Anthony Browne: From transport investment to tax incentives, Treasury orthodoxies are holding Britain back.

8 Aug

Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.

Both candidates agree: there is a “Treasury orthodoxy” that damages economic growth. Coming from a former Chancellor and a former Chief Secretary to the Treasury, that is a powerful accusation.

But what is Treasury orthodoxy?, How can ministers overcome it? I have spent 20 years dealing with the Treasury on policy matters, and have often come up against the walls of orthodoxy.

There are actually lots of Treasury orthodoxies, about many policies: a presumed position by officials. For example, the Government should aim to live within its means, and should not generally borrow to cover day to day spending. Some are sound, some are not.

One reason for orthodoxies is that the economy is incredibly complex, and evidence often unclear. It is easier for officials to agree with those around them, rather than challenging from first principles. Academic papers written decades earlier can form thinking. A paper by economist Stephen Gibbons in 2010 saying there was no evidence that road transport improvements increase productivity still fuels Treasury scepticism about the levelling up agenda.

One of the fundamental challenges is that the Treasury is both a finance ministry and economics ministry, one responsible for raising money, and the other promoting economic growth. Often the two conflict, in which case the finance ministry role wins out because of the responsibility of being responsible for the nation’s finances. But it permeates the Treasury’s approach to growth.

I was tangentially involved in George Osborne’s attempts to introduce tax incentives for businesses in enterprise zones, but they were hampered by HMT concern about losing tax revenue. The tax breaks given were small, temporary, and so restricted they had limited impact on any business decisions.

HMT are obsessed about “dead weight” costs, where they give away tax revenue for something that would happen anyway. So the enterprise zone tax reliefs only apply to businesses which move to an enterprise zone rather than ones already there. That means the policy is about getting businesses to move to the enterprise zone, rather than helping those already there to grow faster. Not surprisingly, the results are underwhelming.

In discussions I had with HMT over a minor reform to stamp duty to facilitate shared home ownership, officials showed no interest in helping first time homebuyers. But they were obsessed with potential leakage of tax, so they blocked it. A decade ago I championed introducing a higher rate of stamp duty for people buying properties that weren’t going to be their homes (for investment, or second homes). Treasury officials focussed on tax revenues rather than helping homebuyers, mangling the policy so it can impose costs on someone buying their first home but give breaks to international property investors.

The Treasury has to rely on modelling to predict the impact of public spending and tax changes, but those models can be flawed. Because few understand the models, they become gospel.

When analysing transport projects, HMT relies on modelling that looks at the impact on existing travellers – how much time will they save  – rather than that a transport scheme that can totally change the way people travel, and how areas develop. HMT campaigned to kill off the Jubilee Line extension, which fuelled the regeneration of the docklands, one of the most successful regeneration schemes ever. HMT campaigned hard against the M25, because there were no people trying to drive around London, so they argued there was no reason to build a ringroad.

The Treasury is rightly the guardian against wishful thinking, but it can be totally unreasonable. When I worked for Boris Johnson whilst he was Mayor of London, HMT refused to pay nearly £1bn for the Northern Line Extension to Battersea Power Station, on the grounds that no one was going there. But developers wouldn’t regenerate the area because people couldn’t get there. I initiated and chaired negotiations with HMT officials to get them to agree to tax increment financing, where increases in tax revenues could be hypothecated to pay for the new infrastructure (a common form of financing in the US). We ripped apart HMT’s arguments one by one until they accepted they were defending the indefensible, and agreed to our proposal. We now have a new transport link at little cost to the public, enabling astonishing regeneration in Battersea. You can beat the orthodoxy.

When the Treasury analyses the impacts of tax changes, it does so superficially. It overwhelmingly looks at first order effects, and much less at anything else.  It does sometimes consider behavioural impacts – when it puts up tax on tobacco it takes account of people smoking less – but usually doesn’t. It virtually never looks at wider impacts, such as on general economic growth or income from other taxes. When it puts up stamp duty, it does not fully consider that reduced property transactions leads to less tax revenues such as VAT on building work, furniture, legal, or estate agency fees, or the impact of reduced labour mobility.

The policy costings papers published with Budgets are eye-opening. Often officials don’t take into account of the intended impact of a policy. In 2013 the annual investment allowance for businesses was doubled to £500k, but costings made no estimate for the intended increase in investment. When HMT increased research and development tax credits, they did estimate an increase in R&D spending (which would have a direct impact on HMT), but not on any wider growth.

The 2013 costing of the Tax Free Childcare scheme estimated the direct cost to HMT, but not of the benefit of having more parents in work. In 2015, when it reduced the lifetime limit of pensions from £1.25m to £1m, they looked at the impact on public sector workers contributing less (which directly affects HMT) but not on pensions saving generally, nor on work incentives. This is how you end up with absurd pension rules requiring doctors to pay the Government to work, and so retire early.

One of the economic insights of Conservativism is that incentives really matter. But the Treasury is largely oblivious to incentives. It does sometimes do behavioural impact analysis, but often ignores it. Most of its policy costings admits there is no estimated impact on behaviour. When it looked at the IR35 regime, which increased tax on self-employed people, it did not take account of the profound impact on behaviour in the freelance sector. The disregard of incentives means that, across the income spectrum, you end up with marginal rates of taxation of over 50 percent – whether it is people on universal credit, higher rate taxpayers getting child benefit, or people on over £100k paying over 60 percent marginal tax.

