David Gauke: My Budget advice to the Chancellor. Raise income tax, not corporation tax.

27 Feb

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

If there is one tax that the Chancellor is likely to increase when he stands up to deliver his Budget on Wednesday, it is corporation tax. Speculation that the corporation tax rate is going to rise has been running for months and if the Treasury wanted to dispel such speculation it could have done so. In contrast to George Osborne’s time as Chancellor – when reductions from 28 per cent to 17 per cent were announced – Rishi Sunak is expected to announce a Corporation Tax rate in the region of 23 to 25 per cent.

Is this a good idea? My view – as the Minister of Tax throughout the Osborne Chancellorship – is that it is not. But it is worth examining the arguments for and against such an approach.

The first argument that will be made is that we might not need tax rises at all. I wish that this was true but sadly this is unrealistic. It is true to say that we can live with higher levels of debt than was the case in the past. Interest rates are low and likely to remain so. Even if they increase, the long dated maturity of our debt gives us a chance to respond. The markets are happy to lend to us, the risk of a sovereign debt crisis is remote. The Covid crisis is the type of event in which governments should be willing to borrow and the consequences can and should be dealt with over a long period of time. In short, we needn’t be in a hurry to pay off the Covid-19 debt.

Even accepting all of this – that ‘this time is different’ – there is still an issue. Even after we are put the economic consequences of Covid-19 behind us, the OBR forecasts a deficit of £100 billion or 4 per cent of GDP. Our debt to GDP ratio would continue growing. Given these forecasts assume tight control over public spending that will be hard to deliver and the significant demographic challenges that face the country in the 2030s, some kind of fiscal tightening in the form of tax rises will be necessary eventually.

The second argument is that now is not the time. I would agree that now is not the time for a fiscal tightening. The economy is currently shrinking and unemployment is likely to increase substantially in the months ahead. The markets are not jittery so there is less of a pressing need to take action. Nonetheless, the Government could increase some taxes without engaging in a fiscal tightening if long term tax increases are accompanied by short term tax cuts or spending rises. So one can announce and even implement tax rises without engaging in an immediate fiscal tightening.

There is also a political issue. Delaying action on fiscal consolidation might make economic sense but it would push tax increases into the last years of a Parliament. Leave it a year or so and the Chancellor might find that his Parliamentary colleagues – not least the Right Honourable Member for the marginal seat of Uxbridge and South Ruislip – might become rather resistant. Now might be the last chance to take action.

The third unconvincing argument is that cutting corporation tax has not cost us any money and increasing it will not raise you any money. Look at how corporation tax revenues have increased since 2010, the argument goes. Sadly, life is more complicated than that. Yes, rates have fallen and revenue has increased but corporation tax receipts reflects where we are on the economic cycle (in 2010, businesses were not making much by way of profits and if they were they had big losses to offset). Furthermore, the post-2010 reforms were Lawsonian in their approach in broadening the base at the same time as lowering the rate (so these were not simply cuts). In addition, lower corporation tax rates have unintended behavioural changes in that more people pay themselves through companies (diverting tax revenues from income tax and national insurance contributions). To put it another way, increasing corporation tax rates really will bring in more revenue.

So, to summarise, it will be necessary to increase tax revenue, it is reasonable to make a careful start on that process now (albeit in a way that does not tighten fiscal policy in the short term) and that increasing the corporation tax rate will bring in additional revenue. I could also add that, of all the potential revenue-raisers, this is likely to be politically less painful than other options. Even businesses will not squeal much because, for many of them, making a profit appears to be a remote eventuality and paying more tax on those profits would be a relatively nice problem to have.

It would still be a bad idea.

Why? If we are going to raise more in taxes – and we are already at historically high levels – we need to have a debate about which taxes are least damaging to economic growth. Over the long term, corporation tax ranks as being one of the worst.

Corporation tax is a tax on profits. Profits are the return on investment; the higher the tax on profits, the lower the rate of return. All other things being equal, the lower the rate of return on investment, the less investment you get.

There is also a tendency to think that corporation tax is something that is paid by, well, corporations. At one level that is true but – to state the bleeding obvious – all taxes are paid by people in the end. Corporation tax is ultimately paid by shareholders in lower dividends, consumers in higher prices and employees in lower wages. There is plenty of evidence to suggest that in an open economy like the UK, it is the workers who lose out the most. Investment goes elsewhere, productivity does not increase as quickly as it would otherwise do and, in the end, wages and salaries reflect productivity.

It is no coincidence that, in the era of globalisation, corporation tax rates have fallen around the world. I spent much of my time as a Treasury minister trying to persuade international businesses to locate more investment and activity in the UK as a consequence of the competitiveness of our corporate tax system. We were starting to see success but there was always a question as to whether the UK was truly committed to corporation tax competitiveness in the way that, say, the Republic of Ireland was. Given the current speculation, it was a fair question. On top of Brexit, a sharp hike in corporation tax rates will be yet another blow to our international reputation as a place in which to do business.

If we need more tax revenue – and we do – we have to make use of our big, broad-based revenue raisers – income tax, national insurance contributions and VAT. The manifesto pledge made in 2019 not to increase the rates of these taxes was unwise at the time but it was made in good faith. However, much has happened since and the Government would be justified in recognising that. Attempting to fill the fiscal black hole by swingeing increases in corporation tax will reduce business investment and damage our international competitiveness. Not for the first time, the politically expedient choice will come with a painful economic cost.

George Freeman: The industrial strategy reforms I led helped to deliver Britain’s vaccine success. Now for the next phase.

1 Feb

George Freeman is a former Minister for Life Science and Chair of the Prime Minister’s Policy Board (2016-18). He is co-author and editor of the 2020 Conservatives book Britain Beyond Brexit.

The combination of Covid-19 and the Crash of 2008 have left this country facing the most serious crisis in our public finances since 1776. Unless we make the post-Brexit, post-Covid recovery a transformational renaissance of enterprise & innovation on a par with that unlocked by Thatcher Governments of the 1980s, we risk a decade of high debts, rising interest rates and slow growth.

