Month: September 2010

I was sent Nick Boles’s “Which Way’s Up” to review. The first couple of chapters was full of loyal support for the Coalition government, and discussion of how Lib Dems and Conservatives had a lot in common. It seemed unremarkable.

Then I came to passages on equality. He takes the argument often used by the left that societies like Sweden and Japan are happier ones because they have greater income equality. He suggest instead that these societies are happier because they are more homogeneous, allowing far less inward migration than the UK has experienced in recent years.

Warming to his theme, he devotes a whole chapter to making a series of very radical and contentious proposals on immigration. His critique states that 70% of the new jobs have gone to workers born overseas since 1997. He says:

“We will not be able to sustain a social contract in which schooling and healthcare are provided to all citizens free of charge and are funded by taxation if we continue to allow, every year, hundreds of thousands of people from around the world to join the queues at A and E and send their children to British schools. Nor can we sit back while eight million British citizens of working age are either shun or shut out from all forms of useful economic activity because employers can find migrant workers who will accept subsistence wages to do menial jobs”

There is a raw edge and anger in his language, backed by figures higher than the official ones. His remedies are equally contentious:

“Britain needs a new immigration settlement, involving tighter controls on the number of people who can move into the UK every year (from both inside and outside the EU), greater selectiveness about who is allowed to settle here, tougher financial demands on new immigrants and those who want to employ them, more robust measures to remove those who break our laws, and more intensive efforts to ensure that all those who do settle in Britain adopt British values and become part of a truly united kingdom.”

So what does he propose?

1. A cap on the numbers of non EU migrants each year of up to 20,000 to 50,000 – putting a number on stated Coalition policy.
2. Requiring a surety deposit from all non EU migrants. This would be repaid after they had paid taxes here for a number of years, or forfeited if they committed an offence or lived here without paying income tax.
3. For EU migrants the UK should enforce the Directive which only requires a member state to allow free movement for the purpose of residence supported by work income or independent means. “Whenever a migrant from within the EU applies to a central or local government authority for benefits or housing or part of the NHS for non emergency healthcare, that authority should be required to check whether the individual in question has a job or sufficient funds to support themselves in the Uk. If they don’t, they should be told to leave the country…”
4. No-one should be eligible for social housing until they lived here for five years.

So what do you think of that? I am sure there will be some strong views out there on such radical proposals.

The intense public lobbying by all three services, leaked letters and the parade of unacceptable options for cuts amidst a culture of secrecy does not make for a good review. Given the need for a wide ranging debate about the UK’s needs, options and capabilities, it might have been better to have called for evidence and invited public hearings to look at the main issues before Ministers came to make conclusions. Alternatively, the documents needed to be held secure and confined to just a few people if the aim was to have a review conducted in secret without leaks.

It will be a pity if the defence Review is driven by current needs in Afghanistan. Of course this government must provide all support and equipment it can for the remaining months of our troops in the Middle East, but it should not regard fighting a war there as normal or an essential future requirement. Better still, we should be seeking to accelerate the transfer of responsibility to Afghan forces, and getting our troops out of combat duties well before the deadline of 2015.

UK defence should have three main aims. The first is to be able to defend the home islands against any possible attack. The second is to make a contribution to expeditionary warfare, peace making and policing through NATO. The third is to ensure maritime protection of our main trade routes and our overseas territories and less powerful friends.

Defending the UK requires a nuclear deterrent, as all three main political parties believe. It requires a substantial navy with air protection, to ensure that no-one can threaten invasion by sea or air. Modern defence may come to rely more on unmanned weaponry and on smart and stealth weapon systems. The UK should retain its involvement in the development of sophisticated weapons systems that rely less on men and women risking their lives to offer credible defence.

The second and third also require a substantial navy with air support. The expeditionary capability requires a mixture of carrier based task forces with possible long distance air support operating from appropriate bases. Maritime patrolling relies on sufficient ships, sometimes needing carrier assistance,sometimes just needing helicopters carried on board smaller vessels.

