Help hard-working people and go for more growth. The economic policy and message that Johnson needs.

23 May

Sue Gray is set to present her report this week.  Boris Johnson’s fate may hang on it.  But whether he stays or goes, the cost of living crisis will remain.  Britain faces the biggest drop in living standards since the 1950s.  And the Government seems to have no agreed plan for what it wants to do or who it wants to help.

Some MPs want benefit rises.  Others want tax cuts.  For some, axeing green levies is the priority.  For others, reductions in VAT. For others still, transferable allowances for families.  Cabinet Ministers are freelancing over a windfall tax.  This is nature abhorring a vaccum with a vengeance.

Essentially, there are two schools of thought.  To the first, the main enemy is rising prices.  Those who believe this tend to want tight monetary and fiscal policy.  To the second, it is low growth.  Those who hold it look favourably on looser monetary and looser fiscal policy, though not necessarily at the same time.

Enter a variant of the second school, as expounded by our columnist, John Redwood.  Essentially, he makes the agonising choice between more borrowing, and the higher interest rates that could come with it, and less spending or more taxes vanish – “just like that”.

This is because Treasury forecasts are consistently wrong, and the deficit came in “at £90 billion below the Office for Budget Responsibility and Treasury forecast”. It follows that Rishi Sunak could use some of that £90 billion before the autumn to help people meet the cost of living.  Which is indeed what most Conservative MPs want him to do.

If this sounds a bit too good to be true, that’s because it is – in a certain sense. Any windfall spent now is one that can’t be spent later (assuming it’s still there).  So the Chancellor would be splashing the cash this year, with the last feasible election date some eighteen months off.

And, of course, money spent now can’t be used to pay off debt. Furthermore, if Sunak goes on a spree, voters won’t be grateful: they never are.  That, after all, is a lesson of Coronavirus.  In any event, the Treasury disputes rosy inflation and interest rate forecasts – arguing that at four per cent of GDP the deficit is stubbornly high.

Nonetheless, voter need requires Sunak to present a package, whatever the party politics. With poverty for working families hitting a record high, and almost a fifth of adults having less than £100 in savings, and one in five families facing fuel poverty, the Chancellor will act before the energy price cap rises again in the autumn.

Having cleared the first hurdle (in other words, decided to present another mini-budget), Johnson, Sunak and company will face the second – namely, determining who it will most aim to help.  Here, the answer is straightforward and uncompromising: those in most need of it.

That means voters who have less room, if any, to cut back their household commitments. They would be helped by a further Council Tax cut for lower bands, extending the warm homes discount, shifting green levies from household bills, and uprating Universal Credit: remember, some 40 per cent of those who receive it are in work.

Raise moral hazard or work disincentives all you like: special help in hard times will always start from the poorest up.  Though it won’t stop there: many of those on Universal Credit, for example, are Nick Timothy’s “just about managing”.  This is a programme for Erdington as well as Easterhouse.

If that sounds discouraging for Conservative voters in Blue Fade seats, or for those clamouring for a cut in the standard rate of income tax now, I have if not exactly good news now then at least the prospect of some later – if they’re interested in the higher growth that helps to fund spending increases and tax increases in the first place.

The first bit is that boosting growth has at least as much to do with supply as demand.  That means Jacob Rees-Mogg, who has made a start in efficiencies with his plan cut civil service numbers, streamling regulation. He has an entire report by Iain Duncan Smith, Theresa Villiers and his colleague George Freeman to draw on.

Its menu covers everything from risk margins in Solvency II through deploying low-carbon technologies on to the National Grid and repealing the EU Clinical Trials Directive to scrapping the Port Services Regulation 2019 to remove
unnecessary, EU-derived regulatory burdens on UK ports.

The biggest supply-side issue of all is housing – the shortage of which harms family life, slows labour mobility and lowers wages.  Michael Gove is tasked with squaring the circle of winning local consent, raising home ownership – and building more houses.  Then there are Sunak’s own productivity-boosting plans.

The second slice of better news is that the Chancellor may be able to persuade the markets that more borrowing and tax cuts should bear no interest rate penalty (whatever is done with a Windfall Tax).  The condition is that these are clearly focused on boosting growth rather than consumption.

On spending, that would imply more for infrastructure, especially in provincial England, for science and technology, and for skills – for example, the rebalancing between academic and vocational courses that the Government wants to see.  On tax, that would suggest cuts for business and workers.

Some of those cuts, if there is enough of that £90 billion left to draw on, could simply be cancelling increases – including the Health and Social Care Levy and, if Sunak can find no convincing replacement for the “super-deduction”, scrapping the Corporation Tax rise.

Rob Colvile wrote yesterday about the negative signal that the rise sends to business and, as so often, the message is almost as important as the detail (such as the rate at which the tax will take the most revenue).  This takes us to the Prime Minister and the Chancellor.

Sunak is able to detail a mass of spending to which he is already committed.  What he and Johnson have not yet done is roll these up into a package and a message.  Remember George Osborne “not balancing the budget on the backs of the poor”?  His “long-term economic plan”?  “We’re all in this together”?

Johnson and Sunak need a message.  Voters will roll up their sleeves and stick it out if they think the Government has a plan for the country, as they did after 1979 and 2010. My starting bid is: “we are helping hard-working people and going for bigger growth”.

I appreciate that many voters don’t know what growth is, and that my draft needs rather a lot of work.  But at least it’s a start.  What alternative is there?  Ministers could sit on their hands and do nothing this year.  Or seek to please the right-wing entertainment industry with performative tax cuts.

Sunak tried a bit of that in his Spring Statement – and look where it got him.  Mention of Sunak leaves me with a riddle.  The non-dom row has sapped his authority.  A Government needs its Chancellor to command fear.  Sunak may do so once again one day, and revive his status as a potential Conservative leader, but at present he doesn’t.

The puzzle is that, on the one hand, Johnson wants a big animal at the Treasury, to deliver for the Government. And that, on the other, he doesn’t, since such a creature would be a threat to him.  I leave this conundrum for our readers to solve.

Gerard Lyons: Sunak should raise the lower tax threshold this autumn to put more money in people’s pockets.