The Treasury doesn’t take sufficient account of the burden of complying with tax regulations. When I chaired the Government’s Regulatory Policy Committee, we were explicitly banned from looking at the cost on businesses of obeying HMRC rules. This is one reason we end up with about the most complex tax rules in the world. It is also why the Office of Tax Simplification is systematically ignored by its sponsor department, the Treasury.

It is easy to point to the problems, but what are the solutions? That, I am afraid, will have to wait until my next column.

The post Anthony Browne: From transport investment to tax incentives, Treasury orthodoxies are holding Britain back. appeared first on Conservative Home.

Sunak’s failure of imagination. He didn’t think that he would need to define himself to Tory members. So it’s now very late to stop his opponents doing it instead.

3 Aug

In his recent interview with Charles Moore in the Spectator, Rishi Sunak said that “I deliberately strived as Chancellor not to talk about things that were outside of my brief”.  This brief bit of a sentence, part of Sunak’s reply to a question about woke, explains why he is likely to lose this leadership election.

Neither of the two longest-serving recent chancellors, Gordon Brown and George Osborne, would have produced such a pared-back reply.  Actually, on second thoughts, they might have done – but only because they had expanded their brief to include matters that were originally nothing to do with it at all.

Take Brown’s tax credits.  In simple terms, they were a form of social security, usually but not always linked to work, for which the Treasury was responsible. (Or rather, HMRC was.  The Treasury answers for it in Parliament)

Now turn to Osborne’s Northern Powerhouse.  There is no reason why this scheme to link up urban areas in the Midlands and the North should have been masterminded from the Treasury, rather than from the Business Department or Downing Street.

Slate Brown turning a body that takes money in into one that also pays it out – and for making the Treasury the older brother of the Department for Work and Pensions (as he renamed it).

Or slag off Osborne for seeking to force elected mayors on areas that often had little enthusiasm for them, and creating the conditions for more urban Labour than Conservative ones.

All the same, both men were displaying a creative quality best called imagination – the power to conjure something out of nothing, and thereby “make the weather”, as Churchill said of Joe Chamberlain.

Another way of pondering the role of imagination in public life is to think about telling a story.  “My tax credits are part of New Labour’s mission to help make work pay, and so deliver economic opportunity and social justice,” Brown might have said.

And Osborne could have said that “our Northern Powerhouse is part of the Conservative commitment to spreading prosperity throughout the country, by joining up our great midlands and northern cities to produce more wealth, jobs and opportunity”.

Nor is imagination confined to Chancellors. Tony Blair had it in spades, Margaret Thatcher even more so.  Ronald Reagan had his “shining city on a hill”.  De Gaulle had his “certain idee de la France”. You will see where all this is leading.

I like Rishi Sunak, and this leadership election has confirmed that he is slick, smart, sharp and fantastically across his brief.  Nonetheless, he seems to be losing the contest, and has explained why himself.

For let me now give you the complete quote which contains the fragment with which I opened this article.  Sunak said the following –

“I deliberately strived as Chancellor not to talk about things that were outside of my brief, because every time I did it, or even remotely did it, everyone would start saying: ‘Oh, gosh, well, what does that mean?”

“And does it mean you’re interested in being leader one day?’ Now it’s painted as a criticism – ‘We didn’t hear enough from you on your views on, say, crime or migration’.”

And quite right, too, you may say: we’ve had enough of chancellors whose reach exceeded their grasp.  We need the traditional kind who sticks to his last in the Treasury, and keeps his fingers out of other Ministers’ pies.

Perhaps – but this model didn’t exactly worked well for Sunak, at least if relations with his colleagues are concerned.  Look at the long line of them queueing up to endorse Liz Truss.

Sure, Ben Wallace in government, say, and Tom Tugendhat outside have an obvious motive: they don’t want to get on the wrong side of the likely winner.

But there’s more to the matter than that.  Talk to their friends, and you will be told that they found the Chancellor inflexible when in dealings or negotiation.

Now I am firm, you are stubborn, and he is bloody-minded, as the old saying has it.  Intransigence is in the eye of the beholder.  And many of those who worked with the former Chancellor support him enthusiastically, and give a different account.

All the same, Sunak’s conventional approach didn’t work well for the Government, either.  After all, if it had, he wouldn’t have resigned.

That isn’t to say that Boris Johnson was right about the economy and that his Chancellor was wrong.  Far from it, in my view.  But the differences between the two men might have been negotiable were they other than they are.

Johnson is intuitive, untidy and formed by the chaotic trade in which I work: journalism, with its hectic deadlines, literary feuds and last minuteism.

Sunak is methodical, neat and shaped by his experience as an analyst in the more consensual and corporate world of investment banking.

To be sure, he was telling Moore the truth, and revealing more than he perhaps intended, when he explained why he trod a narrow path as Chancellor.

For he had no career need to venture wider at the time.  He was a fantastically popular Chancellor, topping our Cabinet League Table until December 2020, as furlough money poured out of the Treasury.

That cramped path might have led from Number 11 to Number 10, had Johnson’s Covid illness been even more severe.  But then came Downing Street parties, the bills for Covid, a record tax burden, his wife’s non-dom status, a Green Card – and resignation.

