Adam Smith Institute

In the policy world you keep your ear to the ground and still things gallop up unannounced. One such is David Cameron’s ‘Chapter 11’ proposal. It certainly didn’t arrive through long rounds of brainstorming. More likely it came off a long list of squibs that CCHQ keep in order to keep DC in the news every week.

Still, it’s not a wholly bad idea, and the timing is excellent, since the UK economy is shot to pieces and lots more people will be going bust pretty soon.

The idea of Chapter 11 is that individuals and firms who are facing bankruptcy are allowed to keep control of their assets provided they have a recovery plan. Does it work? Well, most of the high-profile cases have been airlines. Sure, it has staved off the instant shock of an airline collapsing, but it’s not obvious that it has really changed what would have happened anyway. Some Chapter 11 filers (Northwest and Delta) have merged, some (ATA) still failed, some (United) limp along, hobbled with debt. In the UK, by contrast, we have competition red in tooth and claw, and the threat of failure is all too real. And yes, weak airlines go bust. But it makes the competition so strong that cost-conscious airlines like Ryanair and Easyjet are becoming dominant. America’s airlines still look fat and bloated.

The UK bankruptcy problem, though, is local councils and HM Revenue & Customs. The former try to bankrupt people for unpaid Council Tax of just £1200. The latter are far too willing to force a firm into bankruptcy – no doubt pocketing a fat bonus for the tax they collect – rather than help them through the hard times that years of reckless economic policy have caused. It's all a matter of incentives, Dave.

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