CentreRight

A Keynesian consensus?

By Neil O'Brien

Britain’s budget deficit is soaring to record levels.  The Government is spending four pounds for every three that it raises in tax.  The national debt is set to double.  Britain is running up twice as much debt as the G20 average.  The CBI, the IMF, the OECD and the credit ratings agencies have all raised concerns about the spiralling debt.  And as you can see from the chart below, the public finances are now in a worse state than when Britain was forced to go “cap in hand” to the IMF in 1976.  The red line is the projection from Budget 2009.

Public sector net borrowing (%GDP)

Nonetheless, some people want to run an even bigger deficit. 

Today the Guardian carries a piece attacking "debt hysteria" and arguing that "we can spend our way out of recession."

Over at Left Foot Forward, a group of left-leaning luminaries are calling on Gordon Brown to spend even more and to “make the Keynesian case for budget deficits.”  They argue that reducing public spending will lead to a double dip recession. 

Off the scale and off the rails

By Neil O'Brien

Yesterday  the Institute for Fiscal Studies noted that the government was on course to borrow even more than it expected to. They said that, “If this level of growth in borrowing were to continue for the remaining five months of this financial year, borrowing for the whole of financial year 2009–10 would be about £217bn (or £42bn higher than was forecast in April’s Budget).”

That would mean we are borrowing roughly:

• £818 million a day
• £34 million an hour
• £570,000 a minute
• £9,500 a second.

The interest on all this debt will not be cheap.  Soon, 9p in every pound of tax we pay will be spent not on public services, but on servicing debt interest.  We will be flushing £50 billion a year down the toilet – more than we spend on schools.  That’s real “government waste” for you.

We’ve been carrying out a major research project (which will be published shortly) on international and historical examples of major spending cuts.  That lets us put our current debt crisis in context. 

Britain’s deficit today is at the very upper limit of anything previously experienced by developed economies.  If the Government borrows £217 billion this year, that will be about 15% of GDP.   

The biggest deficit reduction we looked at was in Sweden, where the government deficit was improved by 14.8% of GDP (from a deficit of 11% GDP in 1993 to a surplus of +4% in 2000).  Roughly half of their deficit problem was solved with spending cuts, and the other half with big increases in tax.

If we followed the Swedish example in Britain, it would mean adding the equivalent of 20p onto the basic rate of tax.  Not many people want that.

One party, two think tanks and (several) housing policies

Lawrence Kay is a Research Fellow in Policy Exchange's Economics Unit.

On Monday Tim Montgomerie argued that the Centre for Social Justice is leading the housing policy debate. The CSJ is making a stellar contribution, but what matters is policy. It is not sufficient to just highlight the problems. What we need is a plan for both how to build more houses and release the aspirations of people in council housing so that they, like people in private housing, can pick the best place for themselves to live.

This year, Policy Exchange showed how this could happen via our Right to Move proposal. It takes its inspiration from the Right to Buy policy of the 1980s and argues that, if people in council housing were allowed to tell their council to sell the property they are in and buy an equivalent one elsewhere, many of them would choose to live in places where they are closer to their families or the work that suits them. In short, the wishes of people in council housing would determine where the state funds housing. At the moment the social planners of the 1960s still hold the whip hand. Their dreams of concrete utopias have trapped thousands of people. The consequences have been tragic for many years. Thankfully, the Conservatives adopted our Right to Move proposal earlier this year.

Britain also has a major problem in private housing: there are not enough houses for us to live in, so both prices and the misery of living on top of other people in shared accommodation are high. Supply could be increased by doing something counter-intuitive: letting communities have more say in the housing developments taking place where they live. For too long central planners in local councils have told people ‘we are going to build 10,000 houses in your village’ but then not given the people already living there the necessary improvements in transport and amenities. Trust in development has thus broken down. NIMBYism rules as a result. As shown by the communities-based approach in Germany, this need not be the case. There, people welcome more housing because they know that it means they can spend the financial inducements for it on building things like sports’ centres and roads, as Policy Exchange showed in this report. The Conservatives have long lauded this approach. Grant Shapps reiterated his commitment to it today.

Should we care about manufacturing?

By Neil O'Brien

Should free marketers worry about manufacturing?  During the 1980s the Thatcher administration was forced to make a virtue of necessity.  As manufacturing shrank, the right tended to argue that this was probably inevitable, and that it should be left to the market to determine where Britain’s comparative advantage lay.

This left many uneasy, including me.  It is certainly the case that politicians can’t know which sectors should grow or shrink.  I also am very sceptical about the “new industrial interventionism” pushed by Lord Mandelson, which looks a lot like the old industrial interventionism.  Governments which have tried to “pick winners” have generally ended up propping up losers.

