a known modest loss now than take a chance on a much bigger inflation loss later on bonds that are not index-linked. Yes, my friends, out there across the Atlantic the inflation storm clouds are gathering.

So what to do? How can you make sure it's not your own sweet face that gets ripped off in the coming hurricane?

To be frank, there's not necessarily a lot you can do. One way or another we in Britain have to accept a permanent cut in our consumption to work off all that debt we've built up. In the process - whether through higher inflation, higher taxes, or job losses - an awful lot of faces are going to get ripped.

The one thing we can do is make sure we don't allow our politicos to wriggle out of the difficult decisions needed to stop the same problem arising again somewhere down the road. Which is why we should do what Liam H suggests - back Merv as he pushes to break up our dangerous too-big-to-fail megabanks.

Still Paying For The EU

2010-10-30T12:49:00.008+01:00

Following Mr Cam's, ahem, "triumph" in holding the EU budget increase to a mere 2.9% next year, we thought we'd remind ourselves just how much we've paid in since we joined in 1973.

Because the numbers can get very confusing. All kinds of different definitions of gross and net - pre and post-rebate - get chucked around, often in a deliberate attempt to confuse us.

So let's remember the key points.

Our gross contribution to the EU budget comprises a number of different elements, including revenue from tariffs imposed on goods imported from outside the EU, and a share of VAT receipts. The most important element by far is a pro rata charge based on our share of EU gross "national" income. Currently the overall total is running in the range £12-14bn pa.

Fortunately, up until now we have not had to pay the full amount implied by those rules. And that's because of the rebate negotiated for us by the blessed St Mags back in the 80s.

So what we need to look at is our gross contribution net of those rebates, and that's what's shown in the chart above (the data sources are here and here).

As we can see, in the latest completed year, 2009, we handed over £7.8bn, around £300 for every British family. In real inflation adjusted terms, that compares to a cost of £1.6bn in our first year of membership. So in real terms the costs have increased almost fivefold since we first joined.

And over the entire period of our membership, we have paid total membership fees of £170bn, which is £257bn at 2009 prices. And that is a little over £10 grand per family.

Now it is true that some of this cash comes back again in the form of EU spending in the UK. For example, around £4bn goes on subsidising our old friends the farmers (or "the preservation and management of natural resources" as the EU now prefers to call it - see here). But in terms of the burden on UK taxpayers, that is immaterial - we are paying taxes to fund programmes of the EU's choosing, not ours (farming subsidies would not be high on Tyler's list of worthy spending projects).

Moreover, the cost of our EU budget contributions is only one element of the overall cost of EU membership. In particular, we also need to add in the £5bn+ pa it costs us through paying food prices much higher than the world market. And here's Jamie Oliveoil to remind us just how that works (and see this blog):

Like Jamie says, enjoy.

Best To Be Bold

2010-10-29T12:16:00.005+01:00

Daft - but not quite as reported*

Nobody said welfare reform was going to be easy. There were always going to be losers, and the welfare lobby was always going to scream very loudly.

But if we are ever going to grip our ballooning £200bn pa welfare bill and provide real work incentives, serious reform is absolutely essential. And to do it right, we must be bold. Nibbling away at the margins is very likely to leave us with the worst of both worlds - plenty of losers and screaming, combined with a welfare system that still isn't fit for purpose.

Take the row over Child Benefit. This morning we got the latest instalment, in which the Treasury is vowing to impose fines on any higher rate tax payer who fails to declare his or her partner is in receipt of CB.

Which is fine, except that the partner may not want to say. After all, a couple's tax affairs are separate these days, and CB is paid direct to the female partner specifically so she can keep it away from the nasty beer swilling brute she's forced to live with (well, that's what Pol says anyway). And what happens if the man/woman doesn't realise he's a top rate tax payer, perhaps because of an unexpected bonus?

The basic problem is that we currently have no way of taxing couples as a unit. Tax is levied on individuals, so HMRC doesn't automatically know the overall household income.

And that is a key reason why our own cuts package last year included the complete abolition of universal Child Benefit (see this blog). In its place, following an existing plan put forward by Reform, we proposed beefed up payments to poor families under the Child Tax Credit, which is means tested on household income. True, in an ideal world none us wants more means testing, but since this is the real world with an increasingly limited budget, that's something we just have to put up with.

Had George followed that line, he'd have avoided all these complexities with fines and the indefensible disparity between one and two earner families. He'd have had a clean workable solution - at least pending the more radical universal benefit reforms promised by IDS.

So why didn't he do it?

You know why. Universal Child Benefit is a totem - the very embodiment of the welfare state. Also, he didn't fancy explaining to those Ordinary Hard Working Families (OHWFs) on £30-40k that they are to lose a couple of grand a year - even though at some stage they could look forward to commensurately lower taxes.

So we've ended up with a dog's breakfast. Failure to be bold and go for a workable long-term solution has landed us in a mess.

Let's hope there's no backsliding on the the other great welfare change - cutting Housing Benefit. The much bolder reforms there find themselves firmly back under the spotlight, courtesy Boris's most unfortunate remarks yesterday about "Kosovo-style social cleansing"*. Here's the TPA's Matt Sinclair arguing the case last night against the Bishop:

We've blogged Housing Benefits many times, and we took a good look at the current situation here. We showed how under Labour, spending soared by 35% in real terms, although the number of recipients barely changed - in other words almost all the money went on pushing up rent levels:

We also showed how in some areas, Housing Benefit dependency has reached 30% of all households, and more. The record is held by Hackney, where an astonishing 43% of all households are on HB:

We noted how many landlords have done very well out of HB, driving returns on their equity as high as 50%.

And we pointed out that the serious economic research in this area shows that it is the landlords who will suffer the biggest hit from cuts. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy.

But according to the BBC and the rest of the left, the poor are about to be sent back to the workhouse. Indeed, the preposterous Labour MP Tristram Hunt reckons they'll soon be gnawing on bones and putrid horse flesh to stay alive. Tristram is the son of Lord Hunt and was schooled at University College School Cambridge followed by Trinity - we should probably assume he's never sampled bones, putrid horseflesh, or even KFC, and knows as much about life on low income as the Duchess of Buccleuch.

Admittedly George is from a similar background to Trist, but on HB reform he is a lot closer to reality. His bold HB reforms are a vital step in the right direction and he must not allow himself to be intimidated.

Everyone out here agrees that HB recipients should not be funded to live in houses the average taxpayer can't afford, and that may well lead to some relocation. But that's simply too bad - the money has run out.

Nobody's being sent back to the workhouse. And if the reforms lead to anything like the grim Dickensian world Trist describes, Tyler will personally gnaw on the first bone he can find lying in the gutter.

*Footnote Boris was obviously daft to have referred to Kosovan cleansing. But when you hear the actual interview - as opposed to the hyped up reports of the interview - it's pretty clear he was actually just saying that he wanted to see good transition arrangements for the new system. He wasn't opposing the whole deal, as was reported subsequently. Well, that's what Tyler thinks anyway.

Why The Real National Debt Is Real

2010-10-27T07:41:00.009+01:00

Last week we published our estimate of the Real National Debt, putting it at a very scary £7.9 trillion, or around £300,000 for every British family.

Since then a number of people have dismissed our figure as grossly misleading, and accused us of scaremongering. So let's just run through some of the objections and see what we think.

1. Our nationalised banks have assets as well as liabilities

£2.6 trillion of our debt figure comprises the liabilities of our two big nationalised banks, RBS and Lloyds. The objection is that we have ignored their assets, and therefore hugely over-egged taxpayer exposure.

On one level, that's true. The banks do have huge assets to set against their liabilities, as is fully acknowledged in our research paper.

But the problem is that nobody - including the banks themselves - knows what those assets are actually worth. Whereas the liabilities are now hanging round taxpayers' necks in their entirety.

The final outcome - in terms of our eventual net loss - is anyone's guess. True, most loss estimates are much lower than the entire liability (as noted in our paper), but nobody actually knows. And given the events of the last two years, we believe it's prudent to understand our potential total liability.

