Managing council assets

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Local authorities in England are sitting on £800bn worth of the strangest assets – pubs, golf courses, cafes, stadiums, even an airport. And Communities Secretary Eric Pickles says they need to be better managed.

Not like him to be so wet. They should be sold. Councils argue that these assets produce rent that can then be used on front-line services such as social care. Phooey. We all know that councils are rotten at running businesses. These assets would produce more return for the community by being transferred to the private sector. Councils should be supporting people who need support, and that should come out of national and local taxation. It shouldn't come from councils trying to be entrepreneurial money-makers. They just can't do it.

Of course, the sclerotic over-centralised rules under which local authorities are managed means they can't just flog their restaurants, hotels and cinemas (yes, really) and use the money to cut council tax; it would have to go into other capital projects. That should change. Fine if councils can't just sell up and have a one-off spending splurge, but silly if they have to over-invest in capital assets. Why not just say they can return the value to local council tax payers over, say, a ten year period? Then we can get better-managed local assets – businesses, they should be – and a ten-year cut in taxes too.  

Britain in rehab

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The UK’s anaemic 0.2% growth in the second quarter unleashed the predictable cries from the usual suspects for a Plan B to the government’s fiscal austerity. Labour’s Ed Balls rattled off his well-worn criticism that the austerity measures are too much too fast. Of course, none of these Plan B advocates acknowledges that government spending hasn’t been cut at all yet. Just the opposite. For the fiscal first quarter (April-June), government spending, excluding interest payments, rose 2.6% to £143.7 billion.

To be sure, the growth figures were disappointing and the challenge for the government is to accelerate growth without losing sight of the two fundamental problems afflicting the British economy: over indebtedness by both the government and individuals and inadequate provision for an ageing population, again by both government and individuals. Until both are well and truly under control, no amount of dithering, forestalling or otherwise ignoring will restore consistent and productive economic growth.

The kind of rehab Britain needs isn’t a quick short-term affair. For the serious addict, treatment starts with detox to flush out the poisons as only the first step to long-term recovery. As any reforming addict knows, rehab is an ongoing, if not perpetual, program if it’s to have any long term success.

And for the UK as a whole, detox has only just begun - willingly or unwillingly, consumers are cutting back spending and boosting savings. The household savings ratio has bounced up to around 5% in the past year, more than twice the rate in the period preceding the onset of the financial crisis. Meanwhile, the UK government has also mapped out a long-term strategy to reduce borrowing. Again for its fiscal first quarter, central government net borrowing is down 2.8% on a year earlier.

It’s not at all clear now whether individuals and the government are just sweating through this inconvenient detox stage in the hope of resuming their old ways as soon as decently possible. Successful longer-term rehabilitation means individuals sustaining a proper savings rate, weaning off housing as a substitute for productive investment and factoring in the increased pension and care costs from extended longevity. The government’s role is to facilitate and incentivise such behaviour while destroying stockpiles of profligacy and dependency narcotics.

Tackling short-termism

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The FT reports that:

Hungary’s government is trying to introduce legislation that would allow the state to charge three former prime ministers with “criminal” mismanagement of economic policy after the national debt spiralled upwards in the last decade.

Superficially attractive as this might be, it is of course completely wrong. You cannot justifiably convict someone of doing something that was not a crime when they did it – especially not in a fairly blatant attempt to use the power of the state against your political rivals.

Nevertheless, this does raise an interesting issue: how do you deal with the fact that politicians typically only think as far as the next election, and as such do not as a rule pay much attention to the long term effects of their decisions?

Short-termism in politics is a chronic affliction, manifesting itself both in inaction (let’s not bother reforming social security – its eventual collapse is going to be someone else’s problem) and in action (let’s have a fiscal giveaway now and worry about the deficit once we’ve bought ourselves the next election). But is there anything we can do about it?

It’s an imperfect solution, but I think the only realistic way to counter political short-termism is to place on government the kind of legally binding restraints that we outline here. Force governments to balance their budgets over a defined period; prevent them from raising new revenues without direct electoral approval; make them account honestly for all future liabilities; and so on.