But manufacturing really matters, because it’s the area of the economy where productivity grows most quickly.  Output per person in our economy as a whole grew 1.9% a year between 1980 and 2008.  But output per person in manufacturing grew 3.1% a year.

There are sensible things that policy makers can do, not to favour manufacturing over other sectors, but to create the right conditions for it to flourish.  That’s why Policy Exchange is holding a conference with Ken Clarke and leading manufacturers, and conducting a major research programme on the subject.

For a decade or more Britain’s politicians have thought a lot about how to divide the cake, and not enough about strengthening the productive base of our economy.  We need reforms across the board to enable recovery and growth: from reforming our restrictive planning laws, and repairing our creaking infrastructure, to our making our public sector smaller and more productive.

But we should also specifically try to create better conditions for manufacturing in Britain. There are three main things we are looking at right now:

•    Science skills.  According to the CBI 92% of firms across all sectors require people with science, technology, engineering maths (STEM) skills, but more than 59% are experiencing problems finding them.  But Since 1997 the percentage of pupils studying A-levels in Biology, Chemistry and Physics has fallen.  The Government says the number doing science subjects at University are up.  But we found that’s because the list of subjects classified as ‘science’ by the Government has become much broader, and now includes ‘Nutrition and Complementary Medicine’, ‘Geography Studies’, and ‘Sport Science’ among others.  The number studying Chemistry has in fact fallen during the same period– from 13,923 to 12,515. Meanwhile, numbers doing Engineering and Technology subjects have dropped from 90,930 in 1997 to 80,425 in 2008.

•    Tax and the role of Government.  In general Britain has gone from having one of the lowest corporate tax rates in Europe to one of the highest.  But as well as reducing the overall burden, there are some specific things the Government could to help manufacturers who make big investments in machinery. Current rules on capital allowances are designed for a bygone era where the pace of change was slower and machinery could last longer before it had to be upgraded.  It can take 20-30 years to write down investments under the current tax rules, but firms now replace machinery every 7-8 years.  Instead of the Research and Development Tax Credit, which has not raised the rate of R&D, we suggest that Government should increase capital allowances, so that investment in new machinery will “pay for itself” more quickly.

•    Innovation in universities. More needs to be done to exploit the ideas developed in higher education and to strengthen business links with universities.  We will shortly be publishing ideas about how get better at turning our good ideas into profits.

I am struck by the number of manufacturing success stories that there are in Britain, despite everything.  A product may say ‘made in China’ on the bottom because the plastic case was made there - but its most valuable components are often made here. Britain exports a higher proportion of high tech products than the US, Germany and France, and leads the world in many sectors.  I think there is a lot more that can be done to make sure we stay an engineering and manufacturing nation.  I’d be interested in your ideas about how we can help make it happen.

Why the Conservative Party should not spell out a list of explicit cuts

Andrew Lilico is Policy Exchange's Chief Economist.

Cameron and Osborne are coming under increasing pressure to spell out an explicit list of planned spending cuts.  Some of this pressure, naturally, comes from their political opponents, but there have also been lists of cuts propose by, among others Reform (£30bn) and last week the Taxpayers’ Alliance and the Institute of Directors (£50bn).  Whilst it is useful for think tanks to produce ideas for debate, I believe it is a mistake when they go further and demand of political parties — especially of opposition parties — that they spell out their own alternative lists.  I shall explain why.

First, we should note that the lists of cuts set out so far are simply not enough.  For headline public spending to fall by the £65bn or more required, core spending needs to fall by upwards of £100bn, because in the short-term there will be £35bn or more of additional spending required as a fairly unavoidable consequence of the recession and the consequent unemployment to come.

This point of scale is crucial.  If the cuts required were only, say, £5bn, it might make sense to identify specifically what they are intended to be.  But to cut £100bn means cutting across an enormous area of public spending.  To make cuts on this scale, it is vital that, before they are committed to in detail, bureaucrats in the relevant departments have the opportunity to fine-tune the scheme.  Otherwise, what will happen in practice is that some cuts “committed to” in opposition will prove undeliverable in government.  Once that starts to happen, then other departments or programmes scheduled for cuts will ask why they are being targeted when others on the supposedly fixed cuts list were spared.  The whole programme could quickly unravel.

Part-time support

By Anna Fazackerley, Head of the Education Unit at Policy Exchange

Parents with children awaiting their A-level results on Thursday are right to be feeling distinctly unwell. Last year, if they didn’t achieve the required grades the worst most parents faced was a few exasperating hours on the phone to admissions tutors sorting out a new place. This year if your children slip a grade it is likely to leave them with nowhere to go at all, even if overall they have still done well. With a boom in full-time university applications, but a drastic shortage of places, tens of thousands of eligible students will be stranded in the chill of the recession.

