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Robert Halfon: We should be pro-private enterprise, anti-mega corporates. How have we allowed these to plunder the taxpayer again and again?

21 Oct

Robert Halfon is MP for Harlow, a former Conservative Party Deputy Chairman, Chair of the Education Select Committee and President of Conservative Workers and Trade Unionists.

Lessons from New Zealand

The re-election of Jacinda Ardern, winning an overall majority and so overcoming New Zealand’s complex proportional representation system, shows that, even in the age of centre-right populism, there is a route back for social democracy.

It could be that alongside her emotional intelligence, which she displays in abundance, in this new Covid era, what voters yearn for is competence and security. A feeling of safety first. With both her handling of the terrorist atrocity in 2019, and her extraordinary success in dealing with the virus, is it any surprise that voters have given this remarkable politician the thumbs up?

No doubt our own Labour Party will be trying to pull off the same trick here, as will many other centre-left parties around the world. Conservatives should be doing everything possible to learn from her victory and thus forestalling the same thing happening over here.

If Joe Biden wins the US Election in two weeks time, it could just signal that the pendulum is swinging leftwards once more. If Trump gets an unexpected victory, then perhaps Ardern’s result will be seen as a swim against the tide.

The Corporatist State

I am as pro-genuine private enterprise as most Conservatives. But I don’t understand why our governments never get to grips with the mega-corporatist state.

How it is that we have allowed, time and time again, big corporations to plunder the taxpayer – whether it be through failed procurements, or permitting ginormous consultancies to charge £7,000 a day for their services in terms of track and trace.

Why is it that a noble £85 million laptop computer procurement programme for disadvantaged pupils, announced by the Department for Education in the height of lockdown, took months to deliver – by the time many children were already back to school? A school in my Harlow constituency told me they had only received the laptops recently, whilst others had arrived without the relevant logins et al. Would a better option not be to just give schools vouchers, after negotiating a good deal with Currys and Asda etc, and allow the teachers to purchase the computers themselves?

Of course, I appreciate this is a national emergency, which perhaps makes these vast sums going to consultancies more understandable. But, somehow, it seems pretty grim that the businesses profiting most from Covid-19 are these mega-corps consultancies.

Moreover, it is not as if these issues started in the pandemic. It has gone on for some time, and books have been written about the monies these consultants make and the failed procurement schemes that lay in their wake,

The left, naturally, describe all this as ‘vulture capitalism’ – but this is as far removed from genuine capitalism as it is possible to be. Capitalism is about the free exchange of goods and services and fair competition. The corporatist state is neither. Some of these companies are so big and intertwined with government departments that they become indistinguishable from the government departments themselves.

In the reform of Whitehall that Number 10 is currently planning, perhaps the wisest maxim might be “small is beautiful”.

Taking back control of VAT

Whether we leave with or without a deal by the end of the year, one of the key arguments for Brexit was that we took back control over our taxes.

Indeed in May 2016, during the EU Referendum campaign, both Boris Johnson and Michael Gove said that energy bills would be lower because EU rules meant that Britain could not take VAT off those bills. In The Sun, they wrote:

“The least wealthy are hit particularly hard. The poorest households spend three times more of their income on household energy bills than the richest households spend. As long as we are in the EU, we are not allowed to cut this tax.”

Both were absolutely right. Now we need to live up to that pledge by reducing the five per cent VAT rate for energy bills, and cutting the cost of living for millions. The Brexit dividend must mean cuts to the cost of living.

In a question to the Prime Minister in the House of Commons on this last October, I asked:

“In Harlow, we have already seen the NHS Brexit dividend, with a brand new hospital. The people of Harlow will feel that those who vote against this excellent deal really just want to stop Brexit completely. Will my right hon. Friend confirm that, once we do the deal and leave the EU, we will gain control of our tax rates and be able to reduce VAT and energy bills for our hard-working constituents?”

