Adam Smith Institute identifies £90 billion of privatisation possibilities

By Tim Montgomerie

On Friday the Adam Smith Institute published a report calling on David Cameron to sell the government's stakes in the nationalised banks, Royal Mail, Network Rail, BBC Worldwide, Channel 4 and other state assets. The report - by Nigel Hawkins - estimates that £90 billion could be raised.

The privatisation candidates are summarised in the table below (click to enlarge) and there's more in this PDF.

Reform think tank warns that Coalition's child benefit plan risks bringing targeting of benefits into disrepute

By Tim Montgomerie

A new report from the Reform think tank analyses the bureaucracy-enhancing 'money-go-round' that grew up under Gordon Brown. The appropriately-titled Money-go-round paper notes that middle and higher earners were big welfare gainers under Labour but all gains were lost in higher taxes:

Although it gives 'in principle' backing to George Osborne's attempt to reduce the welfare payments going to higher earners it is critical of the manner in which he has begun his task. The report warns that the child benefit change risks bringing "the whole idea of targeting benefits into disrepute". "The right way to means-test child benefit," Reform argues, "is to abolish it and to increase the value of the Child Tax Credit. This would remove the anomalies in the current proposals without requiring a new means-testing system to be established."

The Money-go-round report is also critical of Iain Duncan Smith's "badly-constructed" welfare plan. It warns that it will "encourage low wage, part time work and cause an increase in the welfare budget and the numbers of people on benefits".

You can read the full report here.

George Osborne should give every taxpayer a receipt, detailing how their money is spent

By Tim Montgomerie

It may be a left-leaning think tank but I love the idea that has just come out of America's Third Way think tank. They argue that every taxpayer should receive a receipt detailing where their money has gone:

"An electorate unschooled in basic budget facts is a major obstacle to controlling the nation’s deficit, not to mention addressing a host of economic and social problems. We suggest that everyone who files a tax return receive a “taxpayer receipt.”"

Looking at the receipt below it highlights the large sum of money that goes on paying down the national debt. This transparency would help fiscal conservatism.

I also like the itemisation of the cost of politics (at the foot of the receipt). It might help voters understand that even drastic cuts in certain budget items won't eliminate the deficit. Entitlement spending is the big budget problem.

I hope George Osborne gives the idea serious consideration.

Download a PDF of Third Way's proposal here.

Oliver Letwin discusses Coalition economic strategy at Liberal Democrat conference

A report submitted by the Social Market Foundation.

The Social Market Foundation (SMF) hosted its first keynote address with Oliver Letwin MP, Danny Alexander MP and Brendan Barber - General Secretary of the TUC - at the Liberal Democrat Party Conference last night.

SMF brought together key decision-makers that will determine the shape of our economic recovery over the coming years - the Government and the Unions. Our event was the first time a Conservative Cabinet Minister has spoken at a Liberal Democrat Party Conference. Letwin was warmly received by Liberal activists, which will no doubt confirm - Letwin chuckled - what his critics in the Tory party have always thought: he's a soggy liberal.

It was a constructive and civilised but straight-talking debate, reinforcing our position as the leading think tank where ostensibly opposing ideologies and actors can come together, with the belief that credible solutions can be found. SMF believes that it is vital in these difficult times that the Coalition listens to and adopts the recommendations of others to ultimately ensure our troubling budget deficit is tackled and recovery ensured in the most effective way.

So with that strong belief in co-operation and cross-party working, we will host this same discussion with Letwin, Alexander and Barber at the Conservative Party Conference on Sunday 3rd October 2010, 7:30-9:00pm (DETAILS).

Alexander did not stray once from the Government line, special advisers watching closely from the back of the room. TINA, There is No Alternative, reared her head again: cutting the public deficit must happen now, and rigorously, or we will witness rising interest rates and taxes that will make economic recovery less likely.

But the cutting will be fair, echoing Clegg's assertion that this won't be a re-run of the 1980s. Regions more reliant on public services will be able to access growth funds. And the long-cherished Lib Dem principle of decentralisation will ensure there will be positives for public sector workers:  they will have more control over the services they deliver. At least for those still in jobs.