5 Apr

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Higher inflation is inevitable. An economic slowdown is expected. Recession is possible. That is the economic outlook and challenge facing the UK. The question is whether policy makers are doing enough?

This troubling economic climate is not unique to us. All western economies are facing an imminent inflation challenge. And, alongside the war and its consequences, this is starting to weigh on confidence and growth prospects for later this year and next.

It was against this backdrop that the Chancellor delivered the Spring Statement two weeks ago. In many respects, it was a missed opportunity. While he cannot be blamed for higher inflation or fuel prices, and although there were some welcome measures, he has to accept some responsibility for the tax take continuing to rise and failing to increase benefits in line with inflation ahead of the cost-of-living crisis.

As expected, the Official for Budget Responsibility (OBR) projected a slowing economy over coming years and higher inflation before it subsides. After 7.5 per cent growth last year, growth is expected to slow to 3.8 per cent this year and 1.8 per cent next. Inflation, meanwhile, is expected by the OBR to rise from 2.6 per cent last year to an average of 7.4 per cent this, and then be four per cent next and 1.5 per cent in 2024.

Such an outlook – with the cost-of-living squeeze hitting people hard, and an economic slowdown ahead – added to the pressure for the Chancellor to do more to help.

Rishi Sunak stepped up to the plate during the pandemic, and perhaps the challenge from that is that it has created the impression that there is a bottomless pit of money into which he can dip. There isn’t.

Yet, as the Spring Statement showed, while debt is still historically high, the public finances are on an improving trend because of the strong rebound in the economy over the last year. This presented the Chancellor with ample room to act. Public borrowing was £321.9 billion in 2020-21 and is now expected to be £127.8 billion in the last fiscal year, 2021-22, which is £50.9 billion lower than the OBR forecast only last October.

But even last autumn it was clear that the finances were improvingm and at that time this cast doubt on the need to announce the increase in the national insurance. Moreover, the margin of error on these budget forecasts is high, suggesting the Chancellor should not feel bound by them when it comes to fiscal policy – especially for predictions several years into the future.

There is still much uncertainty about how resilient the economy will prove to be, as previous monetary policy stimulus is replaced by tightening, as the post-pandemic rebound loses momentum and as the cost-of-living squeeze bites. Measures of confidence have already started to deteriorate. The GfK measure of consumer confidence fell to its lowest level in sixteen months of -31 in March. This will likely get worse.

The biggest problem has been monetary policy and in this context the Chancellor should – at some stage – call for a fresh look at the Bank of England’s remit, operations and communication.

For more than a decade, the UK has suffered from a cheap money policy. This has had three damning consequences, each with economic and political implications.

First, it has fed rampant asset price inflation, not just in financial markets, but in property prices. This has fed inequality and inter-generational problems.

Second, the combination of low rates and the Bank’s buying of government debt through large-scale quantitative easing has contributed to financial market instability, with markets not pricing properly for risk.

Third, monetary policy has contributed to inflation. Even though the pandemic and supply shortages may have been a catalyst for rising inflation, the Bank’s complacency last year fed the problem. Moreover, it now means too that if the Bank has to tighten monetary policy, it will do so at a time when the economy is less able to cope.

With monetary policy having been too loose for too long, the uncertain economic climate might suggest the need for the Bank to tread carefully. It also added pressure on the Chancellor to do more.

Now, two weeks after the Statement, the dust has still not settled. In part, this is because there is increasing concern about what lies ahead economically, and whether the Government may be forced to act further.

The Treasury’s mindset is on balancing the budget – which they don’t do well – at the expense of economic growth. The prospect of slower future growth means more of the deficit is viewed as structural, not cyclical, necessitating fiscal caution. Furthermore, the fiscal rules which are aimed at making the fiscal numbers appear credible can end up embedding tax increases into future numbers to pay for spending plans.

Concern about the rise in debt service payments in the coming fiscal year also appeared to weigh on the Spring Statement’s plans. Perhaps this was overdone, with this rise explained by the increased cost of the principle of index-linked debt. This future liability counts as borrowing in the year in which it accrues, hence the spike in the next fiscal year which should not divert attention from the improving trend in the budget finances.

The Chancellor did unveil some significant and welcome targeted measures to cushion the pain. Most notably, increasing the National Insurance threshold, bringing it in line from July with income taxes at £12,570. This helped many people.

The other was the immediately fuel duty cut by five pence per litre until next spring – although this has not been fully passed on. This followed on from help announced before his Statement on council tax, fuel bills and changes to the universal credit taper rate. He also pre-announced a cut in income tax.

The alignment of national insurance and income tax allowances was a big deal. It not only helps simplify the tax system, but may be a stepping stone to abolishing national insurance completely. This is something many Chancellors have talked of, but none have done. This moves that closer.

Despite this, more should have been done and more help is now likely. This leads onto whether the Government is seen to be on the front foot, or are forced into acting. For instance, benefits could have been increased in line with the latest, higher inflation numbers. Also, recently announced changes to student loan repayments were unnecessary, and expensive for students, but bring in the Treasury sizeable revenues.

Looking ahead, there is still scope for the Government to cut taxes such as VAT on fuel, and shift green taxes from fuel bills onto general taxation (else they might be seen as a green poll tax, not linked to peoples’ ability to pay).

I would suggest raising the lower tax threshold this autumn, if not sooner, to put more money back into peoples’ pockets and to start to reduce the overall tax burden. Raising the upper tax threshold may be too expensive, or not politically acceptable.

Overall, the OBR reported that living standards are expected to fall by 2.2 per cent this coming year – the largest fall on record. And, despite the statement’s measures, previously announced policy measures and the more tax-rich composition of economic activity, the tax burden is set to rise to its highest since the late 1940’s, from 33 per cent of GDP in 2019/20 to 36.3 per cent in 2026/27.

Alleviating the cost-of-living crisis, keeping inflation in check and delivering stronger growth is the aim. This should be supported by smarter regulations and sensible taxes that lower the overall tax burden.

