CentreRight

Re: "Osborne considers billions in Irish loans"

I agree with Tim on a lot of the points he has made in his two articles this morning about the Irish bailout.  It is shocking that it wasn't raised at PMQs; absolutely incredible that no one is stepping up to speak for British taxpayers.

We disagree on whether Britain should say no to a bailout, though.  Tim says:

"I cannot be as implacable as the TPA, however. Osborne should try to persuade Ireland to leave the €uro but if he cannot, a bailout might be necessary to stop the Irish contagion affecting the whole European continent. We are not in ideal world scenarios here."

That is a reasonable position but the problem is that we don't stop the contagion with a bailout, we just delay it.  In the United States, where a little distance helps them get some perspective on this issue, economists from Martin Feldstein to Paul Krugman all think that the Euro is fundamentally broken and have envisaged countries leaving.  Just yesterday, Nouriel Roubini described the Irish bailout as an attempt to "kick the can down the road".  It might be an unpleasant but necessary medicine if British taxpayers had to support a bailout that stopped contagion from Europe, but just to kick that can down the road?

Ruth Lea explained the economics of the issue yesterday:

"The eurozone cannot work with such disparate economies. Putting aside the current financial crisis, it is hard to see how Ireland, for example, can recover economically. As one of our major trading partners this is bad news for us. At some point, the EU will have to come to terms with the exit of some of their members – the sooner the better. Of course there are implications for the banks – but better to deal with their problems directly rather than struggle with propping up the unsustainable."

There isn't an opportunity here to save the eurozone.  As it is one of our key trading partners, we should wish Ireland well, but propping them up in an unsustainable single currency isn't the way to help.  Continental politicians with a fanatical attachment to political integration might think it is worthwhile to kick the can down the road, in the hope that they can eventually make it work with fiscal integration.  They shouldn't be able to do that with British taxpayers' money on the line.

I really hope ConservativeHome readers will sign our petition (look out for the validation e-mail after you've signed, it often goes to the junk folder).  We need to stop this bailout.

Re: The Government is right to protect the International Aid budget

Some aid is important and valuable. But some aid is counterproductive and traps countries in dependency, in the same way that the welfare system too often does here.  At the same time, a lot of money is wasted.  The Government have scrapped some of the worst "awareness" spending in the UK for example, some of the projects that the IPN highlighted in their research last year.  The Department still believes that it should be spending taxpayers' money on "raising awareness" though, making the case for aid as part of our role in the world if it can find the right project.  And millions of pounds is still going to charities like Oxfam and Christian Aid who waste more than a third of their budget on non-project costs.  That is part of the 14p in every £1 of DFID spending that never reaches the frontline, as we showed in a TPA report last year.

With all that in mind, wouldn't it have been fair for DFID to get the kind of settlement that other important areas of spending like education and science did in the Spending Review?  It isn't as if the advocates for those areas of spending, or some of those getting sharper cuts like defence and justice, couldn't make a case that is just as persuasive as Mark Pritchard's.  A freeze in spending, the same deal as science got, would save £3.7 billion.  Plenty of people step up to the plate to defend aid spending in principle, but we aren't talking about an abstract decision over whether we want aid spending or not.  The question is whether we should drastically increase the aid budget while others are being cut and taxes - including on the poorest Britons - are rising.  I haven't heard a remotely convincing case for this kind of dramatic disparity in how the different budgets are being treated:

In the end, that just isn't how the public want to see their money being spent.  Policy Exchange polling before the election made that clear enough.  This graph shows net support for more (+) or less (-) spending.  All the parties are conniving to ignore the public's wishes and spend more on an area where they would like to spend less.

That is why a lot of the sanctimony from politicians backing drastic increases in the aid budget isn't justified.  Big hikes in the DFID budget aren't altruistic.  Altruism is when you give your own money.  The British public often display striking altruism when there is a disaster here or in another country.

Politicians giving more of other people's money isn't altruism, it's just a flagrant disregard for democracy.

When it comes to their own budgets politicians are just as grasping as they've ever been.  While ordinary Londoners were preparing to struggle to work on foot, bicycle or overcrowded bus, Michael Fabricant was telling colleagues they could spend up to £80 of our money on a cab ride home.  You could defend him as just passing on IPSA's decision, but his last words were "Enjoy!"  That sense of entitlement to spend and enjoy taxpayers' money as if it were their own is still the principal vice of Britain's political class.

Re: Don't believe the right-wing commentators who say this isn't going to hurt

Tim is right to point out that the process of cutting some spending will still be extremely painful for lots of people, and shouldn't be understated.  But that doesn't mean that John Redwood, Dominic Lawson, Fraser Nelson, Allister Heath and countless others aren't also right to point out that the overall cut in public spending proposed is quite marginal.

All those right-wing commentators are right to point out that the overall spending cut isn't that severe, because it isn't.  In 2006-07, when we were spending the same share of GDP that we will be in 2014-15, spending wasn't cut to the bone.  That was after a decade of Gordon Brown as Chancellor of the Exchequer.

So it isn't spending cuts that are going to really hurt.  It is the reallocation of spending from some services to debt interest payments and some other services.  What Tim is right to caution about is that no one should make light of those cuts that are taking place.  Lots of people who didn't make the decisions that landed Britain in its present predicament will find that they have less money in their pocket at the end of each month as a result of the decisions being taken to move Britain back towards fiscal sanity.

