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Economics 101

The bleak state of the public finances

Nov 29th, 2011
by Mike Denham.
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Getting debt under control is proving harder than anyone envisaged

- David Cameron last week

At the time of the March Budget, the Office for Budget Responsibility forecast that borrowing would overshoot the Coalition’s original 2010 forecasts by a cumulative £46 billion. The overshoot was entirely attributable to a spending overrun:

Since then growth prospects have deteriorated, largely reflecting the turmoil in the Euro area. So how much worse are things now?

According to the latest monthly public finance data (covering April to October) borrowing this year seems to be only slightly higher than the increased March forecast. However, tax revenues are coming in below expectations – Corporation Tax receipts have been especially weak. And some elements of spending – including debt interest and social security – are running higher than expected.

Against that, there is now evidence of retrenchment in other areas of government spending. Public sector employment fell by 4 per cent over the last year (to Q2), although average earnings are still increasing (up 2 per cent in the year to September).

The overall fiscal picture remains one of slippage. Borrowing is already forecast to be higher than originally planned, and the setback to European growth prospects means that the OBR’s new forecasts will be worse again. On unchanged policies, eliminating the current deficit by mid-decade now looks unlikely.

Yet despite that, the bond markets have continued to support the government, with funding costs down to a 60 year low. It is an impressive pay-off for maintaining fiscal credibility.

However, the gilt market is on very thin ice. Inflation is now more than twice the yield on 10 year gilts – 5 per cent inflation vs. 2.3 per cent yield – implying that the market is taking a huge amount on trust.

The lesson of history is that such trust can be very fragile. The UK may be viewed as a haven of fiscal stability compared to the Euro area, but negative real yields are unlikely to be sustainable for long.

The forecasts built into the March 2011 budget allowed for higher average gilt yields than those currently in place – rising up to 5.1 per cent by 2015-16. So right now, the public finances should be turning out better. But as we’ve seen, they’re not.

And given the inflation background, yields could easily go higher than allowed for in March. According to the OBR, for every one percentage point increase in yields above their baseline assumptions, debt interest payments would be £6 billion a year higher by 2015-16, with further cumulative increases beyond that.

And of course, the official debt is only one component of the real national debt. To get a complete picture we also need to take account of the government’s off-balance sheet debts. These include its unfunded pension liabilities and PFI contracts. Servicing of those liabilities means that the true cost of debt servicing (debt interest plus public sector pensions plus state pensions plus PFI) over the next few years will be around treble the official debt interest forecast:

This highlights an important longer term issue – the cost of our aging population. Because of the rising cost of pensions and healthcare for the elderly, we will need to continue our programme of fiscal consolidation far beyond 2015-16. According to recent calculations by the IMF, between 2010 and 2030, the UK needs to tighten fiscal policy by 13 per cent of GDP – the fifth biggest tightening of any advanced country. Against that, the current budget projections only allow for a tightening of around 8 per cent.

In these difficult circumstances, the Chancellor must use the Autumn Statement to underline his fiscal resolution. There is certainly a case for growth promoting tax cuts, but any such moves must be backed by a tougher stance on public spending.

In particular, we continue to believe that that the government should commit to a third fiscal rule, limiting the growth of public spending over the medium term. Such a rule could allow the Chancellor scope to cut some taxes in the short-term while reassuring the markets that the overall budget remains on a sustainable path.

Taxpayers lose a fortune on the Northern Rock bailout

Nov 17th, 2011
by Matthew Sinclair.
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It is a long time since Northern Rock was last regularly hitting the headlines, as its funding dried up at the start of the credit crunch.  Then politicians were busy playing down the cost of the bailout.  But we weren’t convinced.  TPA Research Fellow Mike Denham argued that we would be left with a hefty bill for the poor quality assets we had taken on.

And I looked at the extent to which politicians were “committing taxpayers money to the risky venture of trying to revive Northern Rock instead of taking the more cautious approach of trying to get value from the assets as they stand”.  Now part of the bank is returning to the private sector and the losses on the bailout are starting to be crystallized: the BBC reports that we are down £400 to £650 million.  But that’s just the start.

The big money is in the bad bank.  Again the BBC reports that the losses there could be as much as £21 billion.  That’s over £800 for every family in Britain.

And even more of our money is at stake in the other nationalised banks; particularly RBS and the Lloyd’s Banking Group.  It wasn’t so long ago that they were worth more than they are today, but wise commentators were telling us that we needed to hold onto those shares so we could enjoy the gains as their prices inevitably rose.

Now, with their talent for identifying every possible opportunity to lose huge amounts of money, and the unfolding eurozone crisis, it is possible that RBS could even need another bailout.  At that stage, surely we would need to finally put the bank out of its misery and look at bail-ins of the kind envisaged in the the Vickers Report instead of putting yet more of our money on the line.

The deal today will at least create more competition for high street banking and get some money back.   Ed Balls suggesting after three years that we should keep holding on in the hope of a turnaround is ridiculous.

The critical mistake that politicians have made at every stage in this crisis is to think they know best, that they can see a safe opportunity for profits where people playing with their own money can’t.  Taxpayers weren’t queuing up to put their money into Northern Rock, quite the opposite, but politicians did so on our behalf.  The best guess as to the long term value of the taxpayers’ shares in the nationalised banks is their market price.  Now we are starting to pick up the bill for the politicians’ hubris.

Fun with the Regional Growth Fund

Oct 31st, 2011
by Matthew Sinclair.
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Today the Department for Business, Innovation and Skills announced the results of the second round of the Regional Growth Fund – which we last looked at when we uncovered that one of the directors is from an organisation that doesn’t support growth.  Nick Clegg told the BBC that the £950 million would help create or safeguard “hundreds of thousands of jobs”.  The opposition’s only criticism was that the money was too late, or not enough.  That it wouldn’t match the scale of the wasteful and ineffective Regional Development Agencies.  That means it is up to the media and groups like the TaxPayers’ Alliance to scrutinise how the money is being spent, and whether it will deliver on the hype.  After all, we’ve seen enough dodgy claims that policies will create jobs before.  So what did we find when we looked at the projects approved?

Nothing.  There is a list of recipients and an estimate of the number of jobs that will be created in each region but no suggestion of how much each recipient is getting or what projects are being funded.  All we have are questions:  Why are British taxpayers funding Santander UK plc, a subsidiary of the major Spanish banking group Santander?  How will funding for miscellaneous national projects that they expect to create 200 jobs directly create 16,500 indirectly? What are any of the 119 firms getting our cash doing with the money?

As Jim Pickard has pointed out in a blog for the Financial Times, even the names of ten of the winning companies haven’t been disclosed.  At some point apparently we will be able to see where the money is going.  But until then grand claims about the numbers of jobs that will be created are a complete joke.  As far as we know, the money is all being spent on procuring the latest generation of the Turbo Encabulator:

Maybe the money is all going to projects that will be incredibly economically valuable but, for some reason, can’t generate a return for private investors and therefore need support at taxpayers’ expense.  Or maybe this is just ugly corporatism.  Taxing all businesses then giving the money to a few who have won the favour of politicians or bureaucrats.  No one knows and until we do I would assume the worst, that this announcement was calculated to get the jobs figure out there and reported before anyone could judge for themselves looking at the actual plan.