Moreover, even if we were to set aside the entire liabilities of RBS and Lloyds as being in some sense temporary, our estimate of the Real National Debt would still stand at £5.3 trillion, or more than £200,000 for every family.

2. Governments have assets as well as liabilities

The second objection is that even this lower figure hugely overstates the debt, because the government itself also has huge assets.

Again, there is some truth in this. According to official estimates, the public sector as a whole has assets of getting on for £1 trillion (see this excellent ONS article for a summary of the official stats).

But we need to understand a couple of things about these assets.

To start with, they mainly comprise specialised physical assets like motorways and hospitals. And such assets are not readily realisable (ie they are not liquid).

Moreover, even if HMG could sell them, much of their assumed value depends on having someone who wants to use a motorway or a hospital and is prepared to pay for the privilege. Their value purely as building plots or agricultural land would be very much less.

Consider who would pay to use a British hospital. Yes, you guessed it - British hospital patients. The hospital's value to a prospective purchaser largely depends on his being able to charge patients for its use, and patients being prepared to pay.

Except in Britain, as things stand, it's not the patient who pays, but the NHS. Or to put it another way, the government could almost certainly sell its hospitals to reduce the debt burden on taxpayers. But only at the cost of the NHS then having to pay a fee to use those very same hospitals. The net effect - the net burden on taxpayers - remains pretty much the same. The only real difference is that yet another chunk of government debt has been shuffled off balance sheet (cf PFI).

3. We are ignoring the government's future tax receipts

This objection says that we shouldn't get fixated on the government's liability to make future payments while ignoring its future receipts of tax revenues. Our analysis is one-sided and a grossly misleading statement of the true fiscal position.

Hmm.

Let's remind ourselves what our Real National Debt calculation is actually looking at.

It's looking at the government's commitment to make future payments in respect of loans or services it has received in the past. Which is the standard and essential definition of debt (see paper).

Thus for example, we include the government's £1.3 trillion accrued liability to make public sector pensions payments. That relates solely to the service and pension contributions of public sector employees in the past - the pension entitlement they have earned so far. What we are saying is that public employees have provided services and loans (their contributions) to the government that they expect to be repaid during their retirement. It is debt, pure and simple.

Similarly, we include the £2.7 trillion liability to make state pension payments. Again, that reflects the accrued liability in respect of National Insurance Contributions already made in the past against pensions to be paid by the government in the future. It is an undischarged loan to the government.

The Real National Debt adds together all these undischarged liabilities that have accrued over the past and tells us where we currently stand overall.

Yes, of course the government will have future tax revenues to draw on in order to meet its debt obligations. Of course. But the greater the debt obligation in respect of past service and loans, the less of those future tax revenues there'll be left over to pay for future services.

Even today, 28% of the government's tax revenues - more than one pound in every four - goes to service these past debts. Two years ago it was just 24%, and the proportion is growing fast (see this blog).

And that's the key point. The massive growth in these obligations from the past is placing a huge strain on the government's ability to fund services in the future.

Sure, the government has revenue raising powers and can always raise future taxes. But that is precisely why taxpayers should be so concerned at the size of the Real National Debt. Unless we recognise and address the full range of government liabilities, taxpayers face a grim future of rising taxes alongside worse public services.

4. The government could always renege on its pension obligations

Since the government can legislate black is white (subject to EU directives), it could simply renege on its pension liabilities, both public sector and state. So things aren't nearly as bad as the TPA make out.

This is quite a popular objection to our calculation, and it must be said that governments across the world are currently embarked on just such schemes.

But we should understand it is no easy option. Quite apart from the moral question raised by robbing defenceless pensioners, events in France and Greece highlight the political difficulty of making substantial changes to existing entitlements. The losers are very obvious, and in the case of public sector workers, highly unionised. It takes a strong government to face down strike-bound public services and street riots.

Of course, it is easier to make changes to future entitlements - by for example gradually increasing the pension age - and our government must do that. Increasing life expectancy means that we must move the pension age up to at least 70 (as Lord Turner has suggested). But that doesn't help much with the existing accrued liability - the liability we include in our calculation.

And that liability is real, not merely some distant entry in an accounting ledger to be left for our grandchildren. It is here with us now, requiring ever greater payments with each year that passes. Two years ago, the cost of public sector and state pensions was £83bn, this year it's £95bn, and growing fast.

Conclusion

The TPA's calculation of the Real National Debt is designed to show the full extent of the liabilities now bearing down on taxpayers' shoulders. And those liabilities arise from loans and services supplied to government in the past: they are not related to services the government may or may not provide in the future.

Yes, there are assets on the other side of the balance sheet, but even on the most optimistic interpretation they cover well under half the debt.

And yes, there are future tax revenues to service the liabilities. But that servicing already consumes more than one-quarter of tax revenue and the proportion is growing. Taxes could certainly be raised, but that is the very reason taxpayers need to be concerned about the huge size of this debt.

As for reneging on the debt - especially the pension debt - that has been an option for desperate governments throughout the ages. But it is not the easy low-pain option often suggested.

A Forensic Focus On Growth

2010-10-25T18:57:00.004+01:00

"When we say we're going to build a new economic dynamism, we mean it.

In the weeks and months ahead, ministers will be developing detailed plans to turn this strategy into action. Everything – from bank lending to skills, green tech to high tech, competition to innovation, international trade to local growth – will be put under the microscope.

That forensic, relentless focus on growth is what you will get from this government."

Thus spake Mr Cam at the CBI conference.

Good. A forensic relentless focus on growth sounds like the very thing we need.

And even better, he explicitly recognises that:

''The new jobs, the new products, the new ideas that will lift us up will be born in the factories and offices you own – not in the corridors of Whitehall.''

Yes, very VERY good.

Just one small point. If he's serious about his forensics, he will want to do whatever it takes to stimulate growth. And that means one thing above all else - tax cuts.

In particular, he has to abolish that economically bonkers 50p tax rate. As we've blogged before, every serious independent analysis says that it will raise virtually no revenue, and may even produce a loss as higher rate taxpayers change their behaviour to escape it (eg see this blog).

Ah yes, the escape hatch. The ultimate escape is to leave the country, and when high earners do that, they very likely take their businesses and their jobs and their economic dynamism with them.

We know there are lots of high earners thinking about this right now. Tyler was chatting recently to some City types, who virtually to a man were eyeing the hatch. And this morning the CBI published a poll showing that "84pc of FTSE 250 bosses surveyed said "personal taxation levels" had made the UK less attractive for investment".

Does Mr Cam understand the risk? The same Mr Cam who lived in Notting Hill and knows loads of top bosses? Surely he must do.

In which case, there really is no excuse. If we are to secure the prosperity and jobs we desperately need, "forensic focus on growth" must trump "all in this together".

****

And talking of growth, this morning's Independent front page really does underline how desperate the left are to undermine the economic recovery.

The headline was "Britain stares into the abyss again as household confidence plummets". But when you read the actual story, there was hardly even a pothole to be found, let alone an abyss. Instead, all we got was speculation that the latest official growth stats (due tomorrow) may show a slow-down from Q2's spectacular 1.2% (4.9% pa) back down to a more sustainable 0.4% (1.6% pa). That, and some survey evidence that the property market is still pretty groggy.

Although the flimsiness of the story didn't stop the BBC giving it extensive coverage this morning.

Inferno Continues

2010-10-25T09:04:00.003+01:00

It still seems to be alight

BOM correspondents have spotted the following ongoing money pyres:

1. British Council

The good old £0.5bn pa British Council escaped the quango cull (see this blog), and carries on torching our cash as if nothing has happened. David Blackie reports that they have just spent an unknown amount on the “style.uz” fashion week in Tashkent. As David comments:

"If the British Council sponsors a “fashion show” anywhere you might wonder whether in this age of austerity it was an appropriate use of taxpayers money. If the organisation sponsors a fashion show to demonstrate support for such a deeply oppressive regime, you know bloody well that it should do no such thing."

