Both the outgoing Labour government and the incoming Coalition government pledged to make work worthwhile. Both agreed that the best kind of spending cut was a cut in welfare benefits because out of work people had found worthwhile jobs.

Some opponents  unfairly quip that Conservatives want tax cuts for the rich and benefit cuts for the poor. They claim that Conservatives think the rich need incentives and the poor need pressures to earn. The truth is kinder and more prosaic. Conservatives want tax cuts for people at all income levels. We want tax rates that mean the rich pay more, and tax rates which mean the poor pay less. Indeed, the Coalition government with the agreement of both parties in it  has driven hard to exempt the first £10,000 of income from all Income Tax, and will doubtless get there soon. Imposing a zero rate for lower incomes is a sign that the government  wants people on low incomes  to pay no tax, not that they wish to penalise them.

There remains the more difficult issue of benefits, which has taxed governments of all persuasions. Labour in office has agreed with means testing benefits, and agreed that getting people into work is designed to get them off benefits. The Coalition government, determined to make it more worthwhile to work, then increased out of work benefits by more than twice the rate of increase of pay this year, which has set back the task of making it more worthwhile working.

The problem with means tested benefits is they have to be withdrawn, and the act of withdrawal recreates disincentives to work harder or at all. Most people agree that if you move from unemployment to working, you should lose some of the benefits the government is paying you when out of work with no income. Most people agreee that it is a nonsense to pay benefits to people with good incomes, or with substantial savings and other resources. The nice question is how do you get from benefit dependence to self support without creating a large disincentive?

You can either have a few people facing a high rate of withdrawal of benefit, the sharp cliff approach, or a lot of people facing a less dramatic rate of  reduction of benefit as it is taken away more gently. If the range of income that faces benefit withdrawal also attracts standard rate income tax, then the combined rate of tax and benefit withdrawal can be high and can act as a disincentive.

There is no way of avoiding one or other of these approaches to benefit withdrawal. The more people that can be exempted from Income tax the better, as then the benefit withdrawal loss is not compounded  by income tax loss. There has not been enough study of what rate of benefit withdrawal is possible without acting as a major deterrent to working for an income. Those settling the rates of withdrawal have to bear in mind the costs of getting to work as well as the loss of state income. The  simple truth is that all income levels the system works best if there is a fair and substantial incentive to work more, work smarter or work at all.

 

              When the government announced its two year pay freeze I asked some questions and pointed out that different departments had different ideas about what constituted a pay freeze. Whilst some thought it meant not paying individuals more, others thought individuals could still move up within grades and receive seniority or performance related enhancements. I suggested to Cabinet Office  Ministers they might like to come up with a common definition and enforcement across the civil service.

              Today’s FT reveals that they did not, and explains how some departments are more generous than others. I am in the process of collecting information to write on the general topic of public sector pay, but now find the FT has done some of the work for me which is most revealing. The net result of the pay freeze is public sector pay is increasing at around the same slow rate as private sector pay overall.

 

As the USA presses home its advantage with cheap gas, Germany is countering with cheap coal. The Uk needs to be wary of just how much a march our leading industrial competitors in the west are stealing by going for cheaper energy, to say nothing of all those coal fired power stations being added to the formidable industrial output of China.

The interesting  thing about Germany’s choice is she is doing this despite living within the EU’s complex and expensive emissions regime. The immediate cause of the dash for coal in Germany is the political decision to close the nuclear power stations. There is also the need to provide continuous power back up to Germany’s substantial renewable sector, where power ceases when the wind drops. With Germany in this mood, now would be a good time to review the EU’s legislation in this field to see if it is still needed or if it still appropriate to modern conditions.

Just how green is say offshore  wind power if you need back up stations burning fossil fuels? How much energy does it take to construct the offshore  wind farms in the first place? At what point does the cost of power become so high that high energy using industries switch from us to parts of the world keen to burn more and more cheap fossil fuel to win?

The Uk has particular need of cheaper energy for two reasons. The first is the government’s pledged strategy of an industry and export led revival. It will take cheaper energy to keep some of the high energy using industries we have, like steel,ceramics, chemicals, aluminium and glass. It will need cheaper energy to encourage more industries here, and to help give them more of   a competitive edge.