This surge in full-time applications has been driven partly by older learners desperate to change direction or beef up their skills. Applications from students aged over 21 are up by 34% on last year. Ironically, many of these applicants would almost certainly have preferred to study part-time, enabling them to juggle a career or family life alongside their studies. What will have put them off is the realisation that part-timers receive a fraction of the support given to their younger full-time counterparts.

Part-time students now make up one-third of all undergraduates – and they aren’t doing flower-arranging, they are acquiring skills to clamber up the career ladder.  But whereas all full-time students receive some financial support from the Government, a staggering 90% of part-time students receive nothing at all. Lord Mandelson can wax lyrical about social mobility and lifelong learning until we are all grey in the face, but unless he addresses this yawning inequity huge numbers of adults will decide that going to university to retrain is simply impossible. In a report out today, Policy Exchange is proposing a new, fairer but affordable financial aid model, which will lessen the divide between part-time and full-time students.

We show that for an additional £33 million the Government can provide some financial support for 60,000 extra part-time undergraduate students, taking the total number up from 44,000 to 104,000. The cash can be diverted from University Challenge – an ill-judged scheme to build 20 new “universities” for £5-£10 million each in down-at-heel towns. The assumption is that a university, even a £5 million one, will automatically drive regeneration. None of the Vice Chancellors we spoke to were remotely convinced.

Having focused rigidly on trying to push 50 per cent of all young people into higher education, then slammed a severe cap on student numbers just as the recession forces more older learners to reskill, the Government should have expected this week’s car-crash. Now is the time for some proper planning on student provision. And part-timers can no longer be conveniently ignored.

Finkelstein is talking from the past - Spending must be cut now

Andrew Lilico is Policy Exchange's Chief Economist.

In this morning’s Times, Daniel Finkelstein continues a theme he has pursued in a recent series of exchanges with Tim Montgomerie.  He argues that public services reform will deliver savings, but that such savings take time to emerge.  He cites the example of changes to the retirement age for women, introduced in 1995 but only now yielding savings.

The implication, in his view, is that the proper procedure will be:

• Raise taxes to address the deficit problem
• Reform public services
• Down the line, public service reforms will yield spending reductions
• Since spending has been reduced, taxes can then be reduced as well

I believe that this is a point of view that does not properly recognise how much the world has changed since 2007/8.  Then, we were spending around 41% of GDP.  This was up from 36% in 1999 and the discussion was about how we had allowed spending to rise too fast during a boom period, “not fixed the roof whilst the sun was shining”, and spent a great deal of extra money on public services without reforming them with the predictable result that productivity returns in the public services were very poor.

The latest GDP data and their implications for future public spending

Andrew Lilico is Policy Exchange's Chief Economist.

This morning’s GDP data constitute a horror story for businesses, for unemployment prospects, and for the public finances.  Contrary to the expectations of only a few weeks ago that the second quarter might have been flat (neither growth nor contraction) or even of the consensus expectation this morning of a 0.3% contraction, GDP in fact contracted by 0.8%.  Government Ministers have attempted to spin this as a “considerable easing in the downturn”.  “Easing” of this sort, if sustained for the rest of the year, would result in a full year contraction of above 5.2% of GDP – worse even than the peak of the Great Depression in 1931.

It is clear now that in Q2 we have only the shrivelled yellow shoots of recovery, probably largely as the result of an inventory snapback (in the final quarter of 2008 and the first quarter of 2009, companies produced little and ran down their inventories to very low levels, so that in the current quarter it was necessary that firms should increase their production, just in order to avoid running out of stock).  Looking forward, it is now less likely that the third quarter will see growth, but my view remains that we will get growth in the fourth quarter and perhaps also in the first quarter of 2009.

This will mean that, going into the likely General Election period, the Government will be able to claim that growth has returned.  It will probably seek to take credit for this growth, as a result of Government policy.  It will be correct, and that is a problem.  Because the growth over those six month will, in my view, be the inevitable lagged effect of a one-off massive policy stimulus consisting of interest rate cuts of more than 5%, a doubling (perhaps by then a tripling) of the monetary base (the quantitative easing programme), and a £200 billion budget deficit.  If economic stimulus on this scale does not result in at least one or two quarters of growth then the economists might as well go home.

A wasted opportunity

Ben Caldecott is Head of Policy Exchange's Environment & Energy Unit.