James Bethell: The Government should drop the ban on asylum seekers working

22 Mar

Lord Bethell was Minister for Innovation at the Department of Health and Social Care during the pandemic.

The plight of Ukrainian refugees breaks my heart. There’s a strong feeling that they should be welcomed to Britain and given a safe-haven to rebuild their lives. I applaud the Government for moving quickly to make that happen. I have started the process to welcome my Ukrainian friend and her daughters to our home so she can live safely and restart her business in the UK. I hope we can make a difference to their lives.

The Ukrainian refugee crisis puts a vivid spotlight on the way we treat other asylum-seekers. Very few in the asylum system pass the government’s strict criteria for a work permit, which rules that unless you have been waiting more than 12 months and your profession is on the highly restrictive shortage occupation list, you must remain jobless.

To repeat, we have a Conservative government that effectively bans people from work, that stops them from improving their lot through their own individual hard work and effort.

Nothing could be more deeply un-Conservative. Utterly central to our beliefs is that the right to work is a basic human right. Margaret Thatcher put it very emphatically in her first speech to the Conservative Party Conference (1975),

” A man’s right to work as he will, to spend what he earns, to own property, to have the State as servant and not as master; these are the British inheritance. They are the essence of a free economy. And on that freedom all our others depend.”

She was right to see the right to work was a moral question, not an administrative authorisation to be decided by bureaucracies. She saw it on the same level as the unalienable constitutional rights listed in by the Founding Fathers of the United States of America, “life, liberty and the pursuit”. These rights, they argued, have been given to all humans by their Creator, and governments are created to protect.

I agree with Margaret Thatcher.

She is right that one of the unifying beliefs that unites the various traditions of Conservative thinking is that that the role of the state is to help people into work, not to stand in their way.

Around half of asylum-seekers are make successful applications, and we want those people to become integrated members of British society, standing on their own two feet and contributing to the national prosperity.

And for the other half, they will move on, either to return to their homeland or to make a home elsewhere, and we would like to think that their time in the UK had left them with a positive impression. Emasculating both groups by denying them the right to work during their application period will not encourage them to become responsible members of society, quite the opposite.

Instead of following core Conservative principles, the Government seeks to hold on to this ridiculous rule which was introduced by a Labour Government in 2002. Instead of encouraging people to take responsibility for their lives and benefiting from their hard work, we demand that people perfectly capable and willing to work must instead sit on their hands and depend on state benefits, letting their skills go to waste, keeping them isolated from their local communities, and harming their chances of building a successful new life for themselves in which they contribute to the UK.

Whether or not people succeed with their asylum claim, while they are here waiting, they should be working, for the good of themselves and society. We have got the moral imperative the wrong way round. Protecting refugees does not mean locking them up or restricting their right to work.

Change would be popular among voters. YouGov Polling commissioned by the Lift the Ban coalition shows that more than 80 per cent of the public think that asylum seekers should be given the right to work while they wait. It’s not a great surprise that the public, who voted for a Conservative Government, support a policy that follows Conservative values.

Home in on individual constituencies and the results of the polling are more interesting still. Whether it’s a Blue Wall seat, a Red Wall seat, a Cabinet Seat, the Home Secretary’s seat or even the Prime Minister’s seat, most people think asylum seekers should be allowed to work.

And businesses want change as well. In polling carried out by Survation, 60 per cent said they supported asylum seekers working. As Conservatives we are the party of business, and we must make sure that this is loud and clear.

By denying people seeking asylum the right to work we are also depriving businesses of much-needed labour.

It won’t have escaped anyone’s attention that the UK has a huge labour shortage problem. According to the ONS figures release in February there were 1.3 million job vacancies in the period November to January, another record.

That’s thousands of businesses up and down the country who are keen to build back better post Covid and see the UK take back control as Brexit allows us to do. Instead, they are being hamstrung by red tape that has somehow become Conservative policy to keep in place rather than consign to the policy bin.

As well as individual prosperity and national prosperity, we must also remind ourselves we are the party of fiscal responsibility and small government.

Stopping asylum seekers from working leaves taxpayers to foot the unnecessary bill, not just for the benefits paid out to people in the asylum system, but for all the lost income from tax and national insurance receipts.

The latest round of Immigration statistics shows the number of people waiting more than six months for a decision on their asylum claim at 62,000 – estimates suggest that this costs the Government more than £200 million a year.

We should not be frittering away that sort of money, especially as we must pay for all the state spending during the pandemic. When people from Ukraine enter our asylum system they, like other refugees who have been waiting months and years for a decision on their claim, will want to work. And we have decided that we will let them.

As Conservatives, we must extend this principle to others who find themselves stuck in limbo through no fault of their own.

Gerard Lyons: Sunak’s task tomorrow. The best way of reducing the deficit is to go for growth.

22 Mar

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Rishi Sunak needs to provide context, actions and vision when he delivers his Spring Statement to the House of Commons this week.

Context, so that people can understand the present difficult economic environment and what lies ahead. Actions will be needed to cushion the imminent cost-of-living crisis. And the Chancellor needs to outline a vision, both from a domestic political perspective and to reassure financial markets and investors about the outlook for the economy.

The current context is a difficult one. The war in Ukraine and the associated high level of oil and commodity prices has added to uncertainty, both here in the UK and globally. This will be reflected in the economic forecasts from the Office for Budget Responsibility (OBR) that will accompany Sunak’s statement.

At the time of their previous forecast, last October, the OBR was forecasting growth of six per cent and inflation of four per cent this year. Now, depending upon their assumptions, the OBR’s growth forecast could be half and their inflation forecast almost twice as high as then. Hence the increased fear of stagflation – where inflation is higher, and growth lower.

For next year, the OBR will be expecting growth to slow further and inflation to ease. It is their cautious future growth outlook that limits the Chancellor’s room for fiscal manoeuvre. Sunak will also stress that higher inflation and interest rates increases the amount spent on servicing the national debt.

Despite this, the Chancellor should not feel constrained by the OBR’s forecasts into limiting the actions he can take. The margin of error for the budget deficit forecasts has been high in recent years – for obvious reasons, perhaps.

