Subsidies and regulations on childcare are costing us all

This morning the TUC released a report showing that childcare costs are rising faster than wages and called for further public subsidy of childcare by the government. Matthew Kilcoyne, Head of Communications at the Adam Smith Institute, agrees that the cost of childcare is a pressing issue but is one that is best fixed by a free market approach, he says:

"The way to bring British childcare costs down isn't, as suggested by the TUC, to spend ever larger amount on subsidising nurseries but to remove the regulatory barriers that make childcare unaffordable. 

"By far and away the largest costs for childcare providers is the cost of labour. Currently in the UK one adult carer is required for every three babies, four toddlers, or eight children over the age of three. By contrast, in Norway the maximum ratio of carers to children is much higher for the very youngest, at nine children to one carer. Evidence from the USA suggests that adding one child per carer more cuts costs by between 9% and 20%. If we relaxed our rules on childcare to Norwegian or French levels we could end up halving childcare costs.

"High staff to child ratios aren't just expensive, they can harm the quality of care too. Studies show that looser mandated child to carer ratios encourage higher qualified staff to enter the industry at higher wages. 

"The Conservative government should embrace the free-market option, increase the quality of care and come on side with young parents who want the freedom to work and start a family."

For further comment or to arrange an interview please contact Matt Kilcoyne via email (matt@adamsmith.org) or phone (07584778207). 

We'll pay an absolutely extortionate bill for energy caps

With the government pressing ahead with a Bill to create an absolute cap on energy prices, the Adam Smith Institute laments the decision by the government to intervene in the energy market. Sam Dumitriu, research economist at the Adam Smith Institute, decried the move saying: 

“The Government’s proposed price cap risks fatally undermining competition in the energy market. The evidence is clear: when price caps are imposed customers stop switching, the best discounts are withdrawn and prices bunch around the cap. Customers may become complacent, leading to fewer billpayers accessing deep discounts by switching suppliers.

Imposing an absolute rather than a relative price cap is especially worrying. If wholesale prices change significantly, as they have in the past decade, then the cap swiftly become out of date. High prices send a signal to suppliers to invest in new infrastructure to meet demand. If the cap is set too low, firms may be deterred from investing risking blackouts. As a result Whitehall may be forced to take even an even greater role in picking and funding new investments in power generation. Theresa May will inadvertently make Corbyn’s case for nationalisation for him.”

For further comment or to arrange an interview please contact Matt Kilcoyne via email (matt@adamsmith.org) or phone (07584778207).

May burying head in sand with energy and housing policies

Today at Conservative Party Conference in Manchester the Prime Minister said she wanted to defend and explain the benefits of the free market. Sadly her words are not backed up by her actions as she announced an energy price cap and government housebuilding. Sam Dumitriu, research economist at the Adam Smith Institute, criticized the move to cap energy bills saying:

"Theresa May began her speech today saying she had a duty to defend and explain the free market. But her actions fail to match her rhetoric. Capping Standard Variable Tariffs will stifle competition and likely raise prices.

“The best way to make energy bills work for ordinary people is to boost competition, but May’s price cap will destroy the incentive for many customers to switch to a new provider, squeezing out new suppliers and will cause suppliers to raise prices on their cheapest tariffs. This is why the Competition and Markets’ Authority opposed price caps when they investigated the energy market in 2015.

“Huge price gaps between otherwise identical tariffs may seem bonkers, but it’s standard behaviour in any competitive market with high fixed costs. It costs Starbucks just a penny more to make a large rather than a small cup of coffee. But, politicians rightly don’t call for a price cap on Venti Chai Lattes.

“Excessive intervention by OfGem has reduced consumer choice, caused switching rates to half, banned the best deals on the market and led to E On’s Stay Warm tariff, which was praised for helping old aged pensioners, to be pulled from the market.

“Capping energy prices may be good politics, but it’s bad economics.”

On housing, where the Prime Minister committed the government to intervening in the market a rash move by the government could miss a golden opportunity to liberalise housebuilding and to win over younger voters. Sam Bowman, Executive Director of the Adam Smith Institute, says:

"It's tempting to laugh at today's speech but really it was quite sad. The Tories seem to have no idea what to do about housing, because they're so afraid of alienating their base that they won't do any substantive policy that could properly boost the supply of new homes. Again and again this week people asked how to connect with younger voters - the simple answer is to give them somewhere to live.