Britain’s waste system has developed piecemeal over the past 150 years without ever being properly reformed. The waste we throw away contains potentially valuable resources that are now being left unused. We still send more than half of our waste to landfill, with more than 15.5 million tonnes of household waste being buried and left to rot in 2007-08. This runs the risk of fines of up to £366 million due to missing European Union targets as well as loosing out on the value of the resources left untapped in the waste stream

Our waste system achieves poor results because it is not designed for the challenges we face. On climate change the drive to recycle more has actually led to more carbon emissions from some materials. Food and biodegradable waste that if used could reduce carbon emissions and help deliver energy security by producing nearly 50% of the gas needed by households is not utilised. Moreover, in an age where people have less spare time, we now have to deal with the hassle of too many bins and overly complicated collections.

The latest report from the think tank Policy Exchange, “A Wasted Opportunity? How to get the most out of Britain’s bins” sets out how we can improve this situation. Our waste system can better protect the environment, extract more economic value and reduce the hassle people experience. It can also cost less to run - the reforms proposed in our report could cut household waste bills, currently around £100 per household per year, by up to half.

Xinjiang uprising: the latest act of rebellion against Beijing’s authority was avoidable

Ben Caldecott is an Associate Fellow of the Henry Jackson Society and a Research Director at Policy Exchange.

The violence that has recently erupted in China’s far-western province of Xinjiang is the latest act of rebellion against Chinese control of the region. Between 1648 and 1878 more than 12 million Muslims in China were killed in ten major uprisings against central authority in Beijing. More recently, hundreds of Uygurs have been arrested and sentenced to death for engaging in 'separatist activities’.

This long history of resentment and rebellion by Muslim minorities in China is coalescing once again and has initiated widespread violent resistance against Beijing's authority. This situation has arisen entirely because of Beijing’s intransigence and its longstanding strategy in the parts of China with a Muslim majority to divide and rule.

Beijing has long sought to break up Muslim populations into smaller administrative units and encourage rapid Han immigration in order to dilute Muslim majorities.  Their policies have been strikingly successful at disenfranchising Muslim ethnic groups and reinforcing Han Chinese control in parts of the country remote from Beijing. For example, the proportion of Han Chinese in Xinjiang has grown from only 9 percent in 1949 to around 40 percent today.  This growth is staggering, but does not reflect the extent of Sinocisation on the area.  Nor does it express the widespread resentment amongst Xinjiang's proud and distinctive Muslim majority.

Cuts in the Budget go Much, Much Deeper than you Think

Andrew Lilico is Policy Exchange's Chief Economist.

Policy Exchange is currently engaged in a major programme on public spending.  Our first report considered the scale of the challenge, demonstrating that there is currently a huge surge in public spending (up £120bn in just three years) and arguing that there would need to be cuts of £55-£65bn from 2010.

A week or so after our report came out, the public spending debate blew up following Andrew Lansley’s comments that the 2009 Budget already implied cuts of 10% in departmental expenditure limits if NHS spending is ring-fenced.  Gordon Brown seized on these remarks, claiming that they indicated an intention by the Conservatives to cut all spending by 10% in contrast to what he claimed was Labour’s intention to keep raising spending each year.  Subsequent press commentary has exposed the blatant untruth at the heart of Brown’s claim.  For Labour’s own Budget scheduled a halving in the capital spending budget and cuts in departmental expenditure limits of 7% from 2011-2014.

But in fact much the largest cuts announced in the Budget have had almost no publicity at all.  Look at paragraph 2.81, p35 of the 2009 Budget.  This states:

This Budget puts the public finances on a path to achieve a cyclically-adjusted current balance in 2017-18. The cyclically-adjusted current deficit falls from 6.7 per cent in 2009-10 to 3.2 per cent of GDP in 2013-14, an average improvement of over 0.8 per cent a year... A further adjustment of 0.8 per cent of GDP a year from 2014-15 would eliminate the deficit on the cyclically-adjusted current budget by 2017-18.

What this says is that from 2014-5 to 2017-18, the 2009 Budget schedules fiscal tightening (tax rises or spending cuts) of 3.2% of GDP, that is to say, a little under £50bn.  Because this is about addressing a structural deficit, it won’t be corrected by the economy returning to healthy growth – this 3.2% is the deficit even when the economy is growing well.

Does this mean £50bn in tax rises or in spending cuts?  Well, the 2009 Budget contains explicit fiscal tightening made up of 80% spending cuts and 20% tax rises.  This is inevitable – historical and international experience suggests that it is impossible to achieve fiscal tightening on remotely the scale required by raising taxes (raising taxes causes the economy to fall deeper into recession and so revenues fall and so the deficit does not fall by nearly so much as the tax rises).  Thus we can reasonably assume that £50bn in fiscal tightening will be made up, as with the other fiscal tightening in the Budget, of about 80% spending cuts and 20% tax rises.  In other words, the Budget schedules about £40bn in spending cuts, Labour cuts of £40bn, from 2014-2018.