We have a truly unique opportunity before us. As a science and innovation superpower, with the City of London now outside the EU’s rules for the first time in nearly fifty years, we can unlock a New Elizabethan era of growth – with Britain a world-leader in global commercialisation of science, technology and innovation. It is what our entrepreneurs have been crying out for. Now is the moment to make it happen.

That’s why I’m delighted to have been asked by the Prime Minister to help set up the new Taskforce for Innovation and Growth through Regulatory Reform (TIGRR) with Iain Duncan Smith and Theresa Villiers.

Reporting directly to the Prime Minister & the Chancellor’s Cabinet Committee on deregulation, and supported by a secretariat in the Cabinet Office, the Taskforce will consider and recommend “quick wins” to use our new regulatory sovereignty to unlock high growth sectors of the economy to drive post-Brexit post-Covid recovery.

Rest assured: there will also be no big report or a thousand pages of footnotes to wade through. We will be crowd-sourcing the best ideas from the business community and the entrepreneurs and innovators who are the engine of our economy.

The Prime Minister has asked me to bring my career experience in business starting & financing high growth bioscience technology companies as well as my experience as Minister in Health, BEIS and Transport leading our groundbreaking Industrial Strategy for Life Science which has paid such dividends this year.

The reforms I led in our Industrial Strategy – launching Genomics England, the Early Access to Medicines Scheme, MHRA and NICE reform, Accelerated Access procurement have been fundamental to our ability to lead the world in developing a Covid vaccine.

We now need to make Brexit & Covid the catalyst for bold reforms to unlock big UK opportunities for recovery & GlobalBritain across a range of high-growth sectors such as those I have worked on extensively as both entrepreneur and Minister:?

  • LifeScience: harnessing the potential of the NHS as a research engine for new medicines, unlocking digital health & innovative approaches to Accelerated Access, clinical trials & value-based pricing.
  • Nutraceuticals: health-promoting “superfoods”, cannabis medicines.
  • AgriTech: smart clean green twenty-first farming technology like the blight resistant potato banned by the EU.
  • CleanTech: new biofuels, Carbon Capture & Storage & digital “smart grids” to reward households & businesses for generating more and using less.
  • BioSecurity: harnessing the potential of Porton Down and UK vaccine science for plant, animal & human biosecurity.
  • Digital: removing barriers to UK digital leadership outside the EU GDPR framework.
  • Hydrogen: using the full power of Gov to lead in this key sector as we did in genomics.
  • Mobility: making the UK a global test-bed for new mobility technologies,

Before being elected to Parliament, I spent 15 years working in life sciences around the Cambridge cluster, financing innovation. I saw time and time again how the best British entrepreneurs and their companies struggled to build business to scale here in the UK.

So often we have invented the technologies of the future and failed to commercialise them effectively.

After several years working as the Government Life Science Adviser, I published my report for the Fresh Start Group on The EU impact on Life Sciences: Avoiding the Global Slow Lane.

Three years before Brexit, the report was the first to highlight the growing hostility of the EU to ‘biotech’ and the increasing tide of ‘anti- biotech’ legislation – driven by a combination of the German Green Party, Catholic anti-science and lowest commons denominator regulation by the “precautionary principle” which was having a damaging effect on the Bioscience Economy and risked condemning the EU – and by extension the UK – to the global slow lane in biotechnology.

The report set out how the genomic revolution was beginning to offer untold opportunities across medicine and agriculture to help generate huge economic, social and political dividends for mankind. Billions of people were being liberated from the scourge of insufficient food, medicine and energy. The main threat to that? The EU’s hostile regulatory framework.

This was seen clearly in numerous case studies. At the time, the EU’s hostility to GM led German-based BASF and major U.S firm Monsanto to announce their withdrawal from Europe in agricultural research and development. My report argued that unless something was done soon, other companies would follow suit, with dire consequences for the UK Life Science sector.

The report recommended a shift away from the increasingly widely used risk-based ‘precautionary Principle’ and greater freedoms around data protection, using public healthcare systems to help accelerate early access to medical innovations, and for the UK to be able to ‘go it alone’ in designing appropriate regulatory frameworks for GM crops.

The UK’s departure from the laws and requirements of the EU provides us with a once-in-a-generation chance to redesign and improve our approach.

This new Taskforce, therefore, is emphatically not another long-term Whitehall de-regulation ‘initiative’. Neither is this is about cutting workers’ or environmental rights that we rightly guaranteed in the 2019 election manifesto.

It is of vital importance that the UK maintains the high regulatory standards that we have consistently championed. In some of the fastest growing new sectors like Digital Health, Nutraceuticals and Autonomous Vehicle Tech, clear global regulatory standards are key to investment confidence. By setting the new global standards here in the UK we can play a key role in leading whole new sectors.

But we must think innovatively about supporting businesses to start and grow, and make the most of the cutting-edge technologies and sectors we nurture in our universities for global impact. For example, why don’t we use our freedom to pioneer new disease and drought- resistant crops, and use our aid budget and variable tariffs to help create new global markets for UK Technology Transfer?

We won’t unlock a new era of the UK as an Innovation Nation generating the technologies and companies of tomorrow with technocratic tinkering. We need bold leadership, clear commercial vision and reforms to support innovation and enterprise. The two go hand in hand. We won’t unlock an innovation economy without an enterprise society. So we will need to look at tax and regulatory incentives for high risk start/ups like the “New Deal for New Businesses” I proposed back in 2010 to drive recovery after the Crash.

This is a once-in-a-generation moment. Together we must seize it.

Anand Menon and Matt Bevington: Will Johnson really be able to level up?

30 Nov

Professor Anand Menon is Director of UK in a Changing Europe, and Matt Bevington is Public Policy Analyst, UK in a Changing Europe.

The best laid plans of mice and men. Less than a year after his decisive election victory, already thrown off course by the pandemic, the Prime Minister has had to hit the reset button. His Chief Adviser is out of the door, and Red Wall Conservative MPs are worried that the government’s flagship domestic agenda – levelling up – might be on the way out too.

When he announced his candidacy for the leadership of the Conservative Party, Boris Johnson declared”: “if we are to unite our country and unite our society, then we must fight now, for those who feel left behind.” Subsequently, levelling up has become a central rhetorical theme of his Government. But can it deliver concrete results by the time of the next election? And if not, will there be a political price to pay for unmet expectations?