Importantly, the fiscal numbers, while poor, are clearly on an improving trend. During the first ten months of this fiscal year, public sector net debt was £138.5 billion, around half the level of a year earlier. So Sunak may have around £25 billion more to use in this statement than previously expected, and still be able to stick within his fiscal rules. He thus has the opportunity as well as the need to provide some help this week.

What then of the actions that can be taken? There are two areas he should focus on.

One is actions linked to the war, such as more immediate defence spending or help for refugees. The other is finding money to cushion the cost-of-living crisis.

While he may mention issues linked to levelling up and incentives to boost investment and improve skills, the bulk of tax changes and spending announcements linked to these will have to wait until the Budget in the autumn.

The imminent cost-of-living crisis is explained by higher inflation, rising fuel and energy bills, and increased taxes. The approach that the Chancellor is likely to take to address these is best captured by the three “t’s” – timely, temporary and targeted measures.

Even though people across all incomes, including the squeezed middle, are being impacted, help will be targeted to those on low incomes and most in need.

The rise in inflation is out of his control. But we shouldn’t pretend that no-one is to blame. Costs have risen across the board – initially because of supply disruptions triggered by the pandemic and now because of the war. At some stage these pressures will ease, but not yet.

But inflation has also risen because the Bank of England has been asleep at the wheel. Last year, when inflation was already rising, it printed an excessive amount of money as quantitative easing reached £895 billion. That made the inflation outlook worse, feeding inflation expectations.

The Chancellor can act on fuel duties. During the next fiscal year, fuel duties are expected to raise £28 billion. By comparison, income taxes will raise £229 billion and national insurance £182 billion. A bold step would be to suspend fuel duties completely for a period. But then the pain would be felt when reintroduced.

Indications are that fuel duty will be cut, perhaps for a temporary period. A similar approach has been seen recently in France and Ireland.

For example, take a litre of petrol at £1.65. This price includes fuel duty of 57.95 pence and VAT of 27.5 pence. So total tax is 85.45 pence

If fuel duty is reduced by five pence per litre, then, after taking into account VAT, this would reduce the price per litre by six pence, in this case from £1.65 to £1.59. A small but significant saving for many people.

A radical – but very unlikely – step would be to move environmental levies from fuel bills onto general taxation. From this April these levies on household energy bills will raise £9.2 billion over the fiscal year, around £325 per household per year. The importance of addressing climate change is critical, it is peoples’ ability to pay that is the issue. This leads onto the big issue that Sunak needs to address: taxes.

Two tax increases will bite this spring. There is fiscal drag: as pay creeps up it drags people into higher income tax brackets. Normally, this is addressed by allowing tax allowances to rise in line with inflation. Allowances have been frozen for a couple of years, so it is unlikely anything will change here.

The other tax is the increase in national insurance, which will rise for both workers and employers, and which comes into effect in a couple of weeks. For workers this rises from 12 per cent to 13.2 per cent, so someone earning £30,000 per year will pay £214 more and a £50,000 earner will pay £339 more.

In April 2023, this is replaced by a new health and social care level (which in all likelihood will rise in future years) and the national insurance rate falls back to 12 per cent.

There was no need for this tax to have been increased in the first place. It was already clear last autumn that the public finances were improving. Furthermore, it is a tax on jobs that it is coming into effect now when incomes are being squeezed.

Sunak appears keen not to reverse or delay this tax. Instead, he could raise the threshold at which national insurance is paid by workers. From April, national insurance is paid after you earn £190 per week. By contrast, the threshold for paying income tax is based on annual income but is equivalent to £242 per week.

The Chancellor also recently announced measures totalling around £9 billion to help people most in need. He could find other targeted help. For instance, benefits and allowances could be raised in line with latest inflation figures.

One lesson from following fiscal statements over the years is that, when it comes to chancellors, don’t just listen to what they say, watch what they do. During the pandemic, Sunak responded well. Further action is needed now.

Finally, despite uncertainty, it will be important for the Chancellor to outline a vision. The UK’s trend rate of growth is too low. The UK needs to become a more competitive economy. Sunak wants to reduce the budget deficit. That is understandable. His choices are: borrow, raise taxes, austerity via cutting spending, focus on boosting growth – or a combination of these.

Austerity is rightly ruled out, although public sector reform is needed. The trouble is that taxes are already high, even for people on modest incomes. The best way to reduce the deficit is to boost economic growth, allowing the ratio of debt to GDP to come down gradually, over time.

James Kirkup: Sunak’s task next week. To get cash into the hands of those who need it. And launch an energy efficiency mission.

17 Mar

James Kirkup is Director of the Social Market Foundation.

Perhaps it’s because now, as then, I have Covid, but when I ponder Rishi Sunak’s approaching Spring Statement, my thoughts go back to March 2020. Then, Sunak made his bones with the British public with nerveless statements about the support he’d offer for an economy – and a population – teetering on the brink of panic.

Those early days of his chancellorship seem a long time ago now: it’s been a long two years. But there’s a lot to learn from those moments, even if both economics and politics have changed since then.

Then, the dominant issue was a pandemic that would prove to be longer and more serious than most people realised. Today, the same is true of what Westminster calls the “cost of living crisis”.

That phrase is so familiar that a lot of people who use it think that it’s old news – that everyone out there “up and down the country” knows full well how much prices will rise and real incomes will be squeezed.

Well, if they think that, they’re wrong. Rising prices, especially on energy, are still going to come as a nasty shock to a lot of voters. Just because us media and political types know something will happen, don’t assume the wider public does too.

So the first job for next week’s not-a-Budget statement is ruthless honesty about what’s coming – and the limitations of what the state can do, in the short term, about energy prices.

That doesn’t mean doing nothing. The compassionate, responsible response to rising prices should be to concentrate help on those who need it most. That should start with benefits uprating. As things stand, benefits will rise by 3.1 per cent in April, because that’s what CPI inflation was in September. But it’s now at 5.5 per cent and will likely exceed six per cent for the rest of the year.

If Britain really is One Nation, not two, then preventing a deep real-terms cut in the incomes of the poorest should be a priority for Sunak next week.

