Autumn statement run-up: Reform looks at fiscal rules. The CPS recommends wage and aid freezes - and no carbon price floor

By Paul Goodman
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The think tanks are starting to set out their stalls in the run-up to Wednesday's autumn.  Today, we have a paper from James Zuccollo of Reform on Long-Term Fiscal Sustainability. He says that -

• Fiscal rules must not allow for creative accounting that keeps some government expenses out of scope, as was the case with investment under the golden rule.  "Essentially, the restriction of the golden rule to the operating balance did not ensure counter-cyclical fiscal policy, nor did it ensure a safe overhead before the debt limit was hit. In addition, the rules granted explicit leeway for the Government to depart from the rules, so long as it gave reasons and provided a schedule for return."

• Secondly, arbitrary debt targets, such as the sustainable investment rule, provide a false sense of security and should be avoided. Optimal macroeconomic policy will often involve using debt as a short-term buffer to accommodate unexpected shocks.  A more flexible rule allows that to occur while still maintaining credibility. The difficulty, then, is in designing a rule flexible enough to be credible, strict enough to be binding, and simple enough to be easily monitored.

• Finally, there are lessons from abroad.  Zuccollo cites Switzerland's " 'Debt Brake', requiring a yearly balanced structural budget, ensures that spending growth never eclipses cyclically adjusted tax revenues; Chile and Russia, where "natural resource exports are an important part of economy, so mechanisms are needed to manage large and on-going revenue fluctuations from change in the terms of trade", and New Zealand, which target "a particular operating balance and back[s] this approach with a debt limit."

There is also a recent briefing from Ryan Bourne and Tim Knox of the Centre for Policy Studies.  Three of their main recommendations are:

• Implement cash freezes to several spending streams. "The Chancellor could freeze all benefits which would usually be increased by the September CPI inflation rate for one year, except for the state pension. He could freeze spending on aid, and abandon the 0.7% of GDP target which has no economic rationale." Finally, the Chancellor should set a clear framework and guidelines for how pay freezes should work in the public sector."

• Avoid introducing new punitive wealth taxes or council tax bands. "There is scope, however, to embark on a revenue neutral tax reform programme according to the principles of broadening bases and lowering marginal rates, starting with the full merging of income tax and employees’ National Insurance into a single income tax rate (with employers’ National Insurance replaced with a simple payroll tax)."

• Abandon the unilateral carbon price floor planned for 2013 and "go further in deregulating small businesses and employment law, roll out a framework for ‘sunset clauses’ for new regulations, put forward a new Consolidated Act which rationalises all the 100+ Statutes that impact on planning and development and, in line with Nick Clegg’s recent speech, lay out a framework for new Garden City developments.

Patrick Nolan: There really is no money left and no scope for giveaways in next week’s budget

Patrick Nolan is the Chief Economist at the pro-market think tank Reform. Its report, “Reformers not spenders,” is available here.

In a foreword to Reform’s alternative Budget in June 2010 Paul Martin, the former Canadian Prime Minister and Minister of Finance, argued that Canada’s successful fiscal consolidation in the 1990s was based on clear fiscal targets and a position that these targets would be achieved “come hell or high water.” In a report released today Reform highlights that when it comes to fiscal consolidation the current UK government is, in comparison, wobbly.

When faced with difficult circumstances the Chancellor’s response has been to shift the goal posts. Rather than eliminating the structural deficit by 2014-15 (the target set in the 2010 Budget), last year’s Autumn Statement said this would happen by 2016-17. Rather than public sector net debt of 69.4 per cent of GDP by 2014-15, debt is expected to be 78.0 per cent. Rather than spending 40.9 per cent of GDP by 2014-15, spending will be 42.2 per cent.

This means that claims that the Coalition is meeting or beating its fiscal targets must be taken with a pinch of salt. Net government debt is still expected to increase by £471 billion over the next 5 years. Far from being out of the danger zone the public finances remain fragile. People who argue that the Coalition should ease up on its spending plans or introduce tax cuts do not grasp the fiscal position. There really is no money left and no scope for giveaways in next week’s budget.

