CentreRight

Today's Education White Paper is a good start - but there's much further to go

By James Groves

The title of Michael Gove's Education White Paper, "The Importance of Teaching", gives a strong indication of where the government believes its hand is strongest - and many of the reforms to teaching it proposes have been well received  The pledge to expand the training schools and teaching schools programmes is particularly encouraging, and should mean that more on the job teacher training will be complemented by a growth in the capacity, skills and knowledge of schools to train.  Moreover, teaching schools will be able to develop an approach which recognises that teachers need to constantly evaluate and learn from their own practice and that of colleagues, thereby beginning to end the artificial break between initial teacher training and continuing professional development.

However, there are still unanswered questions. As more training is devolved to schools, the Government will need to find a way to maintain a strategic oversight, so it can predict and address areas of teacher shortage. The White Paper also reiterates the commitment to increasing pay flexibility, but it is not clear to what extent Ministers are willing to embark on the rocky road to ending national pay bargaining. Pay flexibility often simply becomes the norm, as all teachers simply shift up the scale according to tenure rather than performance. This rigid and hierarchical pay structure is a major obstacle to attracting top graduates.

Keen as the Government is to grant schools more autonomy, it's also eager to recognise the real capacity for self-improvement that lies within schools themselves. As Policy Exchange highlighted in Blocking the Best: Obstacles to new, independent state schools, centrally-driven initiatives, such as the School Improvement Partners (SIP) programme, impinged on the ability of headteachers and governing bodies to set a direction for their schools, and to determine their priorities. Today’s announcement that the Government plans to end this highly systematised approach is therefore welcome, and an important part of trusting schools to raise standards in and of themselves.

However, with OFSETD reporting that only 65% of our schools can be considered to be good or outstanding, we must ensure that the capacity to support underperforming schools continues to be readily accessible, albeit in a less prescriptive fashion. Today’s White Paper offers just such a route.  Increasing the network of National and Local Leaders of Education, publishing "families of schools" data for each area of the country, and the establishment of an Education Endowment Fund are key to providing a more diverse range of school improvement services. None the less, one must not underestimate the task ahead of schools, and Government must ensure that such schemes are adequately supported.     

James Groves is the Head of Education at Policy Exchange.

Neil O'Brien: The truth about public sector jobs

By Neil O'Brien

Never has a piece of old news got such attention.

Yesterday Danny Alexander was snapped reading a briefing which said: “The OBR’s [Office for Budgetary Responsibility] Budget forecast was for a reduction in public sector workforce numbers of 490,000."  This figure is splashed all over the front pages today, as though it was some brilliant secret discovered by the snappers.

But another way to find out this “top secret” information is to go to the OBR website, and simply download it. 

Nor are the headlines telling the full story.

Firstly, this does not mean half a million people are about to get the sack.About 400,000 people leave jobs in the public sector every year. If you didn’t replace just one in four of those leaving, the total employed would fall by 100,000 a year. So a headcount reduction on the scale foreseen by the OBR could be achieved mainly through what economists call “natural wastage”, rather than redundancies.

Andrew Lilico: Taxing according to the ability to pay

It has become popular to believe that taxation ought to be “progressive” — in other words, that those with higher incomes should pay a higher proportion of those incomes in tax.  This has come to replace an older notion, which was that the amount one paid in tax should be related to the ability to pay.  These concepts are not the same.  In particular, the ability to pay depends on one’s (allowable) obligations in terms of costs.  For example, a single childless person on £40,000 a year would be better able to pay £15,000 in tax than a lone parent of two children on that same £40,000.

But this concept of ability to pay has virtually no role in our tax system.  The tax system has come to regard having a child as a consumption decision.  Recent reports suggest that having a child now costs more than £200,000.  From the tax system’s point of view, you could choose to spend £200,000 on a second-hand Ferrari, or a yacht, or a child — it’s all the same, as far as the taxman is concerned.

This was not always so.  A famous paper by Patricia Morgan detailed how, over the 1960s, 1970s and 1980s the balance of taxation changed dramatically, with taxes on families rising rapidly throughout the period and taxes on single childless people rising much less through the 1960s and 1970s then falling through the 1980s.

That happened partly because there was the explicit removal of tax reliefs to the benefit of couples (e.g. the Married Couples Allowance), partly because the incidence of many “anomalous” reliefs (e.g. MIRAS) removed in periods when chancellors sought to raise tax had actually had an incidence skewed sharply towards couples with children.  But the single most important change was the initial downgrading of the child tax allowance during the 1960s and early 1970s, its conversion into a flat payment mis-baptised “child benefit” in the late 1970s, and then the freezing of that tax allowance/”benefit” during the 1980s.  (This was in stark contrast to the treatment of child tax allowances in the 1920s and 1930s, when they rose continually even when much else was cut.)

Now some readers will doubtless be inclined to respond: “Why should I pay for others to have high benefits to pay for children they can’t afford?”  But I am not discussing benefits here.  It isn’t a question of the state paying anyone to have children.  The question is how much tax people should have to pay.  And the thought is that if you have dependents, your ability to pay taxes is less, so you should pay less tax.  And note that this point is independent of precisely how much income you have — someone on £100,000 that has two children is less able to pay £40,000 in tax than is a childless person on £100,000.

The last element of the tax system that acknowledged this issue in any way was the mis-baptized “child benefit”.  But the proposal to remove child benefit for higher rate tax payers, finally converting child benefit from a residual flat-rate tax allowance into a welfare benefit (and hence something not to be paid to the wealthy), removes even this vestigial in-principle acknowledgement.

Child benefit is an anachronism.  It came into existence in the 1970s on the assumption that mothers would stay at home and look after the children, experiencing the costs of child support, but that men would earn the money so gaining the benefits of a child tax allowance.  To negotiate this problem, the child tax allowance was converted into child benefit to be paid directly to the mother.  But these assumptions are now quaintly outdated.