By then, it was very late in the day for Sunak to start carving out a distinctive position on big subjects outside his brief: Net Zero, say; or levelling up or – to pick up where Moore’s question let off – woke.

All the same, he might have been able to do so (however firm, stubborn or bloody-minded he isn’t or isn’t) had he deployed just a bit more imagination, in the story-telling sense in which I’m using the word.

A friend of mine describes Sunak as “an investor, not an entrepreneur”, and as far as I know this is true of his Goldman Sachs and hedge fund work.

And just as being a journalist has shaped Johnson, so investing seems to have formed Sunak.  His bent is to look at an issue, analyse it systematically, and propose a solution, sometimes technocratic and instrumental in character.

So it is than in his Mais Lecture he declared that “businesses simply aren’t investing enough”, added that this is “a pervasive economy wide issue” and concluded that “it seems likely to me that a priority will be to cut taxes on business investment”.

Perhaps he was right to say that “it is unclear that cutting the headline corporation tax rate did lead to a step change in business investment; we need our future tax policy to be targeted and strategic”.

But it may be that he is underestimating the effect that big signals, such as raising Corporation Tax, have on business confidence and certainty.  This is where imagination comes in, or perhaps in this case may not.  At any rate, he now finds himself in a position where, if he can’t tell a story about himself, others will do so for him.

Sunak’s counter-gambit is to double down on jam tomorrow and gruel today, and present himself as the candidate of truth.  But it is late in the day.  His campaign may look better in retrospect, but it seems to be coming off worse now.  Truss may be less smooth but she’s shown more imagination – sometimes a bit too much so, as in the case of regional pay.

The post Sunak’s failure of imagination. He didn’t think that he would need to define himself to Tory members. So it’s now very late to stop his opponents doing it instead. appeared first on Conservative Home.

David Gauke: The pluses, minuses and risks of Trussonomics. And the looming shadow of Lord Frost.

1 Aug

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

Economics is at the heart of this leadership election and will be at the heart of the wider political debate for the foreseeable future. Low growth, soaring inflation (especially energy prices), high taxes and public services under financial pressure all contribute to a focus on economic vision and competence.

Part of Liz Truss’s appeal to the party membership is that she is the economic change candidate. She has a retail offer – tax cuts – and a willingness to challenge powerful institutions such as the Treasury and the Bank of England. She believes that her policies will increase economic growth by strengthening the supply side of the economy. The big question is whether Trussonomics will work.

The issue that has attracted the most attention is her policy on tax cuts. Her argument is that by not going ahead with the increase in National Insurance Contributions and Corporation Tax she will assist with the cost of living challenge and attract more investment to the UK. She maintains that these tax cuts will encourage economic growth and, therefore, help the public finances and strengthen the supply side of the economy, thus potentially being deflationary. Rishi Sunak’s counter-argument is that loosening fiscal policy will be inflationary at a time when there is no spare capacity in the economy.

On Corporation Tax, Truss has a point that international investors have a choice as to where they invest and reducing their rate of return on investment (which is what increasing Corporation Tax does) is bound to have a negative behavioural impact. It is not the most important factor influencing investment decisions (our falling rates were insufficient to counteract the uncertainty created by the result of the 2016 referendum), but it is one that the Government can easily control. An efficient tax system would seek to rely less heavily on it as a source of revenue.

I spent six years in the Treasury bringing down the Corporation Tax rate and was one of the few who objected to its increase when announced in March 2021. Having said that, Corporation Tax cuts do not pay for themselves and the benefits will only be seen over a long time period. They are certainly not disinflationary in the short term.

The more fundamental argument on tax policy is whether her approach is reckless. The inflationary argument can be overstated. When Sunak announced in May measures to help with the cost of living with a net giveaway of £10 billion, the Treasury thought that this might add 0.1-0.2 per cent to inflation all other things being equal.

A £30 billion giveaway would presumably add 0.3 to 0.6 per cent to inflation. In practice, looser fiscal policy will result in tighter monetary policy, so the net effect will not be higher inflation but higher interest rates. Assuming that market confidence is maintained (to which I will return), the additional increase in interest rates is unlikely to be very substantial.

The real problem is not inflation, but that Truss’s plans look set to widen the structural deficit by reducing the tax base. It is not plausible to think that this is going to be removed by lower spending (she plans to spend considerably more on defence and the pressures on health spending are immense), with demography increasingly working against us.

Truss has a point that the UK is moving faster than other countries to restore the public finances post-Covid, but it is not clear when or how she would ever take action. For a party that once prided itself on fiscal responsibility, it is an approach that looks risky.

In addition to having a go at Treasury fiscal orthodoxy, Truss has also been critical of the Bank of England and talked of setting “a clear direction of travel” on monetary policy. The Bank of England has been slow in tightening monetary policy and cannot expect to be exempt from criticism, even though it has been operating in challenging circumstances.

What is not yet clear is whether Truss’s intention is simply to tell the Monetary Policy Committee to pull its socks up and be more vigilant in future (with an implicit rebuke to the Chancellor of the Exchequer for the past two years) or if Ministers are set to interfere more. There is a lower profile debate ongoing in respect of financial services regulation, in which Ministers may end up with greater powers contained in the Financial Services and Markets Bill to rewrite regulations not to their liking.