What we need to resist though is the characterisation of these cuts as part of a programme to drastically scale back public spending.  Two sets of decisions have led to some areas of spending facing very sharp cuts.  Past decisions to borrow so much that we have a lot more government debt, and need to pay more interest on it.  And current decisions to ringfence the health budget and sharp increases in international development spending.  Pointing out that overall cuts in spending are modest is an important part of the process of laying the blame for a lot of the pain that is to come where it is deserved, on those decisions.

With the massive scale of the national debt, serious action does need to be taken to get the public finances under control.  The real debt is even bigger, as new TaxPayers' Alliance research by Mike Denham shows, and he explains in this video:

Please share that video and help us let people know about the scale of the debt the country is facing.

The nearly £8 trillion real national debt is the result of a decade of rapid and unsustainable rises in spending.  That process is being modestly reversed, but that modest reversal will be particularly painful because it is only partial and in some critical areas the Government are still attached to the old attitude that says you can only care about results if you spend more money.  That is the real reason why the necessary cuts being announced this week will be particularly tough in some areas.

Matthew Sinclair: The problems encountered in translating the Big Society principle into policy

Paul Goodman has written about five problems with focusing on the Big Society. One of the problems he cites is that it is a bit vague:

"It's a bit vague. I suspect that this is intrinsic to the Big Society concept.  Lots of good and often little things happening locally are hard for voters to grasp, and for government to package in a big way - unlike, say, selling council houses to their tenants or shares to individuals. Those policies gave people concrete, personal gains - and government clear, hard numbers of winners. The Big Society isn't a retail offer."

I'm not sure that vagueness is intrinsic to the concept; rather, I think it's a response to the challenges encountered in translating the concept into policy prescriptions. The main attempt to do so came when the party released the report Building a Big Society back in March this year. That report contained a number of policy ideas that were quite precise but ultimately unimpressive.

Some of the proposals seemed to be public relations gimmicks - having civil servants do community service, or organising a "Big Society Day". Others were far more worrying. Using taxpayers' money to support the radical left-wing group London Citizens to train activists, in particular - I wrote about that for the TPA blog.

If the Conservatives are looking for an alternative theme which simultaneously attacks their reputation as the party of the rich, addresses the vital subject of the economy and could be clarified to a powerful policy agenda, then rather than advancing the Big Society agenda again I would still suggest attacking crony capitalism, as I did on this site before the election.

Scrap the Carbon Trust

I wrote over the weekend about the cost of quangos.  In that blog, I promised we would be campaigning for some of the bodies currently under review to be abolished in the run up to the Spending Review.

Today we're releasing the first of a series of letters calling for the worst wastes of money in the quango sector to be abolished.  In 2009/10 the Carbon Trust received nearly £118 million from the Department for Energy and Climate Change in its core grant.  Add in grants from other Government Departments and you get to a massive £156 million.

That money means handsome remuneration for staff.  It even means plans to expand into other countries, last year they advertised for a Head of Carbon Trust USA.  We would probably have more examples of waste but for the fact the Carbon Trust isn't covered by the Freedom of Information Act so we can't find out how they spend our money.

The Carbon Trust doesn't do much to achieve any concrete objective.  It doesn't address a real market failure, if large businesses (the ones the Carbon Trust works with) are able to save money by cutting their energy use then they will.  If they need advice, they can pay for it instead of the money coming out of the pockets of ordinary families.

There is more in the letter we have released this morning.

We'll be sending it to Chris Huhne.  And we are encouraging our supporters to contact him as well, urging him to scrap this huge waste of money.

Please do the same by e-mailing [email protected] or writing to him at:

Chris Huhne
Department of Energy and Climate Change
3 Whitehall Place
London
SW1A 2AW

Hopefully the Treasury and some of those sitting in the Star Chamber will listen too.

Matthew Sinclair: How trade unions were funded by the taxpayer to the tune of more than £85 million last year

New TaxPayers' Alliance research is out today looking at how taxpayers' money is being spent supporting the trade unions.  The report looks at Government departments, quangos, councils, NHS Trusts and fire services; over 1,200 organisations.  We found that £85.8 million went to support the unions in 2009-10.  £18.3 in grants and other payments and £67.5 million to support 2,493 employees working for the unions but paid by the taxpayer.  The total was up 14 per cent from 2008-09.

This is a huge amount of money, significantly more than both the main political parties will typically raise in a non-election year.  The unions know how much of a scandal it is, they tried to stop organisations answering our Freedom of Information requests.

They will claim that the presence of union staff helps improve workplace relations.  But research by global business performance advisors McKinney Rogers shows that most employees consider their trade union representative uninspiring (54 per cent) or downright demotivating (27 per cent).  By contrast, 52 per cent find their company's CEO inspiring and 56 per cent find their colleagues inspiring.

Our report shows that the unions have a huge network of paid organisers at no cost to themselves.  And programmes like the Union Modernisation Fund support a range of projects that improve their technical capacity and recruit new members.  All of their actual work representing employees is paid for, so they can use their own income to build multi-million pound warchests to fight spending cuts.  £85 million in public subsidy gives them a huge advantage in their attempts to turn the clock back by decades, and go to war with an elected government with a clear democratic mandate to curb the deficit.