The second is the need to end the squeeze on the consumer. Real incomes have been under the cosh since 2008. A combination of tax rises and price rises has left most consumers with insufficient income to maintain or expand their living standards. The Bank has promised us success at last in getting price rises down below earnings growth. The latest fare, fuel and food price rises threaten this happy forecast.

 

Here’s a Coalition policy many of you will agree with!  They have said they intend to cut the costs of the administrative overhead in each department of government by 30% over the planned five years of this Parliament. This either cuts the deficit or pays for more useful spending. The issue is, how are they getting on with implementing it?

Much of the overhead is the pay bill for officials and quango administrators.  I thought I would have a look to see how some departments are getting on. I started with the two I thought would be the most reluctant to get on with this policy.

Energy and Climate Change show that they had 2724 employees in 2010-11. This had risen to 2914 in 2011-12, an increase of 190 or 7%.   This was despite giving 118 people exit packages in 2010-11 at a cost of £6.9 m to the taxpayer, and  23 exit packages in 2011-12 at a further cost of £802,000.

The Department for International Development  says its 1568 employees at March 2011 had risen to 1655 by March 2012, a rise of 97 or 6.2%.  Elsewhere in its annual report, it says its 2372 employees in 2011 had risen to 2449 by 2012. Either way, there was an increase. This was despite  offering 70 people exit packages at a cost of £3.5 m to the taxpayer in 2011-12.

Over at the Department for Environment, Food and Rural Affairs there has been a bit more success in cutting numbers. Total employee numbers are down from 26,925 in 2010-11 to 24,955 in 2011-12, a fall of 1970 or 7.3%.  This is after agreeing 2194 exit packages at a cost of £89.3 million.

You would have thought the obvious way to get numbers down would be using natural wastage. It should be possible to cut the workforce by  say 5% per annum without having to agree any voluntary severance programmes, simply by freezing most recruitment and promoting internally where appropriate and necessary. This would still leave scope to replace some other leavers with special skills or in special categories. We have read recently that leaving rates are currently high in the civil service, at over 9%.

It does seem that some government departments are off the pace on cutting their overhead, failing to bring staff numbers into line with the new realities. It also seems that some departments are delivering what reductions they are achieving the most expensive way, by agreeing generous pay offs to volunteers to go. That can be a way to lose some of your brightest and best people who are employable elsewhere and like the idea of a lump sum to go. It would be good to hear from Ministers  how they think government as a whole is getting on with this interesting policy.

I have recently been sent a copy of this interesting private email  from Dr Spendlove of Special Projects  to his civil service boss  Dame Lucy Doolittle:

 

Dear Lucy,

             I think your memo asking us to find ways of co-operating with Labour in opposition to avoid the U turns and difficulties the Coalition government have experienced was a stroke of genius. I am so glad you persuaded me to stay on after the 2010 election when I was down in the dumps. 

          Your suggestion reminds people of all the mistakes of the Coalition politicians where they failed to listen to our good advice. Those failures did lead to a series of policy reversals, most notably with the latest budget, as with the sale of forests.  It also  implies that serious people in the civil service  do not think they can win again, without being in any way disloyal.  The civil service is at its best when it is loyal but prudent, working with our current masters but planning  an orderly transition should that be the people’s wish. We do need to begin a serious process of preparing them for power, as some in Labour will also wish to rewrite the rules of government which have been so carefully constructed here at home with the help of the EU. They need to know in advance there is little scope for manoeuvre in the circumstances.

          Meanwhile I am sure you are alert to outstanding business with the Coalition. Now we have succeeded in implementing our plan of public spending  rises in cash and real terms in the first two years of the Coalition, the difficult years, we need to ensure that Ministers do not now implement the damaging cuts we have dissuaded them from so far. We left some very tight numbers in the more distant years in 2010. We now need to explain the political wisdom of quietly moving away from those. There is renewed interest in growth, and we can suggest to Ministers cuts now would not help it. All Ministers, will I am  sure see the dangers of unpopular cuts ahead of an election. It was a nice touch to make sure official figures for the economy take full account of the likelihood that reduced levels of public spending  growth have already damaged output. We can adjust them upwards later should it clearly emerge we have been  a bit too cautious.

