Is this a fiddle in the Autumn Statement?

As we all know, knowledge is local and dispersed. A corollary of this is that you, the readers collectively, will always know more on any specific subject than one single writer on this side of the software. At which point to ask you a question. We've got the BBC telling us that public spending is going to fall to levels not seen since the 1930s. This does seem unlikely: although if we could get government back to the sort of levels of interference in our lives of the 1930s that would be both nice and an achievement.

The Office for Budget Responsibility (OBR) says spending on public services is heading for an 80-year low.

In its report accompanying the Autumn Statement, it projected that spending by central government on public services was going to fall from 21.2% of gross domestic product (GDP) in 2009-10 to 12.6% in 2019-20.

As a proportion of GDP, that would probably take spending on public services to its lowest since the 1930s.

That report is here.

Note that this isn't public spending as a whole: this is nothing to do with pensions or the welfare state or other transfer payments. This is solely what is spent upon public services, not money shuffled from one citizen to another.

And the question is, how important is that word "central" in that calculation?

For example, just imagine we moved NHS funding from its current system to the Swedish or Danish one? There it is, respectively, the counties and the communes that raise and spend the taxation that pays for the health care systems. That money simply doesn't flow through the national treasury nor the central government (which is why Denmark's standard national income tax rate is 3.76% and the top one 15%). We can all think of reasons why this might be better (local accountability, greater efficiency) and possibly some that it might be worse (postcode lottery!). But it's not obvious that there's either less or more government spending on public services in either system: but there's obviously a huge difference (as much as 10% of GDP) in central government spending.

So, of this reduction in central government spending on public services how much is a reduction in government spending on public services and how much is just the movement from central to some other level of government spending?

We could argue that the Scottish and Welsh NHSs, for example, are covered by the Parliament and the Assembly, therefore aren't any longer central government. There's a change coming in the allocation of business rates. As was these were all collected centrally and then apportioned. The new system will see some being retained locally and spent locally: if that a reduction in central spending but not in public spending? As things become devolved do they fall out of central spending but still remain public spending?

In other words, how much of this reduction is not really a reduction, just changes in the budgets that the spending is coming from?

Over to you: and let there be more light than heat.

It’s time the government let adults - even the smokers - grow up

While the under-12s and orchestras hit the jackpot in yesterday's Autumn Statement, tobacco companies were subtly thrown under the bus, as the Chancellor quietly committed to a consultation to determine how much more money tobacco companies should be contributing to public services; a pledge Labour has already signed on to as well. Specifically, the consultation will look at the “introduction of a levy on tobacco manufactures and importers,” which could raise taxes on tobacco companies by millions of pounds a year.

From the Independent:

The tobacco industry should pay for the costs it imposes on British society, the Chancellor has said, signalling that the Government will back a levy on tobacco manufacturers and importers.

In a low-key Autumn Statement announcement, George Osborne committed the Government to a consultation on how tobacco companies could make bigger contributions to the public purse.

Specifically he said:

Smoking imposes costs on society, and the Government believes it is therefore fair to ask the tobacco industry to make a greater contribution.

The Government will shortly launch a consultation on introducing a levy on tobacco manufacturers and importers.

My colleague Ben has just recently addressed these ‘costs on society’ the Chancellor references, and debunked a fair few of them. He also pointed out the known, positive effects of nicotine, and reminded us that, despite all the lies perpetuated around smoking and NHS spending, smokers, on average, take up less health expenditure over their lifetime than non-smokers do.

My two-cents goes something like this: What cost on society? Sure, there’s a cost on the smoker, who will deal with the consequences that come from inhaling all sorts of questionable stuff – but adults get to make those personal decisions and take those risks. All choices have a cost, but in the case of cigarettes, the individual bears the brunt of the consequences; not the public at large.

But more powerful than the adults trying to make decisions about their personal lifestyles is the government, which is treating cigarettes the same way children tend to treat stuffed animals – labelling them with human-characteristics; acting as if objects are inherently bound to be good or bad.

And when it comes to cigarettes, the government has deemed them inherently evil. And it’s the tobacco companies, of course, that are proliferating them (remember, public demand matters very little to paternalists), so naturally, they must be taxed to the death.

But you know who’s really going to suffer when push comes to shove and levies are imposed? Low earners – who probably will, but can't afford to, see cigarette prices rise when the levy comes into play. Because, at the end of the day, these levies aren't coming in to save public health; they're there to save vulnerable public budgets. It's time the government came clean on that—childish, indeed.

