What the budget discussion should really be about

The discussion of the budget has revolved around relatively minor matters of taxation that have most immediate impact on people. The three largest parties have been engaged in a strange dance over how to rejig taxes on alcohol, each defining a different position.

The government has allowed press speculation to build that they may increase taxes on middle class drinking. People are being readied to face increased duties on wine and spirits, sparing the lager drinking classes. We read lurid stories of how people are overindulging in the privacy of their own homes , and how this is according to some, possibly close to Labour, at least as bad as being sick on the streets, and turning violent in the town centre.

The Conservative party wants to spare the home drinkers and hit the young binge drinkers, opting for higher tax on drinks favoured by that group, balanced by reductions in alcohol tax elsewhere.

The Lib Dems arrived late at the auction following a little local difficulty abstaining on the EU. They decided they want to tax all alcohol drinkers more, balanced by a healthy reduction in tax on fruit juices. Memo – they are going to have some great parties then, going heavy on the guava juice.

It’s as if the Credit Crunch was still 2000 miles away and a few months ago. It was as if the banks were soon going to return to the “normality” of last spring, when deal makers were threatening to gear up to take over the largest of the corporations in the world market, and when Northern Rock would offer people 125% of the value of the house they were buying in a loan package designed to take the waiting out of wanting.

The reality is very different. Last week fear stalked the global marketplace. There was little money to buy bonds and to the lend from one bank to another. Good quality paper (loans that can be repaid) fell again in price. Buyers were only available in reasonable numbers for first quality government debt. The prices now being established for good quality instruments, if they become the norm, would mean huge new write offs across the banking sector. More write off means less capital available, which in turn means less money to lend. It also means a further huge increase in the amount of shareholder capital the world system will need to recapitalise the banks, and means a longer period of people having to pay more for their borrowing relative to money market prime rates.

The budget has to sort out this problem in the UK. Far from being exempt, we are a big part of it. The UK government, by being overborrowed itself, has left us weaker to respond. The increasing budget deficit and the failure to control public spending make us more vulnerable to the cruel winds of the credit crunch.

The Chancellor should turn his mind to the big picture. He should try to get on top of his own spiralling debt and spending, without damaging important public services. The good news is he can do so easily, because the management of the public sector is today so poor.

He could start by cancelling the nationalisation of Northern Rock and putting in place a proper banking package, to manage the taxpayer debt down over a sensible time period with clear controls and a repayment schedule. This would prevent the large increase in public indebtedness that will result from the inclusion of all Northern’s obligations on the public balance sheet.

He could continue by imposing a staff freeze on all new recruitment for non front line staff, to bring the civil service and quangoland back under some control over numbers after the years of rapid growth.

He could cancel or delay many of the large computerisation projects that bedevil this government’s approach to management.

He could take some simple steps to increase energy efficiency across the public estate. He should institute reform of personnel management, to bring the public sector absentee rate into line with the private sector, where it tends to be considerably lower, saving staff resources.

We are in dangerous and uncharted waters. The UK ship of state is carrying too much surplus weight and is not being sailed well. We need more liquidity in markets, and lower interest rates, but the poor performance of the UK public sector constrains UK action.

PS: It is curious how Vince Cable got so much air time from the BBC when he became the consistent advocate on Northern Rock nationalisation, at a time when the government appeared to be dithering. It is almost as if the government wanted a Lib Dem to front run the idea, so Labour could not be accused of going back to Clause 4 and their old nationalisation agenda. Presumably the BBC gave Vince so much airtime for his idea because they had reason to believe the government would pick it up. They gave practically no airtime to more sensible proposals to contain the damage and bank Northern Rock intelligently, because they were aware the government would not go that way.

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13 Comments

  1. Paul
    Posted March 9, 2008 at 4:25 pm | Permalink

    Yes, well they won't will they ; it will be yet more spin and mirrors ; spin endlessly until reality hits them between the eyes.

    I don't think a PS Staff freeze on non-frontline jobs would work. The quangocracies would simply redefine the words "front line". I think the only solution is an axe.

  2. hughev
    Posted March 9, 2008 at 4:56 pm | Permalink

    The UK ship of state is carrying too much surplus weight and is not being sailed well.
    'It's up to the gunwales and sailing up shit creek', to use parliamentary phrases that the Labour party would understand.
    This blog has totally denied the press slant on John Redwood.–(phrase left out ed).