        We need to be aware of a new stridency in the Conservative party over European matters. We need to ensure they are not able to opt of all those excellent Criminal Justice measures in the EU that we have helped create. There should be a majority in the current Parliament to keep them, and Labour will I am sure be understanding. I would be happy to be a secondee to Labour, as working with them might improve our mutual understanding on these sensitive issues. We also have a duty to brief Ministers of the importance of not trying to disrupt this autumn’s complex negotiations on  keeping the Euro together with any demands for the UK to get powers back or have a looser relationship. This  would be seen as very unhelpful by our partners and lead to a further loss of UK influence, which is bad enough thanks to our position on the Euro and banking matters.

          I am pleased to report that several of our former colleagues have found good jobs in consultancies and other private sector areas where they can use their wisdom and skills well. They tell me it is not too bad out there, and they of course do have the nice advantage of the generous compensation Ministers so thoughtfully provided when we explained to them the complexities of their plans to slim down the civil service. I fear we will need to make more use of outside help again, now we have lost so much talent through the voluntary redundancy programmes.

 

Yours in hope of a new assignment

 

Roy

 

 

           Yesterday the Today programme ran an interview with an IMF spokeswoman who told us cutting a deficit at the wrong time could be self defeating. She  was asked by Mr Davis if we cut £1 of deficit how much economic output would fall. She said it could do 6-10 times as much damage. He pressed her to give actual percentage figures. She said if the deficit was cut by 1% output might fall by 0.5% in a good case, but could fall as much as 2% in a bad case if the economy was already weak.

           At this point the interview should have become interesting. Surely sharp Mr Davis would ask why she had scaled her 6-10 times back to four times  with just one additional  question? Would he ask what evidence she was using? Which deficit reduction programmes had they examined?  Had she examined the cuts in deficit and spending plans  in the early 1980s and early 1990s in the UK, both of which led to good recoveries? Could she explain why Sweden had grown so well since the 1990 cuts? Why did the new Scandinavian model where growth is faster  rely on much lower public deficits than the UK or Greece?  Why do all IMF programmes demand cuts in spending and tax rises, if they now think this cuts national income? Why did they impose such cuts on Greece at a time when its economy was clearly in free fall, if they now think this will make it worse?

          Instead he let her go on to assert that cutting people’s benefits and pensions would be much better than cutting other types of public spending. He might have asked her how cutting people’s spending and general demand would help, where cutting civil service salaries would not, but failed to do so.

          No-one was invited on to debate with her, no-one was interviewed to provide balance. Surely if the BBC regards such a person as an expert they should be asked tougher questions about their research, what numbers they have produced, and why they think it is right? The interview was remarkable for giving us no actual figures or any country experience.

          Meanwhile the UK state debt goes on up and up. Are there no limits to taking on debt? Why is borrowing an extra £10 bn a month an insufficient deficit? Why does it lead to the economy declining? How would borrowing say £15 bn a month provide growth?

           Labour inherited a state debt of £290.3 billion (outstanding gilts) in 1997.  This rose to £355.5 bn by 2005, an increase of 22.5%.  By March  2008 it was up to £478.8 bn (before the Credit Crunch crisis hit fully), an increase of 65% from 1997. By March 2010, just before Labour left office, it was at £913.5bn. This took Labour’s increase in the state debt to £623bn over 13 years, or an increase of 214.7%. I am excluding all the PFI/PPP and bank debts also incurred.

           The Coalition debt reached £1163.8bn by March 2012, a further increase of £250.3 bn over 2 years, or 27.4% on their inherited base.  This means the debt to GDP ratio (just taking money borrowed via the gilt market) has reached around 77% of GDP.

            However, the Bank of England has bought in £375 bn of this debt, or almost one third of it. If the government simply cancelled this debt, and the Treasury loan to the Bank financing it, UK state debt on this number would fall to £788 bn or around 52% of GDP, a more modest proportion by modern government standards.

            The government  is not rushing to cancel this debt. No doubt it is worried how such a course of action would be perceived by the markets and media. It has four options for its quantitative easing programme:

1. Carry on with more of it. It keeps the rate of interest on government debt at very low levels, making the government’s excess spending seem affordable.  