Levelling up is a compelling phrase, but its meaning is at best fuzzy. In his first speech as Prime Minister, Johnson referred to levelling up wages, productivity, investment and opportunity. He also pledged to answer “the plea of the forgotten people and the left behind towns”. But can all this really be addressed in a single Parliament, let alone one knocked off course by Covid-19?

number of studies make the point that the UK is among the most geographically unequal countries in the developed world, and the Institute for Fiscal Studies reckons that levelling up is a job that will take years or even decades.

Moreover, any plans to reroute substantial amounts of Government money have been thrown up in the air by the Coronavirus. The Spending Review was delayed, and the sheer scale of public debt will act as a break on any government largesse. Meanwhile, new infrastructure projects, which would take years to complete anyway, have yet to be announced.

Then there is a new problem created by Covid: unemployment. This too will affect regional inequalities. According to the IFSLondoners are the most likely to be able to do their jobs from home and therefore face least disruption. The Government doesn’t just need to address unemployment, but try to mitigate its uneven geographical impacts.

And let’s not forget the challenge that, pre-Covid, was the most vexing to the British economy: productivity. Differences in productivity across the UK are at the heart of geographical disparities. It is a complex and difficult question for which there needs to be a Government-wide strategy. Any lasting effort to level up the country has to major on it.

Finally, there is the ongoing impact of austerity. Many of the places identified in the government’s Towns Fund were those worst affected by austerity. Places like Oldham and Rochdale – already some of the most deprived local authorities in the country – saw government spending cuts of 30-40 per cent between 2010 and 2017.

So the task is herculean from the start. And we haven’t yet mentioned the elephant in the room: Brexit. With or without a deal, the economic impact of leaving the European Union will be substantial, and forecasts suggest it will be greatest in precisely those parts of the country most in need of ‘levelling up’.

Thiemo Fetzer, for instance, has found that the costs of Brexit are likely to be more concentrated in local authority areas that have relatively low educational attainment – in other words, that it will exacerbate existing inequalities.

Despite all this, levelling-up as a political project may not necessarily be doomed to failure. For one thing, we should not underestimate the importance of political attention. A Government that appears committed to addressing regional inequality sends a powerful message.

As Deborah Mattinson has found from her work in the Red Wall seats, many voters felt they had been both left behind and taken for granted under successive Labour governments. It may be that the simple fact of having a government that talks about prioritising their concerns makes a difference.

That said, the Government has hardly made a positive start. Its handling of the pandemic has led to accusations that it is one rule for the South and another for the North. Large parts of the north of England were asked to lockdown when Covid raged in the south in the spring, but not vice versa in the autumn.

Perhaps more damaging was the tussle with Andy Burnham. The Government refused an additional £5 million for businesses in his patch, and then made the scheme instantly more generous when London moved into Level Two. And when the whole country locked down, the cherries aligned and the Treasury one-armed bandit spewed out cash.

Be this as it may, there are signs that this might change. The Blue Collar Conservatives and Northern Research Group have given a new public face to the levelling up agenda. And the Conservatives have announced plans to open a second, northern headquarters, in Leeds. The aim, as with their continuing talk of the Northern Powerhouse, is to send a clear signal that the they are there to stay.

Moreover our research with low-income voters in some of these areas revealed that many are not expecting miracles. They simply want better local services. The issues they identify are often pretty basic: reliable bin collections, well-maintained green spaces, and litter-free town centres.

Reversing some of the hollowing out of local government due to austerity would go a long way to addressing these issues, and might well be much more effective (and far less expensive) than large infrastructure projects.

In order to genuinely address the problems besetting those areas in desperate need of a new economic settlement, the government urgently needs to put more flesh on the bones of its levelling up agenda. And for levelling up to be really effective, successive governments must commit to achieving it. But to win the political battle, it may be enough – just – for Johnson to show that he has listened and started to act.

Carsten Jung: Why Sunak’s budget is at odds with mainstream macroeconomics

27 Nov

Carsten Jung is Senior Economist at the IPPR.

On Wednesday the Chancellor announced a spending review that was bold in ambition but actually surprisingly timid in numbers. Rishi Sunak may have political reasons for holding back, but mainstream economic thinking suggests that there are questions we should ask about the size of the Treasury’s response.

The human cost of doing too little could be large. A stimulus too modest, that does too little to strengthen the economy, would disastrously dampen the economic ambitions of the young and future generations.

On one hand, some consider the overall bill of £400 billion of the pandemic so far is evidence enough that spending now needs to be trimmed back. But on the other, the fundamental insight gained from a century of economic crises is:that the state is uniquely able to boost economic activity when other economic players – businesses, workers and households alike – are still licking their wounds.

Developed by Keynes,and reflected in economic theory almost ever since, is the finding that public spending can keep bad things from happening, and that this can be economically optimal. Right now, this means that keeping firms and their workers from going under is economically superior to the train crash of an economic disaster, with otherwise viable businesses going to the wall amid a wave of bankruptcies.

Of course this isn’t just theory – it’s been generally accepted in practice by governments of all political stripes. The Chancellor understands that it’s the Treasury’s job, especially in a crisis like this one, to stabilise the economy and help it back on a path to sustained growth. The question is: will this week’s measures achieve that?

Arguably not. The IPPR estimates that the economy will receive only just over a quarter of the boost it needs to fully stabilise and restore the economy. We calculate that a total stimulus of £164 billion would be needed to achieve this – at first sight an eye-watering sum, and of course subject to margins of error. But whatever the exact numbers, there is a strong case to argue that the Chancellor’s measures are too modest.

Some might argue that the state ought to get out of the way and allow business to drive the recovery instead. But this ignores the harsh environment in which businesses currently find themselves. With demand still well below the pre-crisis trend, and balance sheets ballooning with debt, it would take an unusually brave entrepreneur to embark on an investment spree right now. For this reason, business investment is still a hefty 20 per cent below its pre-pandemic level – itself far below our international peers – and is not expected to recover until 2023. No wonder many business groups strongly favour the government catalysing investment and supporting demand.