Of course a highly professional and well trained army with special forces is also important. The army units provide the core of any Uk defence on land, and provide the bulk of the fighting force taken on any expedition. It is difficult to see why we still need an army of 20,000 in Germany as part of this pattern.

These issues need to be thought through before the question of money comes up. Fortunately the defence budget is one of the smaller ones, and the overall level of public sepnding is rising, so it should be possible to support strong defences for the UK built around a realistic view of what we can and should do.

Today we are told that Mr Miliband will show some humility. He will tell us he understands how angry we are that Labour said they had abolished boom and bust.

He should wake up and understand that what made people angry was not the soundbite – that was just silly. What made people angry was the huge boom and bust Labour presided over and helped engineer. They wish to blame the global economy and the US credit crunch, but the UK credit crunch was made in Britain by British Regulators and by the Bank of England under the supervision of Labour Chancellors. Northern Rock, Bradford and Bingley, HBOS and Alliance and Leicester were UK banks supervised by Mr Brown’s very own design of banking regulator

To please his audience Mr Miliband will say Labour were wrong to go for a deregulated City. This remains one of Labour’s biggest lies or misunderstandings. The City was more regulated in 2007 than in 1997. Mr Brown set up an independent banking regulator, kept the Bank of England involved, and made the Chancellor the Chief Regulator of the whole structure. He introduced extensive mortgage regulation which regulated the wrong things. All his regulators, far greater in number and better paid than in the 1990s, got the main judgement call wrong. They did not control cash and capital sensibly, and allowed a boom. They then controlled money too fiercely, and brought on a bigger bust.

That is what Mr Miliband should apologise for. Don’t hold your breath.

Last week on Question Time I still had to rebut the Labour lie that I advocated the scrapping of regulation of mortgage banks, when the Report I wrote for the Conservatives warned of excess credit and said they should regulate cash and capital more tightly. It turned out to be correct that their box ticking mortgage regulation failed to stop the worst mortgage crisis in our history.

Mr Bean lectures the prudent, the savers, that they must go out and spend more. He tells us the whole point of providing practically no return on our desposits and savings is to persuade us to spend more.

Doesn’t Mr Bean – or the Bank – realise that the UK has a treble deficit problem. It’s not just the public sector that has borrowed too much. In the boom years individuals borrowed too much as well. We are all collectively embarked on cutting the mortgage and putting some more money into savings and pensions. We also have a balance of payments deficit. We need to export more and import less.

Consumers might spend more if they got a better return on their savings and had more savings income. With the current cripplingly low level of savings income people are saving more to try to compensate. As house prices fall, people become more alarmed by the level of the mortgage. Mr Bean doesn’t understand human nature, let alone economics.

David Miliband’s refusal to answer the simple question, does he want to be in Shadow Cabinet, is a distraction Ed Miliband could do without. Mr David’s carefully contrived soundbite that he does not wish to distract from Ed’s day and week achieves the opposite of what it says.

If Mr David wants to help his brother he should make a simple statement that he will support him in any way the new Leader chooses, and will – or will not – be running for Shadow Cabinet. It is difficult to see why people think he would make a good new Head of the IMF. I seem to remember Mr Davidf Miliband supported all of Mr Brown’s disastrous economic policies which got the UK economy and banks into such a mess. The world does not need more of such misjudgment. I do not recall Mr Miliband warning against the credit boom, nor warning that the authorities then overdid the bust.

A combination of Corporation Tax, 50% income tax on higher incomes and 28% captial gains tax was always going to put some people off coming to the UK. The question was how many would it also send away.

Yesterday one of our large companies, Wolseley, announced it was going to the Channel Islands and Switzerland to get away from UK tax rates and the Inland Revenue. It follows Shire and Ineos, and various investment businesses. It should have come as no surprise, as some of us have been warning for some time that the UK is no longer tax competitive. It’s a footloose world out there for entrepreneurs and businesses. Other jurisdictions now are friendlier and set lower tax rates than we do, so people and companies take up their offers.