Strangely, Letwin was more popular, winning the crowd with his courtesy towards other speakers and his self-deprecating humour. Alexander was a pleasure to work with, he said. And these Lib Dems have policies they push strongly in Government; they're not just propping up the Tories.

As expected, Letwin intellectualised the Coalition Government agenda:

• Shift power from the centre to the local - "Personalising and localising budgets generates more efficient results".
• Shift in horizon to thinking long-term rather than tomorrow's headlines - "We're running a Government, not a magazine".

But Brendan Barber from the TUC warned that the economy was heading towards bad times and we could get "less for less" from our public services. He accepted the deficit had to be tackled, but there was still opportunity to debate the timing of when services are cut and the extent spending cuts should contribute to the reduction plan as opposed to higher taxes.

We at the SMF, in our Axing and Taxing paper, have argued for an alternative to the Coalition Government model: the deficit should be reduced by 60% public spending cuts and 40% tax rises, rather than the 80%/20% split currently proposed. Among numerous other policies, we argue for tough decisions: middle-class benefits should be reduced, road pricing introduced and better-off patients charged for visiting their GP.

We hope the Government will keep listening and adapting to the changing economic climate. So we look forward to the continuation of this discussion between Coalition partners and the TUC in Birmingham next month.

Britain will not be able to stop EU ministers ganging up to impose damaging new rules on City of London

By Tim Montgomerie

A new report from Open Europe exposes the risk to the supremacy of Britain's financial services industry by a transfer of regulatory powerto the EU:

1. Broad EU powers: "The new European supervisors will be granted binding powers over national regulators in seven broad areas and will be given the mandate to interpret, apply and enforce provisions in over 20 separate EU laws."
2. EU powers likely to grow over time: "The supervisors are also likely to become more powerful over time, with several proposals already in the pipeline to extend their powers. The Commission and the European Parliament have also vowed to create an EU-based resolution fund for banks “in the longer term”, although that has so far been resisted by member states."
3. Britain won't be able to block anti-City measures: "Crucially, the voting structure within the supervisors is heavily biased against the UK. Most decisions will be taken by simple majority, meaning that the UK would have the exact same voting strength as all other member states despite being home to the bulk of the EU’s financial services industry. This would give the UK highly limited ability to block measures it disagrees with."
4. Regulatory confusion: "In many areas, splitting key supervisory powers between national and EU regulators risks creating more, not less, confusion about who exactly is responsible for overseeing the financial markets, who makes decisions and, crucially, where accountability lies. Ambiguity over where ultimate responsibility lies has often been identified as one of the key failures in the UK’s ‘tripartite’ regulatory system."

In today's City AM Allister Heath forecasts a future where EU ministers gang up to pass rules that damage London's pre-eminent position as Europe's financial centre:

"One of the problems with Gordon Brown’s idiotic tripartite regulatory system was that powers and responsibility were divided; it is absurd, therefore, that the coalition is willing to sign up to a similarly fudged solution on a European level. Nobody will be in charge. Worse, EU regulators will take decisions but it will be national taxpayers, not Brussels, that foot the bill. Countries won’t have a veto over decisions by the supervisors – they will only be able to appeal those with a “significant or material” impact on public spending. But supervisors’ decisions will only be overturnable by a majority vote in the Council of Ministers. So one can easily imagine everybody ganging up on the UK to punish the dreaded City."

George Osborne, who travels to Brussels today to approve the EU plans, insists the UK will still control day-to-day financial supervision.

> A PDF of the full report can be downloaded here.

Centre for Social Justice urges Treasury to make wiser cuts

The new Director of the Centre for Social Justice (announcement here), Gavin Poole, has kicked off his leadership of the think tank founded by Iain Duncan Smith in a manner that will underline his determination to be an independent-minded voice.

The view of ministers in many Whitehall departments is that George Osborne and Danny Alexander are forcing cuts in spending without a strategic view of which services are most important to protect. The Treasury has always been a reform-weary department and the fear is that officials have captured Mr Osborne for their approach.