Public sector staff strike for fifteen times as many days per worker as private sector workers.  They rely on the fact that politicians and managers aren't spending their own money, and that their employers can't go out of business.  It is ordinary taxpayers who pay the price when they don't get the better schools that reforms should be delivering; when money is wasted on excessive spending and higher borrowing costs thanks to a failure to make necessary cuts; and when services they have paid for are disrupted by strikes.  It is an absolute outrage that taxpayers are being forced to finance their own muggers.

The regulations that force employers to pay for staff working for unions should be scrapped, the unions should pay those salaries themselves, and scandalous slush funds like the Union Modernisation Fund should be abolished.  If the Government don't act on this issue, they will accepting a gross distortion of our democracy that threatens their own efforts to fix the public finances, and they will be allowing a chronic waste of taxpayers' money to continue.

We can't allow Government decisions to be dictated by IFS graphs

There has been a lot of media coverage today for a new IFS report claiming that the Government's fiscal adjustment is regressive.  Unfortunately, it is going to be difficult for the coalition to shake this one off, given how much weight they placed on Chart A1 in the Emergency Budget report, which they used to bolster a claim to be making "progressive" cuts.

But that chart and the findings announced by the IFS this morning are actually far less significant than they have been made out to be.  The IFS report is based on an assumption that the fortunes of the poor add up to the amount of Government money spent on them.  In a blog for the TaxPayers' Alliance, I raised a hypothetical example to show how that could produce absurd results:

"Suppose you invented a policy, some kind of economic miracle, which doubled the incomes of the poorest ten per cent of families without the Government spending a pound.  That would reduce benefit spending.  It would also increase tax revenues from the poorest.  The same method that the IFS are using in their reports would show the effects of that policy as horribly regressive, cutting spending on the poor and shifting the fiscal scales against them."

Of course, that example is an extreme one.  But the IFS method does mean recording dependence on government as success.  Allowing it to dictate policy would lead to disaster as it would stop us dealing with the problems created for the poor, and poor areas, by too much government.

There are more practical examples of how this sort of distributional analysis could lead to policy choices that actually hurt the poor.  In my blog, I gave the example of regions where the state dominates the economy, with state spending in the North East over 60% of GDP, crowding out private enterprise and locking in economic stagnation:

"On that measure at least, parts of the country are closer to the Soviet Union than the South of England.  An economy so dominated by government spending always tends to economic stagnation which ultimately means misery for the people who live there."

In an excellent blog this morning for the Telegraph, Neil O'Brien - Director of Policy Exchange - provides another example:

"A couple of years ago I found that between the mid 1990s and the mid-2000s, the incomes of the poorest 10% of the population had grown eight times faster in Ireland than in Sweden (and six times faster in Britain) – mainly the result of faster growth overall. As a result, so-called Anglo-Saxon economies like Ireland and the UK had a smaller proportion of their population below the absolute poverty line than Sweden. Growing the pie matters as much as how you slice it, and equality doesn’t really capture everything we mean by fairness."

The IFS do some very important statistical legwork.  They have exposed some egregious claims made by politicians over the years.  But there is no simple graph which will tell you if a Government is doing the right thing for ordinary Britons, or the poorest.  It is dangerous for politicians to show too much respect to such a simplistic analysis.

Dealing with a fiscal crisis brought on by a decade of irresponsibility will be difficult.  But the way to help the poor is to embrace radical reforms in areas like welfare and education that will allow them and their children to better stand on their own two feet.  Not making more vain attempts to bury deep seated problems in piles of taxpayers' money.

The Treasury aren't the obstacle to welfare reform

At the TPA, we very much appreciate the hard work that Iain Duncan Smith and the rest of the DWP team are doing to try and reform welfare.  It was extremely encouraging to see the 21st Century Welfare report endorse radical measures to fix a failing benefit system - with one of the options in the consultation based on TPA research - that is failing the poorest and trapping people in dependency.  But I'm starting to tire of all the bleating about how this requires lots more money, and how we need to overcome the resistance of a penny pinching Treasury.

Let's be clear.  If welfare reform fails because it is decided that the country can't afford to spend more on benefits, Iain Duncan Smith will bear as much responsibility as George Osborne or any bureaucrat in the Treasury.

£15,000 fine for building a normal house

This story from the Independent on Sunday is very disappointing.  Even the local government team, who have been getting so much right recently, apparently take leave of their senses when it comes to policies aimed at addressing climate change:

"All new homes are rated under the Code for Sustainable Homes. Where planned properties do not reach the highest level 6 standard – where their own green energy production offsets their emissions – developers would be charged a tariff of around £15,000 by the local council to fund infrastructure and local services. Part of this would also include contributing to a "buy-out fund" to pay for the construction of wind farms, solar panels or geothermal technologies in the local area, which would supply the new development with green power."

We are already providing huge subsidies to small-scale renewable energy.  The feed-in tariffs are so generous that they have been denounced by George Monbiot as a "rip-off".  Policy Exchange has called for them to be abolished.

The basic problem is that we are encouraging the use of an inefficient means of generating power.  Things were bad enough when the Government used to try and pick winners, now they pick losers!  We all pay a price in higher energy prices.

Under this scheme, even the most efficient new home will either have to fit some form of microgeneration or pay a £15,000 tax/fine.  That will increase the cost of building new homes and worsen the extremely pernicious shortage of affordable housing.  Just as the vulnerable elderly - excess winter mortality was 36,700 in 2008/09 (the last winter we have data for) - pay the highest price for renewable energy subsidies that drive up energy prices, it will be poor families struggling to find an affordable home who suffer from this green rip-off.

