City AM: Ireland's bailout won't halt contagion

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Old Teaser

Written by Allister Heath

29 November 2011

ONLY the naïve will believe that Ireland’s bailout will halt the Eurozone crisis. It is too late for that; the best that the EU/IMF/UK plan will achieve is to slightly delay contagion.

The 6 per cent interest rate on the EU portion of the loans is far too high, especially given that Eire’s inflation rate is so low. There will be no haircuts for senior bondholders, though holders of subordinated debt will rightly be hit – a system will be introduced under which private bondholders could be made to share the burden of any future Eurozone sovereign debt restructuring, subject to a case-by-case evaluation “without any automaticity.” A clear system whereby losses are shared is desperately needed. It’s a scandal the bailout culture has still not come to an end. One of the surprises was that Ireland will have to tap into its National Pension Reserve Fund, which has €24.5bn under management. That is a good move.

It is galling the UK is being forced to put its hand in its pocket, even though it isn’t part of the euro. But at least nobody believes we are about to be contaminated by the crisis. The coalition’s relatively tough budget has seen to that. But the respite may be only temporary. The UK faces unsustainable commitments and an ageing population. The Adam Smith Institute identifies three fiscal scenarios. The worst, where present spending plans are followed to 2015-16 and all subsequent “proceeds of growth” used to fund higher spending, would result in another crisis by 2019. The second, where the proceeds of growth are split 50:50 between spending hikes and debt cuts from 2015-16, would delay calamity till 2031. The third, where spending is held constant, would eliminate the national debt by 2041.

The Institute argues that the best way to achieve spending restraint is for the state to move away from being the insurer of first resort and become instead a safety net. The majority of people would provide for themselves, while the state’s focus will only be on the most needy. Miles Saltiel, author of the report, says the government should mandate a minimum healthcare package that everyone would be forced to buy, and would fund premiums for those unable to afford them. Service providers – such as hospitals – would be privatised, raising £236bn after recapitalising PFI obligations of £28.9bn. The report proposes a tax and regulatory regime to foster private provision of incapacity, income and mortgage insurance. State support would focus on the poor. Education and pensions would also be reformed.

While fiscal consolidation has saved us from the Eurozone’s fate, we cannot be complacent. Public spending will explode again as soon as the austerity phase ends – and we are already taxed more than is sensible. The coalition has focused on belt-tightening, decimation and efficiency gains. What we really need is radical structural change in the way services are funded and operated. This will eventually be forced upon us – so we might as well get thinking now.

Published in City AM here. 

Another fiscal crisis by 2019

 29 November 2010

· Despite the coalition government’s spending reforms, public spending is set to face huge rises due to future commitments on healthcare, welfare, pensions and education

· These commitments, combined with the pressures of an ageing population, could result in a fiscal crisis in the UK along Irish lines as early as 2019

· The Adam Smith Institute calls for a radical reform of the welfare state to avoid this fiscal emergency

In a report released today the Adam Smith Institute warns that the government’s future commitments on healthcare, welfare, pensions and education are unsustainable. Spending in these areas has continually grown, and will continue to face mounting pressure due to an ageing population. As a result, the official debt figure is in reality only a fraction of the story - far greater are the off-the-books future obligations that the government has guaranteed in these areas. The coalition’s spending cuts will not be enough to stave off another fiscal crisis. Instead the government needs to transform intergenerational expenditures (1) and the way we view the role of the state.

According to the calculations in the Institute’s report, ‘On Borrowed Time’ by Miles Saltiel, there are three possible scenarios for the UK’s fiscal outlook. The worst, where the Comprehensive Spending Review is followed to 2015-16 and all the ‘proceeds of growth’ are used to fund higher public spending thereafter, would result in fiscal crisis(2) by 2019. The second scenario, where the proceeds of growth are split 50:50 between spending increases and debt reduction from 2015-16 onwards, would only result in fiscal calamity being delayed until 2031. In contrast, the third scenario, where public spending is held constant and all the proceeds of growth are devoted to debt reduction, would lead to the national debt being eliminated in 2041.

The Adam Smith Institute favours the third scenario and makes a number of recommendations within the report on how the government could achieve such spending restraint. The proposals would see the transformation of the role of the state away from the insurer of first resort towards being a safety net for the poorest. The vast majority of people would provide for themselves, whilst the welfare state’s focus will only be on the most needy within our society.

The report identifies healthcare as a key area needing radical transformation. Miles Saltiel, author of the report and award-winning analyst, proposes that the government should mandate a minimum healthcare package that everyone would be obliged to buy, and would fund premiums for those unable to afford them themselves. Beyond that, the health system would be private. All service providers – such as hospitals – would be privatized, which he calculates would raise one-off proceeds of £236bn after recapitalising PFI obligations of £28.9bn.

On welfare, the report proposes the introduction of a supportive tax and regulatory regime to foster private provision of incapacity, income and mortgage insurance. State support would be a time-limited last resort and conditional on intervention to get claimants back into work. Suggestions on how to reform education and pensions (3) are also included in the report, in an attempt to replace run-away costs with self-limiting systems that focus on innovation and value for money.

Dr Eamonn Butler, Director of the Adam Smith Institute, says: “We cannot keep voting ourselves generous pensions, healthcare and other benefits and vainly hope that our children will happily pick up the bill. It's time we got realistic on the scale of the problem, forced politicians to fess up to the future costs of new policies, and brought in rules to make sure that future generations cannot be saddled with the cost of our extravagances.”

