Andrew Lilico: Let's get a few things straight regarding "austerity"

The debate about "austerity" in the UK and Europe rages on.  But let's grasp a few things.

• Some significant folk (e.g. the IMF) appear to be calling for the UK to "slow down" the pace of its deficit reduction programme.  Well, the UK's planning to have a £120bn - £120bn! - deficit for three years in a row.  That's right: from 2011/12 to 2013/4 the British government has planned to have no deficit reduction whatever.  How much "slower" a pace of fiscal consolidation than "none whatever" do folk have in mind??

Andrew Lilico: Abandoning all respect for property rights won't end happily

Here's how it should work: if you own something, then setting aside trivial cases such as a toddler stealing her brother's lollipop, the government should protect your property.  If you enter into a contract, then the government should assist in enforcing it (again subject to a materiality condition - a teenage boy failing to turnup for his date when he'd promised needn't be subject to law; and this time subject to certain moral limitations - e.g. we shouldn't be able to contract to become each others' slaves).

Doesn't sound terribly hard, does it?  And furthermore we'd think it a pretty useless form of government that didn't do these things.  Suppose governments started confiscating your property instead of protecting it, or started enforcing "property rights" for people that didn't own that property, or started changing the terms of your contracts even when both parties were content to honour them?

Andrew Lilico: So where next?

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Back in the late 1990s, I was interested in the question of how Blair had disrupted the coalition of support for the Conservative Party and how we should respond.  The traditional Conservative coalition consisted of four elements: traditional Tories; classical Whigs; Paternalists; and Corporatists.  In a successful Conservative coalition two of these elements are dominant and two subordinate.  From the 1950s to the 1970s the dominant elements were Paternalism and Corporatism, with the former being the central focus in the 1950s and the latter coming more to the fore in the late 1960s and early 1970s.  In the 1980s and early 1990s the two dominant elements were the Tories and Whigs, with the Whig element becoming increasingly the key focus.  Then in the run-up to 1997 the coalition switched to one between Whiggish and Corporatist elements.

Blair disrupted this arrangement especially by stripping away much, if not most, of the Paternalist element, though he also made some encroachments into the Whig core (e.g. on the euro or civil liberties).

From the late 1990s I argued that the coalition should change – specifically that the next winning coalition for the Conservative Party would be one between Whigs and Paternalists.  We needed to stand up squarely to Blair in the main zone he threatened us, whilst maintaining our authenticity.  We were Whigs, and could be no other with integrity, but we could say we would use our Whiggish ideas and methods to serve Paternalist purposes.

Andrew Lilico: A true Conservative should believe Conservatism can win

If those that self-label "modernisers" were interested in my advice on how to be less disliked in Conservative circles, right at the top of my list would be this: Stop claiming the 2010 General Election was a success - "the best performance since 1931".  If there is one single thing "modernisers" do that is calculated to enrage other Conservatives it is that.  Every time a "moderniser" claims that the 2010 General Election result should not be regarded as a failure, I hear that person say: "I am not a Conservative."

I know why "modernisers" feel they have to claim the 2010 General Election result was some sort of success, of course.  After all, the centrepiece of their offering was "the Conservative Party must compromise to achieve electoral success".  Well, we compromised, so if we didn't achieve electoral success then the "moderniser" project either failed to deliver proper modernisation (my view and the main ConservativeHome editorial line these past eight years) or it was bankrupt even in its own terms.

But it is wrong and enraging.  Wrong - straightforwardly and so obviously wrong that it's an embarrassment to hear it - to claim that getting 36% of the vote was a triumph against the most unpopular Prime Minister of modern times at the depths of the worst recession since the 1920s; wrong to claim that there was any especial technical barrier to a Conservative majority being achieved when we would have won with 40% and no Opposition came into government with a majority with less than 40% after World War II.

But not just wrong - enraging.  I'm a Conservative.  I believe that Conservatism is true - morally and socially beneficial, and technically and pragmatically effective.  And I believe that the British public, weaned in a country with a constitution crafted by Conservatives, where Conservatives have been in government for the vast majority of the 173 years the Conservative Party has existed, conditioned by Conservative values, having repeatedly witnessed the vindication of Conservative projects and critiques of the projects of others, will vote for true, authentic Conservatism when that is what we offer.  No Conservative should believe that anything other than victory - a majority in Parliament at at General Election - constitutes a good performance by the Conservative Party, and that anything other than victory against Gordon Brown at the depths of the worst recession since the 1920s constituted anything other than an embarrassing failure.