It will also be an administrative nightmare.  Working out whether a property has covered its emissions with new green energy production requires answering a number of tough and uncertain questions.  What load factor are you expecting?  Are you adjusting for the need to back-up wind and solar power, reducing the efficiency of fossil fuel plants?  How can you reliably measure and predict a household's emissions, both in construction and by assessing thermal efficiency afterwards?  Those are just a few questions that will need to be answered to stop this policy becoming even more unfair and inefficient in practice than it is in theory.

The buy-out fund sounds like it will lead to a big waste of money too.  It is like the schemes that require energy companies to spend a certain amount improving efficiency.  If they have money left at the end of the year they start mailing out energy efficient light bulbs to households almost at random, just to spend the money the regulation requires them to.  Councils will wind up supporting all sorts of inefficient schemes not because they are good ideas, but because they need to spend the buy-out fund.

This is yet more bad climate change policy and risks exacerbating the social, economic and political challenges facing a Government trying to push through a significant fiscal adjustment.

Turning aspirations to reform benefits into reality

There is a huge amount to like about the principles set out in 21^st Century Welfare, the new report from the Department for Work and Pensions which sets out the options for radical welfare reform.  It is a powerful statement of intent that Iain Duncan Smith intends to overhaul a system that is failing the poorest instead of applying more counter-productive sticking plasters.

The report sets out four options to drastically simplify benefits: a "Universal Credit" that simplifies existing benefits into a single payment scheme; a "Single Working Age Benefit" recommended by the IPPR that would replace all benefits to the unemployed, disabled and others with a single scheme; a "Mirrlees model" proposed by the Institute for Fiscal Studies that would cut benefits but provide an initially zero and then low withdrawal rate; and a negative income tax model recommended by the TaxPayers' Alliance in our recent report Welfare Reform in Tough Fiscal Times.

As I wrote in an earlier post, there are a number of serious problems with the current system:

1.   It is too complicated, with more than 50 different benefits (the take-up rate for Working Tax Credit is only 57 per cent)
2.   It is poorly administered, with fraud and error costing £4.5 billion each year
3.   It’s unfair on couples because some lose up to £1,336 by living together
4.   Those who work and progress in work are financially penalised, the minimum wage of £5.80 an hour can be worth as little as 26p
5.   The number of people living in severe poverty has increased from 5 per cent to 6 per cent in the last decade

A simplified system along the lines that the DWP are considering could yield huge improvements in all those areas.  Unfortunately, there are two areas where today's report falls down.

The DWP needs to look at changing the poverty line.  As they aren't willing to do so, they are still talking about marginal withdrawal rates of around 70 per cent.  While it would be an improvement from the situation facing some families today, that isn't nearly good enough.  A minimum wage of £5.80 an hour would then still be worth as little as £1.74.  That massively undermines the incentives to work produced by the market, it is hard to think that it would be seen as acceptable at the other end of the income distribution.  Under our proposal, with a poverty line of 50 per cent, it is possible to ensure that total marginal withdrawal rates are never more than 55 per cent.

The failure to take the tough decision and bring the poverty line down to 50 per cent also means that the scheme will cost money, at least until it gets more people into work.  That creates two threats to the reform.  First that a Government facing a dire fiscal crisis will be put off and water down reforms, or insist on a higher taper rate that will further undermine incentives to work.  Second that the public, who rightly think they already pay more than enough for the welfare system, will turn against the reforms and make it easier for them to be unwound by an antagonistic Government in the future.  Policy Exchange polling found that the four areas the public were most likely to support cuts were the BBC, culture media and sport, international aid and benefit spending and tax credits.  Can a coalition Government making cuts really afford to increase spending in two of the four areas of cuts that the public think that is least necessary?

The other area that the DWP need to think about is tapering benefits over time as well as with increased income.  From page 25 in our report we set out some details of how that might be possible to improve incentives to work without unduly complicating the vastly simplified system we proposed.

So there is a lot to welcome in this report, and that was certainly the focus of our response today.  But Iain Duncan Smith does need to understand that ducking some of these tough choices now could make things more difficult down the line.  We will be making that clear in our response to the consultation.

The problem with The Spirit Level

Recently a number of investigations of The Spirit Level - an influential book by Richard Wilkinson and Kate Pickett which claims inequality drives a range of social maladies - have independently come to the conclusion that its empirical claims do not stand up to scrutiny.  First, Christopher Snowdon's book The Spirit Level Delusion, then a report we published in English by a team of economists in Sweden - The Spirit Illusion, and finally a report for Policy Exchange by Peter Saunders - Beware False Prophets.

In an article for the latest edition of Prospect I asked how "all those evangelists for The Spirit Level will respond as many of its empirical claims fall apart like an ageing Trabant."  So many prominent left wing politicians, activists and thinkers have praised the book to high heaven and are going to find it very inconvenient to admit it is wrong.

We're starting to get an answer.  The Guardian recently wrote the critical reports off as polemics and evidence that the right is "spooked".  Any of their readers who take the trouble to take the reports will be surprised to find they are actually quite careful dissections of the statistics in the book.