If Truss’s plan is for a greater role for Ministers – and a reduction in independence for bodies that were previously operationally autonomous – problems lie ahead. Some will argue that such moves would increase accountability, but they would also mean a greater concentration of power and greater politicisation of matters that have, until now, been in the hands of experts insulated from public opinion. Many Conservatives may welcome this; the markets may not. Weakening independent institutions also comes with substantial risks.

An issue that has not featured heavily in the leadership debate so far is Europe. Both candidates are (now) Brexiteers, both deny that Brexit has contributed to delays at Dover (which is clearly untrue), both support the Northern Ireland Protocol Bill. Sunak, however, gives the impression of being a relatively pragmatic. Notwithstanding his vote for Leave in 2016, party members are detecting this attribute and do not like it.

Truss, by contrast, has the zeal of the convert and owes the European Research Group and Lord Frost for getting her to the final round. Rumours are swirling in Whitehall that a Ministerial position at the Foreign Office – possibly as Foreign Secretary – awaits Frost, and it is difficult to see how Truss can retreat from the hard line position she has taken in negotiations with the EU hitherto. It is also hard to see that the EU would be keen to reset its relationship with the UK in the event that Truss won, especially if they have to deal with Frost.

This issue has attracted little attention during the contest but the risk of a further deterioration in UK/EU relations is underestimated. A failure by the UK to comply with our obligations under the Trade and Cooperation Agreement may result in severe retaliation from the EU which could involve the loss of tariff-free, quota-free access to EU markets.

Finally, Trussonomics apparently involves lots of deregulation. But promises of deregulation in the abstract without the details count for little. Vague pledges won’t unleash growth.

So where might Trussonomics leave us? The best case scenario is that her fiscal policies give us a short-term boost, an increase in the structural deficit and marginally higher interest rates; the institutional changes amount to very little; and she finds a way to resolve the Northern Ireland Protocol challenges that leaves the TCA intact, even if that means disappointing some of her backers.

The worst case is that the UK appears fiscally irresponsible; our independent institutions are undermined; and we have a trade war with our most important export market. This combination of factors causes a perfect storm in which we lose market credibility, sterling takes a further hit, interest rates rise sharply and business investment and consumer confidence collapse.

My guess is that she is too smart to allow the worst case scenario to happen. To do that, however, she is going to have to move swiftly from focusing on winning the confidence of Conservative MPs and party members to winning the confidence of the markets. That may prove to be a much tougher test.

The post David Gauke: The pluses, minuses and risks of Trussonomics. And the looming shadow of Lord Frost. appeared first on Conservative Home.

Theodore Agnew: An Office for Economic Growth could help revitalise our government and economy

25 Jul

Britain’s economic growth over the last 10 years has been poor. It has been a problem shared by most major western economies. But we could do so much better. The combination of our universal language, entrepreneurial culture, mature financial and capital sector, and esteemed legal system all provide the foundations to increase our prosperity.

In Whitehall, unique amongst other major economies, the Treasury exerts an overbearing view across Government departments and their spending. Notionally, it is responsible for economic growth, yet its culture is firmly embedded in raising revenue and doling money out to departments on short-term horizons.

To quote economists Stian Westlake and Giles Wilkes, ‘…the Treasury’s powerful short-term budgetary control manifests itself in distortionary rules and procedures, and in an inability or unwillingness to use tax measures to raise revenues. This leads to a lopsided focus on spending cuts as the only means of dealing with the public sector deficit.”

There is a skewed relationship between public expenditure and policy outcomes. The Treasury’s relationship with departments centres around establishing budgets for programmes and ensuring that those budgets are not exceeded, rather than the programme’s overall performance. The department, not the Treasury, is held accountable for failures, creating a culture skewed towards poor outcomes. There is also a history of Treasury holding back economic data from No 10.

Various attempts have been made to correct this over the last 50 years.

  • Harold Wilson established a new Department of Economic Affairs to counteract the Treasury’s alleged short-termism. The new department sat alongside a Ministry of Technology to harness scientific expertise to industry more effectively.

 

  • The Blair Government Commissioned John Birt to look at the organisation of the centre of government. The plan, entitled “Project Teddy Bear”, was ultimately abandoned. However, the centrepiece of the plan was to split the Treasury into two parts and establish: a Ministry of Finance (overseeing macroeconomic issues, taxation, and financial services) and an Office of the Budget and Delivery (to manage departmental spending).

 

  • Most recently, at the recommendation of Sir Michael Barber, a Public Value Unit was created inside the Treasury. However, it been inert against the more ingrained culture of monitoring short-term expenditure. It is not properly embedded with Treasury Departmental spending teams who monitor individual departments’ spending. The shift to judging outcomes has proved too much for the prevailing orthodoxy to adjust to.

The problem with big Machinery of Government changes is that they generate turf wars. Secretaries of State are usually captured by their ministries, fighting to maintain the status quo against any possible loss of authority. They can also take years to implement.

The solution should be something far more agile: creating a unit called the Office for Economic Growth. Modelled after the Office of Budget Responsibility, the Office for Economic Growth should have a streamlined structure and comprise no more than 40 FTE staff.

This will not be costly or disruptive, nor add additional civil servants. The best in the Treasury’s Public Value unit supported by economic growth specialists and a small handful of private sector commercial experts will provide everything needed.

They should be able to draw upon and call for evidence where needed or to commission specific pieces of work if OEG needs to challenge material legislative, spending, or taxation plans emanating from any Whitehall dept.