The only mitigating factor is that many of the projects are being required to raise private capital as well.  That means it is less likely the taxpayer is being sold a complete lemon.  But it could equally mean that these projects would have gone ahead anyway, so public funding hasn’t achieved anything.

As Fraser Nelson has written for the Spectator this morning there is a critical contradiction between this funding and the Government’s wider narrative on how economic growth is best encouraged:

No wonder that so much confusion surrounds the government’s growth strategy. The government is sending out conflicting messages all the time. Osborne talks about tax cuts, while delivering tax increases. It says “there is no money left” while doubling the international aid budget. Clegg talks about the problem of the Man in Whitehall trying to direct regional economies, before going on to direct regional economies. In Vince Cable we have a Business Secretary who seems to regard his job as complaining about businesses. He is perhaps the only business secretary who disparages capitalism as a system which “takes no prisoners”.

If people really want to fight crony capitalism, the answer isn’t moralising about misleading figures on pay for FTSE100 directors.  It is properly scrutinising schemes like this that make a company’s success more about their ability to convince politicians they’re worthwhile and less about their ability to efficiently produce goods and services we need or want.

Some food for thought for Polly Toynbee and the Occupy London protesters

Oct 18th, 2011
by Jonathan Isaby.
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In her piece for today’s Guardian, Polly Toynbee describes her trip to the protest camp outside St Paul’s in the City of London on Sunday night, shortly after her “fierce argument” with me on Sky News on the subject.

I’ll overlook the fact that she misquotes me in the piece – and for branding me “disgraceful” in a Tweet yesterday – in the hope that she can be persuaded that not only are there more useful responses to the economic crisis than setting up camp in the City, but also that there is much on which all of us frustrated  about the situation should be able to agree.

In the initial statement agreed by Occupy London – which Toynbee commends – there are key points on which the TaxPayers’ Alliance can find common cause, namely in our opposition to bailing out the banks and in wanting “regulators to be genuinely independent of the industries they regulate”. (more...)

Britain’s relative problem with youth unemployment has been growing for a while

Oct 13th, 2011
by Matthew Sinclair.
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It is a real tragedy that so many young people aren’t able to find work. According to the Office for National Statistics, 721,000 16 to 24 year olds were unemployed in the three months to August this year, excluding full-time students. Lots of young school leavers and graduates are facing pretty grim prospects with a slow recovery from the economic crisis across the developed world.

But it is important that we are clear about the source of our particular relative problem. The graph below uses OECD data to show how the percentage of young people not in education, employment or training (NEETs) rose in Britain between 1997 and 2007 – before the recession – while falling in the rest of of the developed world:

So why did that happen?

Young people with less experience tend to be less valuable to their employers. That’s why we tend to earn more as we get older. If the Government takes action that makes it more expensive to employ people the first to be priced out of employment, as it costs more to employ them than it is worth an employer paying, are often young (or female, or from an ethnic minority).

Politicians have done a series of things that have made it more expensive to employ people, particularly on low incomes:

  • Increased employers’ national insurance.
  • Implemented domestic regulations like the National Minimum Wage.
  • Implemented European Union regulations like the Agency Worker Directive.

By contrast, back in 2002 then German Chancellor Gerhard Schröder confronted the country’s economic malaise by cutting non-wage labour costs. He took on opposition from the haves who liked the expensive entitlements that those policies provided. Along with an education system preparing people for the world of work, which hopefully reforms like free schools can start to build here, the action he took then has been critical to Germany’s strong economic performance now.

Other taxes like Corporation Tax are also important. If they deter investment and enterprise then that means fewer employers looking to hire people in the first place. And we need to reform a benefit system that seriously undermines the incentive for some people to work.

But the critical thing now is that we stop driving a wedge between what employers’ are able to pay and what employees receive that leaves many sitting at home on benefits who should be in work. Cutting non-wage labour costs is vital to help the most vulnerable people in the labour market.

Prune economic barriers to create growth or it might never come

Oct 11th, 2011
by Rory Meakin.
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The Chartered Institute of Personnel and Development (CIPD) has released a note warning the Government that it is meeting its public sector headcount reduction targets faster than projected but recommending that it should announce a temporary halt to the progress being made. The CIPD’s chief economic advisor, John Philcott, expresses concern that the number of new jobs created by the private sector might not be able to keep pace with reduction in the numbers in the public sector:

Public sector job cuts in this context would be a false economy – exacerbating weakness in the labour market, adding to unemployment and in turn hindering rather than helping the task of fiscal deficit reduction. A more sensible course would be to delay all further public sector job cuts to the end of this Parliament and, if necessary, into the next, thereby enabling them to be more easily absorbed without nasty macroeconomic side effects.

Too slow?

The Government’s modest austerity program leaves no room for further loosening of the purse strings. It is in no small part because of the credibility of Britain’s deficit reduction plan that borrowing costs are still manageable, despite our deficit being just as large and unsustainable as Greece’s. And we shouldn’t be running up debt hoping today’s low interest rates will last forever. They won’t. When they do rise, the cost could quickly become crippling.

It is worth noting that the Government plans are expected to increase the size of the national debt by 50 per cent over this Parliament already. And even if it was sensible to increase borrowing, any measures should cut taxes and promote real growth rather than carry on wasting taxpayers’ money on keeping staff whose jobs aren’t necessary on the payroll.

Lloyds TSB International Wealth revealed yesterday that 17 per cent of wealthy individuals surveyed reported as ‘actively considering a move overseas’, compared to 14 per cent six months ago, which adds to the growing pressure for tax cuts as a higher priority than raising spending. If we leave tax cuts until they’ve all left, that really will be a false economy as jobs and tax revenues leave with them.

The economy is weak and growth is faltering but high public spending and unnecessary public sector jobs are not the solution to the problem – they are the problem. Growth will pick up when the barriers to growth are removed. This means when businesses are freed from the overzealous regulations of the type recently identified in a report by the Institute of Directors, and when taxes are cut which are getting in the way of value-creating economic activity by making it prohibitively expensive. But it also means when buildings, land and employees are reallocated from poor value tasks in the public sector to more useful jobs in the private sector that genuinely create wealth.

This task is always going to be bumpy and cannot and should not be micromanaged to ensure the numbers always match in each quarter. It’s also hard for the people whose jobs are being cut and the businesses whose contracts are being scaled back. But the underlying rate of growth cannot be raised without taking tough decisions. Britain needs lower, simpler taxes for real growth and that means we should cut spending by more than the Government plans to, not less.