  3. jane
    Posted March 9, 2008 at 5:18 pm | Permalink

    I will be furious if taxes are raised disproportionately to punish 90% of the population who use wine at home for cooking and pleasure. I am one of the unfortunate people who will see my tax increase next month (retired aged 60) as the 10p tax rate is abolished. Add to this increases in bills for energy, food, water charges and the ever increasing council tax. The largest proportion of the council tax increase is to fund the police – too much of their operating budgets are going on pensions and they do not understand the concept of productivity. The number of jobs in local government continues to increase with assistants to assistants being advertised. I do not know if the same applies nationally but I must assume it does. I wholeheartedly agree with you that new recruitment should stop and that there should be greater staff flexibility between departments. I also think that many quango's should be abolished – they cost a fortune and it is my money being wasted. Perhaps government should draw up a more detailed list, activities undertaken, cost per annum and their relevance to government policy?

    Everytime an error occurs, government states that an enquiry will take place. I thought government employed a hoard of advisers and civil servants who have expertise on a broad range of issues. It is time these enquiries were reduced and decisions made. Not many government ministers would survive if they were in the real world. The real world cannot afford to set up costly enquiries on every issue.

    Everytime I read a newspaper, I read of some mad idea which is funded by me. Recently, paying individuals to leave the country. What a laugh, they will go home with the money and return again the next month as I do not believe that our control systems are robust enough to stop their re- entry. Partnerships with those on welfare benefits – paying them more to take part in schemes etc. Nonsense – you cannot import all systems operating in other countries. Paying young people to remain in education should not be necessary as the ethos of further education to improve ones life and earning capacity should be paramount.

    The sooner that all public bodies are penalised for not being competitive the better. You mention sickness which can also lead to early retirement on pensions funded by the taxpayer. We perhaps need a better definition of stress and bullying. We all get unhappy, feel under pressure and often have to be pulled up by managers. It seems strange to me that these issues are more prevalent in the public sector. It must be related to the culture of the organisations. Perhaps if all knew that funding remained static, that pay scales were removed and one is paid by performance this may reduce sickness.

    I do not really feel able to comment on your ideas relating to Northern Rock despite my reading much detail. I was aware that the bids made were way below the market value and that no government could permit a bank to go to the wall. I am also aware that the regulations were lacking and that the FSA lacked discipline. I honestly do not know what the best solution at the time was or will be in the future. Whilst world markets remain in turmoil there will be no buyer for a long time to come. However, I am sure you will use every opportunity to ensure that the taxpayer is kept abreast of events with pertinent questions to the Chancellor.

  4. Matthew Reynolds
    Posted March 9, 2008 at 7:26 pm | Permalink

    What ought to happen is that public expenditure increases should be made that much smaller so that the PSBR is slashed by 80% say within three years & wiped out within five years . As John Redwood rightly points out QUANGO's , public sector workers being on the sick too much and IT schemes can take the strain of balancing the books . What we could also do is replace Job Seekers Allowance & Incapacity Benefit with one sort of payment with very strict supervision so that economic inactivity falls and public spending levels are reduced , ID cards can be axed , employment spending can be cut as private business create jobs of value for the most part unlike the state and why must we subsidies farming in a way that promotes poverty in The Third World ? More powers can go to local councils a la Edmund Burke meaning that the central government machine can be cut down to size by axing the local government ministry while the Majorite nonsense of a culture ministry can be axed as its £7 billion budget seems rather excessive . Why have seperate Scottish , Welsh & Northern Irish Departments when they have devolved governments and why have a Justice Ministry when we have a sovereign parliament ? By devolving enough powers to schools & hospitals why not replace the children & health departments with one public services department with half the civil servants ? If enough red tape was cut , competition & private money brought in with the train & track link restored and private road schemes set up notwork rail and costly road building projects could be axed for being too expensive . The Conservatives are wrong to match Labour spending plans when taxes are too high , future generations face ruin due to excess public debt and defence is underfunded while a citizenship pension if brought in could wipe out pensioner poverty . Why tax the working poor into needing credits that do more harm than good ? The admin costs must be vast while people are trapped in poverty as they lose money to tax & NI and then rely on payments that reduce if they earn anymore money . Do LEA's & health authorities really make schools & hospitals any better ? What is the point of the skills ministry and why have a business department that is powerless to stop our competitiveness declining ? Has DEFRA been anything other than a spiteful tool used by the Labour left to destroy what they see as the Tory countryside ? Simpler taxes make economic sense and save on admin costs and as for the waste & corruption that is the EU…

    Speaking as a taxpayer on just over £12,000 p/a why do I have to pay tax to fund all this waste ? Why should I vote Tory to pay the bills of Labour failure as pensioners got o jail for non payment of council tax ?

  5. Bazman
    Posted March 9, 2008 at 11:46 pm | Permalink

    Why tax people, then give the money back? Simple reform of the tax code is the answer.