  • The Office for Economic Growth should have the authority vested in it to review every Whitehall business case above an agreed value. It will determine the impact of public spending on economic growth. The Office should analyse economic announcements and budgets. We need to move away from big, set-piece economic statements. What currently happens is that announcements get held up and economic data is bunched up and released in indigestible lumps, rather than being produced immediately.

 

  • It should evaluate all of the models used by Government departments in their impact assessment and rate them on their accuracy as they relate to economic growth. These models should be published as open source. This would allow outsiders to examine how good they are.

 

  • It should publish the economic growth projections made by the relevant department arising from the proposed legislative or fiscal interventions. The data should be regularly refreshed once outcomes are known to ensure rigour.

 

  • Alongside this, it should be granted discretion to test and iterate novel methods of procurement/public spending. For example, when government wants to procure an innovative solution that doesn’t yet exist it should be able to recommend the use of Advance Purchase Agreements for a solution that delivers certain outcomes.

 

  • It should be given the authority to set the Green Book rules. At the moment, HMT both sets the rules and follows them, meaning it is the final arbiter of best value in public spending. HMT signs off spending it wants to do, even when it falls below the cost/bene fit threshold it would apply to other departments. The OEG should set the rules and force HMT to follow them. This would give No10 more control over the framework by which public spending decisions are made, whilst simultaneously strengthening the enforcement of that framework.

 

  • The OEG should be much more transparent about the Benefit Cost Ratios (BCRs) of public spending projects and then examine them after construction to see if they met the estimates.

 

  • It should report directly to the Prime Minister as the First Secretary of the Treasury with this unit being given advance notice of any major spending decisions before they are locked in or publicised.

 

  • The Prime Minister or their nominee should continue to chair the powerful Domestic and Economic Strategy Cabinet sub committee. However, its terms of reference should be adjusted to provide more focus on economic growth rather than the current remit.

 

  • The Economic Strategy subcommittee should be clearly delineated from the Domestic and Economic Implementation subcommittee so that there is no overlap or conflict.

If the Office of Economic Growth had been in place in the way set out above over the last 3 years we could have seen, by way of examples, the following benefits :

  1. A sharper focus on the post Brexit procurement bill ensuring that economic growth was integral in its design. This bill will cover some £300billion/year of public expenditure.

 

  1. An early warning as to the unintended consequences of bringing housebuilding to a halt in parts of England because of new powers invested in Natural England through the Environment bill. One estimate puts the number of dwellings delayed at over 100,000. What cost to economic growth?

 

  1. Less piecemeal allocation of capital to DfE, meaning schools are being repaired and then demolished because there is no pipeline to show their rebuilding date. This would have accelerated the development of the modern methods of construction industry where we have the potential to be a European leader (a technology on which the DfE leads across Whitehall).

 

  1. Innovative public / private partnerships would have a greater chance of making progress as their economic impact would receive a wider airing in Government and innovation given a greater chance to break through.

All this would help reach that holy grail for all politicians: to find the key to long run economic growth. To grow the pie so that all in society can benefit.

The post Theodore Agnew: An Office for Economic Growth could help revitalise our government and economy appeared first on Conservative Home.

David Willetts: Jobs and living standards – thinking for the long term

7 Jun

David Willetts is President of the Resolution Foundation. He was Minister for Universities and Science 2010-2014. His book A University Education is published by OUP.

The challenge to Boris Johnson’s leadership is of course the immediate political issue grabbing all the headlines. But behind the adrenalin rush of the day’s political crisis, there are still the long term issues which responsible parties of government have to think about and try to address. And behind today’s living standards crisis are still the deeper issues of how well the British labour market is doing and what it means for jobs and wages.

First, the good news. Britain is a high employment economy with a flexible labour market. We are still benefitting from Margaret Thatcher’s labour market reforms of the 1980s. Ironically, it was the threat to these from Jacques Delors in his notorious speech to the TUC which led to her Bruges speech starting the movement which led to Brexit.

But the EU did not actually impose substantially more regulations after that. Instead, the main interventions have been domestic – notably the minimum wage. And contrary to the fears that many of us had, including myself, it did not lead to a surge in unemployment.

There is however still the problem of the NEETS – people who are Not in Education, Employment or Training. It peaked in the 1990s at over a million young people aged 16-24. Now it is down to about 800,000.

Research we will shortly be publishing at Resolution Foundation suggests the fall is almost entirely amongst young women who are less likely to be having kids when they are young and, even if they do so, are more likely to carry on working. There has however been no real improvement among young men.

There has also been a shift in job satisfaction, especially amongst the low paid. In the past the low paid used to be more satisfied with their work than they are now. The minimum wage might have boosted their pay, but it also increased the pressures on them from managers and employers, especially if they are insecure contract workers.

Moreover there are still abuses of the labour protections which successive political parties have brought in – that is why the 2019 Conservative Manifesto promised a single effective body to enforce legal rights instead of the mish-mash of weak and under-resourced agencies we have at the moment. We should have a simpler, stronger system. It would be great if that pledge were now implemented.

Our employment rate for 16-64 year olds reached an all time peak of over 76 per cent before Covid struck. Although our employment rate is high, it is not yet back to its pre-Covid peak. The problem is that a swathe of older workers haven’t gone back to work. They appear to have opted for a quiet life and early retirement.