Continue reading "Patrick Nolan: There really is no money left and no scope for giveaways in next week’s budget" »

Andrew Haldenby: The Government should cut spending rather than raise taxes. Here's how to save £7 billion from health and education.

Paul Goodman recently called for a 'Lower Spending Commission' to help the Chancellor deliver his deficit goals and finance job-creating tax relief. Throughout this week think tanks will be rising to the challenge with suggestions for saving money. The Reform think tank kicks off the series.

Andrew Haldenby is director of the independent think tank Reform.

The tax and spend debate is in a bad place as the Budget approaches.  If the various newspaper reports are to be taken seriously, the Government’s key dilemma is exactly how best to levy more taxes from the very rich.

Even if the 50p rate were to go, it would (in effect) simply be replaced by a mansion tax, or a change in council tax, or a reduction in tax relief for pensions, or a further increase in tax on “non-doms”.

Such a Budget would certainly generate some headlines but nothing really would have changed and certainly no economic benefit achieved.  Given what this Budget actually needs to do, such a shallow set of reforms would be a somewhat tragic missed opportunity.

Continue reading "Andrew Haldenby: The Government should cut spending rather than raise taxes. Here's how to save £7 billion from health and education." »

Nick Seddon of Reform: The NHS Bill should not be dropped - it is only the start of the reforms we need to make

Nick Seddon is Deputy Director of the independent think tank Reform.

Tim Montgomerie’s idea that scrapping the enfeebled Health Bill and sacking Andrew Lansley will make the problem go away is simply wrong. The three Cabinet Ministers he cites are equally wrong. Today’s task is to pass the Bill. This will clear the way so that the Government can get on with tomorrow’s job – the pressing task of delivering a lot more for a lot less.

The problems with the NHS were identified by the last Labour government. It burns money like no other public service, has poor levels of productivity, and quality is extremely patchy. Scandal follows scandal – whether it’s elderly care, children’s care, hospital care or home care. According to credit rating agency Standard & Poor’s, at least 20 hospitals are in such a bad way they will need “extraordinary support” (i.e. lots of money) from Government. This sum could balloon into billions (indeed, a £5 billion overspend, according to a former Special Advisor to Tony Blair, Professor Paul Corrigan, in a report for us last year) in coming years. This is both a short term and a long term problem. For the sake of the health of the people – and the Government’s deficit reduction plan – reform of the NHS is necessity, not a choice, Bill or no Bill.

David Cameron has repeatedly declared that he wants the NHS to look much like it is today. Actually, we should want it to look unrecognisably better. This cannot be a branding exercise. Nor is it legislation that counts. It is delivery that matters now. The only hope for any Government is to radically improve the service.

Continue reading "Nick Seddon of Reform: The NHS Bill should not be dropped - it is only the start of the reforms we need to make" »

Thomas Cawston of Reform Think Tank: NHS reform is a necessity but the Coalition chose the wrong reforms

David Cameron famously claimed his three priorities for Government could be summed in three letters: N-H-S. However, the Coalition could never have neutralised the NHS as a political issue. As today’s Health Select Committee report rightly points out, improving value for money without reducing the quality of care is one of key public policy challenges of this Parliament. Meeting this challenge demands reform. The report equivocally states that making the NHS more efficient means “making fundamental changes to the way care is delivered. As Stephen Dorrell stated this morning “changing not the way the system is managed, but the system itself”.
 
The key message of the report is that efficiency savings are not happening fast enough and being made in the wrong way. The report expressed concerns that savings are being made “through ‘salami-slicing’ existing processes instead of rethinking and redesigning services”. The report also suggested that short term thinking rather than long term planning would make it harder for the NHS to become sustainable. Many have already argued that the Government is falling behind. According to the Department of Health’s own figures the NHS fell short of its forecast savings for the first half of the year. The evidence on the ground is of NHS organisations falling behind, yet the Secretary of State remains in denial. Speaking on the Today programme Andrew Lansley claimed to be “on track” and denied claims that we efficiency savings were turning into cuts.
 