Fat taxes won’t solve the problem they are designed to

Oct 7th, 2011
by Tom Welsh.
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Does Britain need a fat tax? David Cameron hasn’t ruled it out. In Manchester he called for Britain to ‘wake-up’ to rising obesity levels and, with Denmark now the first country to tax foods high in saturated fat, said a fat tax ‘is something we should look at’.

But is a tax levied on fatty foods the best way to tackle obesity? Certainly, obesity costs the NHS money. In 2001, the National Audit Office conservatively estimated that the NHS would spend £3.6 billion treating obesity and related illnesses by 2010. As people get fatter, ambulance trusts are forking out £90,000 on “bariatric” ambulances with reinforced tail-lifts and inflatable lifting cushions.

Some argue that the obese should contribute towards this expenditure. Smokers pay £9.3 billion annually in cigarette taxes, drinkers pay £8.3 billion, but there is no specific levy on obesity. Sin taxes, however, are about more than raising revenue. They are a means of controlling bad behaviour. Cigarette duty raises far more than the £2.7 billion the NHS spends treating smoking-related diseases annually. Intended as polite nudges, they more often crudely shove us towards healthier lifestyles.

A fat tax along the Danish line wouldn’t just target the obese, but anyone who bought foods high in saturated fats. Butter, milk, cheese, pizza, meat and oil would be affected, and with British food prices already some of the highest in Europe, average taxpayers, struggling to buy household staples, would be penalised for eating the food they enjoy.

Sin taxes also disproportionately hit those on lower incomes – not because what they eat is more fatty, but because they spend a higher proportion of their income on food. A fat tax would be regressive, according to a 2004 report by the Institute of Fiscal Studies. It would burden the poorest households seven times more, as a proportion of income, than the richest households.

Crucially, there’s little evidence a fat tax would even change behaviour. Obesity may be a growing problem, an ever heavier burden on the NHS, but indiscriminate taxation of fatty foods is not its panacea. It would not be an innovative response to an unsolved problem, but more-of-the-same intervention.

The Government must leave people to directly face the consequences of their own unhealthy actions. If someone like Paul Mason, formerly the world’s fattest man, has cost the NHS £1 million over 15 years, he should contribute towards the direct costs of his care. A fat tax would not provide this direct link between action and consequence. It would penalise the poor, increase food prices for ordinary taxpayers and stand as an unacceptable intervention into the eating habits of everyone.

FSA Chairman Lord Turner calls for greater central planning in banking

Oct 3rd, 2011
by Rory Meakin.
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Adair Turner, the chairman of the Financial Services Authority, said regulators should take control of much more commercial decision-making by banks and financial institutions. In a speech to a conference on banking and the economy at Southampton University on Thursday, 29 September, he said that leaving the market to decide how to allocate capital leads to boom and bust:

We may need to get far more involved in the details of credit capacity within the economy and even of the sectoral allocation of credit than we have for several decades

Lord Turner’s startling call for much greater economic central planning in the banking sector involved criticism of the market as a mechanism for the best allocation of resources. He questioned:

the extent to which private credit creation processes can be relied upon to be socially optimal

The problem is that centrally planned economies have been tried in the Soviet Union, North Korea and 1970s Britain. They failed dismally. Central planning in banking has also been tried. It too has failed dismally. Government planners in the US forced banks to lend money to risky, low-income aspiring home-owners. This created the ‘sub prime’ market which has proven to have been disastrous for the global financial system and economy.

If Lord Turner’s suggestions turn into Government policy and banks are forced to lend to unviable but “socially optimal” businesses to meet “sectoral allocation of credit” criteria, the financial disaster it will create may well prove to be manageable during the next boom, just as sub-prime lending did. But when the recession that will inevitably follow exposes the business failure and reveals the losses from those “socially optimal” loans, it will no doubt be taxpayers who will be expected to bail out the banks involved.

August ONS figures show higher spending, higher borrowing and soaring debt

Sep 22nd, 2011
by Rory Meakin.
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Public sector borrowing increased from £14 billion in August last year to £15.9 billion this year. The deterioration in the August figures raises further questions about whether the Coalition’s austerity plans are sufficient to repair the public finances.

In the 2011 Budget in March, the forecast for total borrowing in 2011-12 was £122 billion, 10 per cent lower than the £136.7 billion that was borrowed in 2010-11. But total borrowing over the April to August period was just 7 per cent lower than over the same period last year. With August’s borrowing figure 14 per cent higher than last year, it is looking doubtful whether the Government will be able to stick to its borrowing plans set against the backdrop of the spreading Eurozone debt crisis.

The root cause of August’s alarming borrowing figure will come as no surprise to those who pay attention to the numbers rather than the rhetoric about “cuts”. Spending in August was £3.5 billion higher than last year. And continued high spending and borrowing means the debt mountain has continued to soar, up from £810.5 billion at the end of August last year to £944.5 billion this year.

The numbers speak for themselves. The Government should cut spending to ensure it keeps within its already modest borrowing targets and avoid letting taxpayers becoming burdened with the expensive debt interest payments associated with governments that markets don’t trust to live within their taxpayers’ means.

The Government isn’t tackling the fundamental obstacles to growth, prosperity and employment

Sep 21st, 2011
by Rory Meakin.
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A day after the Financial Times (FT) published its startling findings showing that the structural, permanent part of the deficit could be £12 billion higher than previously thought, markets have been shaken by the downgrade of Italy’s government debt by credit ratings agency Standard & Poor’s from ‘AA-’ to ‘A’. The agency has highlighted the deteriorating economic outlook and political difficulties which “limit the government’s ability to respond decisively”.

The downgrade has heightened fears that the Eurozone debt crisis which has engulfed Greece and Ireland is spreading. The problem is simple: governments in the West have spent too much money, more than they can raise in taxes, and those lending it to them are steadily losing confidence that their loans will be repaid. The higher cost of borrowing and the knock-on effects on prosperity and public finances due to confidence ebbing away from Eurozone governments shows what could all too easily happen in Britain. The FT’s analysis shows that, far from being savage, the Coalition’s austerity measures are too timid and may soon lead to market turbulence if it becomes clear that the permanent part of the deficit is larger than was previously thought.

The reason for the reassessment of how much of the deficit is cyclical (moves up and down, mirroring the wider economic climate) and how much is structural (the part that is permanent and won’t be wiped out as the economic cycle returns to growth) is that the estimate of how much spare capacity there is in the economy is uncertain. A key economic factor is unemployment. There will always be some workers who quit their jobs out of personal choice while others are fired or made redundant as some companies fail and industries contract. This means, at any one point in time, there will be some unemployment as they look for new jobs, even in a booming economy. But there are various factors which mean that this underlying rate of unemployment, rather than the proportion that is caused by the whole economy being in recession, might be higher or lower, often due to government policies.

The last Government did a lot to increase the underlying rate of unemployment but the Coalition simply isn’t making the politically tough decisions that would improve matters. In fact, despite the rhetoric of a ‘growth agenda’ and a ‘Britain open for business’, it’s actually making things even worse in two important ways.