The authors of The Spirit Level published a defence of the book earlier this week.  Yesterday we put up a response to that defence from the authors of the report we published.  Here are a few of the key points:

• The startling statement in the book that Portugal is as innovative as the United States appears to be the result of not checking statistics from the Nationmaster website against the original source, the World Intellectual Property Organization.
• An article they cite as supporting their work, by Nobel laureate James Heckman, addresses a very different issue.  The author told our Swedish team that "[t]his is a misrepresentation of my work".
• Another article they cite for support is about China, while their analysis is focussed on developed countries.  That study only has six citations according to Google Scholar.  By contrast, there are almost 100 times as many citations for a study in the authoritative Journal of Economic Literature that constitutes the most robust review of the literature on this issue but was not mentioned in The Spirit Level, presumably because it disagreed with their conclusions.  This rather undermines the claim repeatedly made by Wilkinson and Pickett that their work is a fair representation of a finding that is well-established in the academic literature.
• The authors are having to back away from the prominent claim that "inequality kills", describing it as having "been made for us, in publishers’ publicity and in translation".  Unfortunately, that admission is only coming now after they have used it since before even the publication of The Spirit Level, in an article publicising an earlier book by Wilkinson.  It makes this, from the Guardian, a bit rich:

"The titles of the anti-egalitarian studies – which refer variously to The Spirit Level's "delusion", "illusion" and its "false prophesy" – reveal the polemical intent, a telling contrast with the meticulous subtitle of the original book: "Why more equal societies almost  always do better."

Not quite meticulous enough to check their press releases evidently.

The evidence that The Spirit Level just isn't reliable is stacking up.  The book's many avowed fans need to admit that.

Re: A greener, cheaper energy policy

Over the last few days, it has been extremely encouraging to see groups across the spectrum of British politics acknowledging the problems with our overly expensive climate change policy.  Unfortunately, the Department of Energy and Climate Change (DECC) appears to be retreating into overly optimistic delusion and the Government policy is therefore still heading for a crash.

Yesterday the Energy Intensive Users Group and the Trades Union Congress released a major report on the potential impact of climate change policies on energy intensive industries.  Here is what some of the groups involved said about the potential impact on jobs, sorry to quote at length but this is an important statement from a number of major employers:

How to reform welfare now

Within the centre right, I think most people agree that the welfare system is in serious need of reform.  It is simultaneously failing the poorest, unfair on couples, costing a fortune and - most importantly - trapping people in dependency with high marginal withdrawal rates.  So most of us wish Iain Duncan Smith well as he sets out to reform the system.  But there is an abiding concern that it might not be possible right now, with a crisis in the public finances.

The 10 worst examples of dodgy reasoning in Tim Yeo's new book

Last night, I attended the launch of the new book from Tim Yeo MP "Green Gold: The Case For Raising Our Game On Climate Change", published by the Tory Reform Group.  It was reported in the media yesterday and is available for download here.  The book is a bit of a masterpiece of green conventional wisdom and almost entirely detached from reality.  Here are my ten favourite examples:

Cap and trade's dismal record

In 2007, Gwyn Prins and Steve Rayner wrote that many of the problems with climate change policy today are the result of the fact that:

"Kyoto was constructed by quick borrowing from past practice with other treaty regimes dealing with ozone, sulphur emissions and nuclear bombs"

Basically, world leaders were in a hurry to do something, anything on climate change.  But they didn't really know how to proceed.  So they looked at what had worked to address other problems that seemed similar.  Unfortunately, they didn't properly consider the unique place of CO₂ in modern industrial economies, and how that would undo their attempts to cut greenhouse gas emissions.

Ambitious targets and timetables agreed around the negotiating table were thought to have worked to cut nuclear weapons.  So we had ambitious targets for cuts like Britain's target of a 33 per cent cut by 2020 and an 80 per cent cut by 2050.  But of course cuts in nuclear stockpiles save governments money, are directly within their power and only need to be agreed and enforced between a far smaller set of countries to be effective.  By contrast the targets for cutting emissions meant enshrining aspirations to remake the economy, in a way no government knew how to achieve, in international treaties.  That was and is a sure fire recipe for lots of grandstanding and very little consideration of the practicalities.

What will the climate change policy backlash look like?

One thing that strikes me more and more following the developments in climate change policy is that the politicians are storing up a huge backlash.  There is a cosy political consensus that assumes the various targets that Britain has signed up to for emissions reductions and using renewable energy are inviolate, but it doesn't have any kind of political mandate.

Families have coped for some years now with subdued growth in disposable incomes as taxes and higher housing costs and utility bills have swallowed rises in gross earnings.  The necessary fiscal adjustment will, no matter how well it is managed and regardless of the party in charge, put further pressure on household budgets.  That will make things difficult, particularly for middle to low earners.

In that context, there is a certain madness about the massive investments that policy makers are expecting the country to finance in order to meet climate change targets.  Just in the energy sector, we're talking about £139 billion to meet environmental targets by 2020 according to Citigroup Investment Research.  That is more than is needed in Germany, France and Italy combined and paying for it will require doubling profits in the sector and doubling prices.  For that reason, Citigroup's research talks about a coming "affordability crisis".

It seems almost impossible that all of the hugely expensive measures that politicians are currently planning can be maintained with resources so scarce.  I'm planning on writing a more detailed article shortly about the proposals for a Green Investment Bank, an attempt to get around investors being spooked by the prospect of an affordability crisis.  But needless to say it doesn't solve the issue, it just means more money from taxpayers' pockets and people's savings being staked on these unsustainable policies.