However, with the Health and Social Care Bill on the final leg of its difficult journey through Parliament, today’s report has been seen as another call that the Government should drop its reforms. Last week the Royal College of Nursing joined the list of those arguing that the Government must focus on efficiency and announced outright opposition to the Health Bill. Certainly, reorganising the management of the NHS has distracted NHS leaders. However, the cuts to services have been caused by the failure to reform the system. The Government’s reforms did not focus on value for money, or on creating the competition and diversity that are needed to drive improvement. Instead, under the guise of empowering local clinicians, the Government has rearranged the management in a system that is now more centralised than before.
 
While Tim Montgomerie is right to note that the Government has brought its NHS problems on itself, reforming the NHS was always going to be the challenge that the Coalition would need to grasp. The rises in health spending under the last Government was becoming unsustainable and delivering value for money was essential. Reform was necessity not a choice. The Government’s problems did not start through failing to communicate unnecessary reforms, but with choosing the wrong reforms.

Think tank reactions to Autumn Statement from ASI, IEA, TPA and Reform

Dr Eamonn Butler, Director of the Adam Smith Institute:

“A £40bn business loan scheme, mortgage guarantees, £5bn of infrastructure spending, 'youth contract' apprenticeships, start-up tax reliefs, new R&D tax credits, extending free child care – these are all Gordon Brown-style tinkering measures that look good in the papers but end up being bureaucratic and wasteful. Far better to leave the money in people's pockets and cut taxes, which will boost confidence.”

Mark Littlewood of the IEA:

“George Osborne is operating in difficult economic circumstances, but this is still a disappointing response. He has effectively ditched Plan A and embraced Plan A minus. He is not sticking to his deficit reduction policy. He is sticking to his spending policy. There’s a world of difference. The initial plan was to add £260bn to the national debt between now and the next election. That has now spiralled to £350bn. If growth and tax receipts are less impressive than initially thought, there needs to be a corresponding reduction in state spending. But the only major spending cut spelt out today – a reduction in the retirement age – doesn’t kick in until 2026. Additionally, upgrading many welfare benefits by a full 5.2% while wages remain flat will not help to incentivise people to enter the workforce. The Chancellor conceded that a possible recession in the eurozone could further worsen economic conditions here, but did not signal a readiness to introduce deeper cuts in spending should this occur. It will be difficult for him to retain his hard-earned credibility in the markets should he fail to indicate that further reductions in spending may be necessary.”

Matthew Elliott, Chief Executive of the TaxPayers’ Alliance:

"There is some good news for taxpayers in the Autumn Statement, but over time the Government still needs to do more to deliver lower and simpler taxes. If tax remains the heavy and uncomfortable burden it is today, growth will stay disappointing. Motorists will be grateful for a better deal as they have been overtaxed for years, although they will need to remain vigilant with a big hike still scheduled for next August. And it is right that the Government keeps pay for public sector workers under control, as they currently get a much more generous deal than those in the private sector. The Autumn Statement was a reasonable start in reacting to the huge challenges facing the British economy, but a more ambitious plan for growth will be needed by the Budget."

Patrick Nolan of Reform:

"George Osborne’s fiscal strategy is turning into alphabet soup: Plan A for austerity, Plan A+ for magic bullets, Plan B for more debt, Plan P for panic and Plan S for spending. Yet rather than being clever, having a fiscal policy that sets out to be all things to all people undermines growth and the sustainability of the public finances. It shows that mistakes of the Gordon Brown era have not been learnt. Real growth will not come from more government tinkering but from a productive private sector."

Reform research shows that the Government's good work on deficit reduction will be undone by the effects of the demographic timebomb

Andrew Haldenby is director of the independent think tank Reform

Reform today publishes new research on the UK’s bleak public finance position over the long term.  The lead author, Patrick Nolan, describes the research in today’s Telegraph and the report is available here.  Suffice to say that the big increase in older population – the “demographic timebomb” – explodes not in the distant future but in this very Parliament.  As a result, the Government’s policies to increase the state pension in line with earnings, and fund the NHS solely from tax, will undo all of the good work on deficit reduction on which it is currently engaged.  The deficit should indeed reduce in this Parliament but it will start to increase again in the next, and keep increasing.  It’s a picture like the US currently faces – a debt spiral which can only be escaped through radical action.

