Category: Blog

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.

For most of this week the media have been wanting me to “hit out” at Vince Cable’s attacks on unbridled capitalism.

There seemed no point. Mr Cable was speaking to the Lib Dem conference. He obviously thought anti capitalist words would make him the conference darling. I had no wish to be party pooper. As I patiently explained to disappointed journalists, I could see no policy recommendaitons in what he was saying that alarmed me. A consultation on how we can have more competitive markets and more engaged shareholders need not frighten the enterprising horses. I was also aware that I would have to answer about his remarks on Question Time.

If you ask what has capitalism done for Mr Cable, you might mention it has provided his breakfast, his lunch, his dinner, his suit, his tie, his shirt, his home, his car, and the tax revenue to pay for public services. If you ask where the most rigged and damaged markets are, they lie in areas where government intervenes or controls too much.

I look forward to Mr Cable adding his voice to those of us who want competition to work its magic more extensively in the water industry, in broadcasting and media, in railways and in banking – all areas with nationalised industries, heavy government regulation and state ownership.

This week’s public spending and borrowing figures do not make happy reading in the UK. In August 2010, four months after the arrival of a Coalition government which made “immediate cuts”, public spending in the month was 11% higher than a year earlier. It just goes to show how much dynamic growth the last government had injected into UK public sector spending.

The figures for those who believe all the stories of cuts are on the Treasury website, and show current public spending at £49.8 billion for August 2010, compared to £44.9 billion for 2009, an increase of almost £5 billion. £1.7 billion was a general increase in spending, £0.8 billion went on extra benefit payments, and £2.5 billion on additonal debt interest. The high rate of inflation does not help, as some of the debt is inflation linked. The increase in public spending was more than three times the government’s published rate of inflation.

Ministers are, as reported, locked in discussions about how to reduce inherited budgets and programmes. The worry is that debt interest will absorb too much of the £90 billion of spending increases allowed for in the five year budget announced this summer. The more of the increase debt interest takes up, the less of the spending increase is available for departments and worthwhile programmes.

Central to making a success of the spending round is to curb inflation. If the government and Bank get inflation down and keep it down, there is no need to offer inflationary wage awards to employees, or to uprate benefits so much to keep up with the inflation. Removing inflationary pressure would leave much more of the £90 billion increase for improving public services. It would also relieve some of the pressure on the debt interest programme by cutting the amount the government has to pay holders of inflation linked bonds.

Meanwhile The Bank is making more noises about printing money to boost the economy. This in the short term helps as it lowers the interest rate the government has to pay for its borrowings. It is, however, vitally important to the success of the public spending strategy that the Bank takes it inflation duties seriously and gets inflation down to low levels. That is the best way to manage public spending well, avoiding cuts in services that matter within the £90 billion increase allowed.

Warwick Lightfoot is publishing “Sorry we have no money: Britain’s economic problem” (Searching Finances 2010) to argue the case that any country which allows public spending to go above 35% of National Income will grow less quickly and will be less well off than one which keeps control of its public spending. His wish to see our current proportion of public spending much lower is shared by all three political parties, though none of them have yet been so bold as to propose his resting place of 35%.

He quotes sources to suggest that the increases in public spending under the last Labour government cut the UK growth rate by between 0.5% and 1% each year. He reminds us of the Bacon and Eltis thesis from the 1970s, which stated clearly than excessively high levels of public spending in relation to National Income can hold an economy back, damage its abiltiy to generate jobs and serve customers in the private sector, and undermines the tax base. It leads to the problem of “too few producers”. High levels of public spending imply high levels of taxation and borrowing, which is just deferred taxation. This in turn undermines competitiveness, persuades people to set up business elsewhere or puts them off setting up altogether, and makes it diffiicutllt for established companies to compete well.

Mr Lightfoot reminds his readers that public spending in the UK grew at an annual rate of 10.7% in cash terms between 1970 and 1996. In the lower inflation era that followed Labour pushed public spending up by 6.3% a year. The present government wishes to slow the pace to 2.1% a year growth in 2009-15. During this long period public spending as a percentage of National Income has fluctuated as widely as 36% and 50%. The highest percentages have been reached during downturns. The best growth rates have often been achieved with the lower proportions of public spending.

The book reminds us that past recoveries have taken place against a background of cutting back on the size and cost of the public sector. The private sector has in the past more than made up the running when this is occurring. In the 1980s the large privatisation programme trimmed total public spending, allowing debt repayment to occur. It also shifted substantial activity from the less productive public sector to a more efficient private sector.