Firstly, by implementing the agency workers directive such workers will have to be treated as permanent staff. Good news for agency workers who already have contracts, but it’ll mean companies will have to think again before hiring when they want to use an agency worker. Many of those firms will hire anyway, but for some of them it might just tip the balance against making that decision to hire. And that means higher unemployment.

Secondly, the Government’s decision to close the deficit by raising taxes instead of cutting expenditure has means the ‘tax wedge’ between the economic benefit individuals create by working and the economic benefit they receive as a result will continue to grow. As with the previous example, most people will be unaffected by this but there will always be some people whose decisions were not so clear cut in the first place. For those people, higher taxes will mean jobs and projects on the borderline of financial sense will no longer be worth doing. They will wait and hope something better will come along. Again, that means higher unemployment. After all, people are still unemployed if there was a job opportunity that wasn’t worth taking, even if that job would have been worth taking if taxes were lower than they are.

Decisions like these mean there may be less usable spare capacity in the economy that was thought, which means less room for catch-up growth and a lower trend rate of growth overall. Unless the Government tackles the economic fundamentals that are blocking the economy from fully recovering, and that means deregulation, cutting spending and cutting taxes, the economy will remain weak and stunted for a lot longer than the Chancellor would hope.

The Campaign for HSR prop up the Government’s dishonest claims about HS2

Sep 16th, 2011
by Matthew Sinclair.
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Professor David Begg has attacked our report on the hidden costs of HS2 this morning.  The point of that report is simple: the Government’s plans for HS2 contain a series of unwelcome consequences like worse services for many towns and cities, higher fares and heavy congestion at Euston.  They promise that all of these problems will be addressed, but don’t acknowledge the costs that would entail.  They are trying to have their cake and eat it too.

If they want to stick to all the promises they’ve made that aren’t in the current plans, then they need to provide an estimate of how much that will cost taxpayers.  In lieu of an official study and to inform taxpayers, we asked experienced rail executive Chris Stokes to produce the best estimate he could.  He found it could be a massive £28.4 billion extra.  You can read the details here.

Professor David Begg attacked our report on two key grounds.

First he argued that we are wrong to say building HS2 will necessitate the construction of Crossrail 2, adding billions to the overall cost.  He says that is only based on the optimistic demand forecasts for high speed rail – which we have challenged – and a claim that the line is needed from Boris Johnson.  It isn’t.  As we stated in the report the critical thing is not just that Euston will need to accommodate growing passenger volumes, but that “the majority of InterCity passengers who currently use Kings Cross and St. Pancras would also travel through Euston.”

Kings Cross and St. Pancras are major stations accommodating lots of InterCity passengers from places like Yorkshire.  The Government’s HS2 plans would have huge numbers of those passengers going to the already overcrowded Euston instead.  That would almost certainly, particularly once Phase 2 of HS2 is completed, necessitate the creation of a new underground connection for Euston.  It would cost billions.  That is why Boris Johnson has said the new line is necessary if HS2 goes ahead.  Incremental improvements to the rail network would mean we could continue to make proper use of Kings Cross and St. Pancras and therefore don’t involve the same costs.

Second he argued that we were wrong to argue that existing services would be cut because capacity would be freed up on other lines.  The problem is that the Government has budgeted that they will save £5.4 billion by reducing existing services.  If they instead try to maintain the service on those existing lines – which will be less economical without traffic to the major destinations served by HS2 – then at the very least that saving won’t be possible.

Also, apparently we haven’t offered an alternative, but Chris Stokes has set out a set of incremental improvements that would double capacity against the same baseline as HS2 at a much lower cost.  You can read his alternative here.

Many of the estimates in our note are conservative rough estimates.  We aren’t going to pretend that it is an alternative for a proper, detailed costing of the pledges that politicians are making.  The report isn’t going to provide a definitive answer, we don’t have the data or the resources to do that.  But we have to produce the best estimate we can, on the basis of Chris Stokes’ considerable knowledge and experience, so that taxpayers are aware of the incredible bill that politicians might be setting up for them, if the Government won’t do their job and provide an honest estimate themselves.

Instead of throwing out simple-minded attacks, the Government and other proponents of HS2 need to do one of two things:

  1. Accept the consequences of the plans they have set out.  For example, that towns like Coventry, Stoke-on-Trent and York would get a worse service.
  2. Set out a detailed costing for a project that matches the promises they have made.

Till they do that, the best estimate available of the cost to taxpayers is the one in our research.

Greek bond yields show their spending cuts weren’t deep and fast enough

Sep 8th, 2011
by Rory Meakin.
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Financial markets have recently lost much of the little faith they had in the Greek government’s ability to repay its debt. A bond promises to pay the bearer a fixed sum on a fixed date. One year bonds are those where the due date is one year on from now. Yields on these have rocketed to 96 per cent on Greece’s one-year government bonds, meaning investors are only prepared to pay just over half the value of the promised payment due in a year’s time.

The Greek government simply cannot borrow money at a sensible rate, because it has borrowed too much for too long and its public spending cuts are too slow and too shallow. The Treasury’s Budget 2011 forecasts predicted that the government would pay almost £50 billion on debt interest this year. British bond yields are less than one per cent. Britain’s economic position is much more stable than Greece’s, but the Greek experience does show what happens when governments which spend too much money fail to cut public spending deep and fast enough.

Take a look at our Real National Debt paper and watch the video below to find out more about how much debt the Government really owes.

Harvard Economist Jeff Miron takes on three myths about capitalism

Aug 23rd, 2011
by Matthew Sinclair.
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Here is an interesting video of Jeffrey Miron, Director of Undergraduate Studies at the Harvard university Economics Department, talking about capitalism.  He answers three questions: Is being pro-business and pro-capitalism the same? Does capitalism generate an unfair distribution of income? Was capitalism responsible for the most recent financial crisis?

We have produced a number of reports about businesses making significant amounts out of the regulations, taxes and subsidies imposed by politicians – with taxpayers paying the price.  There are major capital projects which run way over their budgets; Regional Development Agencies we’ve exposed handing out grants to a favoured few at everyone else’s expense; and lots of windfall profits for special interests in the energy sector covered in Let them eat carbon.

Taxes hit the poor just as hard as the rich.  Particularly consumption taxes like VAT and ‘sin taxes’ like the duty on cigarettes and regulations increasing electricity bills.  We need to resist these kinds of often self-righteous policies hitting the budgets of the hardest pressed families and keep increasing the threshold for income tax.

Finally, for more on the financial crisis see a research note that I wrote with Dalibor Rohac, at the Legatum Institute.  Whatever the mistakes of individual financiers, you just can’t understand the crisis properly without looking to the role of bad policy.