The Prime Minister replied:

“Yes. Not only will we be able to reduce VAT in the UK, but we will be able to do it in Northern Ireland as well.”

Ryan Bourne: Johnson’s green jobs. Subsidy-reliant, expensive, price-raising. And a job loser elsewhere.

14 Oct

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

It is said that, during the 1960s, Milton Friedman was visiting China, where guides took him to a canal-building site. Shocked at the prevalence of men bearing shovels, Friedman asked why the project wasn’t utilising modern technologies, such as mechanical diggers.

“You don’t understand, Professor Friedman,” his host explained, “this is a job creation programme.” To which Friedman retorted, “Oh, I thought you were trying to build a canal. If you really want to create jobs, then by all means give your workers spoons, not shovels.”

That tale is beloved by economists because it contains an important truth: gross job creation is a poor metric to judge success when considering government-led infrastructure. We could “create jobs” through getting people to fill in holes.

What matters is the net value added of the output created, as determined in markets – i.e: by consumers and open trade. Using more workers less efficiently to produce a canal reduces the output’s net value, because labour is a cost of production.

This lesson sprang to mind last week during Boris Johnson’s speech to the Conservative Party Conference. As part of his ode to offshore wind, Johnson talked of the UK’s natural abundance of the stuff (the “Saudi Arabia” of wind) and his excitement at the technology (floating wind islands). But he also extolled the idea of a UK “green industrial revolution” that “in the next ten years will create hundreds of thousands if not millions of jobs.”

Any market-led or government-incentivised shift towards wind will see new jobs in the industry “created.” But this shouldn’t be the goal. To echo Friedman, “we thought you were trying to produce electricity, subject to mitigating climate change. If you wanted to create jobs, why not have people make the wind turbines by hand?” We should judge the desirability of a pro-wind energy policy framework, in other words, by its contribution to this social value added, not numbers employed in the sector.

“Gross job creation in wind and other renewable generation is clearly a cost in economic terms,” Professor Gordon Hughes of Edinburgh explained to me last week. “The higher the number [of jobs], the larger the subsidies required and the larger the damage to the rest of the economy.”

He views this outcome as an unacknowledged problem of wind power generally, which does require labour for operations and maintenance, particularly as turbines age. If we are purely looking at how to produce power most efficiently, then these jobs are a hindrance – an economic failure, not success. According to Hughes, talking of creating “millions of jobs” is a “shortcut to national impoverishment”.

Of course, the desire for climate change mitigation means policymakers reject the premise that we just want our energy sector to simply prize efficiency. Due to the “social costs” of carbon, they aren’t just concerned about traditional measured value added, but are explicitly willing to take an economic hit in targeting a broader conception of economic welfare that takes into account these CO2 externalities.

And that’s fine, in principle. Yet even then, “green jobs” shouldn’t be the aim. An economist would say we should try (albeit imperfectly) to price this social cost, and then let markets find the most efficient way of delivering power accounting for it. What that does not require is industrial strategies, picking winners, and seeing the green energy sector as some sort of jobs machine.

Indeed, simple logic would suggest that making energy less efficiently than socially necessary reduces net jobs across the whole economy because of its impact on energy prices. “Energy is a labour-extensive industry. It does not employ a lot of people” Richard Tol, the renowned climate economist, explains. “If the energy sector would start to employ many more people, retail energy prices would rise rapidly.”

Given every other activity uses power as an input, it surely doesn’t need to be said that “more expensive energy means less growth and so less job creation” elsewhere. Given the sizes of the “energy” and “non-energy” sectors too, “a large relative increase in employment in energy is easily offset by a small relative decrease in employment in the rest of the economy.” An explicit aim to “create jobs” in the wind industry, in other words, would be vastly outweighed by job losses elsewhere.

Note: none of my analysis here is passing judgment on the desirability of decarbonisation. Tol believes that given the energy framework of UK policy, wind power will probably be cheaper than coal or gas through the 2030s. What I am simply saying is that aiming for more employment in wind, rather than merely trying to deliver power cheaply subject to any climate goals, is a deeply economically destructive way of thinking.