"Social housing isn't what people want to live in. Almost everyone would like to own their own home. We can do that, but only if we're prepared to change the rules of the game so that new developments benefit existing residents, and so that constraints on densification are eliminated. Take away the rules stopping streets of semi detached houses from being upgraded to terrace flats, and to build densely around railway stations and tube stations. Planning is the huge bottleneck here that is stopping millions of new houses from being built privately and affordably, and if the Conservatives are going to bury their heads in the sand about that then eventually voters will punish them for it."

For further comment or to arrange an interview please contact Matt Kilcoyne on 07584778207 or email matt@adamsmith.org

Help to Buy won't build the young any houses

This morning the government announced an extra £10bn would be used to revive the Help to Buy scheme. This will do nothing to increase the supply of housing, an issue we've looked at in detail recently, but could increase demand and so exacerbate the housing crisis it's targeting. 

Sam Bowman, Executive Director of the Adam Smith Institute, decried the move saying:

"Reviving Help to Buy is like throwing petrol onto a bonfire. The property market is totally dysfunctional because supply is so tightly constrained by planning rules, and adding more demand without improving the supply of houses is just going to raise house prices and make homes more unaffordable for people who don't qualify for the Help to Buy subsidy. 

"London has the second highest property prices per square metre in the world, only behind Monaco. New build houses are even smaller in the UK than in the Netherlands, despite being the most densely populated country in Europe. Only 2% of England is built on, but we're fenced in by NIMBYs and planning laws that block development nearly anywhere.

"To improve the housing market you need to change the rules of the game, so that damaged parts of the green belt can be built on, so we can have more dense and efficient development of existing urban areas,  and so that locals benefit from new developments near them. Reviving Help to Buy is an astonishingly ill-judged move that may prove economically and politically disastrous for the government."

For further comment or to arrange an interview please contact Matt Kilcoyne on 07584778207 or email matt@adamsmith.org.

Corbyn's controls will put renters on a long wait to nowhere

While we were never going to come out batting for Jeremy Corbyn his speech this afternoon ending Labour's annual conference in Brighton marked a new low with his promise for rent controls. 

Ben Southwood, Head of Research at the Adam Smith Institute, said any reliance on rent controls was fantasy economics:

"Jeremy Corbyn’s plan to institute rent controls will lead to smaller properties, shoddier upkeep, and long waiting lists to get a flat. What’s more, it risks cronyism if councils get a role in deciding who jumps to the front of the queue.

"It may come as no surprise that the Adam Smith Institute disagrees with hardline socialist Jeremy Corbyn—but rent control is a rare case where economists almost all agree, left and right.

"95% of top economists agreed rent controls in San Francisco and New York had worsened the amount and quality of affordable rental quality there. And you can see why: prospective tenants in rent-controlled Stockholm languish on waiting lists for 15-years on average—expensive is one thing, but impossible is quite another.

"Unable to make back their investment, landlords in rent-controlled cities let paint peel, carpets mould, and furniture rot. And if you haven’t got connections—whether with property owners or council powerbrokers—then you might be completely out of luck. Even fewer new units are built in the places that need them most, and the ones they do build are lower quality and smaller in order to make it worth their while.

"There are lots of policies that could help fix the housing market—all centred around building more housing—but rent control is one of the few big changes that will make things much, much worse."

To arrange an interview please contact Matt Kilcoyne on 07584778207 or email matt@adamsmith.org

John McDonnell is being Pretty Financially Irresponsible

The Shadow Chancellor, John McDonnell, committed himself to being pretty financially irresponsible as he blasted PFI during his headline conference speech in Brighton this afternoon.

Sam Bowman, Executive Director of the Adam Smith Institute criticised McDonnell's commitment to bring an end to PFI, to nationalise swathes of British industry and the impact these policy proposals will have on British taxpayers. He said:

"Behind everything John McDonnell promised was an unspoken, but unavoidable, price: to pay for all this, we’re going to face big tax rises.

"The tax avoidance ‘tax gap’ exists because beyond a certain point it costs more to pursue tax than it actually raises, not because of some clever conspiracy at the Treasury. So you can’t hope to raise revenues just by ‘getting tough’, because ‘getting tough’ is expensive and difficult in itself. It’s dishonest to suggest that this can pay for the sort of policies McDonnell is proposing, and people should be aware that Labour’s extra spending will mean higher indirect taxes for most workers.

