David Green: Wealth extraction, not wealth creation. The Morrisons takeoever – and why government should be prepared to intervene.

11 Jul

David Green is Director of Civitas.

The Government is in a philosophical quandary. Its commitment to levelling up implies economic interventions in favour of left-behind regions. As a result, it has been attacked for abandoning the ideal of low taxes and small government. Simultaneously, it is pursuing some policies that imply continued commitment to the principle of non-interference in economic policy – not least in its approach to takeovers of British companies by private equity, brought to a head recently by offers to buy Morrisons.

The paradox was particularly striking when Kwasi Kwarteng announced new subsidy rules under the Subsidy Control Bill. He felt bound to say that the Government was not returning to the industrial strategy of the 1970s. There would be no ‘picking winners’ or bailing out of unsustainable companies. Producers will be backed only if they have good prospects of success and especially if they are supportive of decarbonisation. An innocent observer might conclude that a policy of avoiding lame ducks and backing promising ‘green’ technologies was picking winners.

The Government appears to have no clear criterion to help it distinguish between policies compatible with personal freedom and those that undermine it. Fortunately, one of the greatest defenders of liberty in the last 100 years grappled with this very problem.

Hayek argued that the main criterion was the rule of law, by which he meant that the Government should act through general laws that applied equally to all, including itself, and specifically that it should not grant preferential treatment to specific people. To do so would undermine the process of competitive discovery by which we reveal better ways of meeting human requirements.

What would this criterion imply for decarbonisation policy? It suggests not pre-judging which producers or technologies will be preferred. In vehicles, for example, there may be a role for hydrogen, hybrids, diesel, petrol, or all-electric. We should allow the competitive system to reveal the best approaches through trial and error.

But what should the Government do about private equity taking over British companies. Must it be accepted as an inevitable consequence of a free market and its ruling doctrine of non-interference?

Again, Hayek thought it through. It was the character of government activity that was important, he said, not the volume. Many measures were compatible with freedom. Moreover, he thought that a government that was ‘comparatively inactive but does the wrong things’ could do much more to ‘cripple the forces of  a market economy’ than one that is active, but confines itself to measures that assist ‘the spontaneous forces of the economy’.

How should this reasoning be applied today? The Morrisons takeover has come under strong fire from others in the financial sector. Legal and General, the City’s biggest fund manager, cautioned against loading Morrisons with debt and selling off its property assets on the cheap. Andrew Koch, a senior fund manager, feared that this strategy would lead to reduced tax paid to the Exchequer (because debt interest is deducted from profits).

Concerns in the City have been multiplied by the experience of Cobham, the defence group, which was sold to American private equity owners about two years ago. At the time, many warned that the new owners would break up the company, but the Johnson Government authorised the deal after getting some promises. Today, more than half of the business by value has been sold. James Anderson of Baillie Gifford, one of the world’s most successful investors, has recently described the underlying problem as a ‘deep sickness’ in UK capital markets.

The claims of these critics is consistent with the thinking of Adam Smith who warned against misplaced trust in manufacturers, speculators and merchants. They were ‘an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it’.

The Government should not fall into the trap of thinking that it should never intervene in corporate takeovers. There is a public interest in stopping the Morrisons takeover. The company’s model is to own the vast majority of its shops and run some its own manufacturers and farms. It is profitable. Private equity has been granted preferential advantages. Owners are allowed to pay tax as if they make capital gains and not profits subject to higher corporation tax. And owners are able to take advantage of the preferential treatment given to company debt compared with equity. A government that used its powers to encourage Hayek’s ‘spontaneous forces’ would equalise the treatment of debt and equity to preserve responsible private ownership.

If the Morrisons bid is allowed to proceed the owners will probably sell off the shops to another company they control and lease them back, giving them a capital gain and an income stream at the expense of Morrisons. This is wealth extraction not wealth creation. If the Government allows its squeamishness towards intervention to paralyse it into inaction, it will drop helplessly into the trap described by Hayek: that of crippling the spontaneous forces of a market economy by inaction.

How to advise Lord North, or Heath, or Thatcher, or Johnson

5 Mar

Political Advice: Past, Present and Future edited by Colin Kidd and Jacqueline Rose

The press is excited by stories about Boris Johnson’s advisers. Who is in, who out? Who is briefing against whom? Carrie Symonds is running the country from her sofa! The news that leopards are to be reintroduced into St James’s Park shows she is. And anyhow, who paid for the sofa?

Readers who wish to take a longer view of political advice are advised to get hold of this book. But be warned: it does not offer a crib, a cut-out-and-keep guide to how to be an adviser.