Over the longer term, child benefit in its previous form as a flat-rate tax allowance must surely be abolished.  Since it has now been redefined as a welfare payment, it must eventually be restricted to levels much lower down the income scale than £40,000.

But that would still leave the question: is a child a consumption choice, like a Ferrari; or is it a dependent person that increases the costs and reduces the ability to pay tax of whoever is supporting it?  This is nothing to do with deficit reduction.  It is a question of the balance of taxation to be paid between the childless and those with children.  Recent decades have seen that balance shift hugely away from taxing the childless and towards taxing parents.  Is that a concept the Coalition is happy to leave in place?

Andrew Lilico is Policy Exchange's Chief Economist.

Taking back the streets

Max Chambers is a Research Fellow in Policy Exchange's Crime and Justice Unit.

Taking Back the Streets, a series of reports published today by Her Majesty’s Police Inspectorate, should serve as a major wake-up call for police chiefs and those who are charged with holding them to account. The reports demonstrate that anti-social behaviour is often not seen as real police work and does not have the same status as 'crime' for the police. They show that although the public expects the police to take tough action to deal with anti-social behaviour, police forces across the country have consistently failed to take the issue seriously enough. Incredibly, as recently as January this year, a majority of forces did not even cite tackling anti-social behaviour as a priority issue. The police now regularly ‘grade-out’ so-called low priority calls, which means they do not get a police response – and many forces do not have systems which allow them to identify repeat victims such as Fiona Pilkington. How on earth did we get here, given record spending on the police and record numbers of police officers? 

As Policy Exchange argued in a report earlier this year, one of the reasons is the fact that the police have been performance-managed to death in the last decade. This has meant that the less quantifiable aspects of their job (patrolling, preventing, mediating, problem-solving – i.e. real policing) have become less attractive, and ASB has not been prioritised as a result. That’s partly why we’ve ended up with a completely ineffective response to anti-social behaviour (or criminality, as it used to be called) that largely involves council-issued warning letters and unenforceable ‘contracts’ designed to regulate behaviour.

However, it’s not just that central direction from the Home Office has disincentivised action to tackle anti-social behaviour. We have record numbers of police officers, yet because many officers are stuck in the police station, just 11 per cent of them are visible and available to deal with the crime on our streets. We have police authorities which claim to communicate community priorities to police forces, but the police appear to be routinely ignoring what people want. And we’ve had constant drives to improve public confidence in the police, yet the majority of victims of anti-social behaviour have little or no confidence in the police’s ability to deal with their problems. 

Although there is no magic bullet, we have consistently argued that strengthening police accountability – through directly-elected police and crime commissioners – would drive a radical change in policing culture. Replacing weak and invisible police authorities with a single individual with a strong mandate would make police forces and chiefs much more responsive to local concerns – especially anti-social behaviour. We all know that budget cuts are coming, but today’s reports also re-emphasise the need for public debate to move beyond the issue of how many police officers we have. The real question is what the police are actually doing. The public wants to see police officers out of their offices, out of their patrol cars and providing the kind of proactive, beat-based policing that would make a real difference to everyone’s quality of life.

The hard truth about soft subjects

By James Groves, Head of Policy Exchange's Education Unit

Record numbers of A-Level students are going to be finding that the university places which they had hoped for are not going to be there. Securing a place at one of England’s universities has become more competitive than ever. But is this all bad? A healthy measure of competition must be allowed to prevail and access to our universities should be rigorous if standards are to be maintained.

This need not mean that we should cease from looking for new and better ways of improving the supply of Higher Education across the country. Crucially, universities must be allowed to raise top-up fees so that they become self sustaining and no longer rely as heavily on a limited pot of HEFCE funding. This system effectively leaves itself hamstrung, with Government having to artificially set a cap on the number of student places available each year and fining any institution which recruits more than their quota of undergraduates. The private sector could also bring considerable new capacity, issues around which we here at Policy Exchange will be exploring in an upcoming report.

However, much of our focus should be upon ensuring a healthy degree of completion for places remains, provided that all students get the chance to compete on a level playing field.  Much has been made of the fact that the independent schools outperform state maintained schools on A-Level attainment by a considerable margin.  Yet, rather than channel our energies on berating the successes of the private sector, should we not be asking how improvements in maintained schools can be secured?

I might even suggest that the latter might learn from the former. In particular, maintained state schools should look seriously at the A-Level subjects they are offering their students and at how universities regard these subjects. In The Hard Truth About ‘Soft’ Subjects, published in 2008, we indicated that non-selective state school students are far more likely to take non-traditional A-levels than students from Independent and Grammar schools. For example, 75% of all A-level examinations are taken in non-selective schools, but 96% of Law and 93% of media studies A-level entries are in these schools. Conversely, Independent school students are far less likely to take non-traditional A-levels. For example, 15% of all A-level examinations are taken in Independent schools, but only 2% of Sociology and 6% of Psychology A-level entries are in these schools.

This is not just an issue of student choice: it is about which subjects schools choose to offer. Part of the reason why students are more or less likely to choose non-traditional A-level subjects is the availability of those subjects at the school they attend. Non-selective state schools are far more likely to offer non-traditional A-levels than Independent and Grammar schools. For example, non-selective state schools account for 73% of the market share of all schools offering A-levels, but 90% of schools offering media studies are non-selective state schools.

While the previous Government claimed there was no such thing as a ‘soft’ subject, this was proved immaterial by the fact the vast majority of 27 leading research intensive universities that we surveyed admit fewer ‘soft’ A-Levels in comparison with the national uptake of these subjects in schools. Our data on A-Levels accepted in 2007/08 indicated, for example, that more than three times as many Economics A-levels (640) were accepted at Nottingham University than Sociology (193) or Drama/Theatre Studies (165). These two subjects are both more popular than Economics at A-level in schools.