To claim that the 2010 General Election result was anything other than an failure for the Conservative Party is to declare that, even against an appalling unpopular, failed Prime Minister, leading an administration that had run out of steam and run the British economy into the ground, most British voters would not want authentic and pragmatic Conservatism, offered with integrity and clarity.  If you believe that, then in my view you are simply not a Conservative.  That doesn't mean you are unwelcome in the Party, or that I am not interested in your opinion on other matters.  Pro-nuclear social democrats, pro-business Europhiles, Eurosceptic Communists - I'm sure we have room for many in our broad church.  But if you don't believe Conservatism, offered properly, could and should have beaten Gordon Brown, then you aren't a Conservative and I'm not interested in your electoral advice.

Andrew Lilico: An Easter Reflection - the Lordship of Creating over Testing

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Any metaphysical system - that is to say, any account of the fundamental nature of things - must eventually grapple with the following challenge: Although it is perhaps possible to conceive of a universe in which everything is necessary (i.e. everything just is, and could have been no other way) it is certainly not possible to conceive of a world in which everything is contingent (i.e. everything could have been otherwise, and nothing just is).

Put thus, the point may seem very abstract, remote and hard to grasp.  But we can make it much more concrete by considering a very well-known example of someone that began by attempting to claim that nothing need be necessary who eventually concluded that two things were: Richard Dawkins.

In his best-seller "The God Delusion", Dawkins makes repeated use of the "child's question": "Who made God?" and dismisses the notion of a God that is just there, by necessity, as a "sky hook".  If one accepted that every coherent metaphysical system must have things that are just there, by necessity, the question "Who made God?" would be easily addressed - God would be a candidate (presumably the cardinal candidate) element of that necessity that must exist.  But at that point in his argument, Dawkins appears to imagine no need of necessity.

Andrew Lilico: Against deposit insurance

Up to 2007 the UK formally had only £2,000 of full deposit insurance (and, for reasons we shall see below, that was almost all the relevant insurance we had).  Deposit insurance was then extended enormously, at the time of the Northern Rock crisis, to cover all deposits made in any bank up to September 2007, later revised down to the first £50,000 and then subsequently revised up to £85,000 (€100,000) under an EU deposit insurance directive.  I argued vigorously against the extension of deposit insurance, along with the bailing out of banks and the sparing of bank bondholders.  I was dismissed, told that no significant bank in a Western economy had imposed losses on bank bondholders since the early 1980s and none on depositors for even longer, and that it was inconceivable that depositors or bondholders should take losses now.

It is simply not true that it is inconceivable to do without government insurance of bank bondholders and depositors.  The UK had no deposit insurance until 1979.  It was introduced only because of an earlier EU deposit insurance directive.  Many other countries have no deposit insurance, including developed countries such as New Zealand (which will have no deposit insurance under the Open Bank Resolution framework).  In Cyprus this week we have seen that depositors of over €100,000 are taking a haircut of 30-40% and bondholders (including senior bondholders) are participating.  The official policy of the Basel Committee on banking, the European Commission and the UK government has been to use "bail-ins" (debt-equity swaps) of bondholders to recapitalise banks in future crises rather than taxpayer recapitalisations.  I have argued that that will be insufficient, as if depositors are not exposed to risk of loss then bondholder loans will be converted into deposits.  Yesterday, Eurozone chairman Jeroen Dijsselbloem said the principle of bail-ins of large depositors (above the deposit insurance threshold) and bondholders would be applied across the Eurozone, according to the Cypriot model (though, comically and without anyone believing him, he later recanted).

Andrew Lilico: The revised Cypriot deal – good and bad news for depositors and investors in Cyprus and the rest of the World

Cyprus and the Troika have agreed a deal that may now keep Cyprus going until the next bailout.  The key features are:

• Resolution of Cypriot banks raises €4.2bn 
• The "total programme money" available to Cyprus will be €10bn
• Because the money raised from Cypriot banks comes via resolution instead of a tax, the Cypriot Parliament does not vote on the deal
• The shareholders and bondholders (including senior bondholders) in Laiki (Cyprus Popular Bank) are wiped out entirely
• Laiki is split into a "good bank" and a "bad bank", with the "good bank" being taken over by Bank of Cyprus.  The ECB will then provide "Emergency Liquidity Assistance" (i.e. virtually unlimited loans) to the Bank of Cyprus
• Depositors with over €100,000 in Laiki will face a haircut of up to 40% (though the final number may be closer to 30%)
• Senior bondholders of, and depositors with more than €100,000 in, the Bank of Cyprus will also face a haircut, with the amount to be determined according to the amount required to resolve Laiki and recapitalise the Bank of Cyprus.  In the meantime, these larger depositors in the Bank of Cyprus will have their funds frozen
• Depositors with less than €100,000 will be untouched - they won't even be "insured" as the monies for resolution will all come from bondholders and larger depositors
• Cyprus will be subject to draconian capital controls for the foreseeable future