Jeff Miron is right to challenge these popular misconceptions.  Defending free markets doesn’t mean standing up for big business without question, or backing wealthy crony capitalists against the poor consumers paying the price for their dodgy profits.  It means ensuring that politicians don’t get in the way of people being rewarded when they work hard and innovate to better provide new, better or cheaper goods and services for willing customers spending their own money.  It is the ordinary consumer and taxpayer who has the biggest interest in genuine free markets.

ECB intervention targets crisis symptoms over causes

Aug 9th, 2011
by Jonathan Duell.
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After US debt lost its AAA status last Friday in one of the more worrying announcements since the dark days of the financial crisis, all eyes were fixed yesterday on the stock markets of debt-ravaged Spain and Italy. The European Central Bank (ECB) made a desperate attempt on Sunday to try and shield the Eurozone from the impending Wall Street shockwave by buying Italian and Spanish bonds in order to boost prices, create stability and restore confidence.

The ECB’s move achieved its objective – stabilising Italian and Spanish long-run debt costs, whose 10-year bond yields both dropped towards 5% from 6.2% and 6.3% respectively. This represents an edging back from the 7% precipice (a similar yield to that of Ireland, Portugal and Greece when they received bailout funds).

But within little over two hours of market trading, evidence of the ECB’s intervention had evaporated on other markets. The FTSE fell below its opening value of 5,207, losing the gains of the morning, before gradually sliding for the rest of the day to close at a one-year low of 5,068. This was an overwhelmingly clear signal from the markets that although the ECB had averted the need for an immediate bailout, the true cause of the wider crisis – a simple lack of confidence in the face of an accumulating debt mountain that shows no sign of subsiding – remains intact.

As such, the short-term effect won’t last if serious action isn’t taken on the underlying economic and fiscal weakness of the eurozone periphery. Buying Italian and Spanish bonds will leave the ECB itself even more vulnerable if those problems aren’t addressed.

More action on the symptoms is simply no substitute for a genuine commitment to address the causes: the terminal dysfunction of the euro and the high debt and expected low growth which are smothering attempts to rebuild the credibility of the latest bailout suspects.

Photo from Flickr user jurjen_nl.

Why has the US been downgraded from AAA and not the UK, and what will it mean for us?

Aug 6th, 2011
by Matthew Sinclair.
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The ratings agency Standard & Poor’s has downgraded United States sovereign debt overnight, from AAA to AA+.  They are one of the big three agencies alongside Moody’s and Fitch, so it is a significant and unprecedented step.  There are two obvious questions: Why has the US been downgraded and not Britain?  And, what does it mean for us?

In their statement about the downgrade Standard and Poor’s answer the first question.  Contrary to some early reports, they don’t attach particular blame to any party or ideology.  Their view is essentially that they don’t see the political will to take sufficient action to address the deficit there in the medium term:

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Britain’s credibility has always rested on an assessment by the markets and the ratings agencies that people here do accept cuts are necessary.  As I quoted in How to Cut Public Spending, Moody’s specifically credited that as a key reason to maintain our AAA rating before the last election, despite the parties largely avoiding a serious and specific discussion of cuts at that point:

Moody’s assessment that the UK government exhibits a high degree of debt reversibility is supported by the trend over recent months towards an apparent consensus among the public that fiscal retrenchment (including cuts in expenditure) is both inevitable and desirable.

Thankfully the people we are borrowing so many billions from understand that most Britons do want to deal with the deficit, they trust that the irresponsible “no cuts” brigade are a small minority.

It will be Monday before we have a clear idea of what this means for Britain.  There are two key questions.

First whether the ratings agency is essentially following markets which have already priced in that US debt is a lot more risky than it used to be.  Or whether this is another event like the Lehman’s collapse or the events in Greece that alters investors’ perceptions of what is safe quite drastically, and therefore causes a lot of disruption in world markets.  We will find out on Monday.

The second question is whether or not the fact in itself that this debt is no longer unambiguously rated as AAA will force some institutional investors to move their money.  If all the agencies changed their ratings that would almost certainly be the case.  But if Moody’s and Fitch keep the US at AAA then it might not happen.  Again we will get a clearer picture on Monday.

It still looks like the eurozone’s problems are the biggest threat to the global economy right now.  Italy and Spain’s problems are much more urgent.

I don’t think this should change our policy priorities.  We still need to keep up the fiscal adjustment to maintain our credibility, so that ratings agencies don’t come to the same conclusions about our will to sort out our public finances they have come to about the US.  But also with so many dangers in the international economy we need supply side reforms to strengthen the underlying strength of our economy.  Not more spending, which is generally associated with lower economic growth, but improvements in incentives for people to work, invest and build businesses in Britain.  We can’t leave opportunities like more dramatic cuts in business taxes on the table and we need to look at the deeper reforms the 2020 Tax Commission is studying.

High deficit countries aren’t having a good recovery

Aug 5th, 2011
by Rory Meakin.
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Financial markets across Europe and the United States have been in turmoil this week as fears have grown about the ability of the Spanish and Italian governments to repay their debt and the prospect of a double-dip recession in America. The London Stock Exchange’s FTSE100 index closed at 5,393 on Thursday 4th August, down from a high of 5,912 on Monday – a fall of 8.8 per cent. Mr Knapp of Barclays Capital highlighted the impact of worries about the American economy:

When the outlook for the US is good or OK, people find it much easier to deal with the problems in Europe

The problem is that lenders are losing confidence in the likelihood that their money will be repaid. The reason governments need to borrow so much money in the first place and that lenders are nervous about lending further vast sums is, of course, because governments have failed to get a grip on spending. Instead of keeping spending prudent during the expansionary years of the credit cycle, the governments now in trouble are those which ran deficits instead. When the financial crisis of 2008 hit, unemployment rose, meaning spending forcing spending to follow suit, while profits and incomes fell bringing taxation revenues down with them. The strength of these factors varied between countries but so did the starting points.

Government budget balances, % of GPD (OECD)

Germany, Australia and Sweden ran budget surpluses in 2007; Greece, Italy and the United States all ran significant deficits. In 2010, the US and Greece ran deficits of approximately 10 per cent of GDP. Italy, with its huge existing debt, retained a deficit that by today’s standards counts as moderate (but would have been seen as dangerous before 2008).

Germany, Australia and Sweden had swung into deficits by 2010, too, but their borrowing was at a much lower rate. This has affected growth rates. Those three countries grew by 3.4, 2.9 and 4.5 per cent in 2011 but Greece’s economic output shrivelled by further 2.9 as Italy and the US grew by just 1.1 and 2.6 per cent. The correlation between large budget deficits and low growth is stark.

Sadly, Britain is in the high deficit, low growth group. As Sean O’Grady reports in the Independent, the head of the Office for Budget Responsibility has warned that the economy is unlikely to meet its already weak existing forecast of 1.7 per cent:

As a simple matter of arithmetic, in order to get to 1.7 per cent now you’d be looking for quarter-on-quarter growth rates of 1 per cent in the second and third quarters of 2011, and there aren’t many people out there expecting that.