Such hard truths point towards two key realities. Firstly, universities must be properly transparent with students, parents and schools about certain ‘soft’ subjects which they believe do not provide sufficient preparation for Higher Education. Secondly, state maintained schools must face up to the fact that they have a responsibility to advice students of the potential implications of studying ‘softer’ subjects. Furthermore they have an even greater responsibility to emulate the Independent sector by ‘bucking the trend’ and by finding innovative and exciting ways of teaching those more traditional A-Levels which will leave their students much better placed to compete in the race for a University place.

Raise the retirement age, but understand the implications

Andrew Lilico is Policy Exchange's Chief Economist.

Earlier this month, the Government announced plans to abolish the compulsory retirement age, on which it will consult until October.  With rapidly increasing longevity and changes in the nature of work, the compulsory retirement age has for some time been an anachronism, dating back to an era of manual labour in which life expectancy after retirement was restricted to a few years.  With significant numbers of today’s children expected to live beyond a hundred years, having not even finished their studies until their mid-20s, if the current rules were maintained many people would be retired for longer than they had worked.

Furthermore, compulsory retirement squanders the wisdom and experience of many older workers.  Many 65 year olds today are still healthy, focused, and interested in their work.  Why should they be forced into idleness by rigid and outdated laws?

So, abolition of compulsory retirement is welcome.  However, to work as a concept it will have to be combined with measures that are likely to prove very controversial and that have not, thus far, seen anything like the public debate and discussion they merit.  Specifically, absent compulsory retirement, it will probably be necessary to significantly diminish employment protection for older workers.

Let me explain this paradoxical thought.  Current employment law envisages a particular pattern of the working life: promotion and salary increase as job experience advances, right up to the point of retirement.  For a firm to demote a worker or reduce her salary it requires a good reason, such as a specific failing on her part or her salary falling as part of a company-wide salary reduction.  An employer can pick a specific worker and decide to raise her salary and promote her without any material impediment.  But to specifically target a worker for salary reduction or demotion is likely to lead to an employment tribunal and a claim for constructive dismissal.

Cutting the prison population

Blair Gibbs is Policy Exchange’s Head of Crime & Justice.

Michael Howard is fiercely proud of his record as Home Secretary so it was no surprise that he quickly became the most senior Conservative to take issue with Kenneth Clarke for his first speech yesterday on criminal justice.  

But the press headlines and a lot of the reaction from the right of the Conservative Party has run far ahead of the content.  Though light on policy detail, this was a bold speech, but perhaps not the one some penal reform groups had hoped to hear – that prisons were to be closed, short-term sentences abolished next Tuesday, and billions from the prisons budget diverted to social enterprises.  

The speech at King’s College was important politically in laying down some markers on sentencing, courts and legal aid reform, and spelling out the fiscal reality facing the Ministry of Justice in much the same way as Theresa May has had to do with the Home Office – both departments facing 25% cuts over four years.  By next spring, big decisions will have been taken on the size of the courts estate, the reform of legal aid and the sentencing of offenders.

These decisions demand a genuine debate about how to cut crime and keep the public safe when the Government has less money to spend on conventional law and order measures.  What can be safely sacrificed without hampering effective crime reduction?  Unfortunately, the obvious savings that can and must be realised early on – from court closures, estate sales and rationalising back office functions – are not where the real money is. 

There is scope for big savings if – as Clarke indicated – wholesale reform of the legal aid system is in play.  Looking at the scope of civil legal aid provision, and even – he hinted – more use of before-the-event insurance, could all yield big savings.  But in a department required to make £2.3 billion cuts, even this is not enough.  The prisons budget cannot and will not be immune. 

Just by sounding serious about the deficit, the new government has saved us £6.6 billion

By Neil O'Brien, Director of Policy Exchange.

Before the election, there was a big political argument about how soon the government should start to reduce spending.

Labour said early action would "risk the recovery". The Conservatives said getting the deficit under control was essential to protect the recovery.

At the time a Policy Exchange report argued that that early spending cuts would promote recovery. We pointed out that delaying action would increase debt interest payments for the government, and threaten a spiral of rising tax and rising debt. We noted that there would be higher interest payments for households too, perhaps adding £700-£1400 to mortgage payments.

Who was right?

Well, a new report from the Institute for Fiscal Studies suggests that just because the coalition is taking deficit reduction seriously, Britain will waste £6.6 billion less on debt interest payments.

The IFS notes that: "gilts prices probably incorporate an expectation that the new government will adopt a more rapid fiscal tightening" In other words, although it might not entirely be due to the Coalition's tougher stance, the fact that they are serious about reducing the deficit has definitely reassured the markets, who are demanding lower interest payments as a result. There have of course, been other factors, and eurozone debt has looked relatively less attractive as the continent struggles with its own debts. But taking the deficit seriously has been a really important factor.

Will the government cut back middle class welfare? Let's hope so.

By Neil O'Brien

On the front page of this morning's Independent Andy Grice reports that the Government is planning to squeeze hard on welfare spending, targeting the benefits paid out to relatively wealthy people.

If the story is right, this is great news.

There are several other encouraging things in the story, and it looks like some good things are happening at the Treasury more generally.

So called "tax credits" will come under scrutiny.  The "Child Tax Credit" (CTC) is not a tax credit at all, because you don't have to be working to claim it. It is really just a second, much more generous, version of Child Benefit.  It consumes the majority of the £29 billion spent on tax credits.  Roughly a third of all tax credit spending goes to people on above average incomes. In fairness, Labour had been cutting back its generosity since its introduction, cutting the value of the family element by a fifth in real terms. 