The lesson of the book is that there are no lessons. If this volume were by a single author, we could perhaps deduce from it a doctrine, but it is actually the work of 14 different contributors, who on 8th June 2017 met for a one-day conference on Political Advice at All Souls College, Oxford.

We are not fed anything so misleading as a theory of advice, but in these 14 essays we do find intimations, continuities and recurrences as we travel with these authors from Periclean Athens via the Renaissance, Tudor England, the Scottish Enlightenment, British orientalists in Persia, Edward Heath’s managerialists in Whitehall and astrologers at the court of Ronald and Nancy Reagan, to an account of the impossibility of advising Donald Trump.

Nobody can govern alone: every ruler needs help, and as the editors, Colin Kidd and Jacqueline Rose, remark in their introduction, the people running the show today “have no more time or concentration than their predecessors in antiquity”.

There is a limit to how much advice anyone can take in, let alone make use of. William Waldegrave writes, in this volume, about his experience of being a member of the Central Policy Review Staff (CPRS) from 1971-73.

Heath, both as Leader of the Opposition and from 1970 as Prime Minister, had a tremendous appetite for policy advice. He was a man of his time, for as Waldegrave reminds us,

“the late 1960s had seen much discussion of whether Britain’s institutions had sufficiently modernised themselves: the civil service was among those subject to criticism, including self-criticism. This had led in 1966 to the establishment, after a select committee of the House of Commons had levelled the accusation of amateurism at the modern service, of the Fulton Committee…it made trenchant criticisms of what it saw as the cult of the generalist, the lack of influence by scientists, poor training and recruitment practices and other matters.”

The CPRS was one way in which Heath was determined to modernise the machinery of government, by creating a central strategic staff who would engage in long-term thinking and apply the latest management techniques, many of them imported from the United States, to which “two exceptionally able younger Conservatives”, David Howell (now Lord Howell) and Mark Schreiber (now Lord Marlesford) had been despatched on a mission to find out what was happening there.

In 1970, Howell made, in his pamphlet A New Style of Government, the first use in the United Kingdom of the word “privatisation”. According to Waldegrave, these British experts “linked management theory to political doctrine in a more interesting way than is found in most of the American work of the time”, relating “managerial efficiency…to the development of modern liberal free-market doctrines”.

What happened? Heath made a complete hash of things, and in February 1974 the British people threw him out of office. His administration had been characterised, not by long-term thinking, but by desperate short-term expedients which culminated in the lights going out.

And yet all that advice was not entirely wasted. After 1979, privatisation became, with Margaret Thatcher as Prime Minister, one of the Government’s most significant and successful policies.

She too was tremendously keen on getting good advice. She and her advisers learned from Heath’s mistakes, and for a long time her judgement of what was politically possible proved better than his.

But as Waldegrave goes on to say, both Houses of Parliament continue to feel “a deep suspicion of Bonapartist tendencies on the part of the Prime Minister”.

We don’t want a presidential system in this country, and got the central staffs created by Lloyd George and Churchill to fight the two world wars disbanded as soon as those conflicts were over.

Waldegrave, who served as a minister from 1981-97, regrets “the steady erosion” in recent times

“of a sense of Cabinet collectivity. Mr Blair is perhaps most to blame for this, but Mr Cameron is not innocent either. What the press has called ‘sofa government’ – combined with an over-intrusive regime of freedom of information – has taken us back to the time before Maurice Hankey and the establishment of the Cabinet Secretariat in 1916. Some major items of policy are not discussed collectively at all, and if they are discussed, little is recorded for fear of an immediate and politically driven application under the Freedom of Information Act. This is a recipe for bad decision-taking, as well as for ultimate lack of accountability.”

Boris Johnson became Prime Minister too recently for his behaviour in office to be considered in this volume. But one can’t help wondering whether his critics have been asking the wrong question.

They have assumed he is too weak: that he will soon be swept from office. Perhaps they should have been asking, instead, whether he is too strong: whether Bonapartist tendencies are beginning to manifest themselves.

For whoever occupies Number Ten has a near monopoly of the political advice which other ministers would need in order to make forceful arguments in Cabinet, or Cabinet committee, about any subject beyond their departmental responsibilities.

Sajid Javid refused, on being told he would not be allowed to choose his own advisers, to continue as Chancellor of the Exchequer.

Jesse Norman, currently serving as Financial Secretary to the Treasury, contributes to this volume an essay entitled Smith as SpAd? Adam Smith and Advice to Politicians.