This is a far better arrangement than the botched deposit tax the Cypriots tried to pass in the first iteration of the deal.  In particular, it addresses at least two of the three criticisms I made of the previous deal:

• Bondholders, including senior bondholders, are included and take losses.  This is a very significant event, as it has not previously happened on any scale in the Eurozone.
• Depositor participation is restricted to bust banks, and takes the form of a haircut in a bank resolution, rather than a tax.  This is an enormously better way to do things.

Andrew Lilico: We are not targeting inflation and "not targeting inflation" has a long and inglorious history

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As expected, the main macroeconomic policy action in the Budget wasn't in the fiscal area at all - overall it was "fiscally neutral", i.e. it didn't seek to use new policy measures to increase or decrease the deficit.  That means the government has given up on cutting the deficit for years - the deficit in 2011/12 was £120bn; the deficit in 2012/13 has been £120bn, and the deficit in 2013/14 is now scheduled to be... £120bn.  In what universe leaving the deficit exactly the same for three years in a row, at £120bn, counts as "austerity" I'm not sure - but it's not one I live in.

On fiscal policy, the best one can hope for is that the government actually implements its spending cuts programme, which it has now finally got seriously into - perhaps around one fifth of the way through. One monetary policy, on the other hand, the government thinks there's still further it can go. The Chancellor announced a change in the Bank of England's "remit" - i.e. the target it is set and the way it is instructed to meet that target.  In essence, the Chancellor sent the Bank a letter saying: "Your remit is changing.  Although the target is still 2% inflation, you are henceforth allowed to be as far above the target, for as long as you like."  Perhaps the most telling thing about this change was that everyone has shrugged and said: "But that was the practice already!"  Regardless of what the old remit formally said, it has been clear for the past six years, since the inflation target was first breached in the year to March 2007, that the inflation target in no way restricted interest rate setting in this country.  There has been no effort to keep inflation to target, and no restriction on how far inflation was permitted to deviate from target, and successive Chancellors have rubber-stamped that policy by never once admonishing the Bank of England for its repeated misses of the target.

Andrew Lilico: The Bank of England's target may change in the Budget, but probably in the wrong way

The main policy excitement in the Budget is unlikely to concern fiscal matters this time.  The personal allowance may rise to £10,000 and an aspiration to raise it further declared; corporate tax may be cut; pension tax relief may be reduced; a little extra capital spending on housing may come.  The next Spending Review may see some hot debates about ringfencing.  But in the Budget itself, the most important measure is likely to involve either George Osborne changing the inflation target or announcing a short consultation period about a potential change, with the change itself being introduced to coincide with the arrival of Mark Carney as the new Bank of England governor.

Andrew Lilico: Cyprus – How not to bail-in depositors

I've argued vigorously against deposit insurance ever since 2007.  A bank deposit is a loan to a bank.  If you loan money to a chip shop and it goes bust, you'll own a chip shop.  If you loan money to a bank and it goes bust, you should own a bank.  Deposit insurance of fractional reserve banks is deeply misconceived - insuring capital does not prevent bank runs (its insuring liquidity that does that) and it's very difficult, once one starts insuring deposits, not to go the full hog into bailing banks out.  If you want to save money in a safe, insured bank, you should put it in a storage deposit account (like an old savings bank), not a fractional reserve deposit.

So, with the Cypriot scheme to impose losses on depositors, I should be dancing for joy, no?  Well, in fact, no.  Why not?  Here's three reasons:

Andrew Lilico: On heroism

Who are your heroes? Thatcher, Churchill, Disraeli, Blair?  Or perhaps you prefer Burke, or Mill, or Locke?  How good are you at understanding why those that are heroes to your seem like villains to others, or why some that seem mundane to you are heroes to others?  Do you understand what a hero really is?

Let us compare and contrast some archetypal heroes.  Who knows, we might even learn something interesting...

Andrew Lilico: After Eastleigh...