2. Unfunded unprivatised pensions

Nick L highlights last week's court ruling on pension guarantees for the employees of privatised state companies.

As regular BOM readers will know, when companies like BT were privatised back in the 80s, it wasn't done cleanly - HMG issued a Crown Guarantee covering the companies' accrued pension liabilities. In effect, the problem was kicked off into the long grass by ministers and civil servants who have long since retired on their own index-linked pensions. Unfortunately, what with everyone now living to 120, and the dismal performance of the stock market, those guarantees are coming home to roost big time.

The High Court has now ruled in favour of the BT pension fund trustees, saying that taxpayers are on the line for liabilities of up to £23bn. And that opens the door for a slew of other pension funds to make the same claim. Industry insiders reckon Railway Pensions, UK Coal and Trinity House, would all have strong cases. But British Gas and National Grid could also be included.

The final bill could be... what shall we say... £50 - 100bn? All because privatisation was cocked up.

3. BBC

Long-time BOM correspondent Keith M points out that the much-bewailed cut to the BBC's funding may be more apparent than real.

Yes, the BBC has lost its funding for the World Service, but if they look well about them they could recoup that - and quite possibly a great deal more - by opening the World Service to adverts.

He also points out that although the BBC is being made responsible for funding rural broadband and SC4, a large chunk of those costs are already being carried within the existing arrangements. For example, £804m (c£134m pa) in the last settlement was earmarked for supposed digital switchover costs. And now that most people have switched, that cash is effectively available to fund the BBC's new responsibilities.

Finally, he reminds us that a 6 year freeze in the licence fee is not the same thing as a revenue freeze. The BBC will still benefit from the growth in the number of licence holders.

Roll on privatisation.

Conclusion...

What all three of these pyres highlight is that even after George's cuts, the incineration problem has most certainly not gone away.

But on the positive side, when the BBC keeps asking "what's your Plan B?", it's clear that there's still plenty of scope to cut spending further. And that includes spending on the BBC.

Yes We Can

2010-10-24T09:31:00.011+01:00

New Zealand has given us so much more than deeply disturbing TV ads

Maurice McTigue is a New Zealander, and was a member of that country's government as they tackled their own problems of bloated government. He has recently been talking about the experience, and his speech is well worth reading in full (HTP Peter Q). It is hugely encouraging for those of us who want the same here.

First, he explains how they managed to cut public sector employment with none of the dire consequences predicted by the Big Government doomsters:

"When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement.

And if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned."

McTigue goes on to talk about how they reformed the schools system. And given the epic and vital struggle Gove is currently having to push through his Free Schools reforms, it's worth quoting in full:

"We eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. At the same time, we told the parents that they had an absolute right to choose where their children would go to school. It is absolutely obnoxious to me that anybody would tell parents that they must send their children to a bad school. We converted 4,500 schools to this new system all on the same day.

But we went even further: We made it possible for privately owned schools to be funded in exactly the same way as publicly owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage of 14 to 15 percent. It didn’t happen, however, because the differential between schools disappeared in about 18-24 months. Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. Eighty-five percent of our students went to public schools at the beginning of this process. That fell to only about 84 percent over the first year or so of our reforms. But three years later, 87 percent of the students were going to public schools. More importantly, we moved from being about 14 or 15 percent below our international peers to being about 14 or 15 percent above our international peers in terms of educational attainment."

Now that is radical. Not only did they go for a Big Bang reform, making all schools independent pretty well overnight, they also allowed parents to take their school vouchers and buy schooling in the private sector. Which is way beyond what Gove is contemplating.

And the result?

New Zealand schools are now firmly established as top ten performers in the international attainment league tables, comfortably beating our schools right across the board.

As the BBC and rest of the left continue their Luddite war against public sector reform, we should take heart from New Zealand. By focusing on outputs rather than inputs, and by being bold, they achieved a huge improvement in efficiency without laying waste to anything.

Yes, it can be done.

Sorry, We Have No Money

2010-10-23T09:26:00.007+01:00

Tyler has been reading a splendid new book by ex-Treasury advisor Warwick Lightfoot (he advised Lawson, Major and Lamont). It's called Sorry, We Have No Money, and it's right up Tyler's street.

Lightfoot picks up and amplifies all the themes we cover on BOM - that public spending has grown far too much, it's extremely wasteful, and it constitutes a serious drag on our prosperity. He documents all of this in detail, with many references to the supporting research studies.

He argues that we should cut public spending back to around 35% of GDP, roughly the level in the mid-60s. As BOM readers may recall, this chimes with the findings of previous research, showing how there is little further improvement even in so-called social policy objectives once spending increases beyond about 30% (eg see this blog, and this).

Now, 35% is a long way from where we are now (47.3%), and even after all George's cuts we'll only reach 39.8% (see this blog). What Lightfoot shows is that, despite all the pain, by 2015-16 George will only have done half the job.

The book has many interesting chapters, including one devoted to our old friend the Swedish model (and why she's not the paragon of virtue asserted by the Grun).

Tyler's favourite chapter is on the problem with our high dependency regions, something else we've blogged many times. And let's quote Lightfoot's conclusion in full:

"The heart of the UK’s regional economic problem is that individuals and communities have progressively become de-marketised over the last thirty years. If anything, public policy measures intended to mitigate social and economic deprivation have aggravated the problem. The combination of large and expanding public sector employers paying nationally agreed salaries, a national social security benefits system that destroys work incentives in generally high performing labour markets such as London, and expensive national regulatory and tax burdens makes the regions uncompetitive internally and externally. The UK public sector has ignored the role of relative prices and pursued polices that assume that simply spending public money can overcome the handicap of local labour markets where wages are not able to adjust to the productivity in the local economy. It has been plain for many years that the British economy needs greater regional pay differentials and the critical thing is to change public sector pay settlement arrangements to so that public sector pay reflects conditions in regional labour markets."

De-marketisation - spot on. We must abolish national pay rates and welfare scales pdq. And we should also note that shipping all those heavily unionised public sector jobs into the depressed regions hasn't done the local work culture any good at all. Consider Lightfoot's very striking chart on strikes:

So, the very areas where jobs are most difficult to find - Scotland, Wales, the North East - are the very areas where those lucky enough to be in work are most likely to strike. A strike record like that can only exist where the biggest employer is the public sector. And if you were a private employer looking for a new base, would you want to enter a maelstrom like that?

If you want a thorough analysis of how our obese state is crushing Britain, then this book is for you.

TINA Does The Spending Review

2010-10-21T14:14:00.001+01:00

The Real National Debt comes home to roost

BOM readers will be quite familiar with the Real National Debt. It's the measure of government debt that includes all those Enron items the government still manages to keep off its balance sheet (unfunded pension liabilities, PFI, Network Rail, etc etc). And as we blogged earlier this week, when you add them in, you find that the national debt is not £952bn, as officially stated yesterday, but more like £8,000bn. Which is a heart stopping £300 grand for every single British family.

But some people argue that this Real National Debt isn't real debt at all, it's way off in the future, and we can afford to ignore the problem for a decade or two.

The chart above shows why that's wrong. Because the payments arising from that debt are escalating right now. They are a serious problem for us today, not just for our unborn great grandchildren.

We put it together for today's TPA press briefing, using the government's own projections. And what it says is that by 2015-16, on top of £67bn of interest payments we'll have to make on the official national debt, taxpayers will have to stump up another £132bn simply to cover unfunded pensions and PFI payments. So the total servicing cost will be virtually £200bn - over one-quarter of all expenditure and rising fast.

It's a crucial point. And when we listen to all the squawking about George's spending cuts, we need to bear it in mind. It may well be that the cuts are "a gamble", as the pink media says, but not making them would equally be a gamble - a gamble that we can somehow find some other way of servicing our debts without triggering a 70s style meltdown in the bond and currency market. We are being offered a classic false alternative. In reality, TINA will have her way.

