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NEWS
Guy Myles in the Telegraph
Why it’s time to stop attacking business and salute the true heroes of the economy instead.
Zombie firms coverage in The Scotsman
Banks backing zombie firms are stifling growth, says the Scotsman covering our recent Zombie Firms report.
Philip on what the Autumn Statement means for entrepreneurs in City AM
Philip Salter, Director of the Entrepreneurs Network, discusses what the Autumn Statement means for entrepreneurs in City AM.
Adam Smith Institute Autumn Statement Reaction
Reacting to the the key points of the Autumn Statement, Sam Bowman, Research Director at the Adam Smith Institute, said:
- 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.
- 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.
- 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.)
- 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 that create lots of unexpected unemployment?
- 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.
- It’s bizarre to give LIBOR fines to charities. It simply makes no sense. What's the connection between LIBOR and military charities?
- 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.
- 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.
- 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.
- 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.
- 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.
- 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, said:
"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."
The Adam Smith Institute is an independent classical liberal think tank based in Westminster. For further comment from one of its analysts or its Director Eamonn Butler, please phone 02072224995, or email Sam Bowman at sam@adamsmith.org or Ben Southwood at ben@adamsmith.org.
Minimum pricing in the Journal of the Law Society of Scotland
The Journal reports on the criticisms of the Sheffield model used to justify minimum alcohol pricing made by an Adam Smith Institute report.
CMRE: Introduce school vouchers and liberalise free school creation to improve UK education
As Britain faces dire PISA education rankings, the government should liberalise the free schools application process and give parents a voucher for a place in any approved school, state or private, says a new research report from the think-tanks the Adam Smith Institute and the Centre for Market Reform of Education. (School Vouchers for England: Harnessing choice and competition for greater quality and equality in education – http://www.adamsmith.org/sites/default/files/research/files/Voucher%20paper%20web.pdf. Executive summary: http://cmre.org.uk/uploads/publications/Voucher%20exec%20summary.pdf)
The move would abolish the restrictions that prevent poorer parents from accessing England’s best schools. Proximity-based admissions should be scrapped, being replaced by lotteries and subsidised transport in cases of oversubscribed schools.
At a time when many areas will face a 20% shortfall in places by 2015, urgent and cost-efficient action is required, the report says. Parents may be left without schools to choose from unless the government accelerates the development of new free schools.
The government therefore must simplify the school creation process, says the report, cutting through red tape and introducing a voucher system so that parents can signify where and how they require schools to be built.
Gabriel Heller Sahlgren, co-author of the report and Director of Research for the Centre for Market Reform of Education, said:
“Parents are currently restricted to choosing schools they can afford or the schools they can afford to buy a house near. Giving parents a voucher, redeemable to all state schools and participating private schools, would usher in a new era of social mobility and reverse the decline in the quality of English education.
“A voucher programme would expand the number of schools that parents could choose. Parents could choose participating private schools, which would be incentivised by the prospect of a more steady income. The resulting increased competition between schools to attract pupils would cause significant improvement in education.
“Good schools in sparsely populated areas would be incentivised to expand by receiving more pupils and money. Similarly, bad schools would be incentivised to improve by the threat of losing pupils, and therefore funding. A voucher programme would avoid the need to build more costly free schools, as well as the huge costs and regulations surrounding which have hampered the government’s education reforms."
A copy of the paper is downloadable here: http://www.adamsmith.org/sites/default/files/research/files/Voucher%20paper%20web.pdf. An executive summary of the paper is downloadable here: http://cmre.org.uk/uploads/publications/Voucher%20exec%20summary.pdf.
Please contact Alexander Blackburn to arrange an interview with the paper’s authors by calling 020 7799 8903 or 07400 902 290, or emailing ablackburn@cmre.org.uk.
The mission of the CMRE is to explore the potential for more diverse, competitive and entrepreneurial provision in the education sector, and the feasibility of market-led solutions to public policy issues.
The CMRE is a registered non-profit company limited by guarantee and independent of all political parties. The Adam Smith Institute is an independent classical liberal think tank.
Zombie firms threaten to cause a lost decade of economic stagnation
- Up to 108,000 “zombie firms” threaten to cause a “lost decade” of stagnant growth and productivity
- Corporate insolvencies are unusually low, suggesting that zombie firms are holding up capital and labour that could be used productively elsewhere
- “If a business can be saved, it is entrepreneurs who are best place to make the changes required” says OpCapita’s CEO Henry Jackson
Record low interest rates and the willingness of banks to show “forbearance” to unprofitable firms is damaging productivity, undermining competitiveness and preventing workers and money finding its way to the companies of the future.
The Trading Dead: The zombie firms plaguing Britain’s economy, and what to do about them (http://www.adamsmith.org/sites/default/files/research/files/ASITradingDead.pdf), by Tom Papworth, identifies “zombie firms” as heavily indebted firms that can generate enough revenue to pay down debt interest but not debt principle and are dependent on low interest rates to continue doing so. The paper argues that many of these firms require either insolvency or restructuring for a strong economic recovery to emerge. The report is sponsored by OpCapita, an international private equity partnership that specialises in turnaround through operational change.