There’s more to do, of course. Current plans for a £150 council tax rebate for most homes and what amounts to a £200 loan towards energy bills are both over-complex and poorly targetted.

Instead, HMT could simply give £500 to every benefit-claiming household, and £300 to non-benefits households where no-one pays higher rate tax. That wouldn’t cost any more than the current plans: the SMF proposal would cost around £8.4 billion, pretty much the same as existing measures.

Simplicity and speed are key here. What’s needed is a return to the spirit of furlough: just get cash into the hands and accounts of people who need it.

And some people who don’t: the Treasury’s natural objections to the waste involved in universal payments are normally reasonable, but these – still – are not normal times. The strong and natural desire to declare that the exceptional circumstances of the pandemic have passed should not blind us to the fact that Russia’s war on Ukraine is another event of arguably even greater historical significance.

And that offers something of an opportunity, for a politician big enough to seize it. Here’s how Sunak can do so next week.

The immediate and obvious impact of Russian aggression on British lives is via energy. Even though we buy relatively little fossil fuel directly from Russia, we’re still exposed to international prices that are directly and badly susceptible to Russian malfeasance.

Hence the various Government schemes afoot to reduce that exposure: some more wind power, some more extraction from the North Sea, and some wishful thinking about the Saudis and others agreeing to pump more to prices down.

The remarkable thing about all these efforts is ministers almost totally ignoring the best path to reducing British exposure to international energy prices and so easing household energy bills: use less energy.

This is Sunak’s opportunity, though he’ll have to override Treasury orthodoxy and his own inclinations to take it.

By any international standard, Britain’s homes are poorly insulated and badly energy inefficient. This is one of those big, slow and boring national problems that successive governments have nibbled at then pushed aside over several decades.

There are many reasons for this. Voucher schemes are hard to design and easy to exploit: the people most likely to use them would probably have made home improvements anyway. There are always sexier, more immediate things to promise, which are more likely to pay off in time for the next election. No one wants to be the politician telling people to clear their lofts out and fill their wall cavities. Lagging is boring.

More recently, the Treasury has been resisting energy efficiency drives on the grounds that UK industry can’t deliver: not enough workers, not enough material, inadequate supply chains to provide it.

None of these problems is imaginary. But none is insurmountable, to someone with adequate ambition and understanding of how markets work.

The ultimate reason British energy efficiency schemes have failed over decades is a lack of consistency. No policy has stood for long enough to provide confidence and certainty, either to households or industry. The evidence from successful efficiency policies worldwide — New Zealand, Japan, the Netherlands, to name a few – shows that what’s needed above all is the long-term certainty that only strong government policy can offer.

And that’s what Sunak should offer next week: nothing less than a national mission to make Britain’s homes more energy efficient. That mission will take a decade and more, and should be put above party politics: the Chancellor should make a Big Tent offer to Labour to sign up to his aims.

Importantly, this can all be done without so much as mentioning the words Net Zero. The Chancellor’s public ambivalence on climate issues is regrettable, but might not hurt at all here. The best way to get the public to buy in to the national energy efficiency mission isn’t to talk about carbon foregone but pounds saved. The difference between Energy Efficiency Certificate Bands C and D is around £100 per year. And that’s a recurrent saving: who wouldn’t fancy £1000 more in their pocket over the next decade?

This doesn’t all have to be state provision, incidentally. Some banks and building societies are gagging to lend to households to fund home efficiency measures. The Chancellor should use his bully pulpit to egg them on, and prod the rest to do more.

This advice isn’t original or novel, because the energy efficiency issue is a longstanding one that hasn’t really changed. What has changed are the times.

Britain may not be a direct combatant in Russia’s war, but we face wartime economic impacts. That requires a response of similar scale, a great national effort to defend our homes and incomes from unnecessary over-exposure to international energy markets. If he wants to be

the leader of this decade, Rishi Sunak should use his statement next week to launch that unabashedly patriotic drive for energy efficiency, declaring loudly and proudly that it’s time to Lag for Victory.

David Gauke: Higher Universal Credit, public sector pay, state pensions – perhaps some tax cuts. What Sunak should do next.

14 Mar

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.

In nine days’ time, Rishi Sunak will deliver his Spring Statement. It was clearly his intention that it would be a relatively low-key event. The Office for Budget Responsibility would update its forecasts and perhaps a few reviews would be announced, but there would be little by way of big announcements on tax or spending policy. Spending matters were dealt with last October in the Comprehensive Spending Review, and tax announcements belong in a Budget – with the next one due in the autumn.

The Treasury likes having just one big fiscal event a year. It allows enough time for policies to be properly considered and it reduces the scope for other parts of Government to lobby for voter-friendly policies that cause havoc for the public finances. Sunak, wary of his Downing Street neighbour who is susceptible to such temptations, is likely to take the view that limiting this tiresome process to once a year is highly desirable. For one thing, it extends the period of time before the Prime Minister learns to spot the various Treasury tricks used to frustrate any attempt by outsiders at interfering in Budget matters.

The Chancellor was already under pressure to make the Spring Statement more substantial because of the cost of living squeeze. He pre-empted this with an announcement on a Council Tax rebate and loans on energy costs, and dug in on the forthcoming increase in national insurance contributions. We were heading for a tough spring, but it looked as if he could hold the line. And then came Russia’s invasion of Ukraine.

There are certain items of additional immediate expenditure necessary in response to the invasion that should not cause the Treasury too much difficulty. Additional emergency defence expenditure, including arms to Ukraine and NATO allies in the region; humanitarian aid for Ukraine and Ukrainian refugees; targeted interventions to expand domestic energy sources. There is a case (about which I suspect the Treasury is sceptical over the practicalities) for a big push over the next few months in improving home insulation.

It would be understandable if the Treasury’s focus is currently on what we need to do now, and address the more strategic questions later when the position with Ukraine has become clearer. The answer to such questions will almost certainly result in higher defence expenditure in the medium term, which will leave the Treasury with the headache of funding it. Both the long-term spending and the funding can be resolved at a later date.