Many might agree that a much bigger boost would be desirable for the economy, commerce and jobs, but ask: can we really afford it? As some commentators observed this week, the UK appears already to be running up debt so great that at first sight it appears dangerously unaffordable.

But that is the appearance, not the reality. Ultra-low interest rates mean that the UK will pay £20 billion pounds less – not more – to service its debt next year than before the crisis.

Moreover, experience shows that spending less can actually be counterproductive for the public purse. That is because the longer the crisis is allowed to run, the more permanent the damage to the economy. That means less investment, fewer profits, lower wages, less consumption, and significantly lower future tax returns.

Our calculations, based on widely-used economic modelling, suggest that public debt as a proportion of GDP could actually fall, were the Government to embark upon a more major investment package that further boosted jobs and growth. It could be 0.5 per cent lower at the end of the first year, and more so over time, because faster and more resilient growth would mean the economy growing more than government borrowing.

Contrary to widespread belief, government finances are not at all akin to a household’s. They are more like those of an entrepreneur who spots a lucrative business opportunity. For them, it can be more profitable to borrow, invest, and reap the benefits of increased growth later.

The same applies to the state. Smart investments today mean more tax revenues in the future. The economic potential is even greater while interest rates are low, and likely to stay that way for years to come.

The IMF makes a similar argument. It argues that “tightening too fast could undermine the recovery” and says “a further increase in debt in the short term would appropriately balance the pro-growth and debt sustainability objectives over the medium term”. In other words, spending more now will make it easier to manage government debt later.

As counter-intuitive as it may sound, borrowing more to spend now would make it easier to balance the books later. Surprisingly, fiscal stimulus is fiscal responsibility.

What could we invest in? None of this would be about building ‘bridges to nowhere’. There are many projects in dire need of investment, starting with our hospitals and social care infrastructure. Three quarters of buildings are falling short of energy efficiency standards. Much public transport infrastructure is suffering from years of neglect, not least in the towns and cities of the North and other English regions.

Last week, the Prime Minister announced a ten-point plan to tackle the climate and emergency and restore nature; in March we calculated that the UK needs to invest an extra £33 billion a year to meet our environmental targets. Only a small part of this gap has been plugged by the welcome announcements so far.

Such investment in future growth prospects can unlock job opportunities and is the best way to address the widely-feared economic “scarring” from the pandemic. And these are no moon-shot projects either. We already have the technology. We can start tomorrow.

All this suggests a question we should sincerely ask the Chancellor. Could more spending bring the economy back quicker? And apart from all the other advantages, wouldn’t it be more cost-effective to ensure public finances are on a sustainable footing?

Because doing too little now will also come a great human cost. We have all been hit hard by the pandemic, but for the young in particular it has been a disaster. They face a future with an economy severely damaged and permanently below potential, without enough good jobs, and with permanently over-stretched public services. Not only are they having to endure the rigours of social isolation during the pandemic, they also face the prospect of a future denied. Little wonder that their mental health has fallen more than that of any other group during this crisis.

So in addition to having benefits for the long-term health of our economy, a bigger fiscal stimulus could prevent us committing a historic mistake: leaving the next generation without enough jobs, without an intact environment, often without the financial means to move out of their parents’ homes – and for some, without hope. From the Chancellor, that would have been a bolder and a better answer.

Ryan Bourne: Calm down, stay cool – and drop this talk of tax rises. It’s too early to know how everything will settle down.

25 Nov

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

I feel as if I am stuck in some mid-2010s time warp. Rishi Sunak will today update us on how much the Government has splurged during this Covid-ridden year and what it intends to spend next year.

But commentators are already pivoting to sizing up what deficit reduction will eventually be needed, and whether tax rises or spending cuts should fill the future fiscal hole. That conversation will be spurred today by the Office for Budget Responsibility updating its guesstimates of how far the pandemic will permanently impair the economy’s potential, and so the “structural deficit” to deal with. Welcome to the Austerity Wars 2.0.

As I’ve said before, all this debate is massively premature. Yes, this pandemic has caused masses of government borrowing—producing a deficit of 21 percent of GDP or around £400 billion, according to the Resolution Foundation. But we are (still) in a once-in-a-half-century pandemic where we have knowingly kept shuttered swathes of the economy and paid people to sit at home.

There will obviously be “deficit reduction” next year, in the sense that the vaccines ending the pandemic will bring furlough to a close, make Covid-19 test and tracing redundant, and see the end of the inoculation and PPE scrambles. Like demobilisation at the end of war, so the government will de-Covidise its budget with drastic cuts to virus-related expenditure. Likewise, as things re-open, tax revenues will ascend again. So, the deficit will fall.

But anyone who claims they know what level it will settle at, and so what “needs to be done” to re-achieve pre-Covid borrowing levels, is, quite frankly, talking poppycock – including the Office for Budget Responsibility.

None of us, nor them, really have a clue what the long-term impact of this crisis will be on the economy. Will a whole bunch of industries shrink permanently now that the risk of government shutdown orders in future pandemics is understood? Will people stick with online retail and eat out less than they did? Will professionals work from home more, transforming parts of inner cities? Or is there a pent-up demand for socialising and “the old life on speed,” with a roaring 20s to come, as after the Spanish Flu?

Without knowing all this, nobody can say what demands on public service spending will be or how tax revenues will perform over the next five years. Add in the uncertainty of whether there will be a Brexit deal, and the underlying budget position for Sunak is pretty much unknowable today – the whole reason, remember, that the Chancellor is only delivering a one-year spending review.

To see the scale of uncertainty, note that various independent forecasters have predicted that UK government borrowing in 2021 could be anywhere from £102 billion up to £273 billion. That’s a bigger range than the actual unprecedented borrowing of 2009/10.

So we need to take whatever comes out of the OBR’s economic and fiscal outlook today with gallons of salt. Their forecasts have already proven unduly pessimistic, with borrowing outturns from April through October a massive £76.5 billion lower than they were expecting. Nor, historically, have they had a stellar record in assessing the growth potential of the UK economy exiting a deep crisis.

Back in 2010, remember, the OBR predicted a return to robust productivity growth, meaning George Osborne’s strict spending limits were predicted to eliminate the structural deficit as early as 2015. That didn’t happen, despite spending levels being delivered as planned.