"There are problems with private finance initiative schemes, but on the other hand using private funds to pay for new roads, railway lines and hospitals seems like quite a good idea when government itself is so strapped of cash. By all means we should be trying to do PFI schemes with more accountability for the government departments that go ahead with them, so that taxpayers do not face unnecessary risks, but ruling out PFI altogether will either mean much greater costs for taxpayers or much less money available for capital investment. Higher taxes and less investment might be a price John McDonnell is willing to pay for ideological purity, but for the rest of us the right option is to improve the existing systems, not scrap it altogether.

"Nationalising big swathes of the economy will likely mean higher prices, worse service, or higher taxes, or some combination of the three. In the case of rail and energy, costs are high for users because wholesale prices are high and we have chosen to make users pay instead of forcing others to subsidise them. Nationalising these industries will end up starving them of investment, just as they were before they were privatised in the 1980s. That could mean a return to energy shortages and an underserved train network that barely anyone rode."

For further comment or to arrange an interview please contact Matt Kilcoyne via email (matt@adamsmith.org) or phone (07584778207).

TfL and Sadiq Khan harming Londoners by banning Uber

Following the completely disgraceful ruling revoking Uber's licence in London the Adam Smith Institute is leading the attack on the decision by TfL and Sadiq Khan that will leave Londoners worse off, less safe and with less choice over their lives.

Sam Dumitriu, research economist at the Adam Smith Institute, slammed the decision saying:

"TfL's decision to revoke Uber's license is a disaster for Londoners. They are choosing to punish the 3.5 million Londoners who regularly use Uber just because it's cheaper, it's safer, and it's quicker. This decision jeopardises the livelihoods of 40,000 drivers who choose to use the app because it gives them valuable flexibility.

"The only people that will benefit are the Black Cab lobby who have crushed a competitor through cronyism, rather than providing a better service.

"Londoners will face higher prices, longer wait times and will no longer benefit from a safe service where every journey is logged and tracked by GPS.

"Sadiq Khan likes to claim that London is open, but this decision sends a powerful message that London is completely closed to innovation, competition and business."

For further comment or to arrange an interview please get in touch with Matt Kilcoyne via email (matt@adamsmith.org) or phone (either 02072224995 or 07584778207).

Vince Cable hits out at all the wrong targets on housing

Today the Liberal Democrats' annual party conference came to a close. Unfortunately Vince Cable missed the mark in his maiden speech as leader, attacking all the wrong targets for high house prices and ignoring causes to supply that government could easily fix.

Sam Bowman, Executive Director of the Adam Smith Institute, said of the speech:

"On housing, Vince Cable has indulged in the sort of foreigner-bashing that his party usually attacks others for, and missed the point. 'Oligarchs and speculators' are neither a major feature of the housing market nor are they the real cause of high house prices. The problems he points to only exist because housing is an investment asset as well as a place to live, and that is because supply of new homes is so constrained.

"Many people in the Liberal Democrats recognize that the Green Belt is one of the main barriers to building more houses, and indeed Vince Cable has himself acknowledged this in the past. The market isn't working because planning laws have prevented house builders from providing the new homes that people want. Cable's proposals will do little to change that and might even make the housing market seem more dysfunctional by adding complications and extra taxes."

Notes to editors: to arrange an interview or further comment please contact Matt Kilcoyne via matt@adamsmith.org or via mobile on 07584 778207.

UK banking system an accident waiting to happen

New report shows UK banks still sickly, 10 years on from run on Northern Rock

• Latest round of Bank of England stress tests drastically underestimates vulnerability of UK banking system and risks to the UK economy
• UK banks remain highly leveraged; a 2007-08 level shock could still cause the banking system to collapse 
• Properly stringent stress tests and market valuations of bank capital would have seen all major UK banks fail
• Bank of England’s stress tests are worse than useless – offering false comfort while herding banks into identical business models

The British banking system is an ‘accident waiting to happen’ according to a new report released today by the Adam Smith Institute, ten years after the run on Northern Rock heralded the beginning of the financial crisis.

Kevin Dowd, author of the report and professor of finance and economics at Durham University, says the Bank of England’s stress tests continue to greatly overstate the financial resilience of the UK banking system. 