ENDS

1. Intergenerational expenditures are commitments to spending in healthcare, education, pensions and welfare.

2. Fiscal crisis is defined as when the UK’s accumulated debt exceeds the credit watch threshold of 1.0xGDP. At this threshold credit rating agencies give notice of risk of downgrades in government securites, e.g. gilts.

3. The key proposals for education and pensions are as follows:

Education: state providers would be privatized, and a voucher system introduced for primary and secondary education. Tertiary establishments – such as universities – would be re-chartered to establish non-state basis.
Pensions: people would be compelled to save a set percentage of their income in private retirement accounts, as occurs in Chile, Singapore, Australia and (on a more limited scale) Sweden, and would be given tax incentives to make further, non-compulsory contributions. Eventually, the state’s role would be confined to providing a safety net for elderly people with insufficient savings.

· On Borrowed Time is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. You can download the report for free here: www.adamsmith.org/files/On_borrowed_time_ASI.pdf

· The Adam Smith Institute is the UK’s leading libertarian think tank. It engineers policies to increase Britain’s economic competitiveness, inject choice into public services, and create a freer, more prosperous society. For more information on our work, go to www.adamsmith.org <http://www.adamsmith.org>

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Think tank pours scorn on energy price probe

Published in Daily Express here.

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Old Teaser

28 November 2010

Tracey Boles writes in the Daily Express on the energy price probe and Dr Eamonn Butler's criticisms of Ofgem's inquiry. 

Sam on Russia Today on the Irish bailout

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Old Teaser

 22 November 2010 

Response to Ireland's confirmed application for a bailout

 21 November 2010

In response to Ireland asking for an EU bailout, Sam Bowman, Head of Research, argues that the bailout will be bad for Britain:

"The proposed bailout for Ireland is a bad deal for for the UK. It puts the interests of the European Union and the eurozone before the interests of Ireland and the British government should have no part in paying for it. Asking the British taxpayer to cough up £7 billion shows just how audacious the European Union has become in its desperation to keep the eurozone project afloat.

“The UK successfully avoided entering the eurozone. Ireland was not so lucky, but it entered in full knowledge of the risks involved. Bailing out Ireland now would undo much of the benefits that Britain has yielded from keeping the pound and would make a mockery of the spending cuts announced by the coalition last month.

“The proposed bailout is a bad deal for Ireland, because it will simply extend the current pain for even longer and create another lost generation of Irish young people. Ireland’s leaders should take the politically difficult step of defaulting on Ireland’s debt and allowing the insolvent Irish banks to wind down.

“In the end Ireland will have to choose its own path out of this crisis. But the British taxpayer should not be held responsible for past mistakes by Irish politicians.”

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Response to Ireland's confirmed application for a bailout

 21 November 2010

In response to Ireland asking for an EU bailout, Sam Bowman, Head of Research, argues that the bailout will be bad for Britain:

"The proposed bailout for Ireland is a bad deal for for the UK. It puts the interests of the European Union and the eurozone before the interests of Ireland and the British government should have no part in paying for it. Asking the British taxpayer to cough up £7 billion shows just how audacious the European Union has become in its desperation to keep the eurozone project afloat.

“The UK successfully avoided entering the eurozone. Ireland was not so lucky, but it entered in full knowledge of the risks involved. Bailing out Ireland now would undo much of the benefits that Britain has yielded from keeping the pound and would make a mockery of the spending cuts announced by the coalition last month.

“The proposed bailout is a bad deal for Ireland, because it will simply extend the current pain for even longer and create another lost generation of Irish young people. Ireland’s leaders should take the politically difficult step of defaulting on Ireland’s debt and allowing the insolvent Irish banks to wind down.

“In the end Ireland will have to choose its own path out of this crisis. But the British taxpayer should not be held responsible for past mistakes by Irish politicians.”

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Hayek and Friedman are just what we need

Published in the Sunday Telegraph here. 

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Old Teaser

Written by Dr Eamonn Butler

14 November 2010

Dr Eamonn Butler writes a letter to the Sunday Telegraph arguing that the Coalition should seek inspiration from Hayek and Friedman's free market views in order to follow a bold pro-growth strategy.

Sam Bowman on Al Jazeera

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Old Teaser

12 November 2010

Sam Bowman argues that the students need to bear the burden of their education not the public in a discussion on student fees and university cuts following the London protests. 

Dr Eamonn Butler on Channel 4 Britain's Trillion Pound Horror Story

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Old Teaser

11 November 2011

Eamonn appears in Channel 4's documentary explaining the full extent of the financial mess this country is in - with an estimated £4.8 trillion of national debt and counting. It argues that the recent spending review hasn’t gone far enough, and to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name, and drastically lower taxes to make Britain’s economy grow again.

You can watch it here.

Dr Eamonn Butler on Radio 4's Farming Today

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Old Teaser

11 November 2011

Dr Eamonn Butler discusses the possible advantages of privatizing England's National Parks on BBC Radio 4's Farming Today. He argues that it will bring in diverse ownership with diverse ideas of how to manage them and proposes that a car charge in the National Parks would help to protect the parks and raise revenue. 

You can listen to it here (Eamonn speaks from 9mins 30secs approx).