The following details of the report might be of particular interest to ConservativeHome readers.  First, the ageing population means that the tax burden (i.e. tax revenue as a proportion of GDP) will rise steadily over the next thirty years.  Governments would need radical cuts in spending just to hold taxes level.  Second, the rising tax burden will depress economic activity.  A dynamic analysis would show the deficit worsening earlier and faster.

Continue reading "Reform research shows that the Government's good work on deficit reduction will be undone by the effects of the demographic timebomb" »

Nick Clegg recommends the Centre for Policy Studies plan for bank re-privatisation

By Matthew Barrett
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As the BBC reports today, the Deputy Prime Minister, Nick Clegg, has written to George Osborne to ask him to consider the plan for re-privatising the public holding of shares in Lloyds and RBS by distributing shares to all British taxpayers - a policy created by the Centre for Policy Studies in their report "Give Us Our Fair Shares". 

The advantage of the plan is that long-term public ownership of the banks is undesirable, and by distributing shares to taxpayers, the Treasury would receive full value from their shares that would not otherwise be realised if shares were sold in a conventional privatisation. The plan would give all taxpayers a windfall estimated at between £500 and £1000 each. 

When individuals sell their shares or some of their shares, a fixed amount (the "floor price”) will be payable to HM Treasury. The floor would be deducted upon sale. The report explains the floor price:

"For illustrative purposes only, let us assume that the price of the share is 1000p on the day of distribution with the floor set at 850p. When an investor sells, Treasury receives the first 850p and also CGT on the difference between the floor and the sale price. The investor receives the balance. In our example, if the investor were to sell immediately at 1000p she would receive 123p with Treasury receiving 877p. However if the investor waited and sold at 1500p his return would rise to 533p per share, with Treasury receiving 967p."

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New Reform reports show the potential benefits and favourable public attitudes towards for-profit delivery in public services

By Matthew Barrett

The Reform think-tank today launched a new report highlighting cases of successful private sector involvement in public services. These include:

• The Valencia region in Spain, where 20% of health services are provided by private sector organisations, who have to deliver at a cost 25% lower than the public sector.
• In Germany, a third of hospitals are run by for-profit organisations and a further third by not-for-profit organisations. All hospitals are accessible to German citizens through the national programme.
• In Britain, private sector companies have operated prisons for some years. In 2010, an independent evaluation of HMP Doncaster, operated by Serco, found that “the prison is considered to be leading the way in terms of the rehabilitation revolution”.
• A number of failing Local Education Authorities have been run by for-profit companies since 1999. Cambridge Education @ Islington became the education partner of the London Borough of Islington in 2000. By last year, the borough's GCSE results have nearly caught up with the national average, having once being among the worst.
• Other Local Education Authorities have given contracts to for-profit companies to help them improve schools. In 2008, for example, Northamptonshire County Council agreed a three-year contract with the for-profit company EdisonLearning to improve seventeen primary schools and four secondary schools in the council's remit. In the first two years of the contract, the proportion of 15-year-olds achieving five good GCSEs increased from 24.8% to 33.3%.

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Andrew Haldenby: Businesses need clarity from the Government about the future shape of public services

Today Reform held a seminar under the Chatham House Rule with Sally Collier, Executive Director of Policy and Capability at the Efficiency and Reform Group.  That is, the group within the Cabinet Office working under Francis Maude to drive better value in public spending.

The discussion raised specific thoughts about government procurement but really the most important points covered the future of competition in public services.  The commitment of the Government to opening up public services is not in doubt.  But that is not enough.  Businesses, and investors into new businesses, need clarity about the shape of public services in future.  The Government has yet to provide that. 

A lot of hopes are resting on the Public Services Reform White Paper, due for January but now, it seems, not be published before May.  David Cameron and other Ministers have pledged a total modernisation of public services achieved partly through much greater diversity of provision.  But those new providers will only come in if they have certainty about the kinds of businesses that they can run.  That certainly includes some certainty about the role of profit, which remains off the table in schooling and under attack in the NHS.

In its call for evidence, the Public Services White Paper focused on the technicalities such as the use of payment-by-results and personal budgets.  Actually what businesses and investors need to hear is the bigger picture: what will be core activity managed by government, what will be outsourced, what should be contestable.  A Paper of this kind would indeed kick start the revolution for which the Government hopes.