Were you in Eastleigh?  I was.  It was cold.  I wanted to pledge that, if there were a Conservative victory, within just months we would see warmer weather.  If only all political promises were so certain of fulfilment.

But they aren't - and often events are no more under the control of politicians than is the weather - either because policy-making lacks the power to deliver, or because politicians lack the political strength to exercise the power than policy-making has.  That is one reason clever political tactics and schemes are so often futile and misdirected.  Often all that is possible is to do the best we can, given our political constraints, or do the right thing and hope the voters will recognise it.

Andrew Lilico to Robert Halfon: Income tax isn't the right way to involve the poorest in spending decisions

Dear Robert,

Thankyou for your charming letter.  It's always a pleasure to debate with someone so measured and courteous.

I have had an interest in the comparative merits of reduced rates and raising the income tax threshold for a long time.  My first published piece on the topic was the income tax and NI section I contributed to in the 1993 IFS Green Budget (p80ff) where I was arguing against John Major's introduction of the 20p reduced rate.  In the 2000 Bow Group Ideas Book (p20ff) I proposed a target that, within a Parliament less than half of the population should pay income tax.  I have also argued repeatedly that the basic rate should rise to 25p - that the reduction to 20p was a mistake.

I share this history with you to emphasize that this is not simply a debate that is contingent upon time and place - all about what one should do now, given current resources, for those today earning between £10,000 and £12,500.  This debate concerns a long-running issue of principle.

The issue of principle has two key components.  The first is this: relative to a rise in the threshold, a reduced rate always means the poorest paying more tax, for the same exchequer cost of the tax cut.  Those that advocate reduce rates of income tax at the bottom often present their proposal as if it meant the poorest paying less tax, but let us be crystal clear: relative to a rise in thresholds, a reduced rate always means the affected poorest paying more tax.  If the same amount is spent raising thresholds or introducing a reduced rate, there will always be someone that pays no income tax if thresholds are raised that would pay some income tax if there were a reduced rate.

I emphasize this point - I bash it and bang it - because there is so little comprehension of it.  Saying "let's introduce a reduced rate" sounds like a pro-poor measure, but it never provides as much tax reduction for the poorest as does a rise in thresholds for the same money.  It is not dishonest or distortionary to point this out.  And in Labour's case the matter is quite explicit.  Labour says its priority would, from here, be to introduce a 10p rate band, whilst the Coalition says its priority will be to raise thresholds.  So Labour's policy priority involves more tax for the poorest than the Coalition's policy priority.

That brings us to the second point of principle: is it better if the poorest pay some income tax than none, so that they have a stake in public spending and tax rates?  According to the advocates of reduced rates, raising thresholds involves a kind of trade-off - with higher thresholds we trade off having the poorest pay no tax (and hence having more money) for having the poorest pay no tax (and hence having no stake - on this story).

Robert is admirably straightforward in this - he argues in terms that it's better for the poorest to pay some tax than for them to pay none.  I agree with what he's getting at, but think he frames it wrong and comes to the wrong conclusion.  Let me explain.

First, Robert suggests that in my Telegraph article on the 10p rate I offer no principled basis on which to set personal allowances.  That's not right.  I stated:

"The right way to think about fair income tax is the following. We should not impose income tax on the necessary minimum income to live. Above that income, each of us should pay in proportion, a percentage of our income above that minimum necessary to live. At some point, our incomes become very high, such that further income services only luxuries.

"Perhaps it could be considered fair to have a higher rate of tax apply once we are luxury consumers. But even then, tax rates should not be so high that we work mainly for the state rather than ourselves; no one should pay more than half their income as tax."

Here I had in mind my discussion of the application of proportionality to taxation in my 2011 Policy Exchange Paper (p25ff) On Fairness (which I am immodest enough to say everyone in current politics should read closely).  Note something about this, though: I don't claim we ought to set the personal allowance no higher than the minimum amount necessary to leave; just no lower.  But let's assume that we are setting it at that level for now.

We could unpack the principle of the "minimum necessary to live" in a number of ways.  Some people might, for example, think the minimum necessary to live implied no-one should be receiving income-related benefits.  But one fairly natural interpretation would be the income one derives from full-time work at the minimum wage, or at present £12,875 as per the latest Lib Dem personal allowance proposal.