If the Government want to revitalise the economy, they need to start implementing the cuts that have been talked about so much. Simpler, lower taxes. Lighter, smarter regulation. Reliable, stable money. These are the things an economy needs to grow, not ‘stimulus’, borrowing and taxes.

High deficit countries aren’t having a good recovery

Aug 5th, 2011
by Rory Meakin.
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Financial markets across Europe and the United States have been in turmoil this week as fears have grown about the ability of the Spanish and Italian governments to repay their debt and the prospect of a double-dip recession in America. The London Stock Exchange’s FTSE100 index closed at 5,393 on Thursday 4th August, down from a high of 5,912 on Monday – a fall of 8.8 per cent. Mr Knapp of Barclays Capital highlighted the impact of worries about the American economy:

When the outlook for the US is good or OK, people find it much easier to deal with the problems in Europe

The problem is that lenders are losing confidence in the likelihood that their money will be repaid. The reason governments need to borrow so much money in the first place and that lenders are nervous about lending further vast sums is, of course, because governments have failed to get a grip on spending. Instead of keeping spending prudent during the expansionary years of the credit cycle, the governments now in trouble are those which ran deficits instead. When the financial crisis of 2008 hit, unemployment rose, meaning spending forcing spending to follow suit, while profits and incomes fell bringing taxation revenues down with them. The strength of these factors varied between countries but so did the starting points.

Government budget balances, % of GPD (OECD)

Germany, Australia and Sweden ran budget surpluses in 2007; Greece, Italy and the United States all ran significant deficits. In 2010, the US and Greece ran deficits of approximately 10 per cent of GDP. Italy, with its huge existing debt, retained a deficit that by today’s standards counts as moderate (but would have been seen as dangerous before 2008).

Germany, Australia and Sweden had swung into deficits by 2010, too, but their borrowing was at a much lower rate. This has affected growth rates. Those three countries grew by 3.4, 2.9 and 4.5 per cent in 2011 but Greece’s economic output shrivelled by further 2.9 as Italy and the US grew by just 1.1 and 2.6 per cent. The correlation between large budget deficits and low growth is stark.

Sadly, Britain is in the high deficit, low growth group. As Sean O’Grady reports in the Independent, the head of the Office for Budget Responsibility has warned that the economy is unlikely to meet its already weak existing forecast of 1.7 per cent:

As a simple matter of arithmetic, in order to get to 1.7 per cent now you’d be looking for quarter-on-quarter growth rates of 1 per cent in the second and third quarters of 2011, and there aren’t many people out there expecting that.

If the Government want to revitalise the economy, they need to start implementing the cuts that have been talked about so much. Simpler, lower taxes. Lighter, smarter regulation. Reliable, stable money. These are the things an economy needs to grow, not ‘stimulus’, borrowing and taxes.

Boris Johnson agrees, lacklustre growth figures mean we need targeted tax cuts now

Jul 28th, 2011
by Rory Meakin.
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Figures released on Tuesday show the economy grew by just 0.2 per cent in the first quarter of this financial year. Initial estimates are usually revised up, subsequently. In addition, the Japanese tsunami and earthquake, the Royal Wedding, unseasonal heat and the delay in counting Olympic ticket sales have all been used by the ONS to save ministerial blushes for the disappointing figures. Is there really much of a macroeconomic impact from warm weather, for example? Wouldn’t spending simply be switched from heating and sweaters to ice-creams and shorts? But even ignoring all that the number is a serious disappointment, if not an unexpected one. Growth should be a lot higher and the Government’s continued high spending and failure to get to grips with supply side reforms is getting in the way. Ed Balls, the Shadow Chancellor of the Exchequer, voiced concern about the low figure:

“The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down”

At the same stage following the 1990-91 recession the economy was growing 5 times as fast as it is now. Fast growth following a recession should be expected, as depressed asset prices and wage levels tempt firms to make use of the capacity freed up during the contraction. Despite the rhetoric surrounding supposed cuts, the Government has continued to increase spending which has meant it is still employing staff, occupying offices and purchasing the supplies that would normally now be in the process of being reallocated into more productive and efficient use by price signals and market forces. With the Government still spending over half of the economy’s output, the room for the private sector to generate economic growth is much smaller than back in the early 1990s when the Government’s share was closer to 40 per cent.

Quarterly economic growth, 2007-11 and 1990-94

Research has shown that an economy with a 10 per cent higher share of GDP being consumed by government will suffer from growth rate approximately 1 per cent lower than otherwise. But it’s not just aggregate spending figures which have conspired to fetter the nation’s economic prospects. The cumulative effect of two decades of gold-plated regulations from Whitehall and Brussels and tougher planning restrictions have also served to restrict the economy’s ability to adapt to changing conditions and preferences in society. Cities of London and Westminster MP, Mark Field, has highlighted the need for loosening the restrictions in the economy:

“As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size enterprises (SMEs). We have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs”

Fortunately, what needs to be done is not terribly unthinkable. On the regulatory front, hack back the thicket of over-zealous box-ticking regulations in town planning, health and safety and labour markets. Unwinding those regulations back to a sensible framework is no mean task but it is certainly not unthinkable. Similarly daunting is the task of overhauling Britain’s enormously over-complicated tax code. The 2020 Tax Commission , a major joint project with the Institute of Directors, is taking on this task and will produce a root-and-branch overhaul of the system in early 2012. But there are things that can and should be done right now, too.

Contributing to the ConservativeHome Growth Manifesto from London think tanks, Matt Sinclair, Director of the TaxPayers’ Alliance, said we should cut National Insurance, cut Corporation Tax faster and axe the 50p income tax band. Twelve other organisations contributed further pro-growth reforms that should give the Government plenty to be getting on with. Some, such as the European Trade Union Institute’s Duncan Weldon, at a BBC Radio 4 debate, have criticised the manifesto for not being a response to slow growth because we always propose such policies. The reason for this is simple. Supply side reforms always boost growth and we are always in favour of growth and prosperity, not just when the economy has been particularly wrecked by profligate spending, burdensome taxes and a mountain of debt.

Fortunately, the political momentum for tax cuts is growing and Mayor of London Boris Johnson called on the Government to scrap the 50p rate and cut National Insurance in yesterday’s Daily Telegraph:

“You’ve got to look at ways of stimulating growth now, and certainly I think you should look at National Insurance, you should look at ways of stimulating consumption confidence in the market”

Politicians from across the political spectrum who recognise the need for economic growth should join the Mayor of London in backing our proposed tax cuts.

Latest OBR figures show public spending is still rising. Time to cut it

Jul 25th, 2011
by Rory Meakin.
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Central government spending soared by 4.9 per cent to £52 billion in June 2011, up from £49.5 billion in June last year according to Office for Budget Responsibility (OBR) figures. The higher than budgeted figures led to an increase in public sector net borrowing from £13.6 to £14.0 billion. Tax receipts also rose, but not as rapidly as government spending. Nida Eli of the Ernst & Young Item Club said:

“The government still has a very long way to go in order to meet its target of reducing borrowing by £20bn this year. With nine months to go it needs to reduce borrowing by more than £2bn a month compared with last year’s figures.”