The first part of this title has a Wodehousian ring. It prompts the thought that in modern English literature, the greatest provider of advice is Jeeves, and the greatest recipient Wooster.

Adam Smith often advised politicians:

“In 1766-7, he supplied information about French taxes to, and corrected the calculations of, Charles Townshend, then Chancellor of the Exchequer, in relation to the Sinking Fund designed to repay debt incurred during the Seven Years’ War; the fund was topped up in Townshend’s 1767 budget. He also advised Lord Shelburne on colonial policy at this time. Lord North thanked Smith for his advice on his 1777 Budget, when he took ideas from The Wealth of Nations for two new taxes, on manservants and on property sold by auction. He took two more ideas in 1778: the malt tax and a very Smithian duty on the rentable value of buildings. Also in 1778, Smith wrote ‘Thoughts on the State of the Contest with America’, a long and considered memorandum setting out different options for British policy towards the American colonies, then in revolt, at the request of his friend Alexander Wedderburn, the Solicitor General.”

We also find Smith advising on trade between Britain and Ireland. Just now his help would be invaluable. He recognised, as Norman puts it, “that the world was an imperfect place, in which evils could exist and persist”.

Smith was not the laissez-faire ideologue for which he has sometimes been mistaken. Nor was he the kind of generalist with which the Fulton Committee, and latterly Dominic Cummings, considered the civil service to be over-provided. Smith was a Commissioner of Customs, active in the regulation and suppression of smuggling.

Colin Burrow remarks, in his essay entitled How Not To Do It: Poets and Counsel, Thomas Wyatt to Geoffrey Hill:

“The figure of the frank speaker condemned to the margins of political life, and thus unable to deliver counsel to his monarch, became one of the major literary personae of the later Henrician period.”

Twitter is just now infested with such frank speakers, who do not turn out to be gifted poets, but spend their days denouncing with hysterical self-righteousness anyone with whom they disagree.

The adviser has to be willing to compromise; often works for palpably inadequate leaders; but is at least on the field of play.

Richard Holden: The Japan trade deal, future CPTPP membership – deliverers of wages, prosperity and work to my Durham constituents.

26 Oct

Richard Holden is MP for North West Durham.

Maddisons Cafe, Front Street, Consett

In the year I was born, 1985, Consett had unemployment of 35 per cent – multiples of the average across the country.

The decline and, finally, the end of heavy industry and mining in the hands of a few, nationalised employers, poor management and poorly led, often over-politicised unions brought down the industrial North – and the demise of these industries decimated communities that had been reliant for generations on an increasingly small number of large employers.

By the time of the last election, employment in North West Durham had recovered to around the national average. A significant part of that is down to Nissan and its supply chain in the region.

This is why the agreement that Liz Truss has signed with Japan last week provides a very much-needed good news at a very difficult time, particularly for North East England but, more widely, for the whole country.

Trade deal signings come with plenty of fanfare and diplomatic niceties. But, beneath the pageantry, these agreements are a fundamental catalyst for delivering growth and investment of the type that we will need to ensure that our economy recovers from Coronavirus. This is especially the case for places in the Blue Wall, including my constituency in North West Durham.

The Prime Minister was right when he said trade can help us build back better, and make Britain a leader in modern areas like the green economy, high-tech manufacturing and technology.

The Japan deal is proof that we can strike good trade deals for Britain, despite the derision of arch-Remainers. Britain is out there and we’re winning.

It proves we can go further and faster than the EU in such areas as digital and technology, including enabling the free flow of data, a commitment to uphold the principles of net neutrality and a ban on data localisation that will prevent British businesses from having the extra cost of setting up servers in Japan.

The agreement also goes much further than the EU deal in terms of food and drink. We have secured a deal which benefits our farmers and fishermen as British meats, cheese, and fish will face lower tariffs in Japan.

It also contains over 70 geographical indications – compared to seven under the EU deal – that will mean iconic British products from all over the UK such as Melton Mowbray Pork Pies, Cornish Pasties, Welsh Lamb, Scottish Salmon, and Wensleydale Cheese receive legal protection from cheap imitations in Japan.

It helps provide critical continuity for businesses and secures many thousands of British jobs, not least those at the Nissan plant down the road, where many of my constituents’ work and which I recently visited with the International Trade Secretary.

And the Japan deal is just the start.

It is a signal not only of our capability as an independent trading nation, but also of our intent to strike great deals around the world and move well beyond the EU – particularly with Commonwealth countries and parts of the wider Pacific.

British industry, innovation and intellectual leadership shaped the world of international commerce that we recognise today. The work of Smith, Ferguson, Cobden and political giants like Robert Peel established Britain as the world’s pre-eminent trading nation, and set the stage for the creation of the international rules-based system a century later.