Politicians would still think short-term. They’d still focus on winning the next election. But the less discretion you give them, the less damage they can do.

This lacklustre growth is hardly surprising

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The UK’s recent growth figures have been decidedly lacklustre – just 0.2% over the last quarter. Despite the claim of exceptional factors – few of which are totally convincing – the economy is close to flat-lining. This trend is hardly surprising as many households seek to rein in their debts after a near decade of over-spending. Moreover, many employees fear the loss of their jobs as the public sector cuts impact more deeply. Hence, economic caution is the order of the day.

Against this background, notwithstanding the deep-seated economic problems in the EU and in the US, modest economic growth should be expected as the excess debt of yesteryear is unwound. In particular, demand for ‘big ticket’ items has been frail. The house-building sector, which plunged on the back of the 2008 financial crisis and the scarcity of mortgages, remains in the doldrums. The UK’s top two electronic retailers – Dixons and Comet (part of KESA) – are both struggling whilst the outlook at Carpetright, a bellwether for the consumer sector, is still grim. 

For the Government, persistent low economic growth will make it immeasurably harder to bring about major reductions in public borrowing. Apart from accepting that low economic growth rates may well prevail for some considerable time, what can be done?

First, the Government needs a renewed offensive to cut back public expenditure, which is still growing strongly, especially with the net interest cost climbing remorselessly. The scope for cutting the cost of social security remains vast, whilst other major budgets, including local government – some of which is still living ‘high on the hog’ – and defence procurement present open goals for savings: similar comments are applicable to the protected NHS.

Secondly, whilst bringing public borrowing under control remains paramount, the Government also needs to give a medium-term priority to delivering substantial tax cuts. In summary, the vision of ongoing annual economic growth of 2.5% or more looks very optimistic.

The 50p tax rate hurts everybody

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I sympathise with politicians who paint themselves into corners in the hope of electoral advantage. The Conservatives' HS2 High Speed Rail project is looking shakier by the day (the latest is a scathing attack by the number-crunchers at the Institute of Economic Affairs). And Gordon Brown's 50p top rate of income tax, which the Liberal Democrats insisted on keeping, is looking no more solid. But when asked, LibDem minister just have to defend it, as Danny Alexander, backed up by Vince Cable, did at the weekend.

A pity. I thought we were supposed to be in an era where politicians could admit their mistake. And as our report The Revenue and Growth Effects of Britain's High Personal Taxes (PDF) shows, the 50p top tax rate – to which you have to add National Insurance of course – is looking a very big mistake indeed. Only three of the world's 86 largest economies have higher marginal tax rates than the UK. Surveys show that business-generating high-fliers – and indeed whole businesses – are moving overseas, or thinking about it, because of our tax regime. Our loss is Zurich's gain.

Like Danny Alexander, the ASI is keen to see the poorest taken out of tax entirely. Indeed, we would go further and exempt anyone on minimum wage rates from tax entirely, a threshold of about £12,500. That would be a hugely positive incentive to induce people into the workforce and off benefits. But you do not need a 50p rate so that 'the rich' will 'pay' for this.

In fact, the 50p rate actually loses the Treasury money. At least, I am confident that this is what we will find after January 2012 when everyone's tax return is in and the full information is accessible. Because that is exactly what has happened everywhere else. When taxes are too high, people down tools, move themselves or their businesses abroad, fiddle the books, or employ expensive accountants to save them tax. The net result is that the Treasury has less money to play with, not more.

By the the of the next budget, this will be apparent. So it's really unwise for politicians to paint themselves into this corner now.

Say no to Plan B

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Today brings news that the British economy only grew by 0.2 percent in the second quarter of 2011. Predictably enough, this has led to renewed calls for a ‘Plan B’ for the economy. Typically, that means more borrowing, spending, and money printing. That’s fiscal and monetary stimulus, to give it its technical name.