Why we don't need the RDAs, and we don't need regions

At the TaxPayers' Alliance, we've done a lot of work on the Regional Development Agencies.

In 2008 we looked at whether progress had been made towards their key objectives like narrowing the north-south divide, it hadn't.  More recently, we released a new report showing the kind of grants they have been making.  We found that 62 per cent of the grants were going to predominantly public sector organisations or projects.  They should be abolished and we hope that the coalition don't backtrack from the clear language on this issue in the Emergency Budget.  The forthcoming White Paper which will put the detail on today's announcement should reject the very idea that the best way to help businesses is to take their money in taxes then give some of it back through big, regional bureaucracies.

But I wanted to respond to a point made today on his Telegraph blog by Ed West.  He argues that we should replace the RDAs with democratic assemblies, like the one rejected in the North East at a referendum.  Here is the core of his argument:

"But are the Tories opposed to regionalisation? I don’t see why. Personally I think a federal United Kingdom is a great idea, but it has to be authentically democratic, not a collection of talking shops comprising local councillors and quangocrats, which is what Labour’s original plans entailed.

There’s no reason why Britain can’t become fully federal with 11 regions (or “states” if the Scots and Welsh prefer it) all with elected first ministers and assemblies, and with full or dominant control of police, education, welfare and tax. It would help to take away power from London, which has far too much economic and cultural power, and rejuvenate regional capitals; it would result in national political leaders with experience of government, not just party politics; it would allow innovations in services to be tried and tested; but best of all, as in the USA, politics would become much more Right-wing."

At the TaxPayers' Alliance, we are very much in favour of fiscal decentralisation.  But we don't need to hand responsibility to the regions.  In reality, there is no reason that the local authorities can't do the job. 

Regions are more remote and less rooted in well understood boundaries that local people can relate to.  Like the European Union, regional assemblies will be democracies without a demos.  The only argument for them is the idea that local authorities are just too small, that we need bigger areas for decentralised services to be viable.  That argument doesn't stand up to scrutiny.

Swiss cantons are responsible for huge areas of policy.  For example, the excellent Swiss healthcare system is almost entirely run by the cantons.  The national government sets a basic level of mandatory health insurance coverage and then each canton sets policy beyond that.  There is more detail in this report.

Switzerland has a population of under 8 million and 26 cantons.  That is less than 300,000 people per canton. 

By contrast, in England there are 33 boroughs in London including the City, 28 counties, 54 unitary authorities and 36 metropolitan districts.  The population is over 51 million.  That means there are over 340,000 people per authority.

So power should be devolved down from central government.  But there is no need to set up regional governments to achieve that admirable objective.

Don't hike VAT

It is thought that the Emergency Budget tomorrow might include a hike in VAT.  That would take more money out of the pockets of ordinary families and be bad news on two key fronts:

1. VAT hits the poor twice as hard as the rich.  Hiking it would mean more poverty and more benefit dependency.  That would be hard to square with David Cameron's statement before the election that a Conservative Government would "make sure the system always considers the effect of any policy response on the position of the poorest in society."
2. While the Conservatives and the Liberal Democrats pointedly didn't rule out increasing VAT, they went out of their way in the election campaign to argue it wasn't part of their plans.  The Liberal Democrats even had a poster accusing the Conservatives of having a black hole in their plans that would mean a "VAT bombshell", a charge the Conservatives denied.  Neither party has any mandate for this measure at all.

Here is a video we're releasing today about a VAT hike, how the coalition has no mandate to put it in place and shouldn't impose a big new tax on the poor.

There are alternatives.  Even if the rate is hiked to 20 per cent that will raise around £12 billion according to the HMRC ready reckoner.  Just yesterday, the Think Tank blog reported 2020Health's report about how to save £12 billion in the NHS budget that the coalition are currently protecting.  In our research and for the book How to Cut Public Spending we've set out how to save £50 billion and there are plenty of savings left from tackling specific budgets, cutting back on middle-man organisations and restraining public sector pay and perks that the coalition could take up.  Even the Regional Development Agencies have only been cut and not abolished so far.

Spending cuts, not tax hikes are the way to deal with a fiscal crisis caused by massive increases in spending over a decade in which taxes were increased, not cut.

Hung parliament games

I've been thinking about the strategic options open to the different parties in forming the next Government.

Things are simplest for Labour.  They have two options: the first is to drop out of government and enter opposition gracefully; the second is offer the Liberal Democrats whatever they want to form a coalition.  They have chosen the latter and will only leave Downing Street on being dragged kicking and screaming.  That is rational in my view.  The party is starved of funds, which won't be helped by going into opposition.  They risk internecine warfare in the resulting leadership contest.  They might make the transition from power to opposition cleanly after a decade in government, but the odds don't look good.

The question for the Conservatives and the Liberal Democrats is how accommodating they should be in coalition negotiations.  The two leaderships are closer on policy (the Tory Left and the Liberal Democrat right) than the rest of the parties.  So the key question will be what they can promise to the other party without causing infighting within their own.

The decision is complicated by the Conservatives having a second option - forming a minority Government.  As has been written elsewhere, they could probably get quite a lot done in those circumstances as a lot of what they want to achieve can be done through secondary legislation, or is popular and Liberal Democrat friendly, enough that it will likely pass from a minority.