I emphasize again that these £40bn of spending cuts are in addition to the 7% cuts in departmental expenditure limits already being discussed (amounting to about £25bn) and the halving in capital spending (amounting to about £20bn).  If Conservatives are serious about spending less than Labour, we need to work out how to cut spending by more than £40bn, over-and-above the spending cuts of 7% in DELs and the halving of capital spending.  And the reality is that, with the ratings agencies having placed the UK on notice that our AAA rating will be under threat if a credible fiscal consolidation plan is not introduced by the next government, we will not be able to wait until 2014 before doing it.

The (in)significance of the inheritance tax pledge

Andrew Lilico is Chief Economist of Policy Exchange.

The current debate over public spending has involved claims by Conservative frontbenchers that departmental expenditure limits (DELs) will have to fall by 7% after 2011 and may need to fall by 10% in some areas — these figures, of course, being those implied by Labour’s 2009 Budget, a fact that a number of Labour minister appear not to grasp.  One only hopes that the Treasury ministers, in particular, will have a better grasp of their own figures shortly.  Of course, cuts of 7%-10% in DELs are neither nearly sufficient in the way of cuts nor is post-2011 rapid enough.  Labour’s own plans indicate that they would be likely to need to reduce their plans by a further £40bn-£60bn in today’s money (the Budget states that this will occur after 2014) and the Conservatives would be likely to seek additional cuts over-and-above this.  Furthermore, these cuts would need to happen more quickly than currently scheduled if the country is to avoid a gilts crisis that could come as soon as late next year.  But the message about the need for cuts is at least now being debated.

A number of Government ministers, notably Byrne and Balls, have suggested that Conservative plans are driven by the need to find funding for the pledge, announced in the autumn of 2007, to raise the inheritance tax (IHT) threshold to £1m.  Let’s examine that claim for a moment.

The first cut is the deepest

Helen Thomas is a research fellow with Policy Exchange's Economics Unit.

Standard & Poor today placed the UK on a “negative” outlook due to the potential deterioration in the debt burden. The IMF agreed, advising yesterday that the Government must "put public debt on a firmly downward path faster than envisaged in the 2009 Budget”, as well as warning that further capital may need to be put into UK banks.

This isn’t just more bad news for the Government in a bad news week. This highlights the potential for a very real downturn in the fortunes of the UK in the longer term. Of the 18 sovereigns rated AAA by S&P, the UK is the only one now on a negative outlook. It is also the first time the UK has been in such a position since S&P started rating it in 1978.

The last country to lose its triple-A rating was Ireland, in March. An emergency budget was introduced in April.

The Right to Move

By Neil O’Brien, Director of Policy Exchange.

This morning, Conservative Housing Minister Grant Shapps will announce proposals to give housing tenants the right to move around England without losing their accommodation.  This could be as big a shift as Mrs Thatcher’s “Right to Buy” policy - and it will take the Conservatives deep into what was once seen as Labour territory.

In Policy Exchange’s own report The Right To Move, published earlier this year, we advocated just such radical changes to the rights of social housing tenants to give them the opportunity to exercise choice over where they live, work and raise a family - so it’s great to see these proposals being taken up today.

The statistics about life in social housing are shocking. There is only a 1-in-100 chance that a social housing tenant and both their immediate neighbours will be in work. Children growing up on social housing are twice as likely to end up without any qualifications as children from otherwise identical family circumstances who don’t. One in five social housing tenants living in flats do not even feel safe when they are in their own home.  

Yet at the moment council and housing association tenants get little choice over where they live and are rarely able to move: many are in properties that do not suit either their needs or preferences. People with children get stuck high up in tower blocks.  I knew a woman in a wheelchair who was put in a two-storey house at the top of a huge hill.  It is bad for the economy too, because often people can’t move to find work without losing their house.

Churchillian environmentalism: “We are still masters of our fate. We are still captain of our souls”

By Ben Caldecott, Head of Policy Exchange's Energy & Environment Unit

When confronted with a challenging international decision post-war British Prime Ministers will undoubtedly ask themselves, “What would Churchill have done?”. Given the environmental challenges we face, ranging from climate change to biodiversity loss, and the coordinated international responses needed to tackle many of these issues, perhaps it’s not unreasonable to ask the same question. What might a Churchillian response to these dramatic problems look like and could it be a doctrine relevant for today’s politicians?

For a start, given Churchill’s internationalist outlook he would have favoured coordinated multilateral action, with the UK and European Union taking a central role. He would also have expected the United States to join the fight at some stage, after all, “The Americans will always do the right thing...after they've exhausted all the alternatives”.