If they are still of working age and claiming unemployment benefits we should be expecting them to engage actively in job search, and they should be accessing the same range of back to work initiatives as younger unemployed people.

The biggest problem is that we are a low pay economy and that is above all because we are a low productivity economy. The living standards crisis has been building for years as our economy has underperformed. It is hard to boost living standards by tax cuts when Government borrowing is so high and productivity is so low. Instead, we boost living standards by a work force with more education and trainingm together with more business investment behind them.

We had a vivid example of this problem in the Chancellor’s package to help people with the rising cost of living. It was big and bold and widely welcomed. But it was all about transferring money to help people with these costs. There was nothing about actually investing in the home insulation and the innovative domestic heating systems which bring household costs down in the long run.

One reason for that omission is that the Treasury is scarred by the failure of successive green deals. The biggest single reason why they fail is that we are short of the trained workers to insulate the houses or install the new boilers. There is a lot of rhetoric about boosting vocational training, but we need to do more to deliver it in practice.

These jobs can’t all be created straightaway, but we need a plan of gradually increased funding to lower home heating costs by investment and innovation with a proportion of the budget going specifically on the vocational qualifications linked to those programmes. That would show we meant business about boosting living standards in the only way that makes those gains solid and sustainable.

Anthony Browne: It’s the economy, stupid. Or should that be: it’s higher growth, stupid?

30 May

Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.

“It’s the economy, stupid!”: the phrase at the heart of Bill Clinton’s successful 1992 election campaign in America may have become a political cliché. But like many clichés, its use lingers on because it contains a fundamental truth. 

These are words the Conservative Party needs to remember as we plan for the next two years and the looming general election. A clear, concerted focus on growth and the economy would not just be good for the country, but good politically. It would help to relieve many of the problems the country has – or make it easier for the Government to sort them – and it would also help the Conservative Party hold together its new political coalition of red wall and blue wall. 

When I stepped down as the Observer’s economics correspondent in 1999, it was in part because economics had become too predictable to be newsworthy, with growth and inflation steady.

There is no risk of that now. We have had unparalleled battering from many directions. The global financial crisis, the pandemic, and now the massive surge in global energy and commodity prices that has left the economy seriously wounded.  

Even in this age of fury, most fairminded voters think the Government has dealt with these shocks admirably. Rishi Sunak’s £400 billion support package during the pandemic drew international praise, with economists who appeared in front of us on the Treasury Select Committee falling over themselves to applaud it.

Last week’s support package for families facing the cost-of-living crisis won praise from a wide range of campaign groups who normally condemn the Government. But we are still left with the national debt and taxes at their highest since the aftermath of the Second World War – a risky economic position to be in, and a politically uncomfortable one for a party that claims to believe in low taxes.  

The surprise for most economists, though, is how, given all the battering, the economy is not in worse shape than it is. We had predictions of unemployment rocketing up to 1980s levels – but it is now at record lows, with more jobs than jobless people for the first time ever. Unlike the 1980s, we retain many fundamental economic strengths. 

But still the economy is very precarious. Stagflation looms. Quantitative easing is being unwound. The massive national debt makes us vulnerable to rate rises. The ageing population will steadily build up pressure to increase public spending.

The solution is growth. Higher economic growth – and higher productivity – leads to higher incomes, relieving the cost of living crisis. It would increase tax revenues and reduce welfare payments, improving the national finances, and give the Government flexibility to bring in much needed reforms. On average, one person going from joblessness to job improves the Government’s finances by £6,000 a year. 

The western world has had sluggish economic growth for 15 years, and driving it up should now be the defining mission of this Government. It needs the policies to deliver it, and it needs to communicate it.  The Chancellor set out the mission in his recent Mais lecture, where he laid out the strategy to deliver growth based on “a new culture of enterprise”.

His focus was on what he summarised as Capital, People, Ideas” – encouraging investment, increasing skills and trainingand promoting research and development. His central thesis is that the key to drive up growth is to increase business investment, where the UK lags most of the OECD.

That is why he introduced the temporary “super deduction” tax relief on it, and is now consulting on what to succeed it with, to be announced in the Autumn budget. The 1922 Treasury Backbench Committee, which I chair, is currently gathering evidence from politicians, think tanks and business groups, on which reforms could help to promote growth.

There are many other Government policies that help to do so – from agreeing free trade deals, to investing in infrastructure such as new railways (the newly opened Elizabeth Line in London is an inspiration), introducing freeports, and dramatically increasing research and development funding.

The recent Queen’s speech was full of legislation that will help growth, from removing the ban on gene editing (important for businesses in my constituency) and removing red tape on trade documents to modernising business rates and making financial services regulation more competitive.

But clearly there is much more that can be done. As the editor of this site pointed out in Conservative Home last week, there are many sensible recommendations from the Taskforce on Innovation, Growth and Regulatory Reform that have not yet been implemented. We should use tax breaks to encourage regional development not just public spending. 

Going for growth also needs a mindset change across Government. As one Cabinet Minister put it to me recently, the Treasury has never been interested in growth, just in collecting taxes. Many sensible tax reforms are undermined because the Treasury doesn’t fully assess their impact on longer-term economic activity – just on what first order impacts they would have on government receipts. All policies should be assessed across every Government department on what impact they would have on growth, and those that are beneficial should be prioritised. 