The British political class is indulging in one of its phases of moralising and bashing anyone with a bit more money than the neighbours. We are told they should not seek to minimise their tax bills. They should stay here and help the country pay off its debts. They may not be easily persuaded.

All this would be easier to sell if the political classes themselves sought to maximise their own tax bills. There have been cases of prominent Labour, Lib Dem and Conservative MPs, peers and donors who have taken good advice to lower their tax bills legally. I see nothing wrong with them doing that, but the parties should not then turn round and tell people taking sensible precautions to keep their own tax down that such an approach is unpatriotic, immoral or worse. Most sensible people seek to reduce their tax bills by legal means. The government itself encourages that with its tax shelters for National Savings, pension investment, ISAs, charitable giving, family gifts seven years before death and the like.

I found myself agreeing with Mr Darling yesterday. He said that it would be increasingly difficult to collect more tax from income and profits, as successful people and businesses will simply shift tax jurisdiction if the UK puts up its rates. He might have added the way to increase the UK tax take from the rich and successful is simple – cut the rates, then more will want to come here and stay here.

Throughout all my time in UK politics public expenditure has grown. It has grown in cash terms, and in real terms after allowing for inflation. Whenever we have had a Conservative government Labour has campaigned endlessly about cuts, and has left the impression that total spending was falling when it was rising.

Today we have all three main political parties talking about deep cuts. Yet if you read the Budget forecasts for public spending they show that in every year in the period 2009-2015 public spending will go up in cash terms. Current spending will go up by £90 billion over the period, and current and capital spending combined will go up by £70 billion. There will be a substantial cut in capital spend. The capital cuts were the ones Labour incorporated into their Budget plans just before losing office.

The figures are:

Current public spending 2009-10 £600b
2010-11 £637b
2011-12 £651b
2012-13 £664b
2012-14 £679b
2014-15 £693b

Labour’s case is that these increases in public spending require deep and damaging real cuts. That will only be true if wages and costs in the public sector shoot up by more than 15% over the time period, or if debt interest surges and eclipses everything else. If the Bank gets inflation down to 2% and keeps it there as it is meant to do, there will be small real increases in public spending over the five years on these numbers. They go on to say that they want to slow down the path of deficit reduction. In other words they don’t think we are borrowing enough. They would like more of our tax money to be spent on debt interest.

With tight but rising numbers like these the emphasis has to be on keeping all public sector costs down so the extra money goes further and does not just get absorbed into rising wages and prices. To control debt interest the government does need to reassure markets by showing it is bringing the borrowing under control. It can also avoid a big surge in debt payments by selling more assets to pay for some of the shortfall.

It is difficult to argue sensibly that the pace of deficit reduction is too rapid. On the Budget figures the government will borrow an additional 10.1% of National Income this year, a further 7.5% in 2011-12, and an additional 5.5% in 2012-13. These are huge figures. Our total government debt (measured on the Treaty basis in the Red Book) rises from 79% of GDP in 2012-11, to 84% in 2011-12 and to 86% in 2012-13. Labour’s plans to have a larger deficit for longer would make these bad figures even worse, run the risk of losing confidence in UK government debt which would increase interest rates, and would absorb even more of our tax revenue in paying debt interest.

The Coalition said it would cut the deficit by relying on lower spending for 80% of the deficit reduction and higher taxes for 20%. However, in the first three years of the programme higher taxes do more of the work. 41% of deficit reduction this year, 43% next year and 36% the year after is carried out by higher taxes. The government has to be careful lest its higher rates of Income and Capital Gains Tax result in lower rather than higher revenues, and reduce the growth rate which is important to success.

So why then is there talk of cuts at all? The first reason is the government inherited wildly optimistic plans for increased spending, which have to be cut back to produce a credible budget. The second is Whitehall’s reluctance to accept they can keep costs down and do more for less in core areas. The third is the sensible wish to cut out things that are less desirable or unwanted, from ID cards through regional government to a host of quangos.