Where it gets really difficult for the Treasury is the cost of living crisis. Before determining his policy response, the Chancellor will need to determine to what extent the crisis is the consequence of short-term, exceptional factors, such as this war, or whether it reveals that the cost of living is permanently higher than previously thought. If it is largely the former, the case for borrowing to intervene is stronger; if it is principally the latter, the case for taking those higher costs on the chin (preferably whilst protecting the most vulnerable) is increased.

We know that Sunak is a fiscal conservative. He will not consider it morally acceptable to subsidise current living standards at the expense of future generations in normal times. This is an important caveat. After all, Sunak the fiscal conservative is also the Chancellor who broke peacetime borrowing records in his first year in office. Needs must in exceptional circumstances.

There is a respectable argument to say that much of the squeeze in living standards is the consequence of high energy prices that stem from the invasion of Ukraine and our response to it; that this is the cost of economic warfare in a struggle in which we must prevail; and that future generations should not object to paying off debts incurred to combat threats to our way of life. In other words, protecting living standards now is to some extent analogous with creating a war debt.

The analogy only goes so far. We accumulated a lot of debt in two world wars and future generations did not resent it, but we also spent a great deal on defence during the Cold War during a period of time when debt generally fell as a percentage of GDP. Are we in a conflict lasting, at most, a few years or is this the new normal which may last decades? If the former, we can take a hit to our borrowing, if the latter we need to worry more about fiscal sustainability.

The situation is also complicated by the fact that much of the squeeze pre-dates the Ukrainian war. Energy prices were already high; living standards already set to fall. We are poorer than we previously thought, and that is unlikely to be immediately reversed, even if the Putin regime falls tomorrow and the Ukrainian conflict is quickly resolved. This suggests that we cannot avoid at least some hit to living standards,

A reasonable response would be to be willing to borrow to soften – but not eliminate – the squeeze in living standards. Higher increases in Universal Credit, the State pension and public sector pay than previously planned, perhaps some tax cuts (as many Conservative MPs are demanding), maybe an expansion of the council tax rebate scheme. Even taking into account that tax receipts have been higher than the OBR predicted in October, measures which only go half way to avoid falling living standards will see a deterioration of the public finances.

The Treasury then has two further complications.

First, inflation. The intention may be just to protect standards of living but borrowing more will constitute a fiscal stimulus at a time inflation is approaching double figures. This could result in the Bank of England increasing interest rates faster than would otherwise have been the case, which will impose further pressures on many mortgage-holders.

Economists differ on how big an inflationary problem we have and how far interest rates will rise (a further increase by the Bank of England is widely expected this week). Clearly, prices are rising quickly but higher commodity prices also take money out of the economy and suppress demand elsewhere. The risk is that we see stagnation – inflation and a stagnating economy as we saw after the oil shock of 1973.

The second problem is that temporary fiscal measures to address temporary cost of living pressures will have to be reversed when circumstances change. The experience of reversing the temporary UC uplift was a politically difficult one and, I suspect, has driven the Treasury to the bespoke council tax rebate scheme, which will be easier to drop in future. This might be good politics, but ends up with more complexity in our tax and benefit system.

All of this makes next week’s Spring Statement much more difficult than previously assumed. The briefing from the Treasury is that it is going to be policy-light, but I am sceptical. Domestic politics for the next few months will likely be dominated by the squeeze on living standards and inaction in the face of this will be unsustainable and politically perilous for the Chancellor.

Finding a response, however, that satisfies the public and Conservative MPs but does not further weaken the long-term outlook for inflation or the public finances may be Rishi Sunak’s greatest test yet. March 23 will be a big political moment after all.

Natalie Elphicke: This must be the year in which the small boat channel crossings are ended

4 Jan

Natalie Elphicke is MP for Dover & Deal.

More than 28,000 people came into the UK through the small boats route alone last year. Many lives have been lost. What started as a trickle of boats and a few people has become a booming international criminal business, with ever greater numbers of illegal craft coming in day after day, month after month. Even on Christmas Day, the people smugglers didn’t stop plying their trade – putting even more lives at risk on the English Channel.

The range of departure countries is extraordinary and spans continents. Vietnam in the Far East, and the African countries of Eritrea and Somalia, as well as the Middle East: Iran, Iraq, Syria and more besides. Each of these routes has its own brokers and their own specialities. But they all have in common a clear belief that the UK is easy to break into and even easier to stay in.

Last year, records were broken on every measure. The record for the number of people arriving in a single day, for the number of unaccompanied young people arriving, for the number of people arriving in a month and a year (see here). It was a truly shocking year at the Dover border.

As the numbers have increased, so has the impact. Across the land, hotels, bed and breakfasts, old army barracks and rented housing were snapped up by the Home Office to house the equivalent population of a small town.

In addition, there’s the extra strain on GPs, schools, hospitals, skills and language training, as well as welfare payments. That doesn’t include the millions spent last year on new short-term facilities to hold and process migrants. The traditional facilities at Dover have simply been unable to cope with the numbers now arriving.

It’s not just a matter of money. It’s also one of national security. It is an uncomfortable truth, but one still the same, that not everyone who comes into our country through the illegal channel crossing route wishes us well.

People wanted for serious crimes, including those wanted by other intelligence services, have been detained in Dover as they tried to enter clandestinely by small boat. Not every person who lands on our beaches is picked up. Residents of coastal villages, such as Kingsdown and St Margaret’s, make regular reports of arrivals in the dead on night and in the early hours of the morning. Grown men knock on doors, hide in local woods where villagers walk their dogs, or are picked up by waiting cars and vans.

Beyond money and national security, there is also the question of fairness. It’s unfair to people choosing the right way to apply to come to the UK, when people are able to enter the UK illegally and remain. It’s also unfair to people seeking a way out of poverty, who want opportunity, and who are lawfully resident in our own country, including migrants and refugees who come into the UK through legal routes of entry.

Moreover, the bottom line is that no-one has to make these dangerous crossings. We need to be crystal clear about that. Every person getting into the water is already safe in France, which has an established and responsible asylum system. People are safe in many places before France too, both inside the European Union and elsewhere.