Well, I don’t want a Plan B. In fact, I don’t really want a ‘plan’ at all. As I see it, the advocates of stimulus completely misunderstand how the economy actually works. They imagine a motor that’s stalled and needs to be jumpstarted. Just give us a quick boost, they say, and we’ll be up and running like we were before. But in reality the economy is vastly more complex than that crude model can appreciate. It’s not a motor; it’s the product of billions of individual choices and actions. And you can’t ‘fix it’ like a broken down car.

During a boom, the economy gets distorted. With too much easy credit and too much money sloshing around, people make bad investments and take on too much debt. You get bubbles forming in particular sectors of the economy and capital being misallocated as a result. When the bust comes, these bad decisions have to be undone, and new plans have to be made. That’s what a recession is all about: liquidating unprofitable investments, paying down debts, reallocating your scarce economic resources to reflect changed consumer preferences. It’s about adjustment and recalculation, and that means it is a process that takes time.

Attempts to stimulate the economy prevent that adjustment from taking place. They might dull the short-term pain, but they also make a return to sustainable growth very difficult. Look at Japan – they’ve have years of near zero interest rates, several bouts of quantitative easing, and repeated fiscal stimulus. They’ve built the bridges and the roads that Keynesians are so keen on, and they’ve kept their zombie banks on life support. The result? Two decades of stagnation. You have to let the economy adjust: plain and simple.

So what should the government do? In the short run, it’s pretty straightforward: they need to bring spending and debt under control, maintain a stable monetary environment, and make sure that failed businesses (like banks) can be resolved without it triggering mass panic. Then they just need to let things work themselves out. In the longer run, there are things you can do to boost growth: cutting red tape, eliminating barriers to entrepreneurship, cutting taxes on saving and investment. But here and now, we need to be patient: real growth will return, if we let it.

Can we make Keynesianism work?

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Yes, I know, slightly odd question, for why should we want to make it work? Granting politicians the right to splurge money on any old nonsense, whatever the strength of the justification, is unlikely to turn out well.

However, I think we might be able to discern an interesting answer to the question all the same. John Taylor:

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

Now note what is being said here. It is not a rejection of the idea that bigger budget deficits, fiscal stimulus, can work. This is not a rejection at all of the underlying analysis from Keynes himself.

Rather, it's a rejection of giving politicians the right to spray money around when such deficits, such fiscal stimulus, might work. The problem is the discretion: if we had automatic rules about all this it might well work. As, in fact, Keynes himself realised:

I am converted to your proposal…for varying rates of contributions in
good and bad times. (June 16, 1942). Keynes, Collected Writings, vol.
27, p. 208. 

…[Y]ou
are able to show fluctuations in income of an order of magnitude which
is significant in the context… So far as employees are concerned,
reductions in contributions are more likely to lead to increased
expenditure as compared with saving than a reduction in income tax
would, and are free from the objection to a reduction in income tax
that the wealthier classes would benefit disproportionately. At the
same time, the reduction to employers, operating as a mitigation of the
costs of production, will come in particularly helpfully in bad times.  (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

Now I will admit that I'm inclined to like such an answer. Given that I have in fact worked in politics, that almost every politician I've ever met was, if we equate knowledge of economics with pre-school education, on the verge of being held back again for another year of remedial shoelace tying then yes, the further we keep them from any of the economic levers that influence our lives the happier I am.

But this should also appeal to those who are Keynesians: the setting up of an automatic stabiliser like variations in national insurance charges would mean that the essence of his insight would be hard baked into economic policy. Without any of us having to worry about the quality of those who manage to climb the political greasy pole

It's also clearly in line with basic common sense: life is better with less politics and fewer politicians..

UK airports - correct decisions, wrong procedures

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The latest Competition Commission (CC) ruling requiring BAA to sell Stansted and one of its Scottish aiports - probably Glasgow - has to be welcomed. To be sure, this divestment process has been exceedingly protracted - taking over five years to date with the possibility of yet another appeal to the courts by BAA. Back in 2006, Spain's Ferrovial led a consortium which paid over £10 billion for BAA - a take-over that has undoubtedly destroyed shareholder value. Some sympathy has to be extended to the consortium given the wholesale change in the competitive landscape for UK airports - a case of not just moving the goalposts but of shifting the entire pitch.

