Cut business taxes and public spending to stave off UK bankruptcy

Tuesday 4 August 209

Across-the-board cuts in government spending and reductions in business taxes are essential if the UK is to balance its books and stave off bankruptcy, according to a think-tank report published today. The Adam Smith Institute says that an incoming Conservative government will have to draw up a 'Medium Term Financial Strategy' to convince investors that it is serious about bringing the public finances under control and being able to pay off the country's mountain of debt.

Balance the books

The report, by the City analyst Nigel Hawkins, says that the public finances are out of control. The government aims to borrow £175 billion this year, and to continue borrowing, until its total debt reaches £1,370 billion in 2013/14 – some 76% of the nation's income.

But the reality is worse. The government's figures ignore the £37 billion capital injection into the banks, and the £585 billion of bank liabilities now underwritten by taxpayers. And the IMF and other leading economists say the government's growth forecasts are far too optimistic.

The Institute concludes that it is quite possible that Britain could go broke. This year the it hopes to issue an unprecedented £220 billion of gilt-edged securities, and to treble Treasury IOUs up to £65.5 billion. If investors get worried, this financing plan will fail and Britain would be forced to ask the IMF for a bail-out.

The next government should admit that borrowing is far too high, draw up a Medium Term Financial Strategy to restore stability, and focus on retaining the UK's Triple-A credit rating.

Cut public spending

Hawkins points out that the level of public spending has soared, to £671 billion this year. Extra welfare payment because of the recession may push the figure up even more. If the government's books are to be brought back into balance, public spending must be cut. Private-sector employees, who have seen their own wages and pensions cut, resent the privileged position of civil servants, creating political pressure for government thrift.

The next government should aim for real reductions of 3% or more over the medium term. Across-the-board cuts over an extended period would gradually return the public finances to balance.

Commit to lower taxes

Taxes have also risen substantially, and need to be reduced and simplified in order to generate economic growth, says the report. Across-the-board tax cuts will not be feasible until expenditure cuts begin to stabilize the public finances. However, swift cuts in corporate taxes, and reductions in other business burdens, are essential in order to boost the UK's competitiveness.

The next government should pledge to cut taxes once the public finances are under control, reduce corporate taxes in order to promote investment, and reduce and simplify income tax and NI to promote employment.

Other priorities

The next government should also:

• Closely control the money supply and commit to sound money.
• Privatize functions such as water utilities, broadcasting, the postal service, and transport.
• Reduce public sector pension liabilities by closing over-generous schemes to new members.
• Restore honesty into PFI deals, which are currently not counted on the government's balance sheet.
• Radically improve the management of public procurement to reduce cost and time over-runs.
• Overhaul bank supervision, and stress-test the large banks to forestall a future crisis.
• Progressively reduce government guarantees to the banks and sell its bank shareholdings.

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Forbes: Snubbed From The Professions Club

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"There is a decline in social mobility in education, but it's wrong to tinker with higher education funding and admissions; that's meddling far too late in the process," said Tom Clougherty, executive director of the Adam Smith Institute, a British think tank.

Published in Forbes here.

Government told to stop talking and bring on nuclear investment

RELEASE DATE: Tuesday 14 July 2009
 
Government told to stop talking and bring on nuclear investment

New 'low carbon obligation' would boost nuclear power

There could be blackouts in Britain unless the government spends less time producing energy policy documents and more time trying to get the six major energy companies to invest, a new think-tank report says today.

"The UK's energy fate depends upon this sextet, and unless they invest enough in new generation plant, power cuts are not just possible, but probable," says the Adam Smith Institute. But – faced with tougher lending conditions from the banks and better investment opportunities overseas – two of the six are actually cutting back their investment plans.

"It is time for fewer words and more action from the government," concludes the Institute concludes in Re-energizing Britain.

In particular, the government needs to be more pro-active in driving through planning approvals for new nuclear power stations, and helping the companies put together nuclear investment funds, so that new nuclear plant is ready to fill the gap caused by decommissioning older stations.

The report's author, energy analyst Nigel Hawkins, says that nuclear power should be helped further by replacing the existing Renewables Obligation – which requires electricity suppliers to buy from wind, wave, biomass and other 'green' energy sources – with a new Low Carbon Obligation – which would include nuclear power.

Hawkins says that the three key aims of energy policy – security of supply, reduced carbon emissions, and lower prices – would all benefit from this change, since nuclear energy is both low-carbon and less expensive than many other ways of generating electricity, and does not depend on risky supplies of gas from Russia.