Mr Poole issued this statement:

“Our fear is that cuts will be made the wrong way. Instead of assessing the true productivity of programmes and cutting those that are ineffective, we will see salami-slicing: equal cuts off all programmes, good and bad. We will see cuts based on political calculation from politicians and cuts based on administrative ease for Civil Servants. What we won’t see is an overarching rational approach which looks at what works in achieving the Government’s core objectives. Ministers are effectively flying blind, under orders to cut programmes by up to 40 per cent but with confused guidance about their departments' objectives and how they should choose between spending options. The Spending Review Framework announced the end of the public service agreement targets, but was completely silent on what should replace them.”

In an article for yesterday's Sunday Times (£) Mr Poole looked for inspiration across the Atlantic:

"The Washington State Institute for Public Policy in the US, an independent body that assesses the cost-effectiveness of social spending, is helping the state of Washington to achieve better value for public spending. For example, when the institute found that an intensive early intervention initiative called the Nurse Family Partnership had generated almost $3 (£1.90) in savings for every dollar invested, the state decided to divert more money towards it."

The Sunday Times welcomed the CSJ thinking in its leader column (£):

"This is an opportunity to get things right, to tackle the cycle of idleness and dependency and the “why work?” syndrome. It is also an opportunity to make sure the cuts made now give us a state that is smaller and more sustainable, not one that will have voters crying out for the politicians to turn the taps back on. The spending axe has to fall. It is important, however, that it does so smartly."

Download a PDF of the new CSJ paper.

'Coalition capital gains policy will reduce revenue by £2.5 billion'

The Adam Smith Institute has warned that Liberal Democrat plans to raise Capital Gains Tax - forced on George Osborne by the Coalition deal - may cost revenue.

Deawing on international evidence of CGT rises, the ASI concludes that revenue falls by 2% for every 1% increase in the CGT rates.

From the ASI press release:

"Amongst the new evidence considered is the result of CGT rate changes in Ireland and Sweden. The 1997 Budget in Ireland halved the rate of capital gains tax from 40% to 20%. The then Minister for Finance, Charlie McCreevy, was heavily criticized on the grounds that this would reduce revenues.  In fact revenues rose considerably, almost trebling and greatly exceeding official predictions... The report also highlights the extent to which revenues from other taxes would be lower as a consequence of the negative effect on economic activity caused by CGT rises. Evidence from Switzerland shows that cantons which eliminated CGT had 3.1% higher growth over those that did not.  Since a tax on capital reduces the amount of capital that can be formed and profitably used, the consequent lower levels of output, employment, and consumption would reduce a wide range of tax revenues."

The Express reports the key conclusions: "The Adam Smith Institute says matching CGT to income tax levels would have a huge negative effect, leading to an £880 million fall in revenue from CGT itself plus a drop of another £1.6billion a year in income from other taxes because of how the hike would depress economic activity."

In an editorial The Telegraph warns that higher CGT could be a "defining error" for the Cameron government;

"If the Government insists on bringing CGT rates into line with income tax, it should do so over a lengthy period, with indexation to take inflation into account. Taper relief of the sort suggested by John Redwood, so that people pay less for assets the longer they have held them, must also be part of any reform that claims to be aimed at taxing speculative gains. Gordon Brown's decision, at the outset of the Labour years, to end tax relief enjoyed by pension funds damaged the retirement plans of millions. It is essential that Mr Osborne does not make the same mistake next Tuesday. For many of the Conservative Party's core supporters uncertain about the Coalition's instincts, it will be a defining moment."

Ten facts about the rich public sector and the poor private sector

What's the biggest divide in Britain?

The divide between north and south? Between black and white? Between the children of intact families and those of broken families? Or, as David Willetts has begun to argue, between young and old? All are testing divisions but one of the most politically potent divisions of our time is the divide between private and public sector workers.

The divide is described as the "Great Jobs Apartheid" on the front page of today's Daily Mail.