So what do we at the TPA make of the spending review overall?

Our briefing is here, and we can't improve on TPA Director Matt Sinclair's summary:

"It’s great news that the Government is going ahead with necessary spending cuts to get the deficit under control and that politicians are finally setting out clear plans to deal with the fiscal crisis. Many wasteful programmes are being cut and that will mean savings for taxpayers now and in the future. Unfortunately a number of measures that would save significant amounts of money while minimising the impact on services haven't been taken, like a freeze in the International Development budget or pay cuts for the best paid public sector staff. Sensible and necessary cuts have been announced today but more can be done to deliver good value for hard pressed taxpayers."

We're pleased that the government has more or less stuck with the £83bn of cuts promised in June (trimming it back only slightly to £81bn), and we're pleased to see some real detail on what goes. But there are various saving ideas the TPA and others have suggested that still haven't been taken up.

Plus of course, plans are one thing, delivery another. And delivery is going to be tough, more or less right across the board. For example, while we believe local councils should be able to deliver the level of efficiency savings implied by the 26% cut in their central government grants, they will do so only if they all emulate the flagship efficient councils like Hammersmith and Fulham (see this post).

Moreover, as pointed out in the TPA briefing, the pain of the fiscal squeeze is going to be superimposed on some other major league pains heading towards us in the current decade. In particular, we are facing the huge cost of meeting all those bonkers environmental targets set for us by our political class, which according to analysts at Citigroup will exceed £200bn.

Add it all together, and we're looking at £740bn of pain - half one year's national income:

Nobody can think this is going to be easy. And as Tyler types this in central London he can hear somebody screaming through a loudhailer out in the street - the words aren't clear, but the general thrust most certainly is.

Will we go the way of France? We were asked that this morning, and the general opinion among fellow panelists was that we're not French.

That particular proposition has been tested regularly over the last several hundred years. It looks like we're about to test it again.

PS Oh go on then. We know it's not very grown up, but God, we need something to smile about:

A Busy Day

2010-10-20T08:20:00.006+01:00

A lesson we should have learned by now

Tyler is off to the TPA today to help analyse the spending announcements. So no time for a proper blog. But three quick thoughts:

1. Punching above our weight

Much talk yesterday of Cam's defence cuts stripping us of the ability to punch above our weight. Er... what ability is that exactly?

From Suez to Iraq, for the last half century we've had to follow Washington's instructions. Simple as.

And apart from that freakish 19th Century encounter down in the S Atlantic, we can't think of any modern example where we've actually benefited from this supposed punching ability (and even the benefit of holding our Falklands colony is less than clearcut). Sending our boys to die alongside the Americans ain't Tyler's idea of high weight punching.

2. BBC

Pinch me. Is this actually happening? Cam is actually downsizing the BBC? Large ones all round.

Forcing the BBC to pick up the £350m tab for the World Service is a brilliant way of making a start. But longer term we stick to our view that flogging would be better than starving (see this blog).

3. Public sector jobs

Much gaffawing at Danny Alexander's gaff of allowing photographers to snap his cuts briefing. Apparently he's let slip the shock news that 0.5 million public sector jobs are set to go.

Clearly the gaffawers (like Newsnight's Trotskyite Economics man) have forgotten that everyone already knew this. In fact 0.5m is rather less than we were previously told - during the summer the Office for Budget Responsibility forecast 700,000 government jobs losses. And of course, they also said those losses will be more than compensated for by 2m new private sector jobs (not mentioned by the Trot).

See this blog for the details, and here's the pic:

Cuts - Commander Bigglesworth Speaks Out

2010-10-19T18:31:00.002+01:00

What a Fokker*

"I am a Harrier pilot and I have flown 140-odd missions in Afghanistan, and I am now potentially facing unemployment. How am I supposed to feel about that, please, sir?"

Well, that's what happens when Prime Ministers allow themselves to be addressed as Dave: any old public servant feels free to challenge their authority in public.

The thing is while we can all understand that Navy pilot's disappointment at losing his plane, those Harriers are half a century old, the money's run out, and difficult decisions simply have to be made.

As we can now see with horrible clarity, Labour left us with a total shambles on the defence front - vast budgetary overstretch, all tough decisions avoided, and multi-billion equipment orders placed almost entirely to buy Scottish and Welsh votes.

And what about those carrier orders? Contracts so loaded against taxpayers that it's now cheaper to carry on rather than cancel. Even though we do not want - and certainly cannot afford - two carriers.

And at long last we have a government with the good sense and guts to can the hopeless and appalling Nimrod programme. We've blogged it many times, including its dubious inception under Defence Secretary Portillo (see this blog).

The question now is how much have we lost? We know that the programme budget has ballooned to £3.5bn - a trebling in the per plane cost from the preposterously low initial budget - but how much of that has been spent? Our guess is all of it. £3.5bn straight down the toilet.

But though BAE has lost Nimrod, it seems to have kept plenty of other MOD work, and its shares barely moved (since the coalition came in they have roughly tracked the FTSE100). So whatever the screams, this has clearly not been a huge shock to industry insiders.

Going forward, the real issue is HTF are we going to get better procurement value? As we've blogged many times, defence procurement has been a huge money inferno ever since the government started buying bows and arrows.

Like Tyler, you may have been watching the BBC repeats of All Our Working Lives, a 1980s documentary about our traditional industries. And the one about the shipbuilding industry recounted exactly how our grotesquely inefficient shipbuilders were feather-bedded by overpriced defence contracts for decades. In the end reality had to intrude and the yards were closed, but not before taxpayers had been milked for billions.

And one other thing.

Tyler is starting to scream at the constant airtime being given to all the various special interest groups who feel they will lose from the cuts. The BBC is presenting it as a national disaster, with two hour specials and free disaster stickers (probably). But where are the winners? Where are the ordinary hardworking taxpayers (OHWTs) who will benefit from a government with the balls to take the action we must have?

Still, last night we were treated to a highly agitated Michael Crick rushing in to tell Paxo about a rumour that the BBC might be forced to pay for all those free pensioner TV licences itself. Which would effectively mean a £550m pa BBC budget cut. The poor chap looked so upset and uncomfortable we wondered if he'd perhaps wet himself. Does he think he'll be Newsnight's cut?

God, let's hope that particular cuts rumour is true.

*Footnote It may be within a life's span, but Biggles reads like another country. His very first 1932 adventure really was called The White Fokker.

Deeper - Much Deeper - In Debt

2010-10-19T08:31:00.002+01:00

Scary

Tyler's long-promised report on the Real National Debt has finally made it to publication (download here and see TPA blog here). As BOM readers will know, the Real National Debt is the debt including all those off-balance sheet Enron items like public sector pensions, and the key points as follows:

At the end of 2009-10 the real national debt stood at £7.9 trillion, over £300,000 for every single household in Britain
During the last decade debt has more than tripled, soaring from 230 per cent of GDP (£2.3 trillion) up to 560 per cent of GDP (£7.9 trillion)
Official national debt (quoted by the Chancellor in his budget) hugely underestimates taxpayer liabilities
Relative to GDP this is by far the biggest national debt we have ever had since records began

And here's the summary chart with the accompanying key:

As that crotchety old guy on the accompanying vid* reminds us, it's pretty scary stuff.

Well, that is to say, you and I think it's pretty scary. Amazingly, despite the scale of these figures, there are still those who argue that we needn’t worry too much. They argue that we can take time to address the problem, something is bound to turn up when the economy recovers, and that anyway most of this debt isn’t real, like say credit card debt.

In tough times that's a very seductive line, so we need to be clear why it’s wrong.

First, these debts are much more than a few dry entries in some dusty accounting ledger. They represent a real commitment on taxpayers to make real payments in future years.

And lest anyone imagine those payments won’t come due for ages, and that we can safely shrug and leave the pain to our grandchildren, it’s important to understand that annual servicing costs are already increasing alarmingly. By the middle of this present decade the annual cost of debt interest plus pension payments plus other debt servicing will be approaching £200 billion, or £8000 per annum for every family (see this blog).