So why is the Prime Minister talking of millions of green jobs? Well, unfortunately, many politicians have moved beyond simply wanting to set frameworks for energy or even climate goals, and their green credentials have become wrapped with their becoming re-inured to the idea of national industrial strategies.

Not content with allowing consumers and producers to find the best ways to allocate resources, the Conservative Government increasingly wants to decide which sectors the national economy specialises in, thinking the state will this time do a good job of picking winners. And Boris Johnson’s “Saudi Arabia of wind” suggests that he wants to try to use policy to actively push the UK towards exporting wind power.

Would that work? No, says Tol. “Electricity is much more expensive to transport than oil…Wind power in the UK is cheaper than, say, wind power in Italy – but wind power generated in the UK and transmitted to Italy cannot compete with wind power generated in Italy.” Exporting the end product is a non-starter.

What about manufacturing the parts? “Despite what he [Johnson] says, no one is going to manufacture wind turbines in the UK without massive subsidies – that game is long past,” Hughes concludes. So having the Government tilt the deck further to try to create a wind manufacturing export industry would not only drag resources away from other activities with higher net value added, but make us a hostage to technological fortunes.

As Hughes has previously written: there’s no guarantee technological progress is more likely to come in renewables than fossil fuels or nuclear (see, for example, fracking).

To return to the Friedman analogy: we might accept some more shovel than machine use for canal building, if there were greater environmental costs of using machines, though recognising this makes us poorer. It’s another thing to say that rather than building a canal as efficiently as possible subject to this, the national government should intervene to support canal building or our selling shovels around the world. Yet with his promise of a green revolution, that is precisely what the Prime Minister implies.

Rachel Wolf: Net Zero risks upending our lives and livelihoods. Here’s why carbon pricing gives it a better chance of working well.

2 Oct

Rachel Wolf is a partner in Public First. She had co-charge of the 2019 Conservative Manifesto. She was an education and innovation adviser at Number 10 during David Cameron’s premiership and was founding director of the New Schools Network.

Worrying about the state of the environment in the middle of a pandemic might feel like rearranging the deckchairs on the Titanic. Will the public question the Government’s sense of priorities if ministers start talking about how to protect the environment in the midst of a health crisis and a long potential downturn?

Actually, no. This week marked the first substantial policy intervention of the Prime Minister in months – a long awaited change to the education system that will make it easier for adults to retrain, and support more technical education. The rationale was clear: now, more than ever, we need to make sure people are trained for their next job.

The same argument can be made for the environment. The hard lockdown and the gentle recovery reminded people of two things: that everyday life is better for everyone when roads are quieter and the air is cleaner; and that economic growth is always precarious. That means we need to focus on industries and technologies of the future that will help maintain jobs and living standards.

In short, precisely because of their Covid-19 experience, the public have seen the importance of a practical, commercially-minded environmentalism. That is fortunate, because there are some major choices to be made, and we are unprepared for them.

The target of Net Zero emissions by 2050 was passed into legislation with little public notice – most people still haven’t heard the term. There was also remarkably little Westminster debate: all the leadership candidates in 2019 signed up to the policy, so scrutiny was absent. Then, of course, the pandemic halted the entire domestic policy agenda. For this reason, we are still waiting to understand exactly what ending a 200-year dependence on fossil fuels really entails.

In my view, carbon pricing must form a large part of the answer.

As someone on the centre-right, I have always simultaneously applauded the aims and had great fears about the execution of Net Zero.

First, I worry it might upend too much. Our economy and lives are built off copious amounts of affordable energy. It is the main reason we were able to escape the destitution of the past. A life unimaginable to even the elite in the eighteentj century is now accessible to nearly all.

Therefore, any successful programme to reduce emissions must understand that people will not go backwards. Policies must work within the grain of people’s lives – not rewire them. We cannot be against trade; or consumption; or travel. We just need ways to achieve all three without catastrophic environmental effects.