So it’s baffling why think-tanks are taking the OBR assessments today as truth, and outlining “fiscal repair” measures of £40 billion to be delivered from 2023 onwards already. The Resolution Foundation wants significant tax rises on everyone earning over £20,000, for example.

Why not just calm down a bit, and see how things shake out? My central assumption is indeed that there will be a bit of a hit to our growth potential from living through this crisis, pushing the structural deficit up. And, obviously, if the Government keeps NHS spending higher and permanently raises Universal Credit generosity even after the pandemic ends, on top of recent announcements on defence spending and the “green industrial revolution,” then this makes the prospect of future deficit reduction less likely. But it’s the underlying economy that still has the biggest impact on the public finances, and that should be our focus right now.

Indeed, in talking up the need for restraint, the Chancellor, the OBR, and others may be unwittingly damaging our recovery prospects. Tell people big tax hikes are coming, and they begin thinking their permanent incomes will be lower because the economy’s prospects are weaker.

Of course, the Chancellor is trying to balance risks, and make clear to bond markets that the government is aware of the need for fiscal discipline in the longer-term. But what does he think headlines telling people to “prepare for tax pain next year” achieve? As Julian Jessop asked, wisely, on Twitter, what should that preparation look like? “Increase savings? Cut investment? Dump assets? Don’t start that new business?” How is that helpful given where we are?

Rather than lasering in on the deficit as a target, it would be better for now if the debate stayed focused on how to achieve a strong recovery. Whether they help or hinder the economic rebound should be the metric by which we judge almost all new spending and tax choices today, as well as regulatory policy. Anything that we can do to ensure the vaccine roll-out goes as smoothly and quickly as possible, for example, will produce a huge economic stimulus. Bringing forward the end of pandemic restrictions by just one month could generate tens of billions in value.

But even beyond getting that right, we need to stop talking as if spending measures are something wholly independent of our recovery prospects. The whole public sector pay debate, for example, has been tiresome in focusing on whether the Government can afford to raise public sector pay, or whether it is fair too, rather than about how setting pay rates will affect the jobs recovery. A more disaggregated analysis would surely conclude that raising pay in areas of the public realm under severe strain due to Covid is highly desirable to ensure good retention and recruitment, whereas pay restraint is justified in areas where public sector productivity has plunged due to home working.

Yet, sadly, thinking through how spending or tax policy affects our growth potential is not where public discourse is. Instead, people are already fighting the last war, battling over shaping the narrative on whether another round of spending cuts are desirable, or else buttering us up for yet higher taxes despite the historically high burden even before Covid-19 hit. The biggest 2010s economic policy mistake was not austerity, but that the focus on it led us to being fatalistic about growth. Let’s not do the time warp again.

Liam Fox: Today, the Chancellor should aim to boost an unambiguously private sector-led recovery

25 Nov

Liam Fox is a former Secretary of State for International Trade, and is MP for North Somerset.

The successful development of vaccines by the world’s largest – private sector – pharmaceutical companies brings much-needed optimism as we look forward to 2021. Yet, any political respite for the Government is likely to be short lived, as the focus inevitably shifts towards the seismic economic impact that the coronavirus has created at home and abroad.

As the Chancellor said at the weekend “people will see the scale of the economic shock laid bare”.

The UK’s overall debt has now reached 100.8 per cent of gross domestic product (GDP) – a level not seen since the early 1960s. It is terrifying to imagine where we would be if the public finances had not been improved to the extent they have over the past decade. The most recent Bank of England forecast estimates that unemployment may peak at around 7.7 per cent in April to June of next year but could be as high as 10 per cent.

The key to the post-Covid-19 recovery will rely on the ability of Britain’s small businesses to create jobs on the scale that we have seen in recent years. At the beginning of 2020 there were 5.82 million small businesses (with 0 to 49 employees), 99.3 per cent of the total business population.

Despite the unprecedented support from the Government through the Coronavirus Job Retention Scheme (the furlough) which has been extended to the end of March 2021, the Business Interruption Loan Scheme and the Self-Employment Income Support Grant, many small businesses fear that they may not survive the transition to the economic “new normal”.

The unprecedented government assistance has masked the fact that this group has suffered more than most in the varying degrees of lockdown that we have experienced since March, with some still struggling to get lenders to support them.

The longer that lockdown continues, the more that demand for their goods and services is likely to be depressed and their viability threatened. Many fear they may not survive to see the recovery. That is why, in his spending statement this week, the Chancellor must make clear the Government’s commitment to Britain’s SMEs, for this must be an unambiguously private sector-led recovery.

While there are understandable demands to pump more funding into the public sector, we must restore the habit of making sure we have the money in the bank before we start spending it.

Unless we are able to grow our economy through the private sector and generate more national income, then we will be back in the territory of having to choose between damaging tax rises or unpopular spending cuts.

Our ability to borrow heavily during this crisis has maintained the viability of a large part of our economy but an inability to control future borrowing will be deeply damaging to our long-term prosperity and our ability to fund the quality public services on which we depend.

I would like, in his financial statement, to see the Chancellor replace or at least add to David Cameron’s policy test which was “how will this affect and be perceived by every family in Britain”. The new test would be “the entrepreneur test”. This is in line with his natural instincts.

We must assess how every bit of legislation and every regulation will affect the wealth creating part of our economy and our every statement and every speech should be mindful of the message it sends to our small business community.

We must ensure that we are not only a great place for business start-ups but that we can deal with the lack of capital that often results in a failure of scale ups. We must ensure that the elements that make the United Kingdom such an attractive place for foreign direct investment continue – a stable regulatory framework, an attractive tax environment, flexible skills in our labour force, access to quality higher education, access to tech and gold standard protection for intellectual property. As the world’s third largest destination for foreign direct investment, we are already strong in all these areas.

In the 1980s, the Conservatives demonstrated our commitment to the ownership society through our totemic policy of council house sales. The Conservatives must now be seen as the natural ally for every white van man and woman, every tech entrepreneur and every corner shop owner. The Chancellor must make us unequivocally the party of small business.