But it's worth remembering why Labour introduced CTC in the first place: in order to hit their Child Poverty target. I think this is a flawed target, which pushed Labour towards papering over the symptoms of poverty, rather than tackling its real causes. The coalition is committed to the same inadequate target, but I hope eventually it will be abandoned by all parties. 

Nonetheless, the tax credit system is a total mess.  Remember all those stories about people having their tax credits clawed back a few years ago?  Labour "fixed" that problem by introducing a whopping £25,000 "disregard", meaning you can earn an extra 25 k and still get the same tax credit, which is nuts. 

Child Benefit may be means tested.  Probably the most newest element in the Indie's story is the suggestion that Child Benefit may be means tested.  This would open up the potential for meaningful savings.  Tapering away the family element of the Tax Credit after the exhaustion of the child element could save £0.9 billion.  Doing the same thing to Child Benefit too would take the savings to £6.5 billion, which is nearly 1% of total government spending.  I think this is a good idea, although means testing does potentially have an effect on financial incentives to work, a problem which needs to be addressed more broadly.

A benefit freeze may be considered.  According to Grice, "The review is expected to consider the level and scope of benefits for the jobless, sick and disabled – including the option of freezing them temporarily."  To make real progress on reducing the size of the social security bill, it will probably be necessary to freeze the value of some benefits, as well as reducing the number of people claiming them. Holding benefits constant for three years would save £15 billion, or if the state pension were exempted, about £10 billion - more than 1% of total government spending.

In contrast a 5% cut in the number of people claiming saves the following: Disability Living Allowance (£562m) Carer's Allowance (£70m) Attendance Allowance  (£248m) Jobseeker's Allowance (£224m) Incapacity Benefit + ESA (£404m) Income Support (£438m) Council Tax Benefit (£223m) Housing Benefit (£806m) Child Benefit (£518.80) Tax Credits (£976m). In total, a 5% drop in the numbers claiming all these benefits would save "just" £4.5 billion.  This makes me think some combination of freezes and reduced numbers of claims will be needed to make a dent in our £150 billion deficit

The Treasury are stating to explain the real origins of our deficit.  Many people still think the cause of the deficit is the recession.  In reality, the last government had planned explosive growth in public spending, which they didn't rethink, despite falling tax revenues.  There's a graph in the Treasury's document from yesterday on the spending review framework which tells the story well, showing how spending rocketed far more than tax revenues fell:

All in all, it looks like our discussion about how to reduce spending is starting to grow up.  There is still a very long way to go, but so far the Treasury are making all the right moves.  Hopefully by the time the spending review is published in the Autumn, we will have made even more progress.  

Coming Clean

Max Chambers is a Research Fellow in Policy Exchange's Crime and Justice Unit.

By accident or design, the drug misuse that fuels so much of the crime in our communities is being allowed to continue inside prison walls. The true scale of drug misuse is not being properly measured, the ways in which drugs get into prisons are being ignored and drug treatment programmes are failing to get prisoners drug-free, because maintenance programmes and opiate substitutes have become the easy option.

As our report, Coming Clean, argues, the Prison Service needs to be up-front about the issue of staff corruption and a long-term, well-resourced plan for dealing with it needs to be put in place quickly. Proper analysis and recording of how drugs are smuggled will allow guesses to be replaced by facts and will compel the Prison Service to analyse which routes are the most prevalent and effective. In addition, Mandatory Drug Testing needs to be replaced so that the Government has a much better idea of how individual prisons are performing, and of the national picture. Mobile phone use is a growing problem and official figures seriously underestimate the extent to which phones are being smuggled. But tackling this will require a recognition that mobile phones are also used for social purposes: problem mobile phone use can only be dealt with if steps (such as in-cell telephony) are taken to improve prisoners’ contact with their families.

Curbing the supply of drugs and mobile phones will only deal with part of the problem; getting addicts clean and prepared for release is just as crucial to reducing reoffending. To achieve this, drug treatment programmes need to be refocused so that methadone is no longer the first port of call, but instead, acts as more of a last resort where there is a real risk of a short-sentenced prisoner overdosing and dying on release. Clinical guidance should properly reflect the fact that a prison sentence is a chance to get drug-free, not an opportunity to be wasted simply because continuing maintaining a prisoner’s addiction is easier than tackling the underlying causes of offending.

These changes could make a real difference, but they will require a degree of honesty about what has gone wrong and some courage in taking the necessary steps to put things right. If the Prison Service comes clean, prisoners could start to get clean, ending the invidious cycle of addiction and acquisitive crime - and making Britain a safer place.

Time to face the truth: drugs get into prison via corrupt prison officers

By Neil O'Brien

You might think that a prison sentence would be a good opportunity to get drug addicts clean. But according to a survey of prisoners carried out by Policy Exchange, more than a third of prisoners are using drugs inside, with one in five using heroin.

Why does it seem to be so hard to keep prisons drug free?  Surely prison should be one place that chaotic, criminal people can experience a bit of order?

One problem is the culture of denial about how drugs really get into prison.  Previous government reports have always stressed the role of prison visits, and material coming in "over the wall".  But the sheer volume of drugs being consumed in prison suggests a more important channel.  In fairness, a previous investigation by the Met suggested that one in ten prison officers is corrupt. But nothing has been done about it.

Its hardly surprising that there are so many officers are bent, given that drugs are worth up to 1,000 per cent more on the inside, and the current anti-corruption regime is a joke.  As the Sunday Times reports today, even when serious problems are identified in particular prisons, no action has been taken.

Drugs in prison are a massive social problem: making re-offending extremely likely. It doesn't take any money to fix this problem - just the political willpower to face up to the real issues. It is a classic example of a problem the coalition can fix. My hunch is that the trade unions won't like some of the things that must be done to fix the problem.  But many prison officers will welcome a clean out.