As an economic liberal, he would have seen the benefits of new environmental markets driving emissions reductions through innovation and the deployment of low carbon technologies. He would have been in favour of the state creating an enabling framework for businesses and individuals to make the right choices for the environment. But, he would baulk at the idea, possessed by a surprisingly large number of green activists, that a “benign dictatorship” and direct state control of the economy is the solution.

Shuffling the educational deck chairs

Today’s impromptu release of the new plans for the primary school curriculum, drawn up by former Ofsted chief Sir Jim Rose, have been met with a mixture of concern and bemusement.  The ‘stripping down’ of the curriculum in terms of specific content that teachers are forced to deliver will be welcomed by many in the teaching profession.  However, the same cannot be said for some of the other proposals.

While there is a clear argument for introducing an element of web-based learning and technological skills, it appears that this will come at the expense of literacy and numeracy.  As discussed in an upcoming report by Policy Exchange, the reality of literacy and numeracy standards in primary schools is truly horrifying.  Just 56% of the boys and 66% of the girls who left primary school in 2008 could read, write and count to the minimum standard. In fact, 50,000 pupils left primary school last year without reaching the minimum standard in any of the core subjects – English, maths and science.  Sir Jim’s proposals to combine individual subjects into six ‘learning areas’ (which amounts to little more than shuffling the educational deck chairs) and the greater emphasis on addressing “societal concerns” about health and well-being (which recent pilot studies showed to have no positive effect on children according to parents) are unlikely to have any tangible impact.

Furthermore, there seems to be remarkably little interest in whether these changes will improve literacy and numeracy standards.  The Qualifications and Curriculum Authority has previously stated that the changes being put forward by Sir Jim are ‘supported by research’. However, this research merely consists of “listening to and summarising the views of thousands of primary children and parents”, “seeking the views of thousands of practitioners”, visiting schools and attending seminars. This is a typical way of evaluating pilots but it fails to answer the fundamental question of whether any of the above proposals will help more children to read, write and count properly.  This suggests that the upcoming (and substantial) changes to the curriculum will go down as yet another hugely expensive yet ultimately unsuccessful and unnecessary set of reforms.

Tom Richmond is a Research Fellow in Policy Exchange's Education Unit. 

The second dash for gas has begun

The quiet and underreported Government announcement this week to approve the construction of three new gas fired power stations marks the beginning of Britain’s second dash for gas. This is not something we should welcome. It means that we are locking ourselves into a high carbon future and becoming more energy insecure. Whilst our first dash for gas was founded on secure North Sea reserves, the second is reliant on insecure Russian supplies and is purely the result of a failing energy policy. Simply, the investment in renewables, nuclear and carbon capture and storage (CCS) hasn’t been sufficient to replace decommissioned capacity or decarbonise our energy infrastructure. This dire situation was entirely avoidable in 1997, but after 7 major energy policy realignments since then, essential investment has been thwarted by uncertainty and confusing signals from Government. Moreover, Britain’s energy markets still fail to adequately incentivise investment in the most cost-effective low carbon technologies and also in capacity, which is essential for ensuring the resilience of our energy networks. The construction of these power stations will make it harder and more expensive to meet our ambitious 80 percent emissions reduction target by 2050. It will leave us with three options over their 30 year lifetime: decommissioning and replacement with lower carbon generation capacity, their retrofit with CCS and/or the use of UK created biogas as their fuel. The first option will be prohibitively expensive, the second will require significant support from government and the third will need us to change the way we view and manage waste. Retrofitting these power stations with CCS is the option favoured by the Government, but it has presided over a lengthy and widely criticised competition to build the first CCS demonstration power plant in Britain. Given the slow pace of progress under this Government, it is almost impossible to predict if and when CCS could be retrofitted and at what cost. The second dash for gas is one of the least attractive energy policy scenarios. It has been forced on Britain because of government complacency and the maintenance of an energy policy unable to deal with the challenges of decarbonisation and declining North Sea reserves. The reforms needed to sort out this mess have been set out in more detail elsewhere (see: http://www.policyexchange.org.uk/images/libimages/469.pdf) and it is critically important that we implement them. Ben Caldecott is head of Policy Exchange's Energy and Environment Unit.

A bail-out with no guarantee of success

State bail-outs used to be so black-and-white. In the past, the government of the day would hear pleas from a manufacturer for some “last resort” money that it needed to avoid bankruptcy. Ministers would then work out how many jobs would be lost if the company were to go bust, calculate the political fall-out, and hand over the cash in return for promises to use the support to “come out the other side as a world-beater” and not to cut any jobs. Things are now much more complicated.