The report also argues that we need fewer words and more action on promoting investment in gas storage, where our capacity is just a tenth of that of Germany. This, it says, is "a very exposed position", since an increasing proportion of our gas now comes from abroad, much of it from Eastern Europe and Central Asia. The government needs to work with the energy companies to make sure that they have both planning approval and access to finance to increase Britain's gas storage facilities substantially.
 
END

Re-energizing Britain: Promoting investment in our energy future can be downloaded for free here.

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EU seizing on finance crisis to advance federalist agenda

RELEASE DATE: SUNDAY 12 JULY 2009

EU seizing on finance crisis to advance federalist agenda, says think-tank
 

EU bureaucrats are seizing on the financial crisis to centralise financial regulation in Brussels – a move welcomed by France and Germany as a way of curbing their competition from London. But this new EU regulatory bureaucracy will not improve financial stability and will only cause business to drift away from the EU to the financial centres of New York, Switzerland, and the Far East, says the Adam Smith Institute in a strongly-worded new report.

Despite Lord Mandelson's claims that he will defend Britain's interests – saying that "we have more skin in this game than the rest of Europe put together" – the Chancellor and the Prime Minister seem to have rolled over and accepted the EU proposals, even before the public consultation on them has ended, claim the report's authors, Tim Ambler of the London Business School and regulation expert Keith Boyfield.

"When you look at this you wonder whether Alistair Darling's White Paper on UK financial regulation is a rather pointless exercise," said Boyfield, chair of the Regulatory Evaluation Group. "It seems that we have already handed over our right to police ourselves, despite the fact that London's financial market has more scale, experience and expertise than the whole of the rest of the EU." Under the new proposals, the UK, with its huge financial sector, would have no more voting power than Latvia, which is on the edge of collapse.

Brussels wants to create two new bodies, the European Systemic Risk Council and the European System of Financial Supervisors, despite any evidence that the lack of EU cross-border rules had anything to do with the crisis. The real need, they argue, is to improve the supervision structures  that failed in individual EU countries – including Britain. But "instead of dealing with the fundamental problem, the European Commission is proposing to add new bureaucratic structures" that will be top-heavy and could actually make financial instability worse. "The proposals seem opportunistic, using the financial crisis to provide an opening for long-held political objectives in Brussels," the report suggests. "These proposals are not just a knee-jerk political reaction. They are too well thought out for that."

The report echoes complaints last week from the Mayor of London, Boris Johnson, that London's innovative hedge fund industry had nothing to do with the financial crisis, and would be crippled by the heavy hand of new EU bureaucracy, driving them to New York and Shanghai. He agreed with the report's authors that "what is good for London's financial services sector is good for the EU".

There are also proposals to create three new European Banking, Pensions and Investment authorities, all with executive powers to control firms across the EU, stripping Britain of control over its own financial sector. But, says Ambler, "Since financial crises of this scale come along only every sixty years or so, there is no economic reason for this haste." He suggests that these deals were all stitched up at the G20 meeting in April, where President Sarkozy threatened to walk out unless new EU-wide financial regulations were agreed.

Instead, the report calls on the European Commission to conduct a thorough investigation into the real causes of the crash, which they believe was actually made worse by international regulation such as the Basel II banking code – rather than rush headlong, for political reasons, into new cross-border regulation that could simply increase future instability. It says that the EU should aim for "bottom up" improvements in European countries' financial supervision, rather than imposing "top-down" regulation.

"The UK should lead strongly on a positive agenda for financial regulation in Europe," said Adam Smith Institute director, Dr Eamonn Butler. "That will focus on the need for prudential supervision by central bankers (like the Bank of England) rather than tick-box regulation from the likes of the Financial Services Authority. If we focus on improving supervision in the individual EU countries, then the financial services industry of Europe as a whole will get along fine. But if we shackle the diverse financial industries of Europe with heavy-handed, "one size fits all" regulation, the only gainers will be New York, Switzerland, and the Far East."

END

Financial Regulation: What is the best solution for the EU? can be downloaded for free here.
 

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EU seizing on finance crisis to advance federalist agenda, says think-tank

EU bureaucrats are seizing on the financial crisis to centralise financial regulation in Brussels – a move welcomed by France and Germany as a way of curbing their competition from London. But this new EU regulatory bureaucracy will not improve financial stability and will only cause business to drift away from the EU to the financial centres of New York, Switzerland, and the Far East, says the Adam Smith Institute in a strongly-worded new report.