However, the widely-reported shambles at Heathrow, for which BAA must bear much of the blame, acted as a stimulus for reform. As such, the CC was let loose, which eventually led to the sale of Gatwick for £1.5 billion. It is now proposed that the sale of Stansted should progress with haste. Likely buyers include infrastructure funds, although all potential bidders will carefully scrutinise the amount of capital expenditure that will be required at Stansted. The ownership of Scotland's main airports will also be split, with the likelihood that BAA will retain the thriving Edinburgh airport.

Crucially, as UK airport ownership becomes increasingly fragmented, airlines now have greater choice rather than being dependent on a near BAA monopoly, as was the case before the Gatwick sale - a subject on which Ryanair's outspoken Chief Executive, Michael O'Leary, has robust views. Moreover, greater comparative operating data will become available which should drive up overall efficiency levels. 

Looking forward, the UK's three main airports - Heathrow, Gatwick and Stansted - surrounding London are expected to become increasingly competitive: Luton is also growing strongly. Of course, if you are part of the Ferrovial consortium, you will feel very short-changed by forced sales, such as that at Gatwick. Indeed, such major regulatory U-turns should normally be avoided. But introducing far more competition into the ownership of the UK's airports has to be the best long-term solution.

Why government costs so much

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I think we can all tell our little tales of why it is that government costs so much. Sometimes it's the things that are bing done: do we really actually need the Arts Council? At others, it's not what, for the things being done might be very sensible indeed, but the way they're being done that makes them so expensive. As an example, this from a one man helicopter company in the US:

Finally, the FAA inspector looked at my random drug testing program to make sure that everything was in place. I’m subject to the same drug testing requirements as United Airlines. I am the drug testing coordinator for our company, so I am responsible for scheduling drug tests and surprising employees when it is their turn to be tested. As it happens, I’m also the only “safety-sensitive employee” subject to drug testing, so basically I’m responsible for periodically surprising myself with a random drug test. As a supervisor, I need to take training so that I can recognize when an employee is on drugs. But I’m also the only employee, so really this is training so that I can figure out if I myself am on drugs. As an employee, I need to take a second training course so that I learn about all of the ways that my employer might surprise me with a random drug test and find out about drug use. But I’m also the employer so really I’m learning about how I might trap myself.

Yes, regulation of some things is indeed necessary but can we at least try, if not entirely manage, to get to the point that we've got sensible regulation being sensibly done?

Will it be alright on the night?

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For the first time, the UK’s national accounts are being drawn up on a similar basis to those for public-listed companies. Whilst the full details are due this autumn, the recently reported headline numbers are, as expected, immensely concerning.

With the standard Public Sector Net Debt (PSND) figure of a staggering c£1 trillion, the latest data has focussed on two additional elements - public sector pension liabilities and the Private Finance Initiative (PFI). In respect of the former, the liabilities figure is reported to be c£1.1 trillion. This is an enormous number which reflects the ‘It’ll be Alright on the Night’ economics that have applied for decades to public sector pension entitlements. At one time, when private sector pension provision was generous and public sector wages were often below the private sector equivalent, this disparity was more tolerable.

Nowadays, with the marked reversal of these two trends, it certainly is not. Hence, the Government should act aggressively to cut this massive liability. Increased public sector employee contributions, a higher retirement age qualification and reduced retirement benefits should all play a part. The latest figures also highlighted the Government’s escalating PFI exposure. Compared with the pension figure, an estimated c£40 billion liability may look small beer – not so. Although PFI’s appeal has been waning of late – rightly so – efforts are needed to reduce this liability.

Whilst the UK’s PSND reflects internationally approved financing criteria – and therefore excludes both public sector pension and PFI liabilities – the markets are less forgiving. The turmoil in recent days, especially in Italian bond markets, reflects the serious damage that high debt levels can inflict. The next few years will be no time for the UK to wobble on its priority to tackle both its massive PSND and other liabilities. It may take a decade to return the UK’s public finances to equilibrium.