David Gauke: Next week’s spending review – and why our holiday from spending restraint is coming to an end

21 Nov

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

For reasons that some readers will understand, the departure of Dominic Cummings from Downing Street was not a source of great sorrow for me. It appears that I am not alone. Nonetheless, Cummings’ resignation/dismissal makes the Prime Minister’s job much harder in at least one respect.

We are already pushing the limits on when a free trade agreement with the EU can be agreed in order for it to be in place by the end of the year. Boris Johnson continues to appear to be undecided as to whether he is willing to make the necessary concessions in order to get a deal (thus upsetting hardline Brexiteers) or leave without a deal (wreaking further damage to the economy and the integrity of the United Kingdom).

Both options have been apparent for some time, and they are sub-optimal for the Prime Minister and the country. Now he really has to choose.

If he compromises, some people will say that, without Cummings, the Prime Minister lacks a spine. Cummings may well be one of the people making this point.

If he does not get a deal, the Prime Minister’s strategy must be to convince the Leave half of the country that the ensuing mess is the fault of the European Union (it will be a hopeless task to avoid the blame with the other half of the country). To do that, he will need a communications strategy that is ruthless, aggressive and lacking in self-doubt, entirely untroubled by the overwhelming evidence pointing to a different interpretation of the situation. These are exactly the circumstances in which Cummings has a track record of success.

This is a bad time for the Prime Minister to fall out with his most influential adviser.

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Anyone entering politics will be aware that there may come a moment when there is a conflict between what one perceives as the national interest and the furtherance of one’s career.

We can currently see this playing out in the United States, as Donald Trump continues to refuse to accept the election result. With a few honourable exceptions, most senior Republicans have gone along with this nonsense. Presumably, none of them believe the election was rigged in favour of Joe Biden, but they dare not say so because of the fear of offending the Republic base.

Although not as egregious, there are similarities in the UK. Fear of offending the Conservative grassroots has inhibited too many senior Tories in setting out the realities of our departure from the European Union for far too long.

At this particular time, the talk of Westminster and Whitehall is that the overwhelming majority of the Cabinet favour a compromise with the EU because they are conscious of the consequences of failing to get a deal. But the ambitious amongst them know that to be seen to be associated with compromise on Brexit is a career damaging move.

As a consequence, they keep their heads down, content to let others challenge the prejudices of their party’s more extreme supporters. If things ultimately go as badly as they might, history will not judge kindly.

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The Prime Minister’s announcement of an ambitious green agenda will, we are told, help create thousands of green jobs. The increase in defence spending will, we are told, help create 10,000 new jobs. Such announcements are always treated as being good news – a further justification for a policy.

There are good arguments to be made for reducing carbon emissions and improving our defence capabilities but, while the fact that pursuing these policies requires the employment of more people may be good news for the individuals concerned, for the Government and society as a whole, this is a cost not a benefit. Employing people is expensive. And if they are employed to do one thing, they are no longer available to be employed to do something else which society or the economy might value.

I do not always agree with everything Nigel Lawson says, but he has a point when he states that “a programme to erect statues of Boris in every town and village in the land would also ‘create jobs’ but that doesn’t make it a sensible thing to do”.

To give an equally absurd example, it is not a cause of celebration that, from January, the country is going to require an additional 50,000 customs agents because of increased bureaucracy involved in trading with the EU. I repeat, this is a cost not a benefit.

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Wednesday will see the Spending Review, albeit one that is less comprehensive than first intended. I suspect much of the focus will be on the Office for Budget Responsibility’s assessment of the public finances, which is likely to be ghastly.

Borrowing this year will certainly be a peacetime record and might not be far behind a wartime record, either. To some extent, that does not matter as much as it might do – we can get our debt away easily and cheaply enough in a world where markets are much more forgiving of high levels of Government debt than they were even a few years ago.

But the worry will be that, even a few years down the line when the virus is behind us, we will still be borrowing very large sums of money. Exceptional borrowing in an exceptional year is one thing, but one cannot expect to get away with that forever.

Something will have to be done – but when? One of the many challenges for the Chancellor is that the political and economic cycles are misaligned.

Politically, he would want to get tax rises or spending cuts (and it will be mainly the former) in place early in a Parliament so that the pain is well out the way by the time we get to 2024.

Economically, the consensus view is that early tax increases might choke off a recovery so better wait a while. On that basis, even with the recent good news on vaccines, 2022 would be the earliest point for tax increases (and plenty would argue for later).

The politics of tax increases also appears to be immensely difficult. The Prime Minister seems dug in on the tax lock (preventing increases in the rates of income tax, national insurance contributions and VAT, which between them raise two thirds of Government revenue) whilst the back benchers also appear squeamish about any kind of fiscal consolidation.

As a country, we have given ourselves a bit of a holiday from thinking about the public finances. This coming week might indicate that this holiday will soon be coming to an end.

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Should we relax Covid-19 restrictions to save Christmas? It would be lovely to have a normal Christmas, but I am not sure proponents of seasonal break in restrictions have thought this through.

There is every reason to believe that Christmas would be a super spreader event, resulting in the deaths of thousands just weeks before we will have vaccinated the vulnerable.

For too many families, making the wrong decision about Christmas 2020 could mean that all future Christmases will be tinged with sadness, loss and guilt. Just be patient; we are nearly there.

Joe Shalam: We can’t let an unemployment crisis become a debt crisis

5 Nov

Joe Shalam is Head of Financial Inclusion at the Centre for Social Justice.

As the Government’s credit card bends under the weight of our Covid-19 response, the national debt has exceeded GDP for the first time in over 50 years.

But the pandemic has just as alarming implications for household debt: this is, after all, the more immediate source of anxiety for families hit by coronavirus-related income shocks.

The Centre for Social Justice (CSJ) has always considered serious personal debt a pathway to poverty. We see this in the way it tears families apart, the strain it puts on employment, and its cruel encouragement towards alcohol and substance dependency. Any thoughtful poverty strategy needs to address the menace of debt for those who don’t have much to begin with.