The decisive factor is how the two Conservative strategies - minority government and coalition - end.  From there, we can work things out by backward induction.

Everyone has to be aware that with the strains of dealing with the fiscal crisis and a hung parliament there is every chance that this Parliament will not die a natural death after four or five years.  The political fortunes of the two leaderships over the next decade may well hinge on how it ends.  The manner in which the new parliament is dissolved will frame the issues and sentiment for the next campaign and the timing could affect the parties' finances.

If the Conservatives form a minority government then they have considerable discretion over how and when the Parliament ends.  When the timing feels right they can start a fight over an issue where the public are on their side but the other parties will feel compelled to fight them; anything from Europe to a well constructed reform of party finance.  The combination of being able to set up an election on an issue of their choosing and their financial advantage will allow them to do well politically as a minority government, as the Canadian Conservatives have.  By contrast, in a coalition the Liberal Democrats will have a powerful ability - like that possessed by the Northern League in Italy - to take a stand at a time that suits them and force the Conservatives to either back down or break the coalition.

So I think that a minority government is probably the best political option for the Conservatives.  But they mustn't look too keen on that outcome.  They want to appear as if they are trying to work with the Liberal Democrats because anything else might look arrogant given their relatively modest electoral success.  That means they have an incentive to look like they are offering a lot but still cannot work out a deal with the Liberal Democrats.  By contrast, the Liberal Democrats are in a powerful position in a coalition and will ignore the promise of PR under Labour because they know that a minority coalition is a recipe for a complete mess.

The outcome of those sets of incentives - if the parties play their hands well - is probably a coalition where the Liberal Democrats don't get anything meaningful on the key points of contention - their tax plans and PR for example.  Instead, they'll probably get a good range of personnel - I don't think Cameron is that attached to most of his Shadow Cabinet - and movement on the areas where the parties broadly agree.  They'll accept that.

Re: The FT publishes the spending cuts that the political parties will not

There are a few things to note about the analysis in the Financial Times - looking at fiscal policy options after the election - that Tim has written about this morning:

• They have left off two Conservative pledges on welfare spending: the faster increase in the state pension age and stopping tax credit payments to relatively well off families.  The former will have been left off because it won't happen during the next Parliament and the saving will be offset by moves to restore the link between the state pension and earnings.  The latter presumably because the specific Conservative proposals - to stop payments to families making more than £50,000 - do not save a lot of money.
• It is difficult to imagine how a new government could cut prisoner numbers by 25 per cent.  It is hard to see why such an extreme measure has been included, but that those working on the analysis at the FT like the idea of the justice system using custodial sentences a lot less.  Of course, any list of cuts will reflect the wider views of its authors to a certain extent, but it is important to remember that the FT's list is not simply a bald statement of fiscal facts.
• To look at the same issue from another direction, they haven't included anything on the rapidly growing international development budget.  Of course, there is a wide range of views in this area and reasonable people have argued for the rapid rises in spending planned and others for abolishing the budget entirely.  The moderate option we have proposed is to freeze the budget for a year in 2010-11, which would save £862 million, should that really be off limits?
• As the authors note, the list of potential cuts does not include lots of smaller - but still very significant - savings.  All of the items in their list are over £1 billion.  The list of cuts we developed with the Institute of Directors and updated for the book How to Cut Public Spending (and Still Win an Election) came to a bigger total - £50 billion instead of £37.4 billion - but many of the measures included saved less than £1 billion.
• Their list of cuts still suffers from the same omission that exists in all of the parties' plans.  They aren't doing enough to outline programmes and organisations that could be abolished.  That is important as getting rid of entire lines in the budget means bigger cuts in running costs.  In one of the research notes released to accompany the book we set out a range of organisations that could be scrapped outright.  The biggest target should be the Regional Development Agencies.  The Conservatives only need to shift their rhetoric on the RDAs slightly for their policy to count as a cut and save nearly £1.8 billion.

In 2009 Britain had the biggest deficit of any country in Europe not making serious cuts already - Ireland - or being bailed out and quite possible heading for default - Greece.  In the longer term, projections from researchers at the Bank for International Settlements suggestion we are in the worst fiscal position of any major developed economy.

Between the £50 billion in potential cuts that we've outlined, the £37.4 billion that the FT have set out and the billions in spending that haven't been covered - often because it is impossible to cost potential cuts with the scant data available - it should be possible to find sufficient cuts in spending.  We just have to hope that, after the election, the new Government isn't paralysed by the threat of new elections and fresh militancy from the unions to such an extent they don't get the job done.

Debt and borrowing now, in a decade and in 2040

One of the TPA's major projects over the next few weeks is to present the British public with a big visual reminder of the national debt. Next week, we will be launching a huge, lorry-mounted Debt Clock (the website will be developing quite quickly over the next few days as the clock starts its tour) which will tour the country urging people to "wake up" to the national debt.  Using new evidence that emerged yesterday evening and earlier research it is possible to get a better idea of just how big a challenge the country is facing.

This year, the IMF expects that we will run the second biggest budget deficit in the developed world after Ireland.  As I wrote yesterday for the TPA site, we are going to see more and more of our money go to pay debt interest and that amount could explode if yields rise.  Mike Denham explains the issue very clearly in a video from our post-Budget briefing.