In part, they are greener. When he announced his package of loan guarantees for the automotive industry yesterday, Lord Mandelson argued that he was “laying the foundations for a reinvention of its future.”  This claim was odd in several ways. First, the CO2 emissions of new cars produced in the UK have been falling for years. In 1997, new models produced an average of nearly 190g of CO2 per kilometre, now they produce only 165. Second, because the top four producers in the UK are foreign companies, any revolution in car manufacturing will not be driven by British firms. The profits and intellectual property rights generated by the much-vaunted new era of motoring will be collected by other countries.

Bank Bailout: Take Two

By Helen Thomas, CFA, Economics Research Fellow

After all the talk of a “bad bank”, the government have settled for a swath of measures centred on a large insurance scheme. Both ideas aim to draw a line under the ever-increasing losses from toxic debts and non-performing loans in order to free up bank capital and encourage them to lend. The main difference between the insurance approach and the bad bank is how quickly losses are revealed.

With the “bad bank”, losses are immediately revealed as the government finally puts a price on debts that have remained difficult to value ever since the market in such securities evaporated. In the insurance scheme, the government guarantees losses up to 90% in exchange for an upfront premium. The premium will vary from bank to bank, and from asset to asset. The benefit to the government from such an insurance scheme is that they will receive something upfront, whilst the ultimate pay-out day might never materialise.Politically this is a much easier sell, but economically it might slow down the healing process.  As Keynes was forever pointing out, a lot depends on crowd psychology.

The government hopes that the very establishment of the insurance scheme will kick-start lending and halt the slide in asset valuations. That should mean that the insurance is never called upon – and as sentiment improves, so the need for the insurance itself will diminish. The government has certainly filled the deck with all the aces that it can: guarantees on mortgage-backed securities and for new corporate lending should re-start those markets, helping to unlock the credit markets and halt the slide in the securities that are covered by the government insurance scheme.

Britain’s inadequate energy policy must be transformed

By Ben Caldecott, Head of Energy & Environment at Policy Exchange

In the latest report published by Policy Exchange and authored by Dieter Helm, Professor of Energy Policy at Oxford University, it’s clear that Britain must change its energy policy to meet the challenges of climate change and rapidly declining North Sea output. If the Government fails to do this, the lights might go out, we will see a second dash for gas based on insecure Russian supplies and we’ll be locked into a high carbon future. This scenario is the worst possible, but is becoming increasingly likely.

With the retirement of our aging nuclear power stations and the closure of our coal ones due to the EU Large Combustion Plant Directive we face a rapidly growing energy gap. By 2020 between one-third and one-half of our existing generation capacity will need to be replaced. Whilst the Government knows this, it is doing too little to ensure that capacity is replaced, let alone replaced by low carbon forms of generation.

The seemingly endless succession of energy policy reviews and ad hoc policy interventions has confused investors and regulators the like, delaying or preventing crucial investments. In addition, one of the Government’s main energy policy instruments, the Renewables Obligation (RO), is one the most expensive ways of subsidising renewables in the developed world. To make matters worse, there are a plethora of organisations charged with delivering energy policy.

The borrowing dilemma

By James Mackenzie Smith, Economics Research Fellow, Policy Exchange

We have been faced with the dilemma of “our economy needs a stimulus” but “we don’t have any scope to do this because of the public finances”.

Recent murmurings in the press have first hinted at a spending spree a-la-1970’s, then a tax-cutting spree. But both of these however, if unfunded, would have the same effect on the public finances and both of these would have serious long term implications for the British economy: high debt, high long term interest rates and prolonged stagnation - exactly as what happened in the 1980’s.

Britain’s public finances are in a particularly perilous state, not least because of the ‘off-the-balance-sheet’ liabilities such as PFI and public sector pensions (not to mention the borrowing from the banking bailout), but also because the structural deficit is increasing at an astonishing rate and could exceed 1970’s and post-ERM levels - above and beyond the effects of the automatic fiscal stabilisers.

Ignore them at your peril!

By Ben Caldecott, Head of Energy & Environment at Policy Exchange

We need a balanced strategy to tackle climate change and its consequences, currently we have an ineffectual lopsided one.

Green groups and policy makers have a habit of focusing on mitigation first and foremost. This is potentially perilous, as it has sucked away resources and political attention from two other fundamental policy areas – how we adapt to climate change and how we clean up and restore habitats we’ve already destroyed. But, why should we be concerned, surely prevention is better than a cure?

Even with the best will in the world, it’s impossible to stop some human-induced climatic change. Our prevention measures are failing – temperatures are already rising and we’ve failed to control the growth in greenhouse gas emissions. This doesn’t mean that we should stop trying to take collective action to significantly reduce global emissions, especially when the rewards of doing so are enormous. It does mean though, that measures to manage the consequences of climate change need to be put in place. Doing this isn’t giving up hope, as some green groups and environmentalists would say, it’s facing up to the reality of the situation we’re in.