The figures show a large gap between the terms of public debate on spending and the facts. With the official Consumer Price Index of inflation at 4.2 per cent in June, spending is still rising even after adjusting for inflation. The so-called cuts simply aren’t happening and that is dangerous for two reasons: high public spending is holding back the economy and the enormous borrowing means we risk runaway debt service costs and, ultimately, a sovereign debt crisis.

Athenian austerirty riots

Britain has a debt problem. It’s not as bad as Greece’s; our official debt is approximately 80 per cent of the economy compared to 140 per cent for Greece. The average ‘maturity’ of our debt, the length of time left before we are obliged to repay it, is also much longer meaning that in each year a smaller proportion of our debt needs to be refinanced with new debt. But the scale of our borrowing problem is very similar to Greece’s and, unless we tackle our massive borrowing problem, our debt problem might soon look a lot more like Greece’s than we’d like it too.

The Government must act now to reverse the rise in spending and bring borrowing back down not just to the Government’s own tame budgeted proposals, but lower still to create room for tax cuts and growth in the private sector. The credibility of the Government’s spending plans is at stake and if capital markets stop believing the Government’s promises to keep spending under control they will become more nervous about the possibility that their loans might not be repaid. That means they will demand a higher rate of interest to make up for the increased risk. This in turn means higher government spending which can easily turn into a downward spiral (of higher spending on interest and worries about higher spending leading lenders to raise interest rates) into the kind of sovereign debt crisis now engulfing Greece.

Bold cuts to public spending are needed to avoid following that example. Britain’s taxes are already too high and too complicated. The only answer to the borrowing problem is in spending control. But reducing spending will boost the wider economy too, not just the public finances. More public sector spending means more resources being allocated by the public sector according to politicians’ priorities and bureaucrats’ convenience rather than consumers’ actual wants and needs. And that leads to slower growth in the economy and a less prosperous society. While they are always difficult at first for those whose jobs are lost or whose incomes are reduced, over time spending cuts lead to growth in the private sector and the economy as a whole.

Regulation hitting small firms

Jul 25th, 2011
by Matthew Sinclair.
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The Forum of Private Business (FPB) have released a new report, the latest in their quarterly Referendum series of member surveys.  This one is about the cost of compliance with regulation from health and safety to employment law and PAYE and National Insurance.  The FPB represent small firms who often particularly struggle with these requirements and incredibly regulations are costing the UK’s 1.17 million micro, small and medium sized employers an average of £25,500.

That means huge amounts of staff time that could have been spent growing the business, creating new job opportunities.  Billions spent on external help to deal with the more complicated rules, and make sure they are getting things like tax right.  The most onerous areas are health and safety, employment law and tax.

Health and safety regulations need to be closely scrutinised.  Any that have been in place for more than five years should be assessed to see if they have altered the trend in that area, has it actually made people healthier or reduced accidents?  The FPB found the cost of health and safety regulation is still rising which is incredible with manufacturing in long term decline as a share of employment.  It is also a particular problems for small but growing firms as the cost becomes a lot greater when they employ their fifth person, and face new requirements.  Do we want to put small companies off growing like that?

In employment law politicians really need to appreciate that what they think will “protect” jobs will often actually just stop people getting hired in the first place.  Small businesses in particular need flexibility to limit the financial risk when they take someone on.

Reducing the complexity of the tax system is difficult but vital.  That’s why we are running the 2020 Tax Commission which is going to set out a radical plan to reform taxes to improve incentives and make the whole system a lot simpler.

Too often calls to cut sharply cut red tape remain vague and therefore unproductive.  Hopefully with the 2020 Tax Commission and other projects we can start to set out concrete proposals to make Britain an easier place to grow a small business, and create new opportunities.

Latest ONS public sector finances data shows the need for deeper cuts

Jun 21st, 2011
by Rory Meakin.
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The Treasury and Office for National Statistics have released the latest public sector finances statistical bulletin with figures relating to April and May. For all the talk in the media of ‘savage cuts’, total current expenditure rose from £50.6 billion in May last year to £51.7 billion in May 2011. Meanwhile, current receipts rose from £35.1 to £38 billion. After net investment is added, that leaves net borrowing at £17.1 billion, down from £19.3 billion.

Government spends £4 for every £3 raised in tax

These figures show that the need for a fiscal retraction remains overwhelming. The UK borrowed over £17 billion pounds in May alone because the £38 billion raised in tax was not enough to fund Government spending. The events unfolding in Greece show that the greater risk does not lie in the Coalition Government’s timid cuts being too hard but instead that they’re too small. The British economy desperately needs tax cuts and tax simplification but it also needs to close the huge deficit these figures reveal.

Once social benefits and interest charges are stripped out, remaining current expenditure rose only slightly, from £32.5 billion in May 2010 to £32.6 billion in May 2011. This shows that the Government is showing restraint that would be, in a more benign environment, admirable. But for a government that is spending more than £4 for every £3 it can raise in taxation, it simply isn’t good enough.

Osborne needs to do more to safeguard taxpayers from another bank bailout

Jun 15th, 2011
by Matthew Sinclair.
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The reforms set to be announced by George Osborne in his Mansion House speech tonight, aiming to ring-fence retail banking, are an incomplete response to the financial crisis, and if the Government aren’t careful they could be actively unhelpful.  While the details are very complex, there are some simple issues that taxpayers should be aware of in judging if reforms are going to make it more or less likely that bankers come begging to them for a handout again.

Talking to ITV News about changes to financial regulation

As I told ITV news this lunchtime, separating out retail and investment banking can be actively dangerous.  To understand why, imagine you separated them completely into relatively safe retail banks and relatively risky investment banks.  The retail banks would still be able to take risks.  Banking is an inherently risky activity as you often lend for the long term and borrow for the short term.  Research has even found that banks with investment banking divisions can be more reliable as they are more diversified.  Northern Rock didn’t have an investment banking arm, after all.  Alex Tabarrok, one of the authors at the Marginal Revolution blog, sets out why that could be the case here:

Proponents of the Glass-Steagall Act argued that separating commercial and investment banking would increase the safety and reduce bank and customer conflicts of interest.  Neither of these arguments bares close scrutiny here.  At the most basic level, it is clear that many securities (stocks and bonds) are less risky than are loans.  Security investments are also liquid and publicly observable.  Liquidity lets banks quickly rebalance their portfolios to avoid runs, and public observability improves the efficiency of bank monitoring by depositors and bond holders.  Even if all securities were riskier than all loans, forbidding banks to invest in securities could increase bank risk because of the benefits of diversification (see Macey 1991).

If a bank is told that it is a safe, retail bank which the Government can’t possibly allow to fail then that will encourage them to take risks.  We will be offering the retail banks a very explicit heads you win, tails we lose, bet.