  6. gen public
    Posted March 10, 2008 at 12:07 am | Permalink

    See the Govt and Ken in London seem particularly keen on hammering drivers of automatic cars, normal family cars with an auto transmission are apparently so dangerous they need a 400 GDP tax and more to come in the budget – don't get a dodgy left knee in Gordon's Britain, tens of thousands of people who don't qualify as a disabled driver yet need an auto to prevent medical problems getting worse, is it really good economics to hammer such drivers?

    Meanwhile the Toyota prius et all do rather well, shame the pollution during the production and disposal of the battery is not taken into account in these "tax to manipulate the market" measures

    Decent drivers get hammered for minor offences, meanwhile we have "travellers" with gaffer tape over their number plates who the police are literally too scared to stop, and if they do they will routinely get let off cos they cannot be traced

    And so many middle classes now driving on foreign licences from their pad in Spain/Belgium etc as its just too hard to drive on a UK licence in this country, and foreign licences are let off with just about everything

    So fair isn't it

    Normal hardworking folk cannot afford anything more than a one bed flat, yet folk who have never worked are given large desirable homes because they have had multiple kids paid for by the state aka the hardworking folk

    We have rubbish hospitals when even when there is a dead rat in the operating theatre the customer cannot take his business quickly and simply to another provider, and the idiots running the rubbish providers are allowed to get ever more public money

    I cannot have kids, I wouldn't be able to get them into a decent school like the one I had, and they wouldn't be able to see a decent GP like the ones of my childhood, fear to have kids the worst fear of all

    Forcing the builder to build too many flats and too few houses? And houses without car parking spaces cos "cars are bad for the environment" such a simplistic view

    And folk living in flats above or near bars now open 24/7 unable to sell the flats and move

    NHS which does not cope with a mobile workforce which moves address often, wait wait move and go to the beginning of another wait to see a nurse not a consultant to wait again to be sent back to the GP cos "the referral was for the wrong finger" or whatever, complete nonsense

    How did Gordon get away with selling our gold while the price was low?

    Why are we giving so much away to public sector workers in unsustainable pension rights? Why should anyone work their heart and soul off in the real economy to pay for these burdens?

    (Sentence left out)
    Politics is letting the people down in this country big time

  7. Atlas shrugged
    Posted March 10, 2008 at 6:53 am | Permalink

    John

    When you get into office you must take on the public services industry ASAP. It is clearly out of control in all respects. The only problem is that this will cause an even greater short to medium term ressesion then we are already going to have, but what the hell. Start looking just like a mean Labour government in blue and the party and the country are finished.

    As churchill once indicated . If you tell the people the bad news, they will put up with almost anything. I fully understand why its best not to talk down the economy when in opositon. Because there really is no point, the BBC will only blame the Tory party for the ressesion. But as soon as you or that boy Osbourn get to see the figures, honesty is the best policy.

    However when the election is won all bets are off. As we can now plainly see they were in 97.

    As for the BBC. My advice is to strike while the iron is hot, and close the utter diabolical shower down on your first day. Conservative voters will not miss it, and everything will become almost instantly easier in all respects. YOU KNOW IT MAKES SENSE. If there is rioting in the streets, which is unlikely, you can always give the BBC a reprise, a half Billion cental government budget and put your own people in place. Play the socialists at there own game, or you will not last a full term.

    BTW

    There is little point ,pointing out how authoritarian this current government is. When you as a party say so little about which laws you intend to get shot of. If you consider its best to say not too much now, then thats just as well. But say so you must one day, my advice would be not untill the election campaign starts.

    Remember LIBERTY is popular. Its what we British used to pride ourselves on. Please don't bother trying to keep this countries assorted fascists happy, if they are not happy now they never will be. They are mostly all voting Labour or BNP these days anyway. This country needs a Libertarian counter revolution every bit as much as it needed one in 79. It will either get one of sorts, or deserve to sink without trace.

    Reply: THE ECNOMIC POLICY REVIEW LISTS MANY MEASURES WE WOULD LIKE REPEALED IN THE DEREGULATION SECTION. REMEMBER IT IS ADOPTED POLICY TO SCRAP ID CARDS AND MUCH OF THE FORM FILLING.

  8. mikestallard
    Posted March 10, 2008 at 9:56 am | Permalink

    Let's get the idea of any change of taxation for any kind of alcohol out of the way first. It is laid down by the EU: (http://curia.europa.eu/jurisp/cgi-bin/gettext.pl?where=&lang=en&num=79929580C19060063&doc=T&ouvert=T&seance=ARRET) So he cannot do anything about that, and neither can anyone else.
    The big question is why it is even being discussed. As things get more and more secret, of course, rumours start to fly. Is it a plot by the (leftie) BBC? Or the Murdoch Press? Either way, the whole political system comes under suspicion, however unjustly.