This Government’s ambition is to reconnect with that heritage, and re-establish Britain as a pre-eminent global trading nation that looks well beyond its own shores.

Leaving the EU gives us the chance to do that, and to lead the world in areas like the green economy (with hydrogen set to play a major role down the road in Teesside) services and technology.

The Japan deal is an important staging post in that journey. As well as driving economic growth across the country, it paves the way for us to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), one of the world’s largest free trade areas, covering 13 per cent of the global economy (and growing), comprising 11 major Pacific nations.

Membership of CPTPP is vital to our future interests and vision for Global Britain and, more broadly, we must decrease our reliance on large dictatorships whose ‘actions short of war’ – like intellectual property theft and cyber warfare – leave us under permanent attack.

By joining a high standards agreement with countries who play by the rules, we will strengthen the global consensus for free and fair trade at a time of heightened global uncertainty and rising protectionism – keeping markets open and trade flowing. Increased trade and connections with such countries is vital not only in economic terms, but also in geo-political and strategic terms.

Diversifying our trade and supply chains will also help our economy become more resilient to future shocks, and put us in a stronger position to reshape global trading rules alongside like-minded allies, including old friends such as New Zealand, Canada and Australia.

Strategically, this diversification is an exciting part of the Government’s plan to put Britain at the centre of a network of modern free trade deals, making us a hub for services, technology and cutting-edge manufacturing and green technology.

Ultimately, CPTPP membership delivers gains that would be impossible as part of the EU. And do so in a way that doesn’t impinge on our sovereignty. There is no ECJ, no harmonisation of domestic regulation and no ceding of sovereign powers.

All of this matters. Trade – and the notion of Global Britain – can seem divorced from the everyday worries and priorities of people here at home. But at its heart, trade is a powerful way to deliver the things people really care about.

It means more opportunities for local people, higher-skilled jobs, better standards of living, and happier, wealthier, more vibrant local communities in places like North West Durham, building on relationships abroad, as with Japan, to deliver local jobs so that we never again return to the bad old days of decay and decline that ultimately cost jobs and communities.

Liz Truss, who I recently spent time with on the production line at Sunderland, and the Government are working hard to secure CPTPP accession, and am pleased to see that a lot of the groundwork has been laid already – including exploring membership with all eleven countries in line with the official process.

Britain is at its best when it is an optimistic, outward-looking nation that engages with the world. CPTPP membership is the next logical step in the fulfilment of that vision.

It will show the world we are back as an independent trading nation and that we are not only a major force in global trade, but a major force for good across the globe.

Andrew Griffith: Suspending Air Passenger Duty could give the aviation industry the lifeline it needs

10 Aug

Never has there been a more important time for Britain to show that it remains open for business.

The UK has been an open, connected economy since before Adam Smith wrote his Wealth of Nations in the eighteenth century. The prosperity to pay for the high-quality public services that we have come to expect depends fundamentally upon trade, exports and the world actively choosing to “do business” here. Among leading countries, only Switzerland, Singapore and the UAE – three nations incidentally that are all now offering airside testing for Covid – are more reliant upon international trade in order to maintain their own standard of living.

Aviation is therefore doubly important to the UK economy. It is a large sector, accounting for many high skilled and well-paid jobs. But even more vital is its role at the centre of British trade, carrying exports in the holds of the same planes that bring investors, tourists and students to the UK. Indeed, as the UK seizes the opportunities of becoming an independent trading nation again at the end of this year, this strategic importance will become even more pronounced, given the export ‘infrastructure’ that our aviation industry provides in supporting connectivity and routes with the rest of the world.

That is why a recent report from Airlines UK and York Aviation projecting a decline in the UK’s connectivity from the impact of Covid is so dispiriting. While a short-term decline is unsurprising given the reality of the impact of the pandemic on the sector – one major London airport closed and air passengers at some points down by 97 per cent – the persistence in decline is.

Forecasts show that from this December the UK is expected to see a decline in long-haul connectivity of over 40 per cent. For domestic connectivity, this is forecast at 35 per cent, and for short-haul, just under 20 per cent. Such a rapid clogging up of the arteries of Britain’s trade with the world should concern us all.

What the report also shows however, is that not all of this decline is inevitable.

The UK has a diverse and competitive aviation sector and the Government is rightly reluctant to try to pick winners or to second guess the motives of commercial businesses. Some airlines were facing challenges long before Covid.