2. Stop new quantitative easing, but leave the purchased bonds with the Bank of England. As individual bonds are paid back, the Bank would reinvest the money in other gilts from the market, keeping the QE amounts intact.

3. Allow the repayments of gilts that occur to reduce the amount of gilt edged stock owned by the Bank over time, gradually working it out of the system.

4. Sell the Bank’s gilts back to the market, to recoup the created money from the system.

Memo:   Between 1992-3 and 1999-2000 Cyclically adjusted UK net government borrowing was slashed from 5.5% of national output to -1.1%, a turnround of 6.6%, and the economy expanded by around 3% per annum

Between 1980-81 and 1982-3  Cyclically adjusted net borrowing was cut from 3.4% of GDP to -1.4%, a reversal of 4.5%. The economy started to grow As the programme was completed and grew continuously until the ERM disaster at the start of the next decade.

 

Conversely, large increases in the Cyclically adjusted net borrowing occurred piror to the mid 1970s slump and IMF visit, and prior to the Credit Crunch of 2008-9.

 

               That was quite a storm. After years of rising standards, with each year showing an improvement, we reach a year when fewer young people are awarded A* to C grades.

                Some  teachers complain that good pupils have been marked down. They say that if they had been told what the new higher standards were, they would have prepared their pupils to achieve them. They say the marking has been too tough. It was, of course, teachers undertaking the marking, with other teachers advising the Exam Boards on the papers and the marking system.

                Other teachers say it is important to arrest grade inflation. They think it had become too easy to get an A or A*. They hope this latest set of results marks a turning point in establishing and maintaining standards of achievement.

                There seems to be some uncertainty about whether the current system is trying to establish an absolute standard of achievement which stays the same year after year, or whether they wish to have a similar proportion getting higher grades each year by fixing the pass mark through keeping the proportions of the different grades the same.

                 It is unfair on those taking the exams if they do not know what is expected, or if the standards change between the time they start and the time they finish without them knowing it. It is particularly unfair if  someone needs a C or higher in a GCSE to go on to further study, and has just failed to get this through some unannounced change in the standard required.

                  A case can be made for a different approach to exams, and reconsideration of what is expected. Some older people who did O levels think a return to their virtues could help. I am not  sure. O levels required a lot of learning by rote, where the information is now easily available to anyone who wants to look it up. O levels did also require some different levels of thought and attainment from GCSE, which might be worth considering as part of a new GCSE syllabus. Some GSCE syllabuses include items which are good additions to the old O level.

                 I am myself now unsure of what is going on and what is needed for 16 year old qualifications. To do well in the 6th form students should need some basic knowledge, good skills in maths, English and foreign languages depending on their choice of 6th form course, and a capacity to study independently. How far does GCSE prepare young people for that? How could it be improved? I look forward to your views.

 

              I find it difficult to do interviews on the state of the economy. The BBC interviewers all think there have been large cuts in public spending. They want to debate the question should the state spend and borrow more to lift the economy out of recession. I always have to start with explanations of just how much extra the state is spending and borrowing. They cannot point to anyone recommending a  large figure for extra state spending and borrowing,  who thinks deficit reduction is not important. They cannot explain why so much state spending and borrowing so far has not produced the growth most of us want. Under the Coalition government  an expanding state sector has increased national output, but not by enough to offset declines in the private sector.

               I am a strong supporter of the government’s Plan A. That Plan was stated in words. It was to remove the structural deficit by 2015. 80% of the work would be  done through spending cuts, and just 20% through increased tax revenue. It would actively promote a private sector led recovery by supply side measures. That was a good plan, and would probably have worked fine. The trouble is they never implemented that one.

               The embarked on Plan B in their first budget. This kept the sensible idea of eliminating the structural deficit by 2015, but decided to do it by a huge forecast increase in tax revenues, whilst allowing public spending to rise. At the time I suggested the tax forecasts were too optimistic, as the higher rates were always likely to lead to revenue shortfalls.  I also suggested that if they simply froze public spending  for the first year, they would borrow £160 billion less over the 5 year period of this Parliament. That would have given them more leeway and help secure success. They opted for a plan which proposed borrowing an extra £451 bn over five years instead, to allow a substantial spending  rise in the first year.