Despite Lord Mandelson's claims that he will defend Britain's interests – saying that "we have more skin in this game than the rest of Europe put together" – the Chancellor and the Prime Minister seem to have rolled over and accepted the EU proposals, even before the public consultation on them has ended, claim the report's authors, Tim Ambler of the London Business School and regulation expert Keith Boyfield.

"When you look at this you wonder whether Alistair Darling's White Paper on UK financial regulation is a rather pointless exercise," said Boyfield, chair of the Regulatory Evaluation Group. "It seems that we have already handed over our right to police ourselves, despite the fact that London's financial market has more scale, experience and expertise than the whole of the rest of the EU." Under the new proposals, the UK, with its huge financial sector, would have no more voting power than Latvia, which is on the edge of collapse.

Brussels wants to create two new bodies, the European Systemic Risk Council and the European System of Financial Supervisors, despite any evidence that the lack of EU cross-border rules had anything to do with the crisis. The real need, they argue, is to improve the supervision structures that failed in individual EU countries – including Britain. But "instead of dealing with the fundamental problem, the European Commission is proposing to add new bureaucratic structures" that will be top-heavy and could actually make financial instability worse. "The proposals seem opportunistic, using the financial crisis to provide an opening for long-held political objectives in Brussels," the report suggests. "These proposals are not just a knee-jerk political reaction. They are too well thought out for that."

The report echoes complaints last week from the Mayor of London, Boris Johnson, that London's innovative hedge fund industry had nothing to do with the financial crisis, and would be crippled by the heavy hand of new EU bureaucracy, driving them to New York and Shanghai. He agreed with the report's authors that "what is good for London's financial services sector is good for the EU".

There are also proposals to create three new European Banking, Pensions and Investment authorities, all with executive powers to control firms across the EU, stripping Britain of control over its own financial sector. But, says Ambler, "Since financial crises of this scale come along only every sixty years or so, there is no economic reason for this haste." He suggests that these deals were all stitched up at the G20 meeting in April, where President Sarkozy threatened to walk out unless new EU-wide financial regulations were agreed.

Instead, the report calls on the European Commission to conduct a thorough investigation into the real causes of the crash, which they believe was actually made worse by international regulation such as the Basel II banking code – rather than rush headlong, for political reasons, into new cross-border regulation that could simply increase future instability. It says that the EU should aim for "bottom up" improvements in European countries' financial supervision, rather than imposing "top-down" regulation.

"The UK should lead strongly on a positive agenda for financial regulation in Europe," said Adam Smith Institute director, Dr Eamonn Butler. "That will focus on the need for prudential supervision by central bankers (like the Bank of England) rather than tick-box regulation from the likes of the Financial Services Authority. If we focus on improving supervision in the individual EU countries, then the financial services industry of Europe as a whole will get along fine. But if we shackle the diverse financial industries of Europe with heavy-handed, "one size fits all" regulation, the only gainers will be New York, Switzerland, and the Far East."

END

Financial Regulation: What is the best solution for the EU? Is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. The full report can be downloaded for free at: http://tinyurl.com/mme94a

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The Times: Non-exec cull

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Keith Boyfield, chairman of the Adam Smith Institute’s Regulatory Evaluation Group, said there was a case for a return to old-style structures for investment banks.

“One advantage of partnership arrangements was that it was their own money they were risking and they had a stake in the long-term profitability of the business," he said.

Published in The Times here.

EU uses crisis for political gain, says think-tank

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The European Union's plan for a new machinery of financial regulation is an "opportunistic" attempt to extend EU power and is largely based on unsubstantiated claims, according to a hard-hitting report by the Adam Smith Institute and the London Business School.

The study said the British Government has responded with incoherent or irrelevant objections as Europe's elite seize on events to rush through laws that greatly increase EU control over the City of London.

"The proposals seem opportunistic, using the financial crisis to provide an opening for long-held political objectives," it said, accusing Brussels of trying to transform the financial system "while it is too weak to object".

"Since financial crises of this scale come along only every 60 years, there is no economic reason for this haste," it said.

The European Commission has made no attempt to validate its claim that lack of EU cross-border rules was a key cause of the credit crisis, ignoring evidence that the real damage stemmed from the failure of countries to enforce their existing rules properly. "Instead of dealing with the fundamental problem, the Commission is instead proposing to add new bureaucratic structures."