Second, although economic growth will certainly help ease the strain, the rapidly mounting cost of debt servicing means that we will need a high growth rate just to keep our heads above water. Unfortunately, from where we are today a sustained period of high growth doesn’t look very likely.

Third, pension liabilities are just as much debt as government borrowing in the bond market. For sure, the government could renege on its accumulated obligations to pensioners, just as it could default on its market debt. But there would be consequences (cf La Belle France), and the present government shows no signs of doing so. On the contrary, it has promised to re-link the basic state pension to average earnings.

Finally, while it is true that our nationalised banks have assets to back their debts, nobody can be sure quite how much those assets are actually worth. Taxpayers are effectively on the line for the full amount of the debt, and should not assume they can rely on the banks’ assets for support (as Irish taxpayers have recently discovered).

A real National Debt of six times our annual income is insupportable. It represents a mounting burden on taxpayers for years to come, and a colossal drag on future economic growth. In one way or another, government must reduce it.

Which is why Wednesday’s spending announcements are so important. We need to see a convincing plan for delivering the fiscal restraint promised in June’s Emergency Budget.

But that is only the start.

Spending needs to be held down for at least a decade, so that the annual budget deficit becomes an annual surplus, and we start to pay down the debt – we are still a long way from that.

As we've blogged many times, we need to flog our nationalised banks soonest.

And in addition, there needs to be a much more fundamental reform of government pensions, both public sector and state. With life expectancy increasing in leaps and bounds, the age at which people can draw their pension has to be increased soon, almost certainly to 70.

*Footnote. Yes, there is a vid featuring some old bloke Tyler doesn't recognise. But for the record, here it is:

So What Happened To Those 25% Cuts?

2010-10-18T21:32:00.002+01:00

It turns out she had it easy

As we blogged over the weekend, the noises off suggest that all that macho talk of 25% spending cuts was way off the mark.

We learned in June that George's cuts were never going to deliver more than a 4% overall reduction in real-terms spending over 5 years (ie a 9% increase in cash spend against 13% projected inflation). And although the ill-advised ringfence around the NHS and overseas aid budgets suggested that cuts in other departments might still be much higher, it now seems that even those cuts have been trimmed back. The big spending departments seem to have diverted any real pain into the welfare area.

Can that be right?

Sure, we know the difficulties. We know that even Mrs T never actually managed to cut overall spending - she only managed to restrain its growth.

But Mrs T was not wrestling with the kind of horrific government deficits and debt we currently face. Even in the annus horribilis of 1980-81, public sector net borrowing was only 4.8% of GDP, with public sector net debt a mere 46%. Compare her stroll in the park with our current predicament, where we have government borrowing over 10% of GDP, and debt already through 60% and rising fast.

In the circs, you have to wonder why we're not sticking with the original idea of 25% cuts. Surely after those huge budget increases under Brown, all departments must have a great wobbling midriff of blubber just crying out for emergency liposuction.

Now a helpful new report from Policy Exchange gives us a fix on that blubber, at least in a subset of the spending departments.

Policy Exchange examined spending in six non-ringfenced departments to see how easy it would be to make overall 25% cuts without damaging vital services. And it turns out it would be dead easy, or in the words of lead author Andrew Lilico:

“From our report, a natural conclusion to draw is that it would be relatively straightforward to achieve savings of around 25% across most departments. Indeed, it is perhaps surprising that there is so much ‘fat’ in the system that cuts on this scale can really be made in so many areas so straightforwardly."

Which in terms of spending cuts is rather encouraging.

But the report also makes the very good point that it would be even easier to make cuts without damaging services if the ringfenced areas were also made to take their share. PolEx's head Neil O'Brien says:

“There is a lot of waste and unproductive activity in the areas we examined. Yet these are not the areas which have seen the largest increases in spending in recent years. In the areas where there was a real flash flood of spending we might expect even greater potential to make effective savings.”

The overall conclusion is familiar in the sense that it would have been a lot better not to have set up those ringfences in the first place. But by looking at specific areas in detail, this report tells us the ringfenced areas offer a deal of scope for Cuts II, sometime around 2013.

PS Tomorrow Tyler's long promised report on the Real National Debt hits the newsstands... well, it comes out, anyway, and we'll take a look at the main findings.

Shrinking Shears

2010-10-16T14:45:00.005+01:00

We thought we'd moved on from these

So let's see if we've got this right.

The defence budget - intitially slated for a 25% cut - is now apparently only going to lose 7-8%.

The schools budget - intitially slated to share in education's 25% cut - is now to be preserved at current spending levels in real terms.

The quango bonfire turned out to be a damp barbecue.

There's £7bn extra cash to fund early years help for poor kids. And in all likelihood further "good news" spending commitments to come out between now and Wednesday.

Plus of course, the huge NHS budget is ringfenced to keep all Labour's planned growth, as is the overseas aid budget.

All told, that's starting to sound like an awful lot of backsliding in the cuts department. Are these cuts actually going to come anywhere near what we need?

Let's remind ourselves of the big picture.

Back in his June Budget, George announced that total public spending (TME) would be brought down from this year's 47.3% of GDP to 39.8% by 2015-16. That's a cut of 7.5 percentage points of GDP, which is massive. It's a substantially bigger reduction than the 4 percentage points Thatcher/Howe achieved in the five years after the early 80's recession. And in fact the only time anything like that has ever been achieved in peacetime was during the Lawson boom in the late 80s - a repeat of which does not look altogether likely over the next 5 years.

But here's the really striking thing, despite the sharp projected fall in spending as a percentage of GDP, George's budget didn't incorporate any actual overall spending cut at all. In fact, total spending in 2015-16 was projected to be 9% higher than this year.

In reality, all George was doing was to hold the growth of spending below the projected growth of GDP. Indeed, Tyler's fag packet says that had he frozen spending, then by 2015-16 projected growth in GDP would have reduced the spending percentage to a mere 36.6% of GDP, rather than the 39.8% he's actually planning.

OK it's true, a freeze in cash spending would almost certainly entail a cut in real spending, given the projected rise in prices. But as Tim Morgan shows in a useful new paper for the Centre for Policy Studies, even taking account of projected inflation, George's overall spending plans (the so-called "spending envelope") will still only deliver a minimal real-terms cut. In fact, Morgan calculates that even after five years of supposedly hard pounding, spending in real terms will still only have retreated back to last year's level:

Let's just pause to reflect on this.

What we're saying is that public spending - even in real inflation-adjusted terms - is not planned to fall by very much at all. In terms of reducing its share of national income, most of the heavy lifting is done by the projected growth in that income. Growth that is put at an average 2.7% pa over the next five years.

Hmmm.

Sound familiar?

It's almost like that Shadow Chancellor who used to go on about sharing the proceeds of growth. The one who kept on about it right up until the moment the economy fell over that cliff.

What we really need to understand is that if we don't get 2.7% pa growth over the next 5 years, things could get rather awkward. Not only would the current plan not deliver anything like the 7.5 percentage point drop in spending's GDP share, the lower growth would itself push spending higher via its effect on welfare payments.

Conclusion?

Despite all the screams and waving of bloody stumps we'll be subjected to this week, these cuts overall are pretty modest (and see this by George Trefgarne). The real trouble is that for transparently obvious political reasons, George and Cam have ringfenced a number of chunky areas like the NHS, thus making the pain in other areas that much greater.

From what we hear, a lot of that pain will now fall on welfare payments. Which is fine, inasmuch as it accounts for more than a quarter of all public spending, it has grown hugely under Labour, and working age benefits have to be cut to incentivise work.

But what worries us is that the detail of these welfare cuts does not seem to have been thought through. As we saw with the Child Benefit announcement, it's one thing to agree a change during a late-night sofa session with Dave and George, but it's quite another to force through implementation when the practical details haven't been sorted. There is a very real risk of backsliding.