The Government also needs to turn this into compelling narrative that everyone can buy intoDavid Cameron and George Osborne repeated their “Long Term Economic Plan” so often they got ridiculed, but it won them the surprise 2015 outright election victory.

We now need a similar clear plan. Cabinet ministers should mention it in every speech. Every MP should know instantly when asked in TV interviews what the key mission of the Government is: growth. Every civil servant working on a policy should know what the overarching priority is. The whole country should know that is what the mission is.

The Prime Minister is instinctively pro-business, but business clearly needs to be persuaded. The Government needs to ramp up the case for free enterprise and business, and to push back against more statism being the answer to every problem. We need to turn our rhetoric about being the party of low taxes into reality. The public will not believe us if we say we want low taxes when they are at their highest since the Second World War. With the budget deficit shrinking fast, the Government can soon start cutting taxes; a faster growing economy will make it easier to cut them further.  

Having a clear mission on growth is also good politics. In its bid for the middle ground, the Labour Party is trying to position itself as the party of low taxes and of business, but that puts the political frontline on our natural territory.  Just as Conservatives can’t win a bidding war on spending, Labour can’t win a bidding war on growth. Labour can’t stop thinking about how to cut the pie, rather than making it bigger.

Growth can also bridge across the new political coalition. Many other policies that might appeal to Red Wall voters – such as the Rwanda asylum policy, dialling down on net zero or stoking culture wars – risk alienating more liberal Conservative voters in the south.

But a clear mission to promote growth, help business, and cut taxes while balancing the budget appeals to both wings of the party, and can unite it rather than divide it. Being economically liberal and fiscally responsible is the clear political middle groundWhen it comes to what the Conservative mission should be until the election – it’s the economy, stupid! 

Five questions about Sunak’s statement today

26 May

Rishi Sunak, having made his Spring Statement, wanted an autumn follow-up – saying last month that it would be “silly” before to take further major action before then, when the energy price cap is due to rise again.

With poverty for working families hitting a record high, almost a fifth of adults having less than £100 in savings, one in five families facing fuel poverty and Britain facing the biggest drop in living standards since the 1950s, it is scarcely surprising, welcome and almost inevitable that he has been forced off course.

But while there may be some good news today for voters, I am not so sure that it will mean good news for the Conservatives – or the Chancellor.  The downsides of spending money or cutting tax or both now means that those same tax cuts and spending rises can’t be made later – during the run-up to the next election.

Nor are voters, having become used to Sunak deploying his big bazooka during the pandemic, likely to thank him for firing it once again now: familiarity with spending sums so vast as to elude most people’s comprehension may not breed contempt, but it seldom brings gratitude.

And while it is right to give more help to desperate people, the timing of the statement is suspect: clearly, the Government is attempting to “move the story” on from yesterday’s report by Sue Gray.  Which provokes the question: are these measures coherent – or opportunistic?

Confidence that they will be the first is undermined by the weak position of the Chancellor in the wake of the non-dom controversy – and by him having to return to the Commons within only a few months of his last major statement.  And he is worse placed to resist the demands of a Prime Minister whose economic instincts are different from his.

Jack Sunak would eat no fat, and his boss would eat no lean.  It would be unfair to claim that the Chancellor has no interest in growth: his recent Mais lecture was preoccupied by it.  But there is a clash within the Government and elsewhere about the main economic problem facing Britain.

To the Treasury, rising prices are enemy number one.  And so it leans towards lower borrowing and tax rises: it is preoccupied by further interest rises that could intensify an economic downturn. To its critics, low growth is our main foe and, with the deficit lower than was forecast, the Treasury is choking off growth through unnecessarily high taxes.

Johnson’s instincts are to cut tax, spend, borrow if necessary, whack up infrastucture, and “eat, drink and be merry, for tomorrow we die”.  It has been briefed that Sunak will splash out another £10 billion today.  That would be a relatively small proportion of the £90 billion or so by which the deficit undershot the Treasury forecast.

So, then – five sets of questions for today.

  • To what degree will the Chancellor target his measures on those most in need?  Crudely speaking, what will be the trade off between Universal Credit rises and tax cuts (if any)?  If the latter happen, will they be concentrated on workers and business or the retired?
  • How much of this new spending will he seek to find from new windfall taxes and how much by relaxing his plans for deficit reduction and debt repayment…?
  • …And so where will he settle on the relative threats that rising prices and low growth pose to the economy and our future? Will the Treasury shift its position?
  • Will the statement be relatively narrow or broad?  The broader it is, the more of a Spring Statement or Budget-type event it will be.  And the more problematic for Sunak it will become if he is forced to make further such statements before the Budget.
  • If the statement is relatively broad, what will he have to say about supply side reform, faster growth and borrowing to invest in infrastructure, science and skills?

In sum, to what extent will he present a clear plan projected by a clear message?  My starter for ten is “help hard-working people and go for more growth”.

I’m sure that the Chancellor, David Canzini, Isaac Levido and so on can do better than that.  But in order to do better, they need to say something.

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

23 May

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Gauke: It’s right that the civil service become more efficient, but I doubt that these plans to reform it will work

23 May

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

Government Ministers want to reduce the size of the civil service. Jacob Rees-Mogg, the Minister for Government Efficiency, has let it be known that he wants to reduce the civil service headcount by approximately 90,000 which would be a fall of 20 per cent and return the numbers to the levels of 2016. Sky News reported on Friday that departments have been asked to model headcount reductions of 20, 30 and 40 per cent.