The coalition agreement lists 45 areas to "review", "investigate" or "consider"

By Neil O'Brien

At the fag end of the Brown administration, policy making increasingly came to resemble the desperate scenes in The Thick of It, as ministers launched half-baked schemes on an increasingly bemused public.

Reality seemed to blur into fiction. The BBC series gave us the idea of  "Pet Asbos". But the real government came up with the "dog tax". In a desperate moment Malcolm Tucker and his pals came up with the "National Spare Room Register". But the real Labour government wanted to make everyone renting out a room pay to register on a new "national landlords database".

The new coalition suffers from no such shortage of good ideas - in fact the coalition agreement lists about 400 different policies.

It states that many areas are going to be put out to review. On some occasions this will just be a way of kicking issues into the long grass, which is a shame. We can all think of things that a coalition is not going to be able to do, and there are plenty of compromises that might be unpleasant to have to swallow. That's coalition government for you.

But while the media will probably mock, many of the reviews are positively a good thing.  Policy-on-the-hoof and sofa government led to a series of preventable disasters.  From the ten pence tax rate to "marching yobs to the cashpoint", press-release-driven policy making was not a success.

I think life under a coalition will tend to favour slower but much more evidence-based politics.  I'm struck by how the best developed policies survived the pressures of the general election campaign, and are now in the coalition agreement - while the ones that hadn’t been so well thought-through haven’t made it.

The fine details of policy are being haggled about as never before. What exactly will the role of local authorities in school choice be?  How exactly will elected police oversight be implemented?  Detail is everything now.  Conservatives who agree with Mrs T, and think that "the facts of life are conservative" will see little to be afraid of in this process. In fact thinking things through properly is supposed to be a conservative virtue.

The full list of reviews, investigations and considerations is below (I haven't included the spending review).

It's an interesting guide to the strengths and weaknesses  of the coalition and the opportunities it faces. There are some great ideas in there - and some less great ones.  Some are massive, like the West Lothian question, while others are pretty obscure.

Could a “rainbow coalition” cope with our massive debt crisis?

By Neil O'Brien

Have you ever played the game Pass the Bomb?  You have to chuck the ticking timebomb on to the next person before it goes off in your hands. 

Our politicians are doing something similar - competing for the right to try and tackle a catastrophic fiscal situation. The government is borrowing nearly one in every four pounds it spends, and the Governor of the Bank of England has said that whoever wins will have to take such tough decisions that they will be out of office for a generation.

Nonetheless, now that Gordon Brown has offered to resign, some people on the left are talking about a “rainbow coalition”, which would bring together Labour, the Liberal Democrats, the SNP, Plaid Cymru, and politicians from Northern Ireland.

Such a cobbled-together coalition would have a majority of two. Add on one green MP, and one Alliance MP, and it might be as high as six.  

The new rainbow coalition would have to find a leader - which might be a bit tricky.  But perhaps a more difficult challenge would be the need to pass an emergency budget within a few weeks.  It would be very difficult for such a rickety coalition to vote through the package which is needed.  

Each of the smaller parties would presumably bring their own additional demands.   Plaid Cymru have already talked about their demand for 300 million pounds for Wales.  The SNP want no cuts in Scotland. And so on.

Labour have put a number of cuts in the pipeline already, including real terms cuts in public sector wages, and cuts in eligibility for incapacity benefits and benefits for lone parents.  But the left of the Labour party doesn’t really support even these changes.  And far, far more is needed.

To get some idea of the challenge facing such a coalition, here are some options for plugging the gap for the next parliament (and further cuts would still be needed in the parliament after):

1) Freeze all benefits (including the state pension) for the next four years, means-test child benefit and child tax credit, scrap the winter fuel payment, scrap free TV licences, scrap the carers allowance, and cut incapacity benefit by £2 billion.  Then raise the basic rate of tax by two pence in the pound.

2) Cut every government department’s budget - including the NHS, schools and police - by 11%

3) Increase the basic rate of tax by nine or ten pence in the pound, leaving people on low incomes paying more than 40 percent of their income in direct tax - even before they pay VAT on top.  In other words, put the poor on what used to be the top rate of tax.

Do we really think that the 20 Labour MPs who are members of the Socialist Campaign Group will vote for any of these kind of cuts?  Or will the Lib Dems, who promised to cut tax for the low paid, really now vote for a 10p tax hike on the poor? 

Whoever forms the next government will need a big working majority.  Trying to run a flimsy “rainbow coalition” in the middle of Britain’s worse post-war fiscal crisis would be like trying to cobble together a life raft out of a few twigs and some sticky tape - in the middle of a hurricane.  It would be blown to bits.  I just don’t think it’s even a plausible option.

Raising NICs Thresholds

So, the Conservatives plan to raise the threshold for both employers’ and employees’ NICs (£24 and £21 per week, respectively), paid for partly by a rise in the Upper Earnings Limit and partly by £6bn in net spending cuts (these cuts commencing in 2010/11).

Policy Exchange has previously argued that it should be feasible to achieve some £5bn-£10bn spending cuts in 2010/11, and that this would be more likely to promote recovery than to impede it and to limit the rise in unemployment than to drive it.  We thus obviously welcome this announcement as a first step.

Furthermore, Policy Exchange has argued that the rises in employers’ NICs were likely to be particularly damaging to jobs and growth in the short- to medium-term.  Employers’ NICs rises will, like rises in Employee NICs, eventually convert into reductions in real post-tax salaries.  But whereas employee NICs rises achieve this directly, rises in employers’ NICs first raise the costs to employers of hiring staff, which means fewer staff are hired, unemployment rises, and eventually salaries are bid down.  So the route to equilibrium proceeds via increased unemployment in the short term.  This process of returning to equilibrium might involve particularly significant increases in unemployment for a material length of time in an environment of low inflation and widespread salary cuts — as at present.