The key bone of contention is the creation of three new "Authorities" with a permanent staff and binding powers: a European Banking Authority in London; a European Insurance and Pensions Authority in Frankfurt; and a European Securities Authority in Paris.

While they look like the current advisory committees made up of chief regulators from the 27 member states, they are in reality executive agencies able to impose their agenda, with powers to "settle the matter" in the case of disputes. They effectively strip Britain of ultimate control over much of the City, leaving "day-to-day" matters to the Financial Services Authority.

Keith Boyfield, co-author of the report and chair of the Regulatory Evaluation Group, said the raft of proposals coming from Brussels together amount to an extremely serious assault on the City.

"When you look at this you wonder whether Alistair Darling's White Paper is a pointless exercise," he said.

The Government appears confused by the rush of events. Rather than fight the core issue of transferring control to Brussels, it has been arguing over whether the bodies should be run by the Commission or the Council. Either way, London loses ultimate control.

Gordon Brown agreed to the plans at last month's Brussels summit, provided that they do not impinge on "fiscal sovereignty". Lord Mandelson has since said Britain should forge an alliance with those EU states in our camp to limit it saying "we have more skin in this game than the rest of Europe put together".

An EU insider said the credit crisis had thrown up an unholy alliance between nationalist politicians from France, Italy and Spain hoping to chip away at the City, and Left-wing forces opposed to market capitalism.

The two together are a formidable bloc.

Moreover, Socialist Euro-MPs have forced Commission President Jose Barroso- an Iberian Thatcherite -to back their demands as the price for clearing the way for his reappointment.

CNBC: UK bank regulation under fire

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Published on CNBC here.

Daily Mail: Ephraim Hardcastle

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The Adam Smith Institute's Eamonn Butler points out that it is Cost of Government Day. 'This year we worked 134 days, until mid-May, to pay off the tax burden, and now we're just coming to the end of another 42 days' hard labour for all the borrowing that the Government has to do in order to pay its bills.

In total, we are working ten days longer for these expense-swindling, index-linked-pensioned twits than we did last year.'

Published in the Daily Mail here

The Telegraph: Government debt: That’ll be £2.2 trillion, please

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The amount of money owed by the Government is huge and rising, says Eamonn Butler, so why aren’t we pursuing simple, effective ways to reduce the burden?

Today is Cost of Government Day. Average taxpayers in Britain now have to work almost half the year – 176 days – to pay their share of the cost of running Gordon Brown’s administration. Every penny we have earned since January 1 has gone to feed the state leviathan. It is only from today that, at last, you have started working for yourselves and your families.

More than five months of our servitude – from New Year until May 14 – were spent working to pay taxes, such as income tax, national insurance, council tax, VAT and many others including the notorious “stealth" taxes. But all that effort was still not enough to feed the monster, and when he had run out of our money, the Chancellor, Alistair Darling, had to borrow – at £20  million an hour – to pay his bills.So for the past six weeks, day in, day out, we have been working to fund that borrowing. No wonder Mervyn King, the governor of the Bank of England, warned yesterday of the “truly extraordinary" scale of deficits.

We have had to put in 10 days’ more work than last year in order to keep the Government afloat. It is not just the money that Brown and Darling borrowed to bail out the banks. It is the fact that every bit of public spending – national and local – is rising faster than taxpayers’ incomes. In 1999 – when Brown had finished with New Labour’s 1997 election pledge to match Conservative budgets – government spending was just 36 per cent of the nation’s income. Now it is a third more – 47.5 per cent this year – and rising.

Not that you can believe official figures. The International Monetary Fund thinks things will be far worse. Our national income will take a knock, and more people will be out of work and receiving benefits from the Government rather than paying it taxes. That makes it probable that public spending will be more than 50 per cent of our income – sending Cost of Government Day into July.

It amounts to a huge surge in the burden of government for those of us trying to earn a crust – twice that in France, and even more than when Britain was reeling from the oil-price shocks in the early 1970s. In fact, it’s not far off the 1940s, when at least we were paying off the cost of saving the world from Hitler.

But then Alistair Darling’s budget predictions have proved just as over-optimistic as his predecessor’s. In November 2008, despite all the drama in the banking industry, his forecasts seemed almost rosy. Now, he expects the Government’s budget shortfall this year and in 2010 to be four times that prediction, with 2011 and 2012 about five times bigger. The gap between what the Government expects to spend and what it actually brings in has risen five-fold, from £120 billion to £608 billion in the space of six months.