While record amounts were repaid on credit cards during national lockdown by workers deprived of their shopping habits, expensive daily commute and flat whites, we must not let this disguise the tidal wave of debt crashing down on low-income families in Britain. A recent survey showed that low-income households were twice as likely as high-income households to have increased their reliance on consumer credit in response to the pandemic. The charity StepChange report that 2.8 million people have fallen into arrears on bills, including 820,000 on council tax alone.

In focus groups led by the CSJ across the country, community-based money advisors express deep anxiety over the loan sharks ‘licking their lips’ at the growing indebtedness and desperation in our most disadvantaged areas. Ensuring that the Illegal Money Lending Team is well resourced to combat the scourge of loan sharks will be critical going forward, as will maintaining the Financial Conduct Authority’s proactive approach to forbearance in the consumer credit sector.

But given longer-term changes in the composition of ‘problem debt’ in England, it is also the public sector’s duty to reconsider its role as a creditor. As the CSJ showed in our Collecting Dust report, recent years have seen a marked rise in the number of people seriously indebted to public bodies. Our analysis found that 42 per cent of debt problems reported last year related to debts owed to national and local government, most commonly for council tax arrears but also for tax credit and benefit debt.

This has doubled from 21 per cent a decade ago, overtaking difficulties relating to consumer debts, which fell from 57 per cent to 32 per cent over the same period.

Over the same period, charities tell us that debt collection in the private sector has changed dramatically and for the better. Galvanised by the introduction of the FCA’s ‘Treating Customers Fairly’ guidelines, we now see independent debt advice referrals, thought-out vulnerability policies, and personalised repayment plans offered much more widely.

This approach not only provides a sustainable route out for people in debt – frankly, it makes commercial sense. More money is recovered, fewer costly interventions are required, and fewer people default as they are supported to meet their obligations.

Despite this, today it is the public sector who employ the most heavy-handed and unsophisticated methods of debt collection. Out-of-date rules governing council debt collection mean that families with small debts find these rapidly inflated by punitive fees and charges. Councils working religiously to ‘in-year’ targets abandoned in the commercial sector escalated 2.6 million debts to bailiffs last year, increasingly for parking fines.

On top of this, there is some £7 billion owed to government for historical welfare debts (caused primarily by a design flaw in the old benefit system), which is now being collected bluntly via large benefit deductions as people move over to Universal Credit. This is nowhere near talked about enough and has a huge impact on the money received by welfare claimants.

At the height of the crisis the Government suspended these deductions. We need to write off historical welfare debt now so Universal Credit can do its job in helping those who have fallen on hard times, cover day to day costs, and get people back into work.

The Cabinet Office has since launched a cross-Whitehall review of debt management, which is extremely welcome. The Government should take this opportunity to introduce a Debt Management Bill. Drawing from the best of the commercial sector, the bill would establish a unit in the Cabinet Office to enable a ‘single view’ of the various debts owed by a family in order to work out an affordable repayment plan.

It would bring council debt management rapidly up to speed, amending the council tax regulations to end rules which expand debts into an entire year’s bill, and putting the existing good practice guidelines for collection on a statutory footing. Finally, it would introduce proper affordability assessments for benefit deductions and cap these at 10 per cent of Universal Credit’s standard allowance.

In short, the bill would produce savings for the taxpayer through enhanced debt recovery while providing more people with a route out of debt in this time of crisis. An effective Conservative poverty strategy must aim to get people out of debt, not just get debt out of people.

Philippa Stroud: The Coalition stopped officially measuring poverty – which left its successor unsightedover free schools meals

28 Oct

Philippa Stroud is Chief Executive Officer of the Legatum Institute, and leads the Social Metrics Commission.

Marcus Rashford presents the Conservative Party with a problem. No Conservative believes that any child in this country should ever go hungry, but we also want to build a society in which parents are able to earn enough to support their own children and, where that is not the case, in which there is a welfare state that supports those in need. These are our long-term objectives.

So what happens at a moment of crisis when there is a short-term need, and why has the call for the expansion of holiday provision of food and activities to support an additional 1.1 million children in the short term gathered such momentum?

In 2016, the Government abolished the old measure of poverty as an official measure. This means since that year it has been walking blind. Policy decisions have been made in a vacuum without a tool that shines a spotlight on the needs of the most disadvantaged.

The Government has made some great decisions, but without the certainty that what they are doing is hitting the target. Has poverty gone up? Is it plateauing? Until there is an agreed metric that tracks this, who can say?

That is why I launched the Social Metrics Commission (SMC) in 2016, drawing from left and right, and have proposed a new set of poverty metrics: to end the war on poverty measurement so that we could put our energy into working towards an effective poverty reduction strategy.

By the SMC measure, until the start of Covid-19, Conservatives could rightly declare that work was the best route out of poverty and, with record high levels of employment, this strategy was clearly effective, with 90 per cent of households where both adults work full time being out of poverty.

But during this global pandemic, the SMC measure also tells us it is those in deep poverty who are being most significantly impacted by the virus. Two in three (65 per cent) of those employed and in deep poverty prior to the crisis have seen reduced hours or earnings, been furloughed, and/or lost their job.

Although these numbers are not tracked by the Government, the public instinctively feels this to be the case. Locally, Conservatives know this too and are responding with short-term fixes.

The London borough of Kensington and Chelsea for example has promised £15 food vouchers over half-term for its 3,300 local children eligible for free school meals. Councillor Josh Rendall, the lead member for family and children’s services, said: “This is not a long-term solution but this is an exceptional year and we know it has been a tough one for many families.”

Conservatives have a good story to tell. Number 10 and 11 have worked tirelessly to put the entire resources of Government behind protecting the British people from Covid-19, including in the short term with increased support in the benefit system, the Job Retention (and soon Support) Scheme and, in the long term, through improved services for mental health and education, tackling the costs of housing and driving forward the levelling up agenda.

But in the absence of an effective poverty measure, we are unable to quantify the positive impact of all of these choices, gain credit for a comprehensive strategy on poverty, or identify whether there are short term challenges that still need to be addressed.

We need to be able to say that no child in Britain will go hungry on our watch – but we can’t. And we are allowing others to create a narrative for us, and in the absence of an agreed poverty measure and subsequent strategy, we always will. This does not need to be the case.