Things really are getting better

What are we to make of the UK Autumn Statement? The recovery is stronger than predicted, unemployment has fallen faster than anyone can remember, inflation is lower, interest rates are falling... the government is going into an election with the best economic figures in memory. All of that, the strong pound, growth in the 2-3% range, earnings up, inflation down - all of that should help the Conservatives, come the general election on May 8th.

The deficit is still a problem...bigger than forecast. But interest rates have been kept low, so borrowing has not been a strain: the bond markets have not been spooked.

As for the next election – and the Autumn Statement is very much a political thing – it looks like a large number of MPS, maybe 80 or more,, will be neither Conservative nor Labour, a big change on previous governments. The worst prospect is for a government with several coalition partners. One coalition partner is manageable – two or three, not so.

An unstable coalition partnership of several parties would be a disaster. The markets would just go into a tailspin. Ho hum. Right now, the government is benefiting from ultra-low interest rates. Again, if that does not last - and how can it - things might look much messier. The Conservatives want to cut public spending to more like 35% of GDP, the lowest it has been in decades. But if there is a complicated coalition arrangement, that is a no-hoper.

The eurozone remains the biggest trhreat to the UK. It is flatlining, going nowhere. That is one reason why the Office for Budget Responsibility has downgraded its growth forecast.

The bad news is that those on low income have seen almost no rise in their earnings since the financial crash. Those on top incomes have seen wages rise 20%. This is not a very even recovery.

Meanwhile, people have been lured off benefits and into jobs, thanks to the rise in tax thresholds that the Adam Smith Institute was promoting long before the Liberal Democrats thought about it – isn't it crazy that folk on the minimum wage should pay tax at all?

Ho hum, indeed. It's the economy, stupid. The Tories should have done a lot more to balance the books. But they may have done enough to convince us that things really are getting better.

Osborne scraps the worst tax in Britain – the ASI's reaction to the Autumn Statement

Here are our comments on today's Autumn Statement: Stamp duty:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

The old stamp duty slab system was one of the worst taxes Britain had, and we welcome the Chancellor's radicalism in abolishing it, rather than simply tinkering around the edges.

According to the best economic research, raising £1 through stamp duty imposes £2-£5 of cost on the economy. Though it will still, as a transactions tax, cost the economy heavily, the reform will reduce the economic cost substantially. This is a tax cut for the squeezed middle that will make a big difference to a lot of people's lives. Politically, it could be a game-changer.

Business rates:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

A cap on business rate rises is welcome but the rates system itself needs more fundamental reform. The longer rates take to be revalued, the more distortionary the system is, penalising firms located in areas that have done badly since the last valuation. The longer the gap between rates revaluations, the greater the penalty for businesses in poorer areas and the effective subsidy for businesses in richer ones. Ideally the government should move towards a system of constantly rolling rates revaluations. If Zoopla can judge land values accurately on a rolling basis, so can HM Treasury.

Road infrastructure:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Infrastructure investment, especially into congested roads, is bound to pass a cost-benefit analysis. The problem is that we had to wait this long. If private firms could build roads, funded by tolls, then we'd likely have all of these roads already. As well as providing funds for investment, and making sure the investment goes to the most in-demand areas, pricing roads also means they get used more efficiently.

Pensions: 55% tax, tax-free inherited ISA

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

The Chancellor is right to kill off the iniquitous 55% tax on inherited pensions, as well as the tax on inherited ISAs. If people have saved for their retirement but die before exhausting their nest-egg, it should go straight to their dependents, not to the Chancellor.

NHS Spending:

Communications Manager at the Adam Smith Institute, Kate Andrews, said:

The Conservatives, along with the opposition parties, are playing politics with the NHS budget. Everyone is vying to be seen as the 'party of the NHS' but no one is willing to have a serious conversation about the reforms that could make the NHS financially viable for the next ten years, let alone for future generations; like charging small fees for non-emergency visits.

It's been estimated that the NHS could fall into a budget crisis as early as 2015, which could result in cuts to core staff, longer patient waiting lists, and a deterioration in the quality of health care. While the extra £2 billion per year proposed by Osborne today will offsets short-term worries, it merely kicks the can down the road for a little while longer. Serious proposals to address the spending and demand that comes with free care ‘at the point of use’ could not come soon enough.

Personal Allowance rise:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The Adam Smith Institute has called for the personal allowance to be raised to the full-time minimum wage rate for over a decade and it is welcome to see the government move in this direction. But the National Insurance Contributions threshold has been left untouched, which costs full-time minimum wage workers £667.68 a year. To really help low-income workers the Chancellor should make raising the National Insurance threshold one of his top priorities.