However, one sector-wide lever available to the Government to help kickstart a recovery in aviation is to suspend the additional burden of Air Passenger Duty (APD). By waiving APD for a year, it is estimated around half the routes that would otherwise be lost could be saved, providing a very real boost to the prospects of the sector.

Under this scenario passenger demand would increase by around 12 per cent, equating to 21 million passengers against a baseline number of around 170 million. Such an increase would safeguard thousands of aviation jobs across the country including those of my constituents in Arundel & South Downs near Gatwick Airport in West Sussex.

Given the reduction in passenger volumes anyway, the cost to the Exchequer would be relatively modest and compensated for in the longer term by retaining a larger industry tax base that would otherwise be lost.

If suspending the headwind of Air Passenger Duty can do anything to help to get UK aviation – our key linkage and lifeline to the rest of the world – back on its feet sooner, then we would be remiss not to seriously consider it.

Stamp duty cut welcome, but concerns about “tomorrow’s taxpayers”. Centre-right think tanks react to Sunak statement.

8 Jul

Adam Smith Institute –  Matthew Lesh, Head of Research, said:

“Stamp duty is Britain’s worst tax. This temporary cut is the right move at the right time to get Britain moving. Temporary measures to get young people work experience, to build inwork skills, are also welcome in the face of an increased minimum wage.

“Furlough continues for a few more months but reality will hit eventually. In the forthcoming Budget, the Chancellor should cut the cost of hiring by permanently reducing the burden of employers’ national insurance, remove red tape like occupational licenses, and abolish the factory tax to get businesses investing in their futures.

“The stimulus proposals are very questionable. The VAT cut and subsidising restaurants will be expensive and provide limited benefit. People aren’t spending on food, accommodation and attractions because of safety concerns, not lack of demand or cash.”

Centre for Policy Studies – Robert Colvile, Director, said:

“We welcome the focus on jobs and training, which is what the CPS recently called for in our report ‘After the Virus‘, but the challenge will be how to support the economy as we transition to new ways of working in a post-virus economy.

“You can see the Government is trying to strike that balance with this package, but these measures are temporary, and will have to be paid for down the line. This is why we would like to see the sort of long-term structural change that will maximise growth, support businesses and encourage them to create new jobs without placing the burden on the taxpayer.”

TaxPayers’ Alliance – John O’Connell, Chief Executive, said:

“The chancellor announced a ‘plan for jobs’ but it’s tomorrow’s taxpayers who will have to work hard to pay for it all.

“While the jobs retention bonus will help ensure that the furlough scheme isn’t just an expensive pause on mass lay-offs, taxpayers will be concerned about how and when they will pay the bills for ever-more spending promises.

“It is cheering that the chancellor appreciates the economic benefits of cutting taxes and in particular lifting the stamp duty threshold will provide a boon to the housing market.

“That said, while easing the burden on taxpayers is always welcome, we must look at longer-term tax simplification and put a stop to temporary fiddles.”

Institute of Economic Affairs – Professor Syed Kamall, Academic and Research Director, said:

“We are in an unprecedented situation and there remains the issue that many individuals and families are fearful of leaving their homes to resume every day activities. The Chancellor can only do so much in terms of measures introduced to get the economy moving.

“The cut to Stamp Duty is welcome but why isn’t it permanent? It is a destructive, regressive tax that clogs up the housing market and limits labour mobility. Making it permanent would get the property market moving and encourage those who want to downsize as well as those looking for family houses, freeing up homes for first-time buyers.

“It is disappointing more was not announced to encourage private investment in infrastructure – such as reopening old railways or rezoning to allow homes to be built in places being vacated by shops, such as high streets.”

Resolution Foundation – Torsten Bell, Chief Executive, said:

“Today’s Budget in-all-but-name was a £30 billion top up to a pandemic response that is approaching 10 per cent of GDP and will push borrowing to around £350 billion this year.

“The focus on jobs and some, but not all, hard-hit sectors was very welcome. Kickstart jobs for young people represents a tried and tested policy, but the new Job Retention Bonus is poorly targeted at those jobs that are most at risk of being lost.

“The Chancellor is right to focus VAT cuts on food, accommodation and attractions. However, the lack of support for face-to-face retail means significant challenges for Britain’s High Streets. The innovative meal deal voucher scheme is far too small scale to make a significant difference.

 “The Chancellor, having previously announced huge measures to protect household incomes, has now set out much more normal demand support for the next phase of this crisis. That might be sufficient if the UK sees the V-shaped recovery we all hope fora. But given that this economic crisis is likely to be with us until a vaccine is found, he should expect to be returning with further measures to support the economy in the Autumn.”