The report shows that Britain’s “productivity problem” may be partially due to zombie firms holding up capital and labour in relatively unproductive sectors, raising the costs of entry for new, innovative firms. The two main factors responsible for the zombie phenomenon are low interest rates and bank capital regulations. Low interest rates may be misdirecting money to unproductive zombie firms, and bank capital regulations (such as Basel III) discourage banks from foreclosing on zombie debtors, which would worsen the liability on their balance sheets. This also discourages business lending by banks in general.
The report finds that private sector rescue of zombie firms is possible, but only for some. This rescue, in the form of corporate restructuring, must also be done in a decentralised “bottom-up” fashion by individual entrepreneurs and investors such as private equity firms using their local knowledge of specific firms and industries. A government-led drive would likely suffer from chronic inefficiencies.
Tom Papworth, Senior Fellow of the Adam Smith Institute, said “We tend to see zombies as slow moving and faintly laughable works of fiction. Economically, zombies are quite real and hugely damaging, and governments and entrepreneurs cannot simply walk away.
“Zombie firms stop workers and money being redeployed to more productive uses, they prevent new, better firms entering the market, they undermine competitiveness, reduce productivity and slow the growth of the whole economy. Low interest rates and bank forbearance represent a vast and badly targeted attempt to avoid dealing with the recession. Rather than solving our current crisis, they risk dooming the UK to a decade of stagnation.
“Zombie firms need to be confronted with the reality that they are not profitable. With timely interventions by knowledgeable entrepreneurs, many firms can be restructured and saved. But others must be liquidated to allow resources to feed the growth of the future.”
Henry Jackson, CEO of OpCapita and the report’s sponsor, said: “Turnaround specialists are uniquely placed to help Zombie Companies to restructure and return to profitability – a far better outcome than that they continue to limp on indefinitely. And when private equity steps in it is using its expertise and insight to bring the radical changes required for a failing business to survive.”
The report sets out the role of investors in identifying firms that are ripe for restructuring through the seven key aspects of a successful turnaround: crisis stabilisation, new leadership, stakeholder management, strategic focus, critical process improvements, organisational change and financial restructuring.
Henry Jackson concluded:
“If a business can be saved, it is entrepreneurs and turnaround specialists who are best placed to effect the changes required. Private equity firms have the insight and knowledge to do that, and they are prepared to take the risks to get it right. Delivering change in such circumstances is often extremely hard and carries inevitable risk. But genuine improvements in profitability can create long-term sustainable value.”
To arrange an interview with the report's author or for further information, email tom@tompapworth.com or phone 07585 937001. The report can be read in its entirety here: http://www.adamsmith.org/sites/default/files/research/files/ASITradingDead.pdf
Government should follow Royal Mail sale with £40bn asset sell-off
- The government owns around £600bn of assets, many of which do not need to be in the public sector
- A sale of less than a tenth of those holdings—the most peripheral and surplus items, including £23bn of real estate—would net £40bn to cut taxes temporarily or pay down the debt
- Holding onto given assets regardless of price is inefficient on a basic level; valuable assets are best allocated by the market
The report’s author, investment analyst and Adam Smith Institute senior fellow Nigel Hawkins, details how the government could bring in around £23bn from sales of excess real estate holdings and around £17bn from privatisations (excluding the bank stakes) by 2017-18.The report argues that useful resources are languishing in the public sector with no market assessment of their use to society.
Furthermore, the just-beginning re-privatisation of Lloyds TSB, as well as the sales of Royal Bank of Scotland, the government's stake in Urenco, and the Royal Mail, need to be a top priority, Hawkins says. The government should also part with a minority stake in Network Rail to raise around £7bn while still retaining control of the company.
Divestment of the Ministry of Defence’s estate would be another profitable area. Even a very limited approach to defence land sell-offs could raise £3bn, Hawkins says. In health, selling just 10% of Primary Care Trust assets would bring in £500m.
Along with these sales, agencies that already have plans to divest government assets—the Government Property Unity (GPU) and Defence Infrastructure Organisation (DIO) need to be pressured to meet their targets, the report argues.
Sam Bowman, Research Director of the Adam Smith Institute, said: “The government is sitting on hugely valuable resources that it should sell. The Royal Mail privatization is a good start, but going further would be win-win. Sell-offs of real estate and privatization of firms that the government doesn’t need to own would allow those resources to be used more productively by the private sector and net the Treasury some much-needed cash to fund temporary tax cuts to stimulate investment and job creation in the private sector.
“The £40bn of assets that we have identified as being ready for sale are just the tip of the iceberg. We need a slim, efficient government that is as cost-conscious as any business would be. It might be too soon to start planning to move government buildings to an industrial estate in Slough, but that’s what we should be aiming for.”