The Mail is inspired by new research by Policy Exchange. Here are ten of PX's top findings:

1. On an hourly basis, the typical public sector worker is now 30% better paid than the typical worker in the private sector.
2. This pay advantage is not evenly distributed.  It is higher in lower grades, with the bottom 10% of public sector workers now 25% better paid than their private sector equivalents.
3. The public sector wage premium is small in the South East and London, but  higher in Scotland Wales the North east and North west, where public sector workers enjoy a 17-20% premium.
4. Over their lifetimes, people in the private sector work 23% more hours (equivalent to 9.2 years of a public sector employee’s working life) – where their public sector counterpart will either be on sick leave, holiday, strike or in retirement.
5. Since 2002 the public sector wage bill has increased three times faster than the private sector wage bill, growing by 33% in real terms, or £67 billion.
6. A remarkable net 97.7% of the increase in numbers of public sector workers has been in education and the NHS.
7. The number of management positions has increased particularly rapidly in recent years - by over 80% between 2002 and 2009.
8. Between 1997 and 2007, public sector productivity also fell, while productivity in the private sector increased by nearly 28% - leaving the former only two-thirds as productive as the latter.
9. Over the last decade the redundancy rate in manufacturing or construction has been seven times higher than in the public sector, roughly defined. During the recession these multiples increased to 16 and 10 times respectively.
10. Public sector employees have better pensions.  The difference is worth an extra 15% of their salary.

Coincidentally, the Adam Smith Institute today calls for 270,000 public sector job cuts over the next five years. The report, by Tim Ambler of London Business School, proposes to protect so-called frontline staff (teachers, nurses, doctors, police officers and active armed forces personnel) but for 100,000 job cuts at the Ministry of Defence and another 50,000 job cuts at Iain Duncan Smith's Department of Work & Pensions.

Dr Eamonn Butler of the ASI commented:

“These numbers sound radical, but it is worth remembering that more than a million new public sector jobs have been created since 1997. And as for political feasibility, the Conservatives actually proposed to abolish 235,000 bureaucratic jobs in their 2005 election manifesto. Now that the public finances are in such dire straits, this must be firmly back on the agenda.”

One-third of all welfare payments go to families with above average incomes

Fascinating analysis of official data by Policy Exchange reveals that one-third of benefits (£53bn in total) are paid to people who are wealthier than average. £5bn of child benefit, for example, goes to households with above average incomes. The table below summarises which benefits are enjoyed most by wealthy Britons and how much it costs the taxpayer;

Neil O'Brien, Director of PX, commented:

“Our benefits system is totally out of control. We’re wasting billions of pounds on a merry-go-round that taxes people, churns the money through huge bureaucracy, and then gives them their own cash back in the form of benefits. Under Gordon Brown people were encouraged to become more and more dependent on the state. We need now a welfare system that allows people to be self-reliant. The last government ran up debts equivalent to £100,000 per family. Now we urgently need to get our public spending under control – and cutting back wasteful welfare spending is an obvious place to start.”

More here.

Lucy Parsons: The right way to raise taxes

Lucy Parsons is Senior Economics Researcher at the independent think-tank Reform and co-author of Reform Budget 2010: Taking the tough choices.

Next week the Coalition Government will set out its Emergency Budget.  So far the focus has been on where the axe will fall on public spending, but given the size of the hole in the public finances tax increases can be expected too.

The Chancellor, George Osborne, has quite rightly argued that the bulk of the consolidation should come through spending cuts, and has proposed that the balance between tax rises and spending cuts should have a ratio of 20:80. Based on this we can expect to see an increase in the tax burden to the tune of around £16 billion (including those increases already announced by the previous Labour administration).

Yet the Chancellor has been disappointingly silent on the principles that will guide where taxes should be increased and the Coalition’s tax policies so far give little indication that they take the principles of simplicity and economic growth seriously.

The Coalition agreement sets out some ambitions for a tax system that is “competitive, simpler, greener and fairer.”  What is missing from these objectives is arguably the most important of all – economic efficiency.  As Reform sets out in its alternative Budget published today, a tax system should aim to raise revenues in the least economically damaging way possible as this would reduce the degree to which they hold back growth and make reducing the deficit easier.  The best way to achieve this is through a low rate, broad base tax system.  The Coalition Government’s tax policy would lead to a narrower base and higher rates.

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