Everybody knows cutting is difficult. Everybody knew it was going to be difficult this time.

But given that the overall cuts total is considerably less ambitious than the BBC and the rest of the left would have you believe, let's just hope that George has got some hard detail to announce on Wednesday.

PS The late volte face on defence spending sounds like another worrying example of sofa government. Mr Cam apparently intervened personally to over-rule the Treasury and soften the impending cuts. Not only was Cam nobbled by the Defence Chiefs - who naturally want no defence cuts - but it seems very likely he got a personal ear-bashing from Hillary. No doubt she would have told him that while she herself is a great Anglophile and defender of the Special Relationship, she's surrounded by people who have never forgiven the War of 1812, and who are sick of propping us up militarily. Unless Cam rescinded part of the cuts, he could kiss goodbye to joint press conferences with St O on the red carpet, plus those shiny new nukes we've ordered. But let's recall that after the US, we are NATO's second highest defence spender (well, OK, Greece is higher, but we hardly want to go there). According to the official NATO stats, we currently spend 2.7% of GDP on defence (2009), double Germany's 1.4%. Even France - La Gloire herself - only spends 2.1%. So WTF? Why should we continue to shoulder a higher burden, when others are allowed to get away with much less? Tyler yields to nobody in his admiration for the dedication and courage of our services, but there's something seriously out of whack here. Over the entire 65 years since WW2, British taxpayers have shouldered a wholly disproportionate burden in defence of the West. As Ted Bromund's very helpful long-term chart shows (see this blog), for most of the post-War period we spent between 5% and 10% on defence - money the Germans, say, were able to invest in wealth producing infrastrucure and capital equipment:

Sofa spending decisions are no substitute for a fundamental reappraisal of why exactly we're doing all this.

Lessons From A Damp Barbecue

2010-10-15T09:29:00.002+01:00

Are we having fun yet?

Less a bonfire, more a damp barbecue. There is widespread disappointment that yesterday's cull of the quangos wasn't nearly as decisive as originally billed.

In summary, out of 901 quangos reviewed, 380 will remain entirely unchanged, with a further 40 still undecided (ie too difficult to close). On top of that, another 171 will be retained but "substantially reformed", and a further 57 new ones formed from mergers. Overall, out of the original 901, we will still be left with 648. And even among those that are going, many of the functions and staff will simply transfer back to their sponsoring departments.

So was the whole exercise a waste of time?

No, that would be too gloomy. Some of BOM's all-time favourites are definitely going - eg the Audit Commission, the Regional Development Agencies, and the Qualifications and Curriculum Authority. Some praise is certainly due.

But many other old favourites survive. The notoriously profligate British Council survives, as does, ahem, "public service broadcaster" C4.

And those mergers are a worry. We recall what happened to the much mocked Potato Marketing Council (the quango responsible for National Chip Week - see this blog). By 2008 it had become such an embarrassment that Labour merged it into the £50m pa Agriculture and Horticulture Development Board (AHDB). And as far as anyone can see, it's still there, taxing the potato industry £6m pa to fund its half-baked campaigns for more oven chips.

The fundamental point is this: rearranging bureaucratic deckchairs will never save much money. Simply switching the name plates on the front doors will not do it.

What Cam's government has to do is to axe functions. That's the way to save real money.

Take the British Council. It spends an eye-popping half billion per annum on all manner of bizarre cultural enterprises in the far flung corners of the world (of which £250m comes direct from general taxation), and yet nobody has ever been able to show we get value from it. Let's close it altogether and see what happens.

More broadly, as we've blogged before, there are basically only two ways of cutting public spending.

The first is known as "starving the beast". That involves the beastmaster (aka the Chancellor) cutting a fat beast's food budget and hoping that the thing will get itself in shape. That it will make economies by cutting down on cream cakes and other luxuries, and spending its smaller budget on stuff that's really needed. Like broccoli and oily fish.

Beast starving undoubtedly has a role in budget control, especially when prolonged control is required - as now. But the problem with fat beasts is that they may not like broccoli and oily fish. They may go on buying the same old cream cakes and oven chips and end up slumped on the sofa in front of daytime TV and no use to anyone...

Hmm... another metaphor that's spun away from us. The key point is that simply cutting budgets from the top without specifying what functions are being cut risks a serious degradation of frontline services across the board. In a public sector without customer choice and the pressure of competition, leaving the decisions entirely to frontline managers is likely to result in worse services to us, the helpless victims.

Which is why when George announces his long-awaited spending review next week, we must hope we get some chapter and verse. We need to know not just the departmental spending allocations, but also the functions that are being scrapped or privatised.

University Finance Sorted

2010-10-13T10:49:00.006+01:00

Time to break out the port?

As long-time readers may recall, Tyler was never Mr Cam's biggest fan*. But this government is showing a degree of can-do radicalism that is starting to make even Mrs T's initial steps look timid (let alone the spineless foot-dragging of vacuous fantasy reformer Bliar).

In five whirlwind months they've gripped the fiscal crisis, pushed through their promised free schools reform, launched an untrailed but fundamental market-orientated restructuring of the NHS, faced down the Luddites in the police force, announced a revolution in welfare, and signed death warrants on hundreds of useless and unaccountable quangos. There's more, but space is limited.

Yesterday they announced the much needed reform of university finance. Lord Browne's excellent report cuts straight through the BS. His recommendations manage to combine proper funding for the unis, with affordability, with competitive pressure, with... well, to coin a phrase... fairness for all (especially taxpayers). So hurrah.

We've blogged the shambolic state of higher education many times (see all previous blogs gathered here). In summary:

Taxpayers now spend £12bn pa on higher education, up around 50% in real terms since 1997; the students themselves spend a whole lot more.
There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies).
The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog).
The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%
Courses have been dumbed down and grading standards slashed - the proportion gaining first class degrees has nearly doubled under Labour ( see this blog)
Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-traditional graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind; and see this blog)
The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about £30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.

Now, it's on that last point - the financial return to a degree - that Labour misled us most egregiously. Back in 2008 we attended a meeting of the Public Accounts Committee (under its previous esteemed chairman), where Bliar's claim that a degree was worth an average £400 grand was brutally exposed for the fabrication it was. And the Browne Report gives us some chapter and verse on just how the number was cooked up (see Report footnote 11).

Apparently the £400 grand referred not to the value of a degree per se, but to the value of a degree plus all other education beyond the average, which would certainly include A Levels. That is a gross deception, especially when you remember that all reputable research in this area has always and correctly calculated the value of a degree as being the difference between what you earn with A Levels alone and what you earn with a degree (and Tyler does actually know about this, having researched the area for the old Department of Education back in the 70s).

Browne wisely takes his estimate of a degree's value not from HMG or the unis but from the OECD. And they reckon that the lifetime value to a male graduate in the UK is currently running at just over $200,000, or about £120 grand (note that the OECD's calcs are published in purchasing power parity dolllars). Here's Browne's summary chart (click on image to enlarge):

So there is a financial return overall, which is not to be sniffed at (although note that the return for female grads is estimated by the OECD to be 25% lower).

However, there are some very important points to note here:

These estimates are based on the lifetime earnings of previous graduates, the ones who got their degrees long before the explosion in graduate numbers and M Mouse degrees. The returns looking forward are almost certainly going to be lower.
Brown quotes only the returns to the grads themselves. As taxpayers, what we need to know about are the returns to us. What do we get out of the muti-billion subsidy we currently provide?

And even though the report doesn't spell it out, that second point lies at the heart of the Browne reforms. In future, our unis will be funded much more by the fees they can earn from their students, and those fees will be financed not by taxpayers but by the students themseleves, via higher student loans. Which is exactly as it should be.

Because not only are the students the principal beneficiaries of their degrees, but by forcing students to think seriously about the value of a degree, we will force the suppliers to deliver that value far more effectively than any number of quango funding councils (in case you don't know, this is called the market).

Poor students being put off?