Capital gains tax on property for foreigners:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Capital gains taxes are some of the worst ones on the statute book, making society poorer by reducing the efficiency of investment and its total amount, but if we have to have them then everyone should pay them.

This is not just because of fairness, but because it causes massive distortions when different groups face different tax rates. In this case it's likely to both lead to excessive foreign ownership of property—both by favouring foreigners over natives in property taxes and by favouring property over other assets for foreigners.

Masters degree loans:

Director of The Entrepreneurs Network, Philip Salter, said:

By extending Entrepreneurs’ Relief and R&D tax credits George Osborne is backing Britain’s entrepreneurs. However, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions. Banks already provide Professional and Career Development Loans, and entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are responding to the demand for loans for postgraduate studies. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.

The deficit:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The deficit is still enormous and much higher than anybody expected at the beginning of this Parliament. We are borrowing £100bn this year, both because planned cuts to the welfare budget have not taken place and because the growth we have had has not translated into much extra tax revenue. But as high as this is, the Chancellor’s plans to reduce the deficit still seem credible – financial markets are lending to the country at unprecedentedly cheap levels and once productivity eventually does start to recover, things should begin to look considerably better.

Notes to editors:

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Our reaction to the Autumn Statement

Here were my comments on what I thought were the key points of the Autumn Statement:

1. Raising the pension age sooner than previously planned will be unpopular, but it is the right thing to do. With an ageing population we will experience a fiscal crisis unless we raise the pensions age and, ultimately, move to a system of private pensions savings accounts so the system is robust to any demographic shifts.
2. Borrowing has been £111bn in 2013/14, which is equivalent to £304m/day or £12.6m/hour. It’s great that the deficit is falling faster than previously (though not originally) projected, but the numbers are still staggering.
3. The economy is recovering, but compared to this point in previous recoveries, growth is still sluggish. The Bank of England’s mandate is muddled and should be replaced with a single target to stabilise aggregate demand and return nominal GDP to the level it was growing towards before the financial crisis. This would also offset the effects of government cuts, stopping the cuts from having any negative macroeconomic impact. (Ben Southwood, Head of Macro Policy, comments further below.)
4. The cap on total welfare spending seems like a PR stunt. It will be modified every year and doesn’t make much sense in any case: what happens if/when negative economic shocks create lots of unexpected unemployment?
5. The development budget was heralded, but the best tool for development is letting in more immigrants from poor countries, because immigrants send money home – indeed, they sent 3 times as much money to poor countries as was sent in total official aid last year. And this is good for our economy too.
6. It’s bizarre to give LIBOR fines to charities. It simply makes no sense. What's the connection between LIBOR and military charities?
7. The pensions triple lock is about buying votes. Many pensioners don’t need more money and there is no real reason to redistribute wealth to them over other groups in society.
8. Help to Buy and other expanded mortgage subsidies completely miss the cause of expensive housing. If more houses are built (increasing supply) then prices will fall. This will happen if we liberalise the planning system. Throwing money at the housing market will drive prices up and do little to increase supply. Rolling the Green Belt back by one mile would free up enough land to build one million new homes.
9. Corporation tax is a terrible tax and, though the government’s cuts are welcome, it should be abolished altogether. Corporation tax largely falls on workers’ wages and as such it is an invisible and regressive tax on earnings.
10. The Chancellor’s confirmation that the personal allowance will rise to £10,000 is good news, but the government should go further and peg it to the minimum wage rate to reduce the tax burden on the working poor and help to make work pay.
11. Cutting employers’ National Insurance contributions for workers under 21 is a good move and highlights the cost of employer NICs to jobs. Employer NICs are a jobs tax and the government should be aiming to abolish them altogether.
12. Ultimately, there was no mention of reform to planning, immigration or monetary policy – the three things most important to Britain’s economic prospects. The Chancellor has done a good job at balancing the books but he should look to making significant structural reforms that would really get the country booming: liberalising planning to allow hundreds of thousands of extra homes to be built; scrapping the net migration cap to allow talented immigrants to work here and fee-paying foreign students to study here; and giving the Bank of England a new mandate to target Nominal GDP to ensure a stable macroeconomic environment.

Ben Southwood, Head of Macro Policy at the Institute, also commented:

"It's understandable, now that the economy looks finally to be recovering, that the chancellor has moved his focus away from monetary policy, but it's also worrying.

"Economies can absorb financial crises but they cannot absorb inconsistent monetary policy and massive drops in demand. We need George Osborne to change the Bank of England's remit, requiring it to stabilise demand according to strict rules.

"A rule-based monetary policy will stop the economy from overheating into unsustainable booms, and dive-bombing into harsh recessions."