Robert says that if we exclude those below some level from paying tax, they will not feel a stake in income tax decisions (as per his Nigel Lawson quote) or spending decisions (as per his free-riding meal).  On this I would note two initial points.  First, on the face of it this would appear to be an argument for having no personal allowance at all.  Second, it would appear to be the claim that the poor cannot be relied upon to take public-spirited decisions about the higher rate (the 40p rate), and thus would appear to be an argument against that, also.  Indeed, we can go further.  Since the poorest may only pay the 10p rate, why would they have a stake in the 20p basic rate, and hence can they be relied upon to vote even on that?  It seems like an argument for one flat-tax.

More fundamentally, I don't see why the stake of the poor in spending decisions must rest upon their paying income tax.  For one thing they pay VAT and excise duties, and see the consequences of spending rises driving tax rises there.  More importantly, they pay National Insurance - and that is key.

In my 2000 Bow Group Ideas Book contribution I proposed the following:

"The government could replace the current NI system with a series of State-Owned Enterprises (SOEs) for each existing area of welfare, from which individuals could purchase specific contractual provision of, e.g., pensions and unemployment insurance, by making contributions to separate central funds administered by each relevant SOE. This scheme could eventually embrace almost all areas of welfare provision [i.e. including Health]. Individuals or (in certain cases) the State would fund a compulsory Minimum Level of Provision (MLP). Individuals could purchase provision above the MLP from the SOE if they so chose. Entitlements would be secure with a public service-provider...Those not paying income tax would still feel involved in public spending through the MLP under the SOE scheme."

The original Beveridge concept of National Insurance rightly understood it as entailing not simply charitable provision by the state but, rather, earned entitlement by contribution.  The stake the poor should feel in public spending decisions is that public spending increases should mean the social insurance payments deducted direct from their salaries (like PAYE and NI today) would increase.  That is how to make them see consequences.  Higher health spending should mean their health insurance premia rise.  Higher unemployment benefits should mean their unemployment insurance premia rise.  Of course, higher premia would also mean higher income-related benefits paid to them, but under Robert's scheme higher income tax means higher benefits to the poor anyway.

Income tax isn't the right way to involve the poor in public spending.  They shouldn't pay at all.  Income tax is a general payment into a general pot and should create no sense of entitlement since it buys nothing.  The poor generally regard income tax as a straightforward impost.  Insofar as it has a societal aspect they think of it as creating a general entitlement to help - a damaging concept.

Income tax should be (at a maximum) restricted to those that earn the minimum amount we as a society consider necessary to live on.  That means a personal allowance of at least £12,875 and perhaps much higher.  Above that threshold, we should have at most two rates: a rate on ordinary levels of consumption and a rate on luxury levels of consumption, and neither of these should mean anyone paying more than half of income as tax.  The poorest should be involved in public spending decisions through National Insurance or (better) more specific social insurance schemes.

Andrew Lilico: Why we lost the AAA and what it means now

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So the AAA has gone.  Osborne said everyone should judge him as Chancellor and the government as a whole by whether we reduced the deficit and kept the AAA rating.  Well, the deficit now seems certain to rise in 2012/13 compared with 2011/12, and the AAA has been lost.  Some Labour economic commentators and a few maverick Conservative backbenchers are saying Osborne should therefore resign.  Fair enough – you reap what you sow.

Why has the AAA gone?  Moody’s statement says:

“The key interrelated drivers of today's action are:

1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;

2. The challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament;

3. And, as a consequence of the UK's high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.”

So, Moody’s says it has downgraded the UK because

a)    growth is weak, which has undermined the deficit reduction programme

b)    there are political risks associated with so much of deficit reduction being left to the next Parliament, and

c)    the government balance sheet is vulnerable to further shocks (e.g. another deep recession or a bank collapse).

I agree completely with that analysis — indeed, I think it almost indisputable.  Let’s reflect on these points in turn.

Andrew Lilico: On novelty

By Andrew Lilico.

If you heard some composer of modern music were directing an orchestra playing music on cash registers, would you expect that to be worth listening to, or pretentious rubbish - an artistic dead-end?  I would instinctively assume the latter, as I expect would most people.  Yet when we hear the classic opening sequence of Pink Floyd's "Money" we know rapidly that we are in the presence of quality.

To me the great weakness of much modern highbrow art and music is that it has come to be thought that novelty, in itself, is a virtue that can be treated separately from quality - it doesn't matter if it's bad, provided that it's new.

Now to be genuinely new is much harder than often appreciated - as the famous line from Ecclesiastes puts it: "What has been will be again, what has been done will be done again; there is nothing new under the sun."  But even if ultimate novelty is very difficult to achieve, being "fresh" and "different" - being "new for our age" - is not terribly hard at all.  But is it, by itself, virtuous?