Well, at the margin you might worry about that. But as Browne was pointing out all yesterday, a university education will still be free at the point of use. And there will be no credit check on first time students applying for a loan. What's more, graduates who earn less than £21 grand pa (indexed against average earnings), will not have to pay anything.

Education is about more than cold hard cash?

Well, yes, it is. And Tyler is a big fan of the so-called "non-pecuniary benefits".

But by the time we get to degree level (ie assuming we've already taught everyone the 3Rs and a bit of shared science and culture), most of those wider benefits again accrue to the individual.

So we think the Browne reforms are spot on. Congratulations to him and his team.

And to St Vince for having the balls to accept reality.

PS Yes, yes, hypocrisy. Tyler got not one, but two free degrees, from not one but two top Russell unis. How can he now kick the ladder away? Well, (a) a much smaller percentage of pupils went to unis in those days so the taxpayer bill was much less, (b) Tyler has since paid sick-making amounts of tax that would probably have funded several entire lifetimes at uni, (c) Tyler does make voluntary contributions to both his two unis. Apart from that, you do have a point. In truth, the taxpayer should never have funded uni education, other than through loan provision.

*Footnote While Tyler was never Mr Cam's greatest fan, Mrs T (T as in Tyler, that is) always was. She backed him from the very first time she heard him speak back in 2005. And she now greets each new brilliant radical announcement with a triumphant "that's my boy". Very irritating.

Simple Shopper To Go Green?

2010-10-11T20:44:00.006+01:00

I could do you 200 dozen, trade

Regular BOM readers will be all too familiar with the Simple Shopper and his staggering ability to burn our cash (see previous blogs gathered here). But Cam's procurement guru Sir Philip Green has clearly been rocked by what he's seen of the Shopper's operations:

"The process is shocking. There's no reporting, there's no accountability... You could not be in business if you operated like this. It would be impossible."

His report is refreshingly brief and punchy - very unlike the usual telephone directory reports we get from officialdom (see PS below). Among the real shockers he highlights:

£2bn pa spent on landline telephony, where the Shopper is overpaying by an astonishing £600 - £700m every single year
400,000 hotel rooms booked every year in central London alone - Green estimates £50m pa could be saved by teleconferencing
£800 laptops bought for £2000 each
£20m lost on failure to break expensive central London lease - government property costs £25bn pa, but has not been managed on a commercial basis (especially taking opportunities to break expensive leases)
Failure to exploit HMG's AAA credit rating - a commercial operation with such a rating would insist its suppliers extend lengthy credit facilities (aka paying invoices later).

Green declines to give a figure for the total possible savings, but with the total procurement spend getting on for £200bn pa, we're clearly talking tens of billions annually. Savings that would go a very long way to closing George's fiscal gap.

So WTF hasn't it been done already?

After all, governments overpaying on procurement has been a problem for at least four centuries (see this blog for what Charles II's Clerk to the Navy Board - a certain Mr Pepys - had to say about it). And the Great Helmsman used to bang on all the time about how much his brilliant procurement reforms had saved us.

Sir Philip suggests it's because government buying is too fragmented - scores of different departments and quangos buying their own paperclips and not capitalising on their combined buying power. What we need is centralised buying in the hands of hard-nosed professionals such as... well, such as Sir Philip.

Yes, nice idea. So logical.

Except... hang on a minute... isn't centralised buying precisely what was supposed to have happened under the G Helmsman? Didn't he set up the Office for Government Commerce under the direction of hard-nosed (and expensive) professionals, specifically to wring better prices out of suppliers by exploiting scale?

Well, yes he did.

And yes, it flopped.

You see, what Sir Philip has failed to understand is that once you set foot in Whitehall, you aren't in Kansas any more. You no longer have people around you who are driven by the cost imperative. Instead, you have people who are driven by the need to defend territory, and to keep the politicos off their back.

Just what that means in practice was neatly highlighted by one of those politicians, responding to Sir Philip's report today. Margaret Hodge is the new chairman of the Public Accounts Committee - the grand-daddy of Parliamentary watchdogs and the very body set up by William Ewart G to ensure taxpayers get good value from public spending. And her response to Phil's report was to say he doesn't know what he's talking about - government is much more complex than running Topshop. Even for the Public Accounts Committee, it's clear that cutting costs is not the over-riding priority.

The fundamental problem here is that government does not do cost efficiency - never has and almost certainly never will. And the reason is very simple - unlike Topshop, the "customers" of government have no choice. Yes, of course they can replace the non-execs every so often, but there is no other shop just along the High Street they can simply take their business to.

So government isn't under the same pressure as Topshop to deliver value for money. Not the same pressure to screw their suppliers down to the last penny. So even where you have centralised buying - as for example in defence equipment - because the pressure isn't there, you never get the cost saving the private sector takes as a matter of course.

No, the only real cure for all the billions government wastes in its procurement programmes is not to coordinate purchasing programmes, but to stop government procuring stuff at all.

In other words to break it up. To downsize government drastically, and return many of its current functions (like education and healthcare) back to the private sector.

PS Today's Fairness report from the Equality and Human Rights Commission is in sharp contrast to Green's snappy offering. It weighs in at a totally unreadable 750 pages, with further vast research appendices on top of that. As always, Tyler has only looked at the pictures, and we may blog one or two of them in due course. But for now, let's just note Commission head Trevor Philips' latest suggestion for government action - to redress the unfair distribution of "moral and social capital". No, we don't know how government could do that either. Outside of North Korea, that is.

Should We Grow More Lettuce?

2010-10-10T10:37:00.003+01:00

Maybe not that much

As we've mentioned before, Tyler Senior spent his entire working life as an engineer. And he's been very uncomfortable with the sad decline of British engineering and manufacturing over recent decades. He worries about what it means for the future of the country - or as he puts it, who's going to grow the lettuce?

Sir Anthony Bamford of JCB fame shares those same worries, and this morning he urges us to change direction before it is too late. Highlighting the way that German engineering is currently hauling their economy out of recession, Bamford says:

"I can't help wondering what might have happened if our various Governments in recent decades had put in place a long-term industrial policy and promoted engineering as a professional career for young people. Maybe Britain would be enjoying the same recovery in economic growth that Germany is going through right now...

We need to look ahead and get our policymakers to focus on the future – urge them to make manufacturing important once again, treat engineering with the respect it deserves and use it as the driver for economic growth and wealth creation in Britain."

That really could be Tyler Senior talking.

Let's look at a few facts.

Contrary to what many believe, UK manufacturing output has actually grown over the last 30 years. Yes, it was severely whacked by the early-80s recession, but it bounced back strongly through the rest of the Thatcher government. Indeed, by 1988 output exceeded the previous peak in 1973. The early 90s recession saw another dip, but much more modest this time, and by the end of the Tory government in 1997, output was again at a new high and growing steadily.

In fact, over the entire 17 year period of Tory rule, manufacturing output grew - not by a huge amount (0.7% pa), but it did grow.

Which contrasts sharply with its more recent dismal performance under Labour. During their 13 years of catastrophic misrule, manufacturing output fell by 6%:

Of course, where manufacturing never recovered was in its workforce. The numbers employed have fallen from 6.6m in the late 70s to a mere 2.5m today - a loss of 4m jobs:

And it is quite true, as Bamford points out, that manufacturing has a far more important role in Germany than it does here. At the last count (2007), German manufacturing comprised 24% of their entire economy, whereas here it was just 13%.

But what should we do about it?

Well, we've already done one thing of course. We've slashed our interest rates to zero, printed a ton of money, and allowed our currency to depreciate by around 25%. That has hugely boosted the competitiveness of British manufacturers, and that is now feeding through into output - up 6% year-on-year.

Should we do more?

Certainly there's no harm in government encouraging kids to take engineering seriously. For example, it is appalling that we have hundreds of state secondary schools now labelling themselves as "specialist performing arts colleges" or "specialist sports colleges", whereas we only have 70 labelled "specialist engineering" colleges. Just how many jobs are there going to be in sports or performing arts? We are selling a cruel fantasy to the kids going to those places.