We also need to be clear that there are legal routes of entry into the UK. These are the routes that should be taken. Many people who are making the crossing are fleeing poverty, not persecution. They lack opportunity, not safety. The lure of the UK is predominantly economic. That’s why people borrow and save to pay to come to the UK. It’s an investment in their future.

And right now, there are hundreds of thousands of work visas up for grabs – in a huge array of sectors, including charity worker visas, seasonal worker visas, young persons’ mobility visas, creative workers’ visa, health and social care, HGV, and even amusement arcade work. You can come and work in the UK legally, and millions of people do. But you need to go about it the right way.

There are safe and legal routes for family members, too. Any person with a case for family reunion can make that case on behalf of their relatives in the UK and from the UK. There is absolutely no need for any close family member to be smuggled in at the dead of night.

It is absolutely right that the UK should help those most in need around the world and we do. But encouraging or facilitating people smuggling is not the way to do it. We need to bring an end to the small boat crossings and stop the dangers of people being in the hands of people smugglers and the risk of further deaths on the Channel.

This is the first of two articles by the author on small boats.  The second will be published on this site on Thursday.

Omicron. How Starmer is swelling the number of today’s Conservative rebels.

14 Dec

When a revolt of Government backbenchers swells, the Leader of the Opposition must choose: is he to be a John Smith or a William Hague?

First, Smith

In 1993, John Major’s administration was attempting to steer its Bill to enshrine the Maastricht Treaty into domestic law through the Commons.

John Smith sought tactical opportunities to vote down its provisions (forcing a vote on confidence on one occasion in the wake of having done so).

This had the plus, for Labour, of defeating the Government and weakening its standing, but the minus of disincentivising Conservative backbenchers to oppose Major.

For after all, one doesn’t like voting with the Labour Party if one is a Tory backbencher.

Next, Hague.

In 1997, Tony Blair’s newly-elected Labour administration to proposed a cut in the payments of some benefits to lone parents who were new claimants.

Hague decided to vote with the Government – a decision presumably informed by not having the numbers to defeat it were the Conservatives to join with Labour rebels.

But his decision had the effect of maximising the Labour revolt, as horror at the prospect of voting with the Tories swelled the ranks of the rebels.

Furthermore, a Minister and four junior members of the Government resigned in protest.

Which takes us to Starmer.

As I write, the Labour leader is set to be a Hague rather than a Smith.  He seems willing to shun the tactical gain of defeating the Government in order to win the strategic one of maximising Tory rebellion.

This would cover Starmer’s bases.  He is unwilling to alientate pro-lockdown voters, who comprise much of Labour’s base: public sector workers who are relatively insulated against the effect of restrictions.

Furthermore, he is offering the Conservative rebels a risk-free option.  Since there is no prospect of today’s measures being defeated, they are insulated against consequences that might follow their defeat.

For in the event of the NHS being unable to cope with Omicron, the Government will get the blame – not the rebels.

The latter now also appear to have strength in numbers.

Once a critical mass of backbenchers revolt, as Theresa May kept finding out when she put her Withdrawal Agreement to the Commons, revolt gathers its own momentum.

David Gauke: Sunak’s options for a Budget windfall. Lower debt, tax cuts and higher spending. Which will he choose?

27 Sep

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

In a month’s time, Rishi Sunak will have some good news to deliver in his Budget. He will have more money to play with than was forecast at the time of the last as forecast by the Office for Budget Responsibility. How he uses these additional resources will tell us a great deal about his priorities and the priorities of the Government.

Before turning to his options, it is worth setting out some context. The overall state of the public finances cannot be described as being particularly cheery, even if they are significantly improved since March.

The debt to GDP ratio will still be nearly 100 per cent, higher than at any point since the early 1960s, and not forecast to fall fast. The Government still has substantial spending pressures in the short and medium term – Covid catch-up, levelling up, net zero and social care – as well as long term demographic pressures that will bite in the 2030s. In response, the Government has this year announced substantial tax increases with the Corporation Tax rise, a freeze on thresholds and allowances in the personal tax system and the National Insurance increase announced earlier in the month. We now have the highest tax burden in our peacetime history.

The tax rises have not taken effect yet, but many people are already facing a squeeze in living standards. Inflation is set to hit four per cent, with energy prices rising much faster than that and six million people are about to see the end of the £20 per week Universal Credit uplift.

So at a time of high debt, high taxes, falling living standards and unfunded spending commitments, a bit of good news does not come amiss.

The good news is that the OBR’s March assessments of GDP growth in 2021 (4 per cent) and of the long term scarring effect of Covid on the economy (or, to put it another away, the capacity for the UK economy to grow in future) of three per cent looks to be pessimistic. With GDP growth this year likely to be approximately seven per cent (although the current supply chain uncertainties may bring it down a little) and scarring as little as one per cent, the difference to the public finances could be low tens of billions – a very handy sum.

Assuming that this is the case, what are Rishi Sunak’s options?

First, he can strengthen the public finances by bringing debt down faster than originally planned. We are getting our debt away cheaply at the moment which, some argue, suggests that there is not an imperative to do make a further reduction. But our debt levels are uncomfortably high in the event of another recession, and even small increases in interest rates could result in us paying a lot more to service our debt. Maintaining market credibility is always important to the Treasury and, by all accounts, the Chancellor of the Exchequer. We can assume that he will be keen to ensure that a significant proportion of the improvement in the public finances is put to this purpose. It also means that the Government may have more choices available nearer the time of the general election.

Second, taxes could be cut. This seems very unlikely to be announced in October ,given that the Prime Minister has just announced some tax rises, there remain outstanding spending pressures and it is still relatively early in the electoral cycle. Many Conservative MPs are not happy with the historically high level of taxes, but that is not going to change any time soon.

Third, he could increase departmental spending. The Treasury is downplaying the chances of this option by stating that the spending envelope has been set and is not going to be re-opened, but I am somewhat sceptical that this is quite so hard and fast a position.

There are two conflicting views on the pressures on departmental spending. One view is that the current spending plans assume no Covid costs after 2021-22 which is unrealistic; that generous spending plans for health, education and defence mean that there is precious little left for other departments – to the extent that unprotected departments face a real terms reduction and, if you compare the departmental spending numbers with what was announced in March 2020, there has been a cut.