There is plenty of politics in these announcements and I will get to that in a moment. There are also a large number of practical challenges which are worth highlighting. Having served as Chief Secretary to the Treasury as well as being the Minister responsible or relevant for the three biggest employers of civil servants (at the Department of Work and Pensions, HMRC and the Ministry of Justice), I have a few thoughts on that.

Before turning to those issues, however, it is worth acknowledging that seeking to ensure that public money is spent wisely and that public services are delivered efficiently is a perfectly reasonable thing to do.

Indeed, it would be irresponsible not to seek to do this. We spend taxpayers’ money on public services in order to serve the public. This requires the employment of public servants, but the employment of public servants is incidental to the Government’s purposes, it is not an objective in itself. This is an obvious point, but I can remember at least one meeting with civil service staff where this point had been lost.

Governments should seek to achieve more for less and, if it is possible, to deliver satisfactory public services whilst employing fewer people. This can result in savings for the taxpayer and release workers to make a contribution elsewhere in the economy. Jobs are a cost not a benefit.

Some will argue that reducing headcount results in a deterioration in public services. That is not inevitably so. To take HMRC, for example, this is a department that has grown in confidence and capability over the last twelve years at a time when the number of employees has fallen.

The reason it has been able to do this is that it has embraced technology which means that many clerical tasks which once had to be undertaken manually have been automated, whilst its sophisticated use of data has enabled it to deploy its skilled workforce more efficiently, significantly reducing the tax gap.  But this does not mean that the plan to reduce numbers by 90,000 is realistic.

It is worth analysing why civil service numbers have increased over the last six years and well worth looking at a paper by the Institute for Government on the topic.

The principal reason is that we have wanted the civil service to do more things. The obvious example of this is Brexit. We have returned certain responsibilities to the UK Government from the European Union, and we need to employ people to fulfil those responsibilities. We previously did not have (or need) a Department for International Trade; now we have one employing 2,000 people. We have increased the number of policy staff in the Environment and Culture departments because there is now more policy that needs to be done here. We also have new operational requirements, such as operating a new customs border with the EU, which will require civil servants to operate.

The employment of a few thousand extra civil servants as a consequence of leaving the EU is not a killer argument against Brexit (there are better arguments, but let us leave that for another day).  However, it is an undeniable consequence and it cannot be dismissed, nor is it just temporary. If policy for some matters is permanently going to be located in the UK, then we permanently need to maintain policy capability here.

There are other policy objectives that have risen up the political agenda. Levelling-up – ensuring that prosperity is more equally shared across the country (I think that is what it roughly means) – will not be achieved without a vast effort. This will require people – civil servants – to be employed to make the vast effort.

In some cases, the Government has observed what civil servants are doing and concluded that we would like more of it. Let us take DWP’s work coaches who provide holistic support for those looking to get into employment. Successive Work & Pensions Secretaries have been impressed by the contribution they have made to turning people’s lives round, solving problems ‘upstream’ and contributing to low levels of unemployment. So the number of work coaches has been expanded. For a Government that believes that work is the best way out of poverty, it would be very odd to reverse this.

Of course, some of the additional tasks have been pandemic-related and there are saving to be made. But Covid also raises questions about our overall resilience to future public health emergencies which will have ongoing implications for staffing.

Looking at the public sector as a whole, the Government has clearly concluded that job cuts went too far in some areas over the ‘austerity years’, hence the pledge to recruit 20,000 more police officers. If our intention is to reduce crime, there are other (arguably better) examples of where numbers fell by too much after 2010. The Government is rightly committed to offender rehabilitation. This means we need more probation officers. Probation officers, like work coaches and customs officers, are civil servants. As are those who work in DVLA, the Passport Office and the Courts where there are backlogs and delays that need to be addressed.

There is also something odd about a process which requires departments to come forward now with proposals which in aggregate sees a 90,000 headcount reduction. It is right that spending departments, the Treasury and the Cabinet Office work together to ensure that strategic and bold thinking is undertaken to identify possible savings, including by deprioritising some activities and identifying opportunities for automation. The problem is that there is a time at which this should happen – at the point at which the Comprehensive Spending Review is being determined – and that happened only seven months ago alongside the 2021 Budget.

At the time of the CSR, the Government set out plans which implied a reduction to the civil service headcount of 28,500. This, presumably, was part of the discussions within Government and provided a key assumption in the departmental spending settlements. Now, we have new numbers and a new process is being commenced. Spending departments are entitled to ask what is going on. Is the CSR being reopened or not?

The suspicion is that this is driven by political considerations as part of a desire to be more ‘ideologically Conservative’, appealing to those who think that civil servants are lazy and useless and spend all their time watching daytime television whilst claiming to be working from home.

Putting aside the unfairness of this observation (most current and former ministers would, I suspect, speak highly of the professionalism of the civil service), it is not an attitude that is likely to bring out the best from those upon whom the Government depends to get things done. Nor is it coherent with the big state conservatism that contributed to the 2019 general election victory.

Squeezing greater efficiency from the civil service is to be welcomed but I fear that these proposals have all too familiar characteristics – unrealistically optimistic, politically motivated and ideologically incoherent.