But we are very nervous about government getting back to the days of industrial planning. It didn't work then, and it won't work now. The horrible truth is that nobody has any real idea which industrial sectors are going to be the winners of tomorrow. And whereas the Germans can still prosper with 24% of their economy in manufacturing, they are Germans - leaders in engineering excellence for over a century. Whereas we produced the Austin Allegro.

Besides, amongst the richest economies, Germany is an outlier. Most countries have smaller manufacturing sectors, more in line with our own. The US is on 13%, France on 12%, and Canada on 16%. Even Japan has dropped down to 20%. And as China and the other BRICs develop, manufacturing sectors in the West seem certain to shrink further.

As we've blogged many times, what our government can most helpfully do to stimulate economic prosperity is to cut taxes and regulation. Not to pick winners.

PS And who grows the lettuce? Why, all those Eastern European migrants of course.

PPS A couple of weeks ago we were treated to the sight of a highly discomfited Steph reporting on the BBC News that the IMF had come out in support of George's economic programme, including the cuts. She spoke through gritted teeth, and Tyler wondered if she was in pain. It must be very difficult to manage a rabid anti-Tory mindset at times like this, and today's MoS gives us some splendid detail on Steph's medical history.

Do We Need Tax-Funded Science?

2010-10-09T17:30:00.006+01:00

You can do great research without tax-funding

Today Britain's nationalised science research industry joined the list of special interest groups protesting against cuts to their public funding. They say"we hope that by showing that scientists are not a soft touch, that there will be a political price to pay if our message goes unheeded by the Treasury."

Soft touch? As things stand, taxpayers put £5bn pa into "curiosity-driven science", and that is reportedly facing the same 25% cut as all the other non-ringfenced areas of public spending. So the scientists are hardly being singled out as a soft touch - they are merely being asked to take their fair share of the pain.

But setting that aside, there is a more fundamental question here - why should British taxpayers be forced to pay for any "curiosity-driven science" at all? In tough fiscal times, why can't we leave it to the market, or private foundations, or simply coat-tail on scientific advances made elsewhere?

According to the science industry it's because if we do, we will suffer economically. As a nation we will slip behind in the great science race, and we'll therefore slip behind economically.

But in truth there is no convincing evidence that would happen. Indeed, there is no convincing evidence of any economic return to this kind of tax-funded research.

As we've blogged before, 30 years ago Tyler took part in a government study of the economic return to basic scientific research. Despite piles of papers, endless international meetings, and the best efforts all round, we could find no trace of provable return whatsoever. And our study was not alone.

Which is why the science industry subsequently came up with an alternative measure of return, placing emphasis not on the direct return to specific research projects but on the supposed "spillover benefits" into the wider economy. The idea is that having a load of brainy people engaged in serious scientific research will somehow spill over into the rest of the economy via... well... er... ummm... ah yes, maybe some of them might go off and set up go-go companies like this one.

According to the science lobby, this spillover return is worth a huge amount - a staggering 30% pa on top of any direct project return.

Of course, on an intuitive level, we all accept science is vital to our prosperity - without science we'd still have an economy based on subsistence agriculture. But to accept a 30% spillover return on £5bn of research funding from hard-pressed British taxpayers, Tyler needs to see some hard evidence. And that is distinctly lacking. As the lobby itself admits:

"All our work emphasises to us that our estimates of the rates of return need to be treated with extreme caution. Most aspects of the methods unavoidably involve considerable uncertainties...

These figures are obtained from a small empirical literature, much of it US-centred and... the application to the UK... is at best tentative."

And this interesting US article casts considerable doubt on the US literature itself, describing the key study as being "methodologically dubious".

The bottom line is that the tax-funded science lobby is lobbying for itself. And that's fair enough.

But please don't be fooled into thinking that cuts in the science budget will undermine the prosperity of the nation.

They won't.

As far as anyone has ever been able to determine, our economy can work perfectly well without any tax-funded curiosity science at all. Private enterprise can take care of it.

How Can We Ever Escape?

2010-10-08T21:04:00.002+01:00

But does it go anywhere?

Tyler was asked a very good question today. He was explaining to some normal taxpayers just how big the real National Debt has now become, when one of them put her finger on something very troubling. "But surely if the debt's that big" she said, "how can we ever hope to escape?"

Tyler's immediate response was to advise emigration. But can that be right?

Let's recap a few facts.

The official gross National Debt has just broken through the £1 trillion mark, around £40,000 for every single British household.

But as regular BOM readers will know, that official figure vastly understates the government's real debts (eg see this blog). By the time you've added in unfunded public sector pensions, accrued unfunded state pension liabilities, PFI, Network Rail, etc etc, the real National Debt stands at over £5 trillion. And that's without counting the liabilities of our bailed out nationalised banks, which currently stand at around £2.5 trillion.

Now given that our entire annual GDP is only around £1.5 trillion, the government has amassed debts of 4-6 times our annual income. You try borrowing that kind of multiple from your friendly high street bank - they'd laugh at you, knowing you would never ever be able to pay it off.

And neither will the government.

Moreover, even after all the cuts that George will be announcing on 20th October, and all the accompanying screams we'll hear, he still plans for our debts to go on increasing all the way through this current parliament. By 2015-16 our official gross National Debt will have increased to from £1 trillion to £1.5 trillion, and all the hidden debts will almost certainly be higher too.

So OK, you say, we don't necessarily have to pay off the debt. Maybe we could pay the annual debt servicing costs and just sort of run with it.

Hmm.

According to George's Office for Budget Responsibility, by 2015-16 the government's debt interest payments will have surged to £67bn pa, well over double what they were last year, and a bill of over £2500 pa for every British family.

And to that you have to add the annual cost of unfunded public sector pensions - £32 bn pa by 2015-16 - payments under PFI contracts - £10bn pa by 2015-16 - and unfunded state pensions payments which weigh in at an astonishing £79bn pa by 2015-16 (BSP plus SERPS plus S2P).

Add that lot together and the government's annual servicing bill on its real debts will be running at £188bn pa by 2015-16. Which will be an annual bill of £7500 for every single family, and still rising.

So what then?

More public spending cuts?

Yes, we'll need them. But after 5 years of serious cuts, will the government (of any complexion) have the stomach for yet more?

Tax rises?

Maybe. But tax rises would dent what may still be a sluggish recovery. And tax rises to fund debt servicing costs hardly sound like a vote winner.

The miracle cure of course would be faster GDP growth, painlessly lifting tax revenue and cutting welfare related spending. Which is why the government should bust a gut to stimulate that growth, by for example, canning the 50p tax rate soonest.

But failing a growth spurt, we're left with just one option - default, the traditional escape route for failing governments throughout the ages.

Default on the government's formal debt will be quite easy. Inflation is the key, and as we know, we're already running well above the 2% pa supposedly underwritten by the Bank of England. And with all that extra money the Bank printed still sloshing around, it should remain high for a good while yet.

But default via inflation only really works on the government's official debt. The much bigger unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments. Denied a stealth default, the government will have to be much braver on those debts, including a faster and greater increase in the state pension age, and a big cut in public sector pension benefits (much bigger than John Hutton was prepared to let on yesterday).

So where does that leave us?

For the government, escape requires years of spending cuts followed by years of severe restraint. At the same time it requires much bolder action to stimulate sustainable growth (ie tax cuts, especially axing the 50p rate). And unfortunately, the inflation tax looks certain to make a contribution.

For the individual... yup, emigration really does seem the only surefire escape route.

PS Didn't he do well. Longtime readers will recall our previous encounters with Red Ed's ~~right~~ left hand man Sadiq Kahn. Kahn has now ascended to the giddy heights of Shadow Justice Secretary, even though as Guido recounts, he carries a weight of "controversial" baggage. We first clocked him back in 2007 when as a member of the Public Accounts Committee he ate a man in a canoe.