In the last decade the large increases in public spending have been accompanied by declines in productivity. This has increased the drag on UK output and incomes from the surge in public sector employment. Mr Lightfoot thinks economies can become worryingly inflexible and unable to generate jobs and prosperity if public spending rises too high. He fears we have reached that point in some of the UK regions.

This is an interesting and timely book. No elected politician will nail his colours to the mast of public spending at 35% of National Income (as it almost reached in the early Labour years) for fear of Labour playing their usual trick of spelling out lurid cuts to get there. All main party politicians are signed up to Mr Lightfoot’s direction of travel, so they should look at his book to understand a little more why it might be good idea to cut the proportion of public spending in National Income. It is, of course, best done by growing the economy rather than by big cuts – exactly the course this government wishes to see, given its plans to carry on increasing cash public spending.

Left wing politicians always wish to believe there is a crock of gold for the Treasury if only it showed some determination to end tax evasion and tax avoidance. They think these crimes and malpractise are the preserve of the rich. Tackling it more resolutely would be just, as well as filling a black hole in the naitonal accounts.

The first error in this thinking is to assume previous governments have not tried to do just this. Every government spends large sums and employs large staffs to hunt out evasion, and to legislate to make some avoidance illegal.

The second error is to confuse avoidance and evasion, without also considering what the Revenue and Customs themselves describe as “ordinary sensible tax planning”. If Labour want to stop all tax avoidance, they had better start by asking the government to withdraw all its own marketed schemes to urge us to indulge in tax avoidance or “ordinary sensible tax planning”. National Savings has gained a large share of the savings market in the UK for its nationalised product range by offering tax free savings certificates. Savers can legally avoid both income tax and capital gains tax on some of their products.

The Treasury’s policy of allowing income and capital gains tax concessions on savings held through an ISA would also presumably need to be swept away. Is it avoidance to put money into a tax exempt pension fund? Or to pay a donation to a charity, calling on a tax rebate at the same time? Some avoidance is part of a grand plan by government to encourage certain kinds of financial conduct.

The third error is to think the main cuplrits when it comes to the criminal activity of tax evasion are the better off. No sensible accountant, company director, lawyer, or other professional is going to fail to declare income or sales to lower their income tax or VAT bill. They would be likely to be found out, and they would lose a great deal from successful prosecution. Many wish to uphold the rule of law and understand their professional status depends on doing so.

It is people who are less well off who have the opportunity and the motive to indulge in tax evasion, or who might make mistakes with record keeping which result in tax evasion. Electricians, plumbers, jobbing builders, mobile hairdressers, the organisers of the local dance or music classes, market stall holders – anyone handling cash from the public – could forget to declare all the income to the taxman, and could be shy about putting all revenue into the VAT return if they need to make one.

If more action was to be taken against tax evasion it would entail a new level of scrutiny and audit of all these small businesses and events where cash is handled. I think the Revenue get their actions about right in this field. Judging from my correspondence they sometimes overdo the doubts and probing with honest people. As I understand it they have commonsense views of how much a person is likely to be earning from various activities, and look more closely at ones falling well below the average. They follow up tip offs or information sent in alleging evasion. They can examine a person where the gap between lifestyle and declared income seems large.

There is no large crock of gold to be found from a different approach to evasion and avoidance, unless they mean by that the removal of a series of tax allowances and incentives put into tax law to foster certain kinds of conduct. What is true is tax does have a huge impact on our collective conduct. High Stamp duties discourage home sales, capital gains tax puts people off selling investments and buying different ones, and high marginal income tax rates put people off venturing or working harder.

The public spending debate in the media continues apace, with the crucial numbers left out. The debate about defence spending has been one of the most active, presumably because the lobbies in defence have been especially keen to put their views to the media whilst arguments rage within Whitehall.

The meetings at Westminster on this topic have tried to keep up with the ever more lurid portrayals of cuts. The Secretary of State, Liam Fox, has explained in various meetings that many of the stories are unreliable, without being able yet to replace them with accurate guidance based on agreement about the future. The new line in some of the papers is that this Defence Review is proceeding too quickly and will not be thorough enough, yet day after day brings evidence of every stone being overturned.

When I have attended meetings I have asked a couple of simple questions. Will Defence be in receipt of rising sums of cash current spending, given the fact that current public spending overall rises from £600 bn a year to £690 billion 2010-15? What is the scope to buy better, given the many criticisms of past weapons procurement, and the cost overruns on one off designs and some programmes? I can get no answer to these questions. Without an answer it is difficult to have a worthwhile discussion of what might be needed and what can be achieved.