Second, I worry the plans rely on an implausible level of omniscience and competence from governments. We cannot engineer economies. We do not know exactly what innovations to support. We are likely to end up with endless unforeseen consequences and costs. We can encourage and support technology and invention; but prescribing what it should look like in 50 years time? That’s implausible.

It is for both of these reasons that I have spent much of the last six months working for an independent commission on how carbon pricing might practically, and technically, work.

To put it simply, possibly too simply, a carbon price requires those who produce, distribute, or use fossil fuels – or who produce greenhouse gas emissions in other ways – to make a payment for every tonne of greenhouse gases that enters our atmosphere.

In principle, the arguments for a carbon price are fairly obvious. It works with the grain of the market. It doesn’t make grand regulatory predictions about what will work, what we should do, or how exactly people ought to change their behaviour. It just prices in the ‘bad’ – in this case, emissions.

In practice, too, it has been effective. Electricity is the only area we have had a consistent approach to carbon pricing in the UK, and that is why electricity is the area where we have driven down emissions the most. But electricity represents only a minority of our carbon emissions, and we now need a clear approach to the rest of the economy.

Carbon pricing also provides two things that we now – badly – need.

First, revenue. In some countries, carbon pricing is completely revenue neutral, and the money is distributed back to households. This deals with the challenges of the environment without leaving people worse off. But in others, it is used to support general government objectives – like funding the health service (or reducing the deficit).

If the Government needs to raise money, doing it in a way that will win public support and support environmental aims, without burdening businesses excessively, is a sensible way to do it. The other way to use revenue is to support transitions to cleaner energy alternatives and new green jobs – incentivising people away from carbon emissions, while supporting innovation.

Second, it provides certainty. A lot of the money for net zero should come from private investment. A fixed, clear price gives them the confidence to spend.

We already have some carbon pricing in the UK tax system. Unfortunately, it lacks transparency, is far too complicated and is piled sequentially on top of electricity bills. It has the bizarre consequence of actively encouraging people to move from electricity to gas – the opposite of what we want if we care about carbon emissions. Neither consumers nor suppliers have a clear idea of who is paying what and why.

Carbon pricing is not a silver bullet. I have oversimplified the changes necessary to reach Net Zero, and in our commission report we outlined a list of complementary policies required for different sectors to reach it. They recognise that the cost of reaching Net Zero is likely to be different for electricity, heating, industry and agriculture, and that the technologies are less mature for some sectors than others. Nor can it be too high: the economy is fragile, and business must be able to recover and grow. But the basic human principles remain – if there is a price, people will change their behaviour, and human ingenuity will always outstrip governments’.

We have been submerged in environmental rhetoric for years. Now the UK, alongside other countries with similar commitments, is having to make some real choices. Often, understandable fear of a public backlash has held them back – our research suggests there’s a credible way of gaining public consent and achieving our environmental aims: by having a clear price, credible alternatives for people to switch to, and cushioning so that no one is too badly affected. That is both deliverable and desirable, and it should form the core of the UK’s net zero roadmap.

Ruth Edwards: It’s time to accelerate the roll out of electric vehicles

22 Aug

Ruth Edwards is the Member of Parliament for Rushcliffe.

The first electric car was built 130 years ago and could travel at the heady speed of 14mph. For a time, it looked like there would be a VHS-Betamax style battle royale between electric cars and the internal combustion engine (ICE), but the high cost, low top speed, and short range of early electric vehicles handed victory to the chugging petrol alternative.

We now know this came at a considerable human and environmental cost. Alongside contributing to an increase in global temperatures and climate change, air pollution is a huge danger to public health, contributing to 36,000 premature deaths in the UK every year.

The transport industry is the biggest single contributor to the UK’s green house gas emissions, with petrol and diesel vehicles accounting for 90 per cent of the sector’s emissions. Moving to electric vehicles is vital to protect our environment and our health.