The alternative argument put forward by the Treasury spending hawks is to point out the extent to which March 2020 signalled a turning-on of the spending taps. The long term trend growth of our economy is forecast to be 1.5 per cent. If departmental spending is to remain constant as a share of GDP, it would also grow at 1.5 per cent but, instead, the plans involved increases of four per cent a year and the capital spending element by seveb per cent a year.

The Treasury gets very annoyed at any suggestion made by the good people at the Institute of Fiscal Studies that there are departmental ‘cuts’ because the current spending plans are lower than those announced in March 2020. It is reminiscent of the trick Gordon Brown used to pull of setting out steep increases in public spending and, when the Conservatives set out slightly shallower increases in spending but increases nonetheless, describing the differences in spending as ‘Tory cuts’.

The bigger point the Treasury will be making is that, for those departments that have much more to spend, they really should absorb the short-term Covid recovery costs because spending is going up fast enough as it is, thank you very much.

(And, by the way, given that we are giving you this extra money, how about some proper efficiency reforms in return? Spending reviews should be the moment when the Treasury and spending departments make some big strategic decisions as to how taxpayer value for money is achieved but, since the Prime Minister has just reshuffled many spending ministers and the Chief Secretary to the Treasury, such a development does not seem likely on this occasion.)

The real issue is the position with the unprotected departments. There is a political vulnerability if departments do, in fact, see real term cuts (“the return to austerity”). With regard to two departments of which I have experience, the Ministry of Justice clearly needs more resources to function effectively and, in terms of protecting the public finances, penny-pinching with HMRC is counter-productive. My guess is that, with the exception of overseas aid, the Chancellor at the very least will find the resources to ensure no department faces real term cuts.

The final choice is on welfare. The £20 per week Universal Credit uplift will have gone by the time we get to 27 October and, particularly at a time of rising prices, this is going to be painful for many. Lowering the taper rate will not help the poorest claimants, but it is consistent with the Government’s emphasis on incentivising work by essentially lowering the marginal tax rate. It would also provide a reasonably good answer to what the Government is doing to help people with the squeeze on living standards. Taken in the round, a reduction in the taper rate ticks so many boxes that I would be surprised if it does not happen.

So the Chancellor should have some positive announcements on borrowing, departmental spending and Universal Credit. In what may prove to be a difficult autumn for the Government, Sunak’s October Budget looks likely to be one of its better moments.

Iain Duncan Smith: The Universal Credit uplift is an opportunity, not a problem. Keeping it would help save taxpayers’ money and improve lives.

13 Sep

Iain Duncan Smith is a former Secretary of State for Work and Pensions, and is MP for Chingford and Woodford Green.

This year has tested many of our institutions to the limit but one, Universal Credit (UC), has been the quiet ship in the fleet, rising to the challenge, and delivering – despite the huge increase in claims as the Coronavirus struck, providing a lifeline for millions up and down the country.

Even the Labour Party has acknowledged the triumph of UC. Despite its to scrap it, Stephen Timms, the Labour Chair of the House of Commons Work and Pensions Committee and former self-confessed critic, now calls UC “…a national asset which we should make the most of” and rightly stated that through the pandemic “Universal Credit has delivered”.

An astonishing million new claims were made in a fortnight in March 2020 but, despite this unprecedented influx, 96 per cent of claims made during the first months were paid in full and on time, a figure which is now at 98 per cent.

The five million claims made since the beginning of the pandemic represent two-fifths of all claims made since UCs creation in April 2013 – a figure that would just not have been possible under the paper based legacy system that UC replaced.

It is also worth reminding ourselves that, under the previous system, many claimants would have had to go in person to the Job Centre to make their claims, thus increasing the risk of catching Covid: instead, they were able to avoid that and claim online.

In the face of this unprecedented challenge, the Chancellor made the right decision to increase the amount that UC claimants received. This meant families on UC had an extra £20 a week in their pockets and, over the winter of 2020, 600,000 people were insulated from poverty.

I and five of my successor Secretaries of State at the Department for Work and Pensions have since made it clear that we believe the Chancellor should seize the opportunity to protect more families from poverty and make the £20 uplift permanent.

Importantly, the £20 returned to UC some of the original investment that was in my design, but which was removed by the then Chancellor, George Osborne. The additional money shouldn’t be seen as an exceptional uplift, but as a means of restoring UC to its rightful level. Removing it now would hit one third of working age families with children across the country.

As Conservatives, we believe in a welfare system that supports aspiration and allows people to live with dignity. UC is designed to support people and move them into work, which ultimately is the best route out of poverty. Those on UC who take on extra work hours are supported through the flexible taper rate, meaning that no one is penalised for securing extra work.

The furlough scheme has a fraud and error rate as high as 10 per cent and, although it was needed through the critical phase of the pandemic, the Chancellor is right to now bring to an end.

The Treasury must understand that, since UC gives a true picture of the need of each household, it can be better targeted and more efficient, thus resulting in significant further savings. UC has, more than any other form of Government spending, the greatest capacity to tackle poverty as it is hugely targeted meaning every pound spent on UC goes in the pockets of those who need it most. Research by the Resolution Foundation has shown that increases to UC, and in particular raising the UC work allowance, is a notably much more efficient way of improving the incomes of the poorest than raising the personal income tax allowance.

As our economy fully re-opens, there may be bumps along the way and the flexible design of UC allows the system to adjust nimbly to these changes. As the jobs market begins to expand, the taper rate of UC could, for example, be lowered. This would leave low hours workers with more money, helping accelerate them into full-time work and off benefits. This in turn would reduce the total amount of money spent on UC, as people move on into work and start to pay tax.

That’s why, instead of seeing this £20 uplift to UC as a problem to be solved, we should see it as a dynamic investment in a system that can turn people’s prospects around, in turn saving taxpayers’ money whilst improving lives.

As the economy reopens, UC won’t just be critical in building social cohesion, but will be seen as an investment in people who have too often been left behind. After all, you can’t advocate levelling up if you first level down.