It isn’t clear yet how much risky activity will be contained within the retail part of the banks, as we don’t know the Government’s definition of retail and investment banking.  But Robert Peston has written about one definition, and the extent to which major risks are still contained within that notional retail banking sector:

A recent suggestion by HSBC – which would base the break-up on a new accounting standard differentiating a bank’s trading activities from traditional banking (in the jargon, those assets valued on an accrual basis would be in the ring-fenced retail bank, and those marked to market would be outside) – would see some 60% or 70% of a bank inside the ring-fence.

Now some bankers argue that HSBC’s proposal would tend to keep taxpayers far too exposed to potential bank losses – since, in practice during the recent crash and recession, losses for banks on HSBC’s definition of retail banking have been massively greater than investment banking losses (by a multiple). For example, HBOS’s insanely loss-making loans to property businesses would have been inside the ring fence, on HSBC’s definition.

It could be that we do need to carve out a safe space for retail depositors.  It is far from clear that the Government is doing that though and half measures could be the worst possible outcome.

There are two missing ingredients so far.  The first is ensuring that bondholders bear the risk when they lend to banks.  The decision to give them a free pass, as we did in the bank bailout, creates huge moral hazard.  If someone lends money to a company, and it goes bust, they should lose it.  Otherwise there is no incentive for lenders to insist that executives at the banks are careful about the risks they take on, and be careful about only lending money to sound institutions.  Andrew Lilico has led the charge on this arguing that bondholders should be bailed in, rather than banks being bailed out, and he wrote about that for ConservativeHome.

The other thing they need to do is look at global regulations that are increasing the systemic risk to the financial system.  As that regulation becomes more and more homogenous, the result is a kind of monoculture which is far more vulnerable to disease.  When something goes wrong everyone has the same vulnerabilities and tries to respond in the same way, becoming a huge danger to the world economy.  There is a lot more on this in a short research paper we released with the Legatum Institute.

For all these shortcomings, there was some very good news at the speech.  The Government is going to auction Northern Rock as soon as possible.  We need to get our money back, and we need to get the Government out of the business of investing in banks.

Strong employment growth

Jun 14th, 2011
by Matthew Sinclair.
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The recovery has been distinctly lacklustre recently. Recovering from a financial crisis is hard and, as higher spending tends to mean lower growth,  an economy straining under the heavy load of spending at 46 per cent of national income was always going to struggle. Construction in particular seems to have had a hard time.

There is good news though.  We aren’t facing the kind of dismal prospects that they are in the United States on employment. More people are getting jobs and businesses are planning to hire lots more over the Summer. Reuters reports that staffing firm Manpower thinks the market is holding up well and the time is right for necessary public sector job cuts:

Small and medium-sized companies plan to step up hiring over the summer, a survey by staffing firm Manpower showed, raising the chances that private firms will make up for jobs lost due to the government’s spending cuts.

“We’ve been warned for such a long time to expect large scale public sector job cuts in central government, but in our experience that is just not happening,” Mark Cahill, Managing Director of Manpower, said in a statement.

“If the government really intends to make the large-scale redundancies initially suggested, ministers must realise that the longer they wait to start this process, the harder it will eventually become,” he said.

“We’re now confident that job creation in the private sector, particularly among SMEs, can now fill the gap created by job losses in the public sector,” he added.

Steve Hawkes at the Sun adds a quote from the stockbroker Investec:

We may be going through a soft patch in the recovery now, but employers are looking to hire.

Our relatively liberal employment laws mean that businesses feel confident to employ people as the economy recovers. If only we had the kind of supply-side reforms we need to get Government off the backs of families and businesses, a real plan for growth. Combine stronger trend growth, with a private sector that has shown it will create lots of jobs, and robust welfare reform, and everyone can enjoy more opportunities and greater prosperity. It’s an exciting opportunity.

The Government must get out of the way to let entrepreneurship flourish

Jun 8th, 2011
by Jon Boulton.
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On Monday Duncan Bannatyne wrote about the life of a modern entrepreneur in the Financial Times. Among other things he discussed the overwhelming amounts of regulation and bureaucracy that blight today’s businesses, and the failure of banks to provide loans to those looking to start new firms.

The myriad of poorly thought out, badly written and obstructive regulations and laws that govern those who try to start – and grow – a business is a huge burden and can hold otherwise sound businesses back. The Business Secretary has made it his job to cut regulation but action needs to follow the rhetoric.

In addition to less regulation, lower taxes are needed to keep those businesses that do succeed in the country. If we are to return to the nation of entrepreneurs we once were, the Government needs to encourage entrepreneurial spirit by doing less, making the environment less daunting. The lack of capital to start up a business in the current economic climate is a real concern but the reluctance of some banks to provide finance for viable businesses is only part of the problem. Governments must be wary of directing the banks to finance more loans while also demanding banks build up their reserves to guard against another crisis.

The Government has for too long patronised entrepreneurs with Regional Development Agencies and by attempting to pick winners. Further government ‘assistance’ is not what the business community needs. The only way the government can truly help is to cut taxes and regulation. A good example is the North East  – it’s now heavily reliant on taxpayers’ money, with 64 per cent of GDP in the region made up by public spending. But it hasn’t always been like this; it was previously an industrial powerhouse, with the likes of George Stephenson creating huge industries at a time of low tax, less regulation and a much smaller state. The standard of living of poorer people at the time was dragged up with high wages, and people flocked from all over to work there. The place was a hive of innovation and entrepreneurship.

Bannatyne makes some good points in his piece, although his call for greater government assistance for entrepreneurs should mean getting out of their way so they can create jobs and wealth. Although he summed up the folly of grant-giving best on Dragon’s Den, as this clip shows.

If the OECD is a source of “wise advice”, maybe Ed Balls should listen to it?

May 26th, 2011
by Matthew Sinclair.
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In an interview with the Times this morning, the OECD chief economist Pier Carlo Padoan said that “if there is not so good news on the growth front” the Government might have to reconsider its spending plans.  Ed Balls has got very excited about that and said “it’s now time George Osborne listened to wise advice” and reconsidered the fiscal adjustment.  Unfortunately for the Shadow Chancellor, the OECD has made clear that, on the current data, they think that planned spending cuts are necessary.  Just yesterday they published their Economic Outlook, and said:

“The current fiscal consolidation strikes the right balance and should continue in line with the government’s medium-term plan to eliminate the deficit, while allowing the automatic stabilisers to work.”

There hasn’t been a rush of new economic data overnight which has led to a Damascene conversion at the OECD.  They’ve clearly been asked a question by the newspapers about what their recommendation could be in certain, currently hypothetical, circumstances.  If Ed Balls appeals to their authority then he is going to have to accept that the institution currently backs the fiscal adjustment.  Otherwise he is going to have to set out why exactly the organisation is wise today but was foolish yesterday.

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