By raising the thresholds, the Conservatives would reduce the impact on jobs — particularly the impact on the jobs of the low paid.  Of course, there would still be an impact on the jobs of the better off, but few choices are appetising when the deficit is nearly 12% of GDP.

The next phase of the fiscal debate begins now

By Neil O'Brien

We just missed the last chance to have a sensible election debate about public spending.  The Government could have finally told us where the axe is going to fall, and challenged the opposition parties to say how they would have done things differently.

Instead, the Government will now go into the election simply refusing to tell the electorate which items of spending they would cut, or which taxes they will raise. We will be asked to sign a blank cheque.

Today’s Budget doesn’t really deserve a response.  It contains endless micro-policies and political wheezes: all intended to distract from the fact that it does nothing to staunch our ever rising debts.

The budget gives away £1.5 billion now, and says that it will be taken back again after the election. To put things in context, that's just one in every 500 pounds the Government spends.

You can get a sense of how little difference any of this makes from the chart below.  It shows how much debt the government is running up for every family of four people.  In just a few years it will have spiralled from £40,000 to safely over £100,000 a family.  And even that is based on wildly optimistic assumptions about growth - which are not shared by independent forecasters.

Blocking the Best

Alex Massey is a Research Fellow Policy Exchange's Education Unit.

On Monday evening a debate was held between the education spokesmen of the three main parties. Predictably, it wasn't long before the discussion turned to Sweden. As one frustrated audience member pointed out, Messrs Balls,  Gove and Laws mention the state of Swedish schools so regularly these days that one could be forgiven for thinking they are competing to become mayor of Stockholm - the small Nordic nation having become a convenient form of shorthand for the concept of independent, state-funded schools.

All three main parties have to some degree signalled support for the idea of encouraging new independent state schools. However, what this means in practice remains unclear. There are already about 200 'academies' in the UK, run by non-state providers notionally outside the control of local government. Many have been successful- some, like Mossbourne in Hackney, astonishingly so. But any party wishing to expand this small system will face big problems. There remain significant local obstacles to new schools being set up, while the range of potential providers is far more limited here than in Sweden and elsewhere. Moreover, many of the freedoms which new academies in theory enjoy are curtailed by bureaucratic realities, or have been severely eroded since the replacement of Andrew Adonis and Tony Blair by Ed Balls and Gordon Brown.

In Blair's words, the whole point of academies was “about schools feeling ownership of their own future, the power and the responsibility that comes from being free to chart their own course, experiment, innovate... the decision-makers in their own destiny.”    But Ed Balls made his suspicion of such thinking very clear during Monday's debate, when he denounced the false idol of independence and extolled the virtues of local authority-run education systems.   During his three years as Education Secretary, Balls has given local authorities a de facto veto on the creation of new academies (undermining the original purpose of the academies programme -  to reverse local authority failure); removed the freedom academies once enjoyed to set their own curriculum; and forced academies to co-operate with local authority-wide plans for the provision of children’s services, diluting their focus on improving educational outcomes.

If we are to attract more new providers to run new, high-quality schools, we must not only restore their independence, but also address the bureaucratic restrictions, regulations and inconsistencies that stand in their way.  This means overhauling prescriptive planning and building requirements, reforming school accountability, and sorting out the postcode lottery of local per-pupil funding, whereby an academy provider sets up two schools in deprived areas sixty miles apart - and the difference in funding between the two areas is £1,000 per pupil or more.

Policy Exchange’s report Blocking the Best is released today, and sets out the ways in which we might overcome the obstacles that confront new providers entering the schools system.  Additionally, it assesses the level of genuine independence available to academy sponsors, and points to where freedom must be granted or restored in areas such as curriculum, discipline, admissions and staff terms.  In summary, it’s an overview of what must be done to create a flourishing system of truly independent state schools.   Now we need to see who’ll go for it.

The Renewal of Government

By Neil O'Brien

The little groups of forlorn-looking smokers you normally see outside Government buildings have been replaced over the last few days by gangs of official pickets in fluorescent jackets.  The PCS union has been striking in protest at government plans to reform the generous redundancy payouts regime which currently applies in the civil service.  As a result, court hearings have been postponed, job centres have been operating a skeleton service and 2,000 driving tests were cancelled.  People have found it difficult to get their passports or benefits.

This is just a little taster of things to come.

Whoever wins the election faces a really tough slog, and many battles with the public sector unions. Labour have set out plans for tax rises and spending cuts worth £77 billion.  Oddly enough, they still don’t want to say where the axe will fall.

Even so, the Treasury grimly forecasts that our debts will rise to £1.5 trillion - more than twice the upper ceiling level for debt which Gordon Brown promised to remain below.  And in reality a bigger tightening is needed to stop our debt from soaring ever upwards, because the Treasury forecasts assume that we will immediately bounce back into a wonderful economic boom.  But, as the Institute for Fiscal Studies has pointed out, there are good reasons to think growth will be weak for years - unless something big changes.

As we point out today in a new book - The Renewal of Government - getting spending back under control will not be enough to solve our problems.  The next government must unashamedly go for growth if we are going to get out of this mess.

On the supply side, we must staunch the flow of business regulation, make it easier and cheaper to build, and reduce the huge cost of energy and climate policies.  Government must encourage house building and business development. We need to ensure that local authorities directly benefit from development, so that they have a powerful incentive to grant planning permission.  We should consider innovative answers to the problem of housing in the South East, including docklands style development zones in areas people want to live.  Government must also facilitate investment in our creaking energy and transport infrastructure, services that are the life blood of any healthy economy.