Weighing in to the debate on obesity

Henry Featherstone is Head of Health & Social Care at Policy Exchange.

We’re getting fatter.  More and more of us are putting on weight and we’re not doing much about it.

The consequence of being overweight or obese is greatly increased risk of high blood pressure and diabetes which in turn lead to cardiovascular disease, which is now the leading cause of premature death in the UK.

Since a stunning two thirds of the British population are now overweight, this should be something for us all to get upset about.

The growing prevalence of obesity marks it out, along with harm from alcohol, as one of the public health epidemics of the 21st century.  According to the International Association for the Study of Obesity, England tops the league in terms of adult male obesity and comes only second to Scotland in the list of female obesity.  So what’s to be done?

Well, there a number of good anti-obesity programmes being tried out in different places. In a new study from Policy Exchange we report on ten low-cost and effective programmes.  We find that the best schemes have certain features in common: they empower local communities; they providing financial incentives, and encourage early intervention.

Sherlock Holmes Policing

By Gavin Lockhart, Head of Policy Exchange's Crime & Justice Unit.

Last week, Bill Bratton, the Los Angeles police chief, criticised Scotland Yard's crime solving methods, likening them to something out of a Sherlock Holmes mystery novel.

The Police Commissioner, who has halved the number of gang killings in Los Angeles, said the emphasis in Britain had to move on from responding to crime to preventing it. The next Commissioner of the Met must embrace this approach and end the public’s general sense of impotence about the police and their partners.

 

Successful violent crime reduction is predicated on changing social norms and demonstrating that violence would not be accepted on the streets of the city. In certain communities – amongst certain individuals – violence is an accepted social norm. Bratton’s lesson is that there needs to be a clear ‘carrot and stick’ approach to violent crime reduction strategy. In high risk areas a deterrence strategy should send a clear message that violence will not be tolerated and must be backed up by all relevant agencies using every available lever.

Two of the favourites to replace Blair - Sir Paul Stephenson and Matt Baggott - understand that a reducing in crime cannot be achieved by the police alone. The Deputy Mayor Kit Malthouse and James Cleverly, deputy leader of the Tories on the London Assembly both understand the importance of prevention and partnership work: their ideas for a dedicated jail for first time offenders are designed to prevent jails becoming schools of crime. And, to be fair, the Metropolitan Police Commissioner (MPA) gets it too. MPA strategy documents acknowledge that the Met’s “current practice of trying to reach all groups with the same solution is mistaken. For example a drug dealer requires enforcement action; the child at risk needs a social care structure robust enough to meet their needs and those that are ‘reluctant gangsters’ can be addressed through cultural and educational means.” Expanding Safer School Partnerships and Street Pastors schemes are steps in the right direction. The investment of £600,000 into targeted schemes in areas of high crime should be welcomed.

Less than 2% of crime results in a guilty conviction.

Gavin Lockhart, Crime & Justice Research Director, Policy Exchange

The admission that the police forces have been failing to properly record serious violent crime for more than a decade comes on the same day that the Leicestershire chief constable (who is also responsible for neighbourhood policing) said that that four in ten victims of crime are not visited by a police officer. The public are deeply skeptical about crime figures and they have reason to be so: the latest research from Policy Exchange suggests that after a decade of New Labour initiatives less than 2% of crime results in a guilty conviction. 

Sources of crime figures range from official statistics (the British Crime Survey and police recorded  crime), to less public sources (criminal intelligence maintained by law enforcement agencies). Published statistics need to be interpreted with care: non-reporting and non-recording of incidents mean that recorded crime figures do not and cannot include all crimes committed. Changes in police recording practices – notably to the counting rules in 1998 and the introduction of the national crime recording standard in 2002 – have led to artificial shifts in violent crime statistics. And the Government sometimes uses minor variations from one year to another to present a misleading picture of an improving situation. Much data is collected at local police force level but collated and published centrally by the Home Office, leading to duplication of work and long delays. Detailed crime statistics are available only months after the end of the reporting period and so the latest figures may be years old. Sound policy cannot be developed on the basis of out-of date statistics and intelligence. Central government should collate and publish recorded crime figures much faster than it does now, ideally every quarter, so that emerging trends can be identified promptly.

Take gun and knife crime: figures released this morning show that the number of attempted murders in England and Wales involving a knife April and June this year were 28 per cent up on last year. But the ‘corrected’ figures still do not offer a complete picture of gun and knife crime because much of it – especially violence between criminals and offences by children under 16 – has historically been unreported. Organisations that could provide extra data to fill out the picture, such as the Ministry of Defense or hospital A&E departments, are often reluctant to do so.