The main reason is the continuing absurd political debate we have continuously in the UK about cuts, with parades of inappropriate, worrying or plain wrong cuts in spending in substitute for good public sector management. It was always thus. The figures are more reassuring than the language.

The Coalition government should start to change the way it presents all this. It is worrying some people needlessly about their public services, and it is allowing bad public sector managers to get away with frightening people about the impact of revenue numbers which any business would regard as acceptable and capable of decent management. I see no need for cuts in any public service that matters on these figures. I also expect that when we get to the last two years of the period the government will increase its spending plans still more, as an election draws near.

It was bound to be Ed, as this site has said throughout the contest. I send him congratulations on his victory.

The task ahead is to answer some of the country’s questions about what went wrong in the last five years. Why, for example, did Labour’s very own system for regulating banks and other financial institutions get it so wrong, allowing such growth of risk and credit up to 2007? Why did they then get it wrong the other way, forcing such a tough pace of contraction that even Northern Rock, their favourite bank, got into difficulty? Why did they commit such huge sums of taxpayers money to rescue by buying shares and underwriting, when a more sensible money policy and lender of last resort actions coupled with sales of assets would have been a cheaper way of avoiding deposit losses for taxpayers?

They also need to answer how they managed to spend so much in the public sector, and borrow so much, without obtaining the big improvements in public services people wanted? How did they preside over 5 million people out of work and on benefit even at the height of the boom? Why did all the spending and borrowing fail to keep the economy going as they promised?

The test for Mr Miliband is whether he is indeed Red Ed, keen just to argue for more public spending and borrowing come what may, or whether he will develop a reform agenda. Will he recognise that the Labour model went wrong? That many voters want something different and better? That Labour needs to have a message for people of enterprise and for savers as well?

It will be interesting to watch how it develops. I expect Mr Miliband to seek to move back from the left now he has won the leadership. The government should not underestimate him. He is a modern politician who has risen without trace and has put little of his views on the record. It will get more competitive from here – only Mr Balls has shown much aggression so far from the Opposition benches, making it easier for Ministers.

It was good yesterday to wake up to a front page splash saying there will be a substantial cull of quangos. It was even better to hear that the Cabinet Secretary is launching a leak enquiry, implying it was a serious leak and there is substance behind the story.

Labour in Opposition in the 1990s attacked quangos. They rightly thought then that there were too many, that they were increasing in size and power too rapidly, and they needed to be diminished. In government they went the other way, soon abandoning any pretence that they wanted fewer and leaner quangos. Instead every problem had a piece of legislation and a quango or two as the answer. They expanded the number, budgets and powers way beyond anything undertaken by their predecessors in office.

Today the new Coalition government seems to grasp that quangos are the soft underbelly of the overextended state. They are often a needless or excessive layer of government. If a quango has a budget to spend on something worthwhile, let it be spent by the Ministers and officials of Whitehall or the Councillors and officers of Town Hall whose salaries we are already paying. We do not need another bunch of officials to supervise it. If its spending is at best marginal and at worst a waste of money, then close the budget as well as the quango.

If there is overlap, merge and reduce the amagamated overhead. If the quango has some independent regulatory function make sure it is doing it well, efficiently, and that it is a necessary function.

We set out this approach to quango reduction in the Economic Policy review. We saw it as complementary work to deregulation, as often the deregulation initiaitive produced areas of regulation organised by quangos that could be abolished together.

The quango state has allowed the multiplication of Chief Executives and senior executive personnel, large expenditures on corporate overheads, consultants, logo making, marketing and advertising. It has created shadow taxation regimes as people and businesses are charged ever higher fees for the services and regulatory clearances they have to take from the quango state. It is high time there was a good reveiw of how much of this is necessary, and a concerted effort to cut the overhead. If government can do more for less anywhere easily, it must be in quangoland. If government should do less for much less in any area, it is also in quangoland.