The debate in the newspapers is conducted around the proposition that there will be cuts of 10% in defence spending. Does that mean that current spending will be 10% less by 2015? Does that include the cuts in capital spending as well? We know that by 2015 the Afghanistan war will be over for the UK, so we would expect a saving from that happy release. If we are talking of a five year programme, efficiency and effectiveness improvements and better buying could achieve a cumulative 10% if they run at a modest rate of under 2% a year.

I read some very odd ideas. Apparently an economy could entail selling or mothballing expensive ships we already have in the Navy. Another could involve buying two new aircraft carriers but not many of the planes that were meant to be on them.

Many of our leading retailers regularly cut costs by at least 2% a year. They do not do so by announcing the closure of the bread department, or by failing to stock milk and butter anymore. They do so by working away at doing more for less. The managers and staff do not parade difficult choices over which costs to cut in our daily newspapers. They know they are all in it together.

The Papal visit has become an opportunity or an excuse for the media to ask some fundamental questions about what kind of a country and people we now are.

I was brought up in a constitutional monarchy. The Queen was Head of an established Protestant Church and ceremonial Head of State. The Prime Minister was the elected leader who with his collegaues made most of the important government decisions. The Archbishop of Canterbury with his colleagues ran the Anglican Church at home and abroad. Religious toleration was assured for all those of differing Christian Churches.

This changed markedly with the growth of EU power. Gradually we had a second unelected government making laws and drawing up budgets. The monarch became a citizen of Europe like the rest of us. Parliament was no longer sovereign in areas of competence taken by the EU.

It has also changed somewhat as a result of social change. Many people feel no allegiance to the Anglican Church or to any Christian community. There are now larger communities of people who follow a different faith. There are many who take a secular or atheist view of the world.

The English Reformation was designed to end the authority of Papal courts and law codes in England, to end Papal power and doctrine and to usher in a more flexible expression of clerical power which was answerable to the English courts and above all to the High Court of Parliament.

At a time of flux and change it would be interesting to hear views on whether we are happy to keep our established Protestant Church, whether we should continue to represent it in the House of Lords through automatic seats for leading Bishops, and whether the Anglican Church has struck the right mood and tone in its response to the Papal visit.

This summer I fitted in a weekend visit to some Bordeaux vineyards (at my own expense as part of my holiday before you start to hurl your allegations!). I also visited some English farms, not in my own constituency.

The Bordeaux vineyards show what can be achieved, at the top end, by the vigorous pursuit of quality and improvement, through investment, thought, the application of science and judgement, and the exploitation of world brands inthe ever enlarging glamour end of the global market. The huge crane towering over the tiny property of Le Pin sums up the dramatic impact success at the top of the wine world that serving the mega rich can bring. Mouton Rothschild sports two massive construction cranes, as they too plough back some of the surging revenues from the giddy prices the rich Chinese will now pay for the finest wines. So far the buyers queue at the gates, the higher the prices rise. The best in Bordeaux show that from a very small farm base you can add prodigious value through selection, quality based production and excellent marketing.

My visit to one or two UK farms reminded me even in the UK we still have some relatively small farms struggling to make good money out of arable husbandry. If you are a wheat producer you are competing against the vast prairie farms of the new world, where ever larger and dearer machinery can till, sow and harvest vast acres laid out in mega fields with the minimum of cost. In the Uk we like our small fields and hedgerows, spinneys and lanes. The arable crops are broken up by the much loved features of the landscape and by the patterns of ownership and tenancy.

Which leaves us in the grips of the CAP. Much of what a farmer does is designed to use or draw on an EU subsidy. It distances the farmer from adding value and serving that ever growing and more demanding world market. Farmers do what the subsidy indicates. Green policies promote the idea of farmer as grand landscape gardener, earning money for maintaining various habitats and following prescribed rotations.

The CAP itself has been the object of criticism with demands for reform from successive British governments. Mr Blair said he was surrendering part of the UK’s rebate on contributions to buy us agricultural reform. We have lost a big chunk of the rebate but there is still no sign of reform. The new UK government should demand the follow up promised to Mr Blair. Now would be a good time to see if we can remodel or remove the CAP to give taxpayers a better deal.

Successful farming either applies more machinery and technology to ever larger units to get the economies of scale, of adds more and and more value to the fruits of the land before it leaves the farm gate. The successful Bordeaux chateau show what you can achieve by way of extra revenue if you turn your fruit into an iconic product. Some English farmers are struggling, despite some rises in grain prices, because they face strong global competition from bigger and better invested farms. The CAP is dear to taxpayers, but it cannot make up for all the problems caused by the lie of the land, the size of the holdings and the shortage of capital.