Reducing the Public Sector headcount will not be economically inefficient

There is an interesting quote from Madeleine Bunting in the Guardian:

There was a fascinating analysis in a Compass report last autumn, In Place of Cuts, on how much money the government saves by axing a £25,000 public sector employee. After you've calculated for all the lost income tax and national insurance contributions, and then factored in all the benefits this sacked employee would receive on jobseeker's allowance, guess the grand total saved? Less than £2,000. And that is before one tries to put a figure on the wider social costs of unemployment – depression, rise in illness, risk of long-term withdrawal from the labour market. It's a no-brainer.

Such arguments are heard regularly in private sector settings.  For example, at the time of the withdrawal of BMW from the Longbridge plant in 2000, there were a number of arguments for government subsidy on the grounds that the cost of supporting workers in unemployment, the lost tax revenues, and so on outweighed the costs of subsidy.

But the claim is quite wrong, and fundamentally confused, nothing more than a classic canard.  For the key gain to the economy is ignored in the calculation, namely the value of the output the worker will produce if she finds new employment doing something that adds, rather than destroys value.  The same is true of the capital employed in the worthless enterprise – machines, plant, land.  By being re-directed from activities that produce less value than they use up, such capital can become productive again.

Many parts of the public sector are pathologically unproductive.  Public sector productivity actually contracted over the decade from 1997-2007, by 3.4%, whilst productivity in the rest of the economy rose by nearly 28%.  The scope for public sector staff to be redirected into more productive private sector activities amounts to the order of one half of their total output (public sector workers, if re-employed in the private sector, might produce half as much again as they currently do in the public sector, simply by working at private sector productivity norms) – a huge potential gain.

Identifying over-manning and cutting down on excess staff will obviously not be a pleasant experience for those that have to find new jobs, but it will not be economically inefficient in the way Compass and Bunting claim.

Andrew Lilico is the Chief Economist of Policy Exchange

ONS blunder of political and financial market importance

Andrew Lilico is the Chief Economist of Policy Exchange.

Last Friday, the Office for National Statistics’ press release stated: “Services growth in December pushes up GDP estimate”.  This led to considerable excitement, both in political and financial market terms.  Market watchers expected the pound to strengthen.  There was speculation that Gordon Brown might call a General Election.

But the pound actually tanked, to some initial confusion.  This should not, however, have been a surprise, since GDP was actually revised down, not up.  The ONS press release headline was simply wrong.  The initial estimate for GDP in the final three months of 2009 was £315,845m as you can see here (cell G289).  This was revised last Friday to £315,712m as you can see here (Table C2).

The ONS had managed to confuse the level of GDP with the growth rate of GDP.  What happened was that (as has happened regularly during this recession) the GDP level in the previous quarter (Q3) was revised down quite a lot (things were quite a bit worse than previously thought).  So the change (the increase) between the third and fourth quarters was re-estimated up to 0.3% from 0.1%.  That is obviously a bad news story – the economy was worse than we had thought.  But the ONS headline managed to turn that bad news story into a (wrong) good news story.  Only the Telegraph ran the true story.

Given how politically sensitive GDP data is, and how jittery financial markets are at present, this is a terrible blunder for the ONS to have made.

The Unconsidered Option

Andrew Lilico is Policy Exchange's Chief Economist.

The debate on what to do about the UK deficit in 2010/11 has two main schools.  First, there are those that argue that the deficit should be cut early – through a combination of whatever spending cuts can be delivered and some tax rises.  This school argues that the danger of not acting early, in the immediate aftermath of election victory, is that bond markets may start to fear that policymakers will not take the tough decisions at all if they cannot take them when their political strength is greatest.  The consequence would be a fall in bond prices and hence a rise in gilt yields – that is to say, a rise in interest rates – which would mean mortgage costs going up just when the recovery was most tender.  The economic consequences would be disastrous.

The other school argues that recovery is too fragile at this stage for the stimulating effects of deficits to be withdrawn any more than is already scheduled.  According to this view, more aggressive action risks plunging the economy back into deep recession, and thereby actually making the deficit worse (as tax revenues fall) rather than better.

Now, we at Policy Exchange have broadly advocated the first view.  In our view, deficits on the current enormous and unprecedented scale (12.5% of GDP) go well beyond any plausible stimulatory effect level and well into the zone in which excessive deficits damage recovery rather than promoting it.

But the deficit is not the main problem, or the most urgent.  The main problem is the excessive level of government spending, up from about 41% of GDP in 2007/8 to close to 50% in 2010/11.  Government spending should be cut by as much as possible, as early as possible.  And what has not really been discussed in the UK debate is the option of combining early spending cuts with early tax cuts, so as to keep the deficit constant.

No backtracking

Andrew Lilico is Policy Exchange’s Chief Economist.

There has been much excitement in the press over the weekend about a supposed softening in the Conservative line on spending cuts, focusing particularly on Cameron’s comments that cuts needed to begin early but that the early cuts didn’t need to be “particularly extensive” and that there would not be “swingeing cuts” in the first year.

Many commentators have connected these statements to the very poor GDP figures and the growing expectation of a double dip, with the suggestion being that the recovery may not be sufficiently robust for the economy to tolerate significant spending cuts.  But does the prospect of a double dip stymie the case for early action to correct the deficit?

It is certainly true that, for much of late 2009, the Conservative Party emphasized that if there were recovery in 2010, there would be no need for additional fiscal stimulus and that with a recovery in growth, a normalisation in fiscal policy could begin.  But this was not the case for fiscal consolidation we at Policy Exchange offered.  In our view, the case for early action to address the deficit is even stronger if there is a double dip.