It will also help our public finances. In 2017, health conditions caused by air pollution were estimated to cost the NHS £157m; this is expected to rise to as much as £18.6 billion by 2035 if action isn’t taken.

The Government is making big investments in electric vehicles, for example the announcement in this year’s budget of £500m for a nation-wide charging network.
However, to truly shift into top gear we must go further.

Over the course of this Parliament, we will build at least a million new homes. It’s vital these include EV charging points or, where this is not possible, that developers fund on-street charging schemes. This is over a thousand pounds cheaper than retrofitting them once ICE cars are phased out. There is also the question of car parks and motorway service stations. Supermarkets and large retail parks should make more of their spaces electric by default and should be incentivised by the Government to do so.

Even before coronavirus, the job market had started to undergo huge change as new technologies in automation, data analytics, and mobile connectivity begin to revolutionise work and the skills required.

Investing in the roll-out of electric vehicles and associated infrastructure provides an opportunity for the UK to get ahead by creating Green Apprenticeships in areas such as battery technology. We should also set up Zero Carbon Academies, in strategic sites across the country, where the government is looking to increase investment and opportunities for local communities. Ministers should also incentivise private sector investment in the EV supply chain, building on precedent set through the Charging Infrastructure Investment Fund.

Finally, we should take heed of Parkinson’s Law that work expands to fill the time available, and move the target for phasing out ICE vehicles forward from 2035 to 2030, the date recommended by the Committee on Climate Change. The car industry has been hit hard by COVID-19. As the sector recovers, it needs to look forward rather than returning to an obsolete model. This is a unique opportunity to leap ahead of expectations. Doing so will be in line with consumer demand. In the UK new petrol and diesel registrations have fallen by more than 60 per cent on the previous year, but demand for electric vehicles was up 21.5 per cent on May 2019.

The argument that this transition is somehow too fast is both defeatist and simply wrong. The pandemic has shown us how much we can achieve in a short time if we need to do so. As recently as a decade ago, electric cars were viewed very much as rather niche and something of a joke. Who can forget the time Jeremy Clarkson spent decrying electric vehicles and laughing at their range and price tag? With the latest offerings from Tesla, Nissan, Honda, Jaguar and others, no-one is laughing now.

After more than a century on the road, our automotive industry is overdue for an MOT. It will need radical rewiring of infrastructure and a completely new engine – and this time, let’s go electric.

Ryan Bourne: “Levelling the playing field” is no argument for an online sales tax

5 Aug

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute.

Some time soon, we’ll see more automation in the fast food sector. Burger-making machines are real. Franchises such as McDonald’s have rolled out self-ordering touchscreens. It’s not difficult to imagine a world in which fast-food worker numbers collapse. In the longer-term, when the technologies become widely affordable to businesses, cost reductions from these sorts of labour-saving investments will benefit consumers through lower prices.

Not every competitor chippie, kebab shop, or burger outlet will make the transition, of course. Some will struggle under what will then become the higher cost, labour-intensive model, finding their niche in the market. Others may simply go out of business – unable to compete on price and without the ability to invest in the machinery.

Would this be a problem? Or is it simply an example of capitalism’s creative destruction?

Imagine if the struggling companies and their employees demanded Parliament pass a “burger automation tax” under the premise of “levelling the playing field” with those companies that took the plunge. Think how dangerous supporters of consumer-led capitalism would consider it for popular price-reducing innovations to be held up as a problem. Consider how bemused we’d be if the savings in labour costs were dubbed “unfair competition,” simply because not every company realised them.

Well, we are seeing an analogous argument capture policymaking today. And, bizarrely, free-marketeers within the Conservative party are not really speaking out against the muddled thinking.

The UK government is kite-flying about an online sales tax of two per cent, or taxing online deliveries to consumers. One of the many justifications given for even considering these Luddite measures is to “level the playing field” between online retailers and the High Street, given the latter face business rates.