Had we had the SMC measure already in place, we would have been monitoring the impact of Covid-19 on the most vulnerable during this time of crisis. Had we adopted the SMC measure, we would have known in May that although the pandemic is hitting everyone, it is hitting those in deepest poverty the most and that short term measures may be required to see the poorest through this time.

It was Will Quince, a Work and Pensions Minister, who first announced that the department was taking forward the SMC measure of poverty and developing Experimental Statistics, back in May 2019. But even now, when accurate and timely data is needed more than ever, the work has stalled.

I know there will be some who will be nervous about a new measure of poverty, even one that has gained consensus across the political spectrum and already won the Government much political capital. But the measure is in effect a framework. It is the best way of capturing the “who” is in poverty – the “who” we need to be concerned about and looking out for. The Government can then decide where it wants to place its effort – so at a time like this it would have focused on those most impacted.

The Government could decide to focus on those who are moving in and out of poverty and close to the labour market (the top seven million). That is in effect what the £20 uplift has done in Universal Credit.

Or, it could decide to focus energy and resources on those in deep poverty – those who are 50 per cent below the poverty line (bottom 4.5 million). This is the most vulnerable group and where I would put my energy and effort at a time of national crisis. This is who many of the public thinks of as being in poverty, which is why they are so concerned now and why Rashford has received so much support.

I know that many Conservatives, like myself, came into politics because we were concerned about the long-term drivers of poverty. We feel deeply concerned about the most vulnerable in the nation. We know that poverty is about money, but that it is also about family, education and skills, debt, housing, sickness and disability, and employment. It is about the support being there when you need it so that you can get up and onto your own two feet again and find your own way out of poverty for you and your family.

This is a moment to take action in the short term – as the Government has been doing and still needs to do – but it is also a moment to get our house in order for the long term: to adopt the SMC poverty measure and build a comprehensive poverty strategy so that now and in the future we can say hand on heart, on our watch: no child went hungry.

Alex Morton: How Sunak can save £30 billion a year

21 Oct

Alex Morton Head of Policy at the CPS and a former Number Ten Policy Unit Member.

Today, the Office for National Statistics will announce the provisional figures of Government borrowing for the first six months for 2020/21. They will be truly dire. We know because borrowing in the first five months alone were bigger than the previous annual total, and by August this year the national debt was larger than the UK economy, rising by over 10 per cent from 2019/20’s total.

Putting aside the ongoing – and crucial – debate about the nature of lockdown restrictions, it is clear even on the most optimistic forecasts, and with the best decisions, the UK will end the pandemic with a serious debt and deficit problem. Even assuming higher borrowing for years, something must give.

For that reason, the Centre for Policy Studies today publishes the paper Saving £30 billion: Nine Simple Steps, which discusses, on rough but plausible estimates, nine savings to cut £30 billion a year from the Government’s spending without jeopardising frontline services, or asking the politically impossible.

The Government is in the middle of a Spending Review, and we believe that now is the time for proposals to stop the threat of tax rises which will both hit growth and hard-pressed workers, companies and families. None of the savings would impact frontline delivery and none of them ask for MPs to vote through what would be political suicide.

Government efficiency

Despite the arguments made that austerity means no further reduction in spend is possible, we find significant potential savings across a wide range of areas, none of which impact frontline delivery. The first group of savings are thus about making the state more efficient.

  • We analyse the number of Government administrative staff versus the private sector and find initial convergence but significant disparities in reductions in recent years, with the private sector slimming down this group more effectively. We therefore propose benchmarking Government administrative staff totals to the private sector and reducing these in the public sector once a post-Covid recovery gets underway.

We also propose –

  • To abolish some quangos and to bring all quangos under the control of a relevant department. Each department should create a single body to manage HR, marketing, and other administrative functions for all quangos it oversees. This should also make bureaucracies more accountable and improve public sector productivity.
  • Pushing toward greater use of back office function sharing in local government, as occurs between Westminster and Kensington & Chelsea. There is no need for 350 councils to have distinct IT or press or procurement teams. The Housing and Local Government Department should publish data on the administrative costs for each council to push forward action. This should enable many of the savings around unitarisation without the massive political rows.
  • Improving e-procurement and data sharing, noting that other countries such as South Korea or Estonia have significantly improved productivity and reduced costs through this route, and agreeing with critics of the existing Government procurement systems.
  • Since the state owns land and property worth a staggering £1 trillion, we call for an inventory of all non-operational land followed by a sale and leaseback model across all this non-operational land, rather than past Spending Review’s top down land targets for each department. Just selling off the Network Rail arches gained £1.4 billion while boosting growth, and Covid-19 has changed office work patterns, so this should raise serious sums.

Ensuring a fair state

The second group of savings are about ensuring that the state does not give excessively to one or other group, and create a state focused on the core tasks of government. We propose:

  • Replacing the triple lock with a dual lock, which still gives pensioners the best of inflation or wage growth, and removing the tax anomaly of the Winter Fuel Payment and just treating as taxable income like other benefits.
  • Sell and replace high-value council properties when they fall vacant with a less expensive nearby equivalent. It is deeply unfair there are million-pound council properties in many parts of London and this is not what making sure people have a roof over their heads is about. This doesn’t even mean anyone has to move – just no more new expensive tenancies.
  • Roll child benefit into the child tax credit system with a further taper that reduces the top 10 per cent or so of households (essentially capturing those with two fairly high earners to bring them into line with a single high earner household).
  • Cut overseas aid to 0.5 per cent, still placing the UK in the top 10 donor countries and moving on from 2005 when this target was set at 0.7 per cent at a time when India and even China were legitimate UK aid recipients, not emerging economic superpowers. It would be both immoral and politically toxic to make the other savings while protecting a budget overseas that has nearly doubled in recent years.

Taken together, these savings would help bring down the deficit to an acceptable level. They involve some hard decisions and confrontation of vested interests, but not impossible ones, and all should pass through the Commons, even in its new rebellious state. The alternative, ever higher borrowing, or even worse, ever higher taxes, is unthinkable if we are to achieve what the CPS believes the number one priority post-pandemic must be – restoring sustained economic growth. We call on the Government to investigate and takes forward these ideas as part of the Spending Review process.