For further comment or to arrange an interview with the report's author or an Adam Smith Institute spokesperson, please email media@adamsmith.org.
Help to Buy scheme will worsen Britain's housing crisis
- The government’s Help to Buy scheme will drive up house prices by increasing demand for but not supply of housing – it will not improve overall access
- Help to Buy risks taxpayers’ money with no guarantee of a return
- By subsidising homebuyers and introducing the possibility of socialising lender losses, Help to Buy risks recreating the perverse incentives that led to the 2000s-era US housing bubble
If already badly-off people are less likely to access the scheme, it could have a particularly hard effect on the poor, the report says, a group who already lose out badly—the UK's extreme restrictions on housing supply have been calculated to add 3.5 percentage points to the GINI coefficient measure of inequality.
According to the report, a preferred alternative would be liberalising a hostile regulatory environment which inhibits the construction of additional housing supply—allowing houses to be built in more places, and slashing regulation on doing so. According to official statistics, only about 10% of the UK is built on, and of that the biggest fraction is gardens. If we want to control runaway house prices and give first-timers a chance to get on the ladder, we need to allow more houses to be built.
"It is crazy for the government to stoke demand even more without addressing supply and claim that this will help the housing market," said the Institute's Research Director Sam Bowman. "Making taxpayer-subsidised handouts to homebuyers will only drive further house prices up, risking a bubble, improving access for a select few but making housing even more unaffordable for most people."
"On the other hand, radical liberalisation of the planning system has the potential to drive massive economic growth, drastically reduce housing costs for the badly-off, and give millions more a chance to own property of their own. "
"Deregulation is a way of addressing the housing supply shortage while avoiding recourse to public fiscal intervention,” commented Preston Byrne, the Institute’s Legal Fellow. "If the Government is serious about finding a long-term solution to the housing crisis, it's time to take a hard look in the mirror and examine the role existing planning regimes – both local and national – play in regulating and inhibiting new housing construction.”
This paper is available to download here: http://www.adamsmith.org/sites/default/files/research/files/burningdownthehouseWEB.pdf
The Adam Smith Institute is a independent libertarian think tank based in London. For further comment or to arrange an interview about this paper, please contact Sam Bowman at 075-9682-6323 or email media@adamsmith.org
Think tank launches live markets to compete with government economic forecasters
- Adam Smith Institute launches betting markets on UK inflation and unemployment rates
- Markets pit the “wisdom of crowds” against government forecasters
- Launch coincides with Mark Carney’s first major speech as Bank of England governor
The markets (which will be run by bookmaker Paddy Power and can be accessed here: http://www.paddypower.com/bet/current-affairs/economy-specials?ev_oc_grp_ids=1289447) offer these odds:
UK Inflation on 1st June 2015
7/1 - 2% or Less
3/1 - 2.01 - 3.00%
9/4 - 3.01 - 4.00%
5/2 - 4.01 - 5.00%
7/2 - 5% or Greater
UK Unemployment rate on 1st June 2015
9/2 - 5% or Less
3/1 - 5.01 - 6.00%
15/8 - 6.01 - 7.00 %
5/2 - 7.00- 8.00%
5/1 - 8% or Greater
Bookmaker odds tend to be far more reliable than expert opinions about sports, politics and the Eurovision Song Contest, because betters have a strong financial incentive to bet in a dispassionate way and betting markets collect the judgments of thousands of different people, eliminating individual biases.
Even if no single member of the public can beat the experts, collecting the local knowledge of thousands of people in betting markets allows for a much broader set of data points, weighted according to the strength of people’s beliefs. The Office for Budget Responsibility already collects around two-dozen expert predictions, but this is nothing like the kind of volume needed for the ‘wisdom of crowds’ effect to take place.
These markets follow the CIA’s attempts to use betting markets to anticipate geopolitical crises, which were short-lived because of public objections. In future, the Adam Smith Institute will use these markets to compare betters’ judgments about the direction of the economy to those of government forecasters.
Sam Bowman, Research Director of the Adam Smith Institute, said: “No individual can know enough about the economy to make a really reliable prediction about it. By combining the local knowledge of thousands of people, betting markets can outpredict any panel of experts. If these markets catch on, the government should consider outsourcing all of its forecasts to prediction markets instead of expert forecasters.”
Rory Scott from Paddy Power said “Mr Carney – forget your fancy financial models; let’s see where the great British public put their pound instead. Failing that, perhaps the solution to topping up the Bank of England coffers is to take advantage of Paddy Power’s 7/1 for inflation to be 2% lower come June 1st 2015.”
The Adam Smith Institute is a independent libertarian think tank based in London. For further comment or to arrange an interview about the markets, please contact Sam Bowman at 02072224995 or email media@adamsmith.org
Media contact:
emily@adamsmith.org
Media phone: 07584778207
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