Here’s the problem: there already is a level playing field. Just as all businesses face the same minimum wage laws, they also face the same overall tax regime. This includes business rates – which is a tax on the rental value of commercial property, not sales.

Faced with those policy realities, businesses are free to decide how to operate and structure. Innovative online sellers such as Amazon have simply adopted business models that repudiate the need for a high fixed‐cost physical presence in expensive inner‐city areas.

Operating from out-of-town warehouses is a cost-saving business decision akin to the potential automation in fast food. To then suggest that online retailers not needing to rent high-value property is some distortion of competition that requires a corrective tax, as the Treasury reportedly believes, is just bizarre.

It’s this business decision that partially explains why online sellers can provide low prices for consumers, enhancing their welfare. The idea that adopting this model is some underhand advantage is as daft as saying that Amazon’s packaging costs are a disadvantage for it, requiring a “packaging-equivalent tax” on High Street stores’ sales.

To echo the 19^th century classical liberal economist Frédéric Bastiat, the bricks-and-mortar retailers using this level playing field argument are akin to candlemakers petitioning the Government about the sun flooding the market with cheap light.

Now if the Government thinks that the current business rates regime is an inappropriate tax on rental values or has distortionary impacts on commercial property use (I agree, but think the impact overblown) then, by all means, they should change the law faced by all. If councils are worried about car parking charges’ impact on high street retailers, then they are within their rights to adjust them.

But let’s not talk as if it’s unfair competition when firms, faced with a tax regime, innovate to reduce costs to provide a service in a way that consumers prefer. For make no mistake, it is customers that will ultimately bear the costs of any new sales or delivery tax in the form of higher prices, especially those whose use of delivery is less responsive to price, such as in rural areas.

Of course, increasingly traditional retailers are themselves re-orienting to online, especially during Covid-19. Any cuts to business rates (to the extent they are passed through by landlords) might allow for some consumer price reductions to “compete” better with online firms for sales. But if these same traditional retailers then face a new tax on their growing online sales anyway, the Government will have given with one hand and taken with another.

And which companies will suffer disproportionately from the new administrative burden of having to deal with an online sales tax, do you think? Will it be Amazon? Or is it more likely to be smaller companies navigating the online market for the first time?

This whole debate highlights a broader gripe I’ve had with Conservative policy thinking for some time. Conservatives used to understand the case for consumer-led markets, as extolled by Jeff Bezos in a US Congressional hearing last week. They trusted customers to make choices in their own best interests. Our revealed preferences were thought to represent us trying to maximise our wellbeing under the circumstances we face.

But increasingly MPs seem to think they know better. Sure, customers might be flocking to online retail, especially during a deadly pandemic. But what they really want, we are told, is a thriving High Street. Who you gonna believe: MPs or your lying eyes?

The idea that any business providing the same product must face the same tax and regulatory cost base to truly compete on a “level playing field” is easily dismissed. Wind and nuclear power both produce electricity. But if someone told you we needed a tax on wind power to make up for the safety costs of nuclear, you’d think they were utterly mad. So what do we think is different about retail, after we’ve decided that it’s appropriate to tax commercial property consumption?

Now perhaps the Government’s real aim is not to “levelling the playing field.” Some say a tax on online deliveries would reduce congestion – a daft argument given a van delivering to 30-40 places would cause far less traffic congestion than everyone going to stores. Some say that the Government simply needs the revenue – in which case £2 billion is a relative drop in the ocean. Our communitarian friends, with their stale 1950s vision of High Street’s somehow engendering “community,” want to pull any lever to try to preserve the town centres of yesteryear.

Yet those arguments are self-evidently absurd or futile in the face of ongoing trends. The “level playing field” line is more dangerous precisely because it sounds as if it’s pro-competition. If Conservatives really believe, however, that the role of Government is to correct for businesses finding ways to reduce their fixed costs, as if this were some unfair advantage, then they are further through the economic looking glass than I’d realised.