    About the reduction of bureaucracy etc etc: these are the people who brought it in. It is often called "the client state." So no hope there either, I am afraid.
    Do you remember when Argentina crashed a few years ago? Exactly the same causes……
    Me? I expect a lot of stealth taxes to pay for the broken machine and then a final brilliant fling – like 2p on every pensioner's Easter bonus.

  9. Posted March 10, 2008 at 1:20 pm | Permalink

    The Tories should target 100 quangos, tabulate their budgets & promise to get rid of them & put the money into cutting corporation tax. If they chose some which have the power to prevent building or increase its costs they would do the economy even more good by cutting construction costs & times than by saving the money.

    I don't think quangos are popular. While the concept of massive unspecified cuts is, rightly, a bit scary & would be seen as giving a blank cheque to an incoming government, the idea of a massive barbecue of specific sacred cows would be popular & put Labour on the defencive.

  10. [[NAME EDITED]]
    Posted March 10, 2008 at 2:44 pm | Permalink

    Matthew Reynolds and Atlas Shrugged. Monday morning, and I have just read your comments, & shall go on my way with a song in my heart. Surely everybody with any sense at all is going to come round to that way of thinking? Am I living in a private fantasy world?

  11. David Hannah
    Posted March 10, 2008 at 4:08 pm | Permalink

    It’s hardly surprising that the middle classes are in the crosshairs of the latest budget. After all, we’re not yet dependent on Gordon Brown’s client state for our income. Thus, a further tax on our simple pleasures is inevitable.

    We’re all used to this authoritarian BS from our esteemed NuLabour government. However, what I find astonishing is that the Conservative party have joined the “binge-drinking” bandwagon of taxing alcohol even more. Shame on you! This behaviour is cultural; it cannot be modified through the tax system.

    Please do not allow the Tories to become a wholly owned subsidiary of the “something must be done” brigade. Besides, once again, our real government in Brussels calls the shots, and would prevent the imposition of discriminatory taxes on specific brands of alcoholic beverages (specifically, if those higher strength products come from abroad, as they often tend to), rendering your proposals illegal.

    When are we going to hear some sensible policies on tax from the Conservatives? With 1 in 10 skilled professionals leaving the country, you’re fiddling while Rome burns.

    What we need is a vast reduction in public spending, not more taxes. If we were to return to 2001 spending figures, we could abolish Income Tax altogether. If we left the sclerotic EU, we could also abolish the Death Tax and Capital Gains Tax. Then let us have a bonfire of the ‘quangos’ (a real one, not one that exists only at a party conference). If we were to transform the Welfare State (making it a safety net rather than a hammock) we could abolish Corporation Tax too. Then, instead of witnessing the exodus of companies and individuals to Switzerland, we could see them coming the other way.

    If we must spend £50 billion of taxpayers’ money, I’d rather see it going towards something that will have tangible benefits. Rather than purchasing a bank with bad debts, we could instead have a Maglev link from London to the North-East, and to Scotland. By bringing the North of the country into the London commuter belt (remember the North; the bit that’s in the opposite direction from Brussels and Paris), it would do more to address the North-South divide than any amount of Government handouts.

    Now, where’s that Australian immigration website?

  12. Posted March 10, 2008 at 9:12 pm | Permalink

    David, Atlas, Matt and Jane might find a better home in the Libertarian Party!

  13. Terry
    Posted March 11, 2008 at 2:26 pm | Permalink

    You returned again to Northern Rock in your post script. Vince Cable, who apparently can do no wrong at the moment, was gung-ho for nationalisation, as you rightly observe. He took up this position almost from the start of the crisis, even though at that time the quality of the NR loan book was unknown. Why are the media still treating him as a sage for now querying the security of some of those loans and letting him opine sanctimoniously on a situation he helped to create? It’s a bit late in the day for him to have second thoughts. You seem to be the only politician to have consistently criticised his approach. Keep it up.

One Trackback

  • […] John Redwood thinks that Darling could could start by cancelling the nationalisation of Northern Rock and putting in place a proper banking package, to manage the taxpayer debt down over a sensible time period with clear controls and a repayment schedule. This would prevent the large increase in public indebtedness that will result from the inclusion of all Northern’s obligations on the public balance sheet. Personally, I think it’s too late for that, and that action needs to be taken in other areas of the public balance sheet to help  close the yawning gap between government expenditure and taxation revenue. […]

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

    Promoted by David Edmonds on behalf of John Redwood both of 30 Rose Street Wokingham RG40 1XU

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