At that rate, according to the Institute for Fiscal Studies, it will take 23 years to return government borrowing to anything like normal levels – Gordon Brown’s famous “golden rule".

And of course, every year you borrow keeps adding to what you owe. Right now, the Government calculates that it owes a total of £2.2 trillion – about £144,000 per household. The figure has trebled since the bank bail-outs. Some traders are beginning to wonder if Britain can actually pay its debts. If they start pulling out, then we really are bust.

And the real picture is worse, because the Government does not record all its debts on the official books. Take all those new schools and hospitals being built on tick at a future cost equal to £5,600 per household; Network Rail’s borrowing, another £1,000 per household; nuclear decommissioning, another £2,750; those generous civil service pensions – a future cost of almost £50,000 per household; not to mention the state pension. Add those in, and the real national debt is twice the official figure.

Do not imagine that all this extra spending and borrowing are the fault of the financial crisis and the need to counter recession – interest payments, social benefits and suchlike. A good half of it is simply feeding the Government’s pre-election spending splurge.

And do not believe the spin that the Conservatives would make 10 per cent cuts to balance the books. They have pledged not to cut education, the NHS, or overseas aid, and they are stuck with the debt repayments and the EU’s demands; even if they cut 10 per cent off everything else, it amounts to just 3 per cent overall. They would be shrinking next year’s spending bill from £717 million to £695 million. That is still more than Labour has ever spent.

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom," wrote Adam Smith. If your family had debts as big as the Government’s, you would know what you had to do:spend less or earn more – and preferably both.

The Government won’t earn more by putting up taxes. The Centre for Economic and Business Research estimates that the proposed 50 per cent top tax rate will make 25,000 people leave the UK, costing 140,000 jobs and reducing revenues. Britain is already overtaxed.

And the private sector has borne nearly the whole burden of the economic downturn. Wages have fallen, and unemployment is heading up to 3 million. But the public sector has been largely unaffected. That is why people are so angry when they see how much of their 176 days’ effort is simply wasted – or abused, as with MPs’ expenses.

The task is to reduce public expenditure without it showing. A freeze on spending and recruitment for a couple of years, then pegging it to inflation, would be surprisingly effective at re-balancing the books. (If spending since 1997 had risen no faster than inflation, we would be spending a third less than we do now, and could abolish income tax, VAT, and council tax entirely.)

Another useful move would be to publish online every cheque the Government signs, so we can see what it is spending and where. Private firms would be able to show what they could do more cheaply. And citizens could point out where they think their money is being scandalously wasted, as with the £300 million on departments’ service contracts, wasted through bad management, or the £200 million lost through bad procurement of hospital buildings.

Then there are the IT projects, such as the NHS records system, that are billions over budget and months or years late (the Department of Employment alone spent £59 million on a computer system that did not work). Exposing such wasteful incompetence would help eliminate it. And do we really need to spend tens of billions on ID cards?

Along with the Royal Mail, we can privatise the Tote, Channel 4, BBC Worldwide, air traffic control and various utilities, which would bring in a handy £20 billion. And we can get rid of central bureaucracy by measures like simply handing head teachers their bit of the budget and telling them to get on and spend it as they see fit, rather than as Whitehall bureaucrats think they should. The same could go for health – give the budget to patients or their doctors, not to layers of bureaucracy such as the strategic health authorities. And the quangos need to be culled again: they have grown in number, cost and power under Brown. For what gain?

Meanwhile, dozens of local government officers are now paid more than £100,000 and retire on generous index-linked pensions – something now almost unknown among the private-sector employees that work to support them. As this newspaper reported yesterday, PricewaterhouseCoopers claims that 96 per cent of companies regard final salary schemes as unsustainable.

About a third of Child Benefit is little more than pin-money for the middle classes. It should be given to the poorest. By taking everyone on the minimum wage out of tax entirely, we would see a stampede into work by those who we presently make better off on benefits.

Another huge saving would be to speed up the plans to raise the pension age, reflecting improvements in health and longevity. This is by far the largest spending change one could make. Yes, many people would not like it – though others would be delighted to avoid forced retirement at 65. But it would be hugely symbolic – a return to honesty in the public finances, and an end of the idea that we can all live at someone else’s expense. If this recession has taught us anything, it should have taught the politicians that.

Dr Eamonn Butler is director of the Adam Smith Institute and author of 'The Rotten State of Britain’ (Gibson Square Books)

Published in The Telegraph here