A mild double dip may well commence before the General Election, perhaps as early as the first three months of 2010 or more probably in the April to June period.  This was, for example, the experience in 1992, when, after growth from October 1991 to March 1992, the economy slipped back into contraction from April to June.  This will come before any action to cut spending or raise taxes – indeed, spending will still be rising rapidly over this period.  Double dip will make it all the more urgent to cut spending.  Why?  Well, suppose that we left spending at about 50% of GDP and left the structural deficit (that bit of the budget deficit that won’t go away once the economy is growing well again) at about £125bn.  The result would be that financial markets would become very concerned that the British political classes lacked the will (and the economy lacked the growth) to address the deficit when times were tough and that unless everything went smoothly thereafter, Britain would be at risk of inflation or even defaulting.

Running on Empty

Robert McIlveen is a Research Fellow in Policy Exchange's Energy and Environment Unit.

As we approach the end of winter, fears about energy security will start to recede. Yet we need to think long and hard about our energy supplies over the coming decade. As our aged nuclear power stations reach the end of their lives and older coal-fired power stations are closed under pollution control (to cut emissions of sulphur dioxide and oxides of nitrogen, not carbon dioxide), gas fired power plants are likely to pick up the strain up to 2020. Ministers reassure us there will a golden future of new nuclear and plentiful renewables – a combination which has significant problems in its own right – yet fail to tell us how we will get there, and omitting the rather alarming gap somewhere between 2015 and 2025.

The increase in gas-fired electricity generation has its own knock-on effects. North Sea reserves are beginning to tail off, and the UK has already become a net importer of gas. This is a fundamental shift for UK energy markets, which were established in the 1980s and 90s at a time of over-provision of power stations and secure and reliable domestic supplies of gas from the North Sea.

How to react to the changing circumstances is the subject of our latest research note launched today - Running on Empty: Coming to Terms with UK Gas Dependence.  Britain’s liberalised market has delivered very competitive prices, but has now got to adapt to the challenge of tight global and regional markets and declining UK production. To that end, the Government has a diplomatic role to play.

Child poverty targets are diverting policymakers from the causes to the symptoms of poverty

By Neil O'Brien, Director of Policy Exchange.

In the FT this morning Nick Timmins suggests that the Conservatives are considering widening the child poverty target into a wider set of indicators in order to get a more in-depth measure of poverty.

The current child poverty targets certainly need to be reassessed, because they are distorting and undermining anti-poverty policy.

As Professor Peter Saunders pointed out in a recent Policy Exchange paper, the current targets are not really child poverty targets at all. They are in fact income inequality targets – aimed at reducing the number of children living in households below 60% of median income. 

Among many other perverse aspects of using this as a target, it means that recessions “appear” to reduce child poverty, because the median income falls while the incomes of those on benefits do not. This suggests there’s something seriously wrong with the target.

The most serious problem with the current targets - which the government’s Child Poverty Bill reproduces in slightly modified form - is that they push policy makers relentlessly towards tackling the symptoms of poverty (by increasing benefits) rather than tackling the causes of poverty.  According to the Institute for Fiscal Studies, the Government needs to spend £4 billion extra on benefits to hit the 2010 target or and £19 billion to hit the 2020 target. 

Changing the climate change debate

Robert McIlveen is a Research Fellow in Policy Exchange’s Energy and Environment Unit.

ConservativeHome’s survey of PPCs’ views on a range of policies has brought up some surprising results. Bearing in mind the questions asked, which focused on the next 4 years only, it is little surprise that “reducing Britain’s carbon footprint” came bottom of the pile. Even as an environment policy wonk, I would put plenty of things on the list higher for the next four years. In some sense, it is more striking that new schools, the West Lothian Question and Victory in Afghanistan came towards the bottom than climate change came last.

Climate change is a complicated, long-term issue with more uncertainty than many of those arguing for radical decarbonisation would admit. The fact that the UK will experience few effects which require serious adjustment in the coming years does make doing nothing tempting. Indirect medium term effects, however, are likely to be sufficiently severe to raise it up the agenda. For example, immigration to the UK will become more attractive, both from Europe but especially form other parts of the world, if a fraction of the predictions made come to pass.

Of course, these predictions are at the heart of the debate. Climate modelling has taken a battering recently, especially in the wake of the CRU emails which have undermined confidence in the science entirely. While we should not lose track of the basic science – CO2 is a greenhouse gas and we have pumped a lot of it into the atmosphere – what that means for our climate and society is less clear. How much to avoid emissions and prepare for adaptation entirely depends on what you expect to happen.

To that end the sensible strategy is related to cost. There are some things, for example energy efficiency, which provide savings immediately and are worth doing in any case. However, the rationale behind putting most of the UK’s climate eggs in the wind basket is not clear – it is one of the more expensive technologies and has some significant downsides. This is an issue we are looking at in our Rational Environmentalism project.

Climate change is one of the worst debates in contemporary politics. That the terms “denialist” and “eco-fascist” are regularly used reflects the unhinged tone of the debate. A sensible approach to a long-term problem riven with uncertainty would be very welcome.

Defence: is it even worse than we thought?

By Neil O'Brien

According to the National Audit Office, the Ministry of Defence is on course for a £36 billion overspend.

Their report, out yesterday, noted that:

"The Department estimate that the Defence budget remains over committed by £6 billion over the next ten years; this assumes an annual increase of 2.7 per cent in their budget after the end of the current Comprehensive Spending Review settlement in 2010-11.

However:

"If the Defence budget remains flat in cash terms after this time, then the extent of the over commitment widens to £36 billion. In either case the budget remains consistently unaffordable over the next ten years"

Their chart shows how the gap between the MOD’s spending plans (in green) and its budget (in blue) will gradually widen to about £7 billion a year by 2018.

But defence spending isn’t just going to be frozen.  According to the Institute for Fiscal Studies, the Government’s plans in the Pre-Budget Report imply that real terms spending in “non-protected” departments like defence will be cut between 16-19% by 2013/14.