               Now we are on Plan C. Plan C delays eliminating the structural deficit until 2017 or later. It is seeking to reinstate some of the cuts in public capital spending made by Labour and included  in Plan B. It recognises that revenue will be lower than forecast in Plan B. It is, if you like, a massive fiscal stimulus plan, based on borrowing  £556 billion  extra between 2010 and 2015. Latest figures imply they may well add additional fiscal stimulus to this package, as so far this year they have borrowed £9 billion more than budget. How much more borrowing do the additional  fiscal stimulus enthusiasts think it takes? Why hasn’t the huge fiscal stimulus administered by the current large structural deficit done the job?

           State borrowing is simply deferred taxation. It all has to be paid back, with interest, by taxpayers. Too much deferred taxation is as damaging to enterprise, incomes and prosperity as taxation itself. The government has increased planned borrowing by £105 bn for the period of this Parliament when shifting from Plan B (Budget 2010) to Plan C (budget 2012).  How much more deferred tax do people want?  This autumn will probably see a further rise in the official forecasts for the borrowing total.

 

              People on this site love to knock the Coalition. As host I don’t censor  your criticisms  or even censure you  for doing so.

              In the interests of democratic debate and fair presentation, I thought today I would ask if any of you did like some of the things the Coalition has done. Someone the other day said they did like the ending of the M4 Bus lane, and the abolition of Home Information packs, though they would have liked the Energy reports to have gone as well. I agree that I thought those two items were good.

              I might add that I have  liked the ending of long detention without trial or charge, the increase in Income Tax personal allowances (any income tax cut is a good thing), the cap on Housing benefit claims, the stated intention to get the deficit down, the one million new jobs which the private sector has generated so far and the veto on the new financial Treaty to stop the UK being dragged into it.  Abolishing the South East England Development Agency was also a good moment. Some of you are doubtless benefitting from the more generous state pension payments.

                  On Monday the Times published a list of 50 areas where they expected disagreement between Lib Dems and Conservatives in the Coalition. They asserted that many Conservative Ministers have come to the conclusion I advanced at the outset, that a minority Conservative government would be easier. Then  people could see which things the Lib Dems blocked in Parliamentary votes.

             However, the Times  list did not always reflect the feelings of the respective parties and made more of the disagreements in some cases  than is warranted. They argued, for example that Conservatives were against sorting out the lop sided extradition arrangements with the USA, when many of us have pressed Mrs May to do just that. They say Conservatives want to hold internet service information for police use, when many of us are worried about the impact of that on freedom. They suggest Conservatives are keen to push up rail fares – not the ones I know. They argue the Lib Dems want income tax cuts. I can assure you so do Conservatives.  They see Conservatives as resisting bank reform. Many of us have been going hoarse demanding it. The picture is more complex than the Times suggests. Their list also repeated items to make it look longer. 

           The one major area where the difference is large and important is over the EU. Several of the items related to EU powers and policies, where there is one Eurosceptic party and one pro EU party in the coalition.

 

                  The July  figures for public borrowing were disappointing.  The government borrowed an additional £600m in a month when revenues are traditionally strong. The deficit in July 2012 was  £3.4 billion higher than in 2011.

                    There are two very simple reasons why borrowing was up. The first is  a fall in tax revenues.  They collected £0.4 billion or 0.8% less than in July 2011 in cash terms. Allowing for the current inflation rate of 3.2% (RPI) this is a considerable real fall.

                    The second is the continuing growth in spending.  Current spending was £2.4 billion or 5.1% higher than in July 2011. It confirms the pattern of considerable real increases in current public spending, even after allowing for 3.2% inflation. Given the  fact that a public sector pay squeeze is in place, the real increase should be more than this implies. Government investment spending also rose by £0.6bn or 33% on the low July 2011 base.

                     If  the government keeps increasing spending at this rate, there will be too much borrowing. Tax revenues from  self assessment income tax  and capital gains tax are falling because the government has set uncompetitive rates. The Chancellor wisely changed his tax regime for oil and gas in the latest budget, following the fall off in activity  last year from higher taxes. He needs to review all taxes with a view of maximising revenues by setting competitive rates.