Looking a little further out - to 2020 - all of the parties are currently committed to a fiscal adjustment worth tens of billions in cumulative spending cuts or tax rises.  Their policies also require big investment in other areas like meeting climate change targets which will push up bills and put further pressure on family budgets.  Add it all up and you get to a combined fiscal crunch of £573 billion, as I set out in our new book and an accompanying TPA research note.

TPA Post-Budget briefing and book launch

This morning, we held our first Post-Budget Briefing and the launch for our new book How to Cut Public Spending (and Still Win an Election).  The presentation and a brief guide to what all the eight speakers had to say is available over at the TPA website.

The big picture is that the Government have utterly failed to set out a credible plan to deal with the crisis in the public finances.  If you want to find out more about how politicians can cut spending and deal with the deficit, then put down the Budget report and read our book.  You can download the Powerpoint on our site, with plenty of interesting graphs to get your teeth into.  Here are just a few of the interesting findings:

Breaking down the Operational Efficiencies Programme

William Norton's analysis shows that the areas making the biggest savings are the Department of Heath and the NHS, local government and education.  So much for the idea that you can't cut spending on schools and hospitals.  But, despite all the material out yesterday, he also finds that more than half of the mooted £11 billion savings still aren't identified:

How to cut public spending (and still win an election)

Today I had an article in the Telegraph and Tasha Kheiriddin had an article in City AM.  They are both based on the soon to be released book How to cut public spending (and still win an election).  Copies reached the TPA office today and it is available to preorder now.  Here are a few of the questions that the book should help ConservativeHome readers answer:

How big is the challenge over the next decade?

The TPA is working on a big new project to remind everyone just how big the national debt has got, and how fast it is growing.  But an important point, to remind anyone who argues against public spending cuts of, is that everyone is planning them now.  In their Budget 2010 Briefing Note, Reform point out that all the major parties are planning significant cuts in spending.  Policy changes to reduce Total Managed Expenditure, from planned levels, by between £57.8 billion (Labour) and £67.8 billion (Liberal Democrats) between 2010-11 and 2013-14.  Reform, to their credit, go further than the parties to keep down tax rises.

All of the debates about cutting in 2010-11 or 2011-12 are important, and as I've written on the TPA blog there is a strong economic case not to delay, but they will quickly be in the past.  Sooner rather than later even the most ardent of Keynesians will have to admit the need for a big fiscal adjustment.  Another way of understanding the scale of adjustment needed is to use the Government's plans as a baseline and look at the cumulative amount of money being taken out of people's pockets over the next ten years.  Since Budget 2008, the Government have announced £341 billion in reduced spending and increased taxes between 2011-12 and 2017-18.  Add the investment needed to connect people up to high-speed Internet, upgrade the water network, keep the lights on and meet climate change targets and you're talking a grand total of nearly £23,000 per family over the next ten years.  Managing that without placing an intolerable burden on families, crashing the economy or creating a political crisis will be the big challenge facing policymakers.

Fighting crony capitalism

The announcement that the Conservatives are out to take on vested interests is potentially very important.  If they get it right, the fight against crony capitalism could become an important and popular theme for a government.  It could help restore the vitality and credibility of capitalism in Britain.

Luigi Zingales recently wrote a very powerful article for the journal National Affairs about how the recent crisis could have a lasting effect on American capitalism.  There is an important confidence among Americans that generally people do well because they work hard, have a good idea or otherwise provide some new way of providing some good other people want.  The moral quality of free markets is that everyone is encouraged to think of the needs of others; to paraphrase Adam Smith the invisible hand guides the butcher, the baker and the brewer to see their own self-interest in providing our dinner.  Americans' confidence in their economic system is largely well placed.    Wealthy people in the United States are generally that way because they have provided some valuable service that has made many other people better off.  From Andrew Carnegie, who produced high quality steel for the railway lines that made the United States a country, to Bill Gates, who saw a world in which there was a computer on every desk coming and provided the software to make it happen.

Crony capitalisms produce plenty of millionaires and billionaires too.  But that wealth is invariably associated with political favour or being in the right place, at the right time, to take advantage of your fellow citizens.  Wealth comes at the expense of others, not from catering to their needs.  At the more legitimate end of the spectrum, from winning the favour of politicians and bureaucrats.  Without the institutions of a free market, you aren't rewarded necessarily for providing some good that others want to pay for, you are rewarded either for convincing those with raw political power to give you what you need or for simple graft.

Vote Conservative, get higher electricity bills

The Canadian Conservatives won an election fighting against a carbon tax.  The Financial Times reports that the British Conservatives are going to go into this election promoting one.  Essentially, the tax would function as a floor on the price under the European Union Emissions Trading Scheme (ETS), making up the difference when the market price fell below a certain level.

The amount it would add to bills is highly contentious.  Mostly because it depends on the kind of market carbon price we expect in the future, and how much and how often it is below the new floor.  But the FT article reports that EDF Energy believe a floor in the range of €25-35 a tonne is necessary (confirming the figure in a Times report last year which EDF Energy appear to have attacked unfairly).  The current price is around €13 so you could easily be looking at doubling the contribution of the ETS to energy bills.

I once spoke at length to some of the lobbyists pushing for this new carbon tax.  What they are after is a stable incentive to invest in things like nuclear energy and carbon capture and storage which are more affordable ways of cutting emissions than building windmills.  After a long discussion, they didn't contest my point that there are basically two ways of changing policy to get the result they want.