High bank leverage was a key contributing factor to the severity of the financial crisis and UK banks are still highly leveraged, but easy-to-game risk weighting measures still hide this.

The Bank of England’s stress tests look at book-values – values of assets and securities recorded in accounts. On these measurements UK banks’ leverage fell by around a third since 2006. Using more accurate numbers based on real market value reveals that banks’ leverage has actually increased by about a half.

Market-valuations of bank capital are more reliable than book valuations, says the report, indicating that markets believe banks are still carrying large hidden losses not reflected in book valuations or in the stress tests. By doing so, the report suggests, the stress tests provide the public with false assurance about the financial health of their banks.  

UK banks experienced losses of around half a trillion pounds from the last crisis. The Bank of England, as recently as last month, suggested from its view that British banks were in a far better shape to cope with a major shock than they were ahead of the last recession. The paper argues that this is not the case and another crisis on a similar scale could wipe out the entire capital of the banking system multiple times over. 

The Bank’s stress tests are seriously flawed in a number of respects, Prof Dowd shows:

1. they are based on book values instead of market values,
2. pass standards are based on minimum capital requirements that are way too low,
3. they generate implausibly low losses for a severe stress, 
4. they are based on discredited and gameable metrics such as Risk-Weighted Assets and Tier 1 capital (which include OECD government debts - including eurozone crisis countries such as Italy), and
5. they fail to even consider some of the biggest risks faced by the UK banking system.

Professor Dowd suggests that the stress test programme is so severely compromised that it should be scrapped. Instead, the Bank of England should focus on the reforms really needed to get the UK banking system on its feet – raising capital standards, and establishing tighter corporate governance and reforming accounting standards. 

Another shock on the scale of 2007-08 is a possibility, something the tests are designed to prepare for, but UK banks and the Bank of England are not remotely ready for it. Instead, the report argues, the Bank’s policies towards the banking system amount to a form of Russian roulette risking disastrous consequences for the UK economy.

Kevin Dowd, senior fellow of the Adam Smith Institute and author of the report, said:

“The stress tests are about as useful as a cancer test that cannot detect cancer. They seek to demonstrate a financial resilience on the part of UK banks that simply isn’t there. 

"It is disturbing that 10 years on from Northern Rock, the best measures of leverage – those based on market values – indicate that UK banks are even more leveraged than they were then.

"The biggest risk facing the UK banking system now is the Bank of England’s own complacency.”

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

“The Bank of England, understandably, wants to prepare for bad eventualities. But its definitions of risk are nonsensical—Italian sovereign debt counts as zero-risk—and easy to game. That means that the stress tests are yet another incentive for banks to put all their eggs in one basket. Even if the Bank were right about risks, this would make crises less frequent, but when they did arrive, much, much worse.

“The Bank of England, now with all its extra powers, should focus on improving the rules of the game, not micromanaging banks’ balance sheets.”

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. A full version of the report "No Stress III – The flaws in the Bank of England’s 2016 stress tests" can be found here. 

Plan to curb EU migration a disaster

This morning new strict immigration proposals were leaked to the Guardian newspaper, and reported extensively as a commitment to end free movement of workers from the EU, the Adam Smith Institute damns the move as creating a potential economic disaster for the United Kingdom. 

Sam Bowman, Executive Director of the Adam Smith Institute, says if implemented the leaked proposals would undermine British businesses and public services:

"The government’s migration plans would be a disaster if implemented. The Home Office has shown again and again that it isn’t capable of dealing with non-EU immigration effectively – as orders to leave the country wrongly sent to long-time British residents prove. Extending this sort of system to EU immigration will massively drive up waiting times, uncertainty and bureaucracy facing businesses and public services who need to hire foreign workers. Requirements that firms prove that they have tried to hire British workers first don’t work in other countries, they just add bureaucracy and costs.

"EU migrants do not harm native wages or job prospects, and they pay more in taxes than they cost in benefits, effectively subsidising British public services. Curbing their numbers substantially will mean higher taxes or deeper spending cuts just to keep the public finances at their current level, and public services that rely on foreign workers – like schools and the NHS – will face shortages of key workers and need to cut spending on frontline services to fill in the gaps."

In order to arrange any further comment, or to arrange an interview about this topic please do get in touch with Matt Kilcoyne via phone (07584778207) or email matt@adamsmith.org