Category: Politics and economics

Councils doing business

My eye was caught earlier this week by the news that Travelodge, which runs budget hotels, has been approaching local authorities to get them to build hotels for Travelodge to run.  The arrangement will enable to councils to get a returrn on land, as well as a degree of city centre investment.  It needs, however, loans (or at least, loan sanction) from the Treasury.  There have been some initial developments on this basis.

I’ve long been of the view that government, and local authorities, should be able to do whatever is appropriate to advance the welfare of their citizens; that’s what they’re  there for.  I’ve suggested, too, that governments should be able to engage in enterprise and make profits for its citizens.  The intriguing thing about the Travelodge proposal is that the initiative has come from the private sector – which seems to make it politically acceptable – whereas initatives from within the public sector are knocked back.  Active government is one of the principal means of generating economic activity, employment and growth, and any policy for regeneration depends on it.

Britain’s phoney recovery

In March I reviewed figures from the World Bank which showed that Britain’s economic performance since 2008 was markedly worse than many other countries.  Since then the Bank has published figures for 2012 and I can update the table.  Here it is.  I have taken 2008 as the base year and the countries are ranked in the order of how Gross National Income per capita has developed since then.

2008 2009 2010 2011 2012
Australia 100 103.47 109.79 117.65 141.9
Canada 100 96.39 99.52 104.83 117.28
Sweden 100 93.2 96.93 101.45 105.48
United States 100 95.95 98.89 101.52 104.66
Germany 100 100.16 101.91 104.24 103.63
Denmark 100 98.83 100.93 101.83 101.24
Belgium 100 98.96 101.79 101.79 99.58
France 100 101.05 100.6 101.14 99.55
Finland 100 97.04 98.27 99.6 97.87
Netherlands 100 99.53 99.51 101.7 96.85
Italy 100 99.47 99.41 98.69 94.63
Spain 100 100.91 98.74 96.99 94.54
Greece 100 103.55 97.45 90.4 85.89
United Kingdom 100 90.2 84.09 82.8 83.7

The countries at the bottom of the table have had three successive years of declining output, but even with that they haven’t dug a hole as big as Britain’s.  This, then, is what George Osborne’s much vaunted recovery amounts to: if things carry on like this, we might hope in due course to match, or even to better, the economic performance of Greece.

Putting money in the wrong bucket

A bequest left by a former nurse has embarrassed senior politicians.  She directed that her money should be used by the government of the day ‘as they see fit’.  Her solicitors misinterpreted the will and sent the bequest to the political parties that were in power.  Following public exposure, the coalition partners have agreed that the money should go to the Treasury, where it will disappear into general funds.

I doubt there is a local authority or a hospital trust anywhere in Britain that would have acted in the same way.  It is a standard principle in British public administration that public bodies can only act in accordance with the powers they hold within the law.  In most circumstances, that means that money can only be spent in ways that have been specified by law,  but there is an important exception.  Where funds become available that are not subject to those constraints, they can be used on a discretionary basis, without direct restraints, subject to the general reservation  that the governing body is acting in trust for the benefit of the public.  Then the money can be used for the kind of thing that normal funding can’t  – prize competitions, pilot projects, public amenities, events, charitable art-works, donations, whatever.  The patterns of accounting vary, but local authorities and pubic trusts will almost always have an ultra vires fund, designated unrestricted funds, a charitable arm or a separate account, distinct from other funding, so that they can manage bequests, donations and the like appropriately.

The current government, by contrast, seems to have been nonplussed by the situation.   The parties’ first reaction was to accept the solicitor’s statement at face value; the second, to drop the embarrassing money, like a hot potato, into the nearest bucket.   It might be, of course, that the UK cabinet considers that they already have unlimited authority to use money in any way they please (if they did, they would be mistaken).  It might be that they couldn’t think of anything better to do with the bequest, which begs the question why anyone should donate money to the government  in the future.  I suspect there is another reason for the misunderstanding.  It rests in the dominance of a new political class , whose preparation for public  office relates entirely to Westminster politics, and who have no previous  background in public service.   If more of them had the relevant experience, they would known what to do with a routine donation.

The Effects of Taxes and Benefits on Household Income

The ONS statistical release on the distributive impact of tax and benefits has attracted some attention, including concern that the tax system is not particularly redistributive.   I’ve used the figures in this series several times in the past, for example in my 1988 book Principles of Social Welfare and an essay on income and wealth published in 2001. The series has always been controversial, as much for what it doesn’t include as what it does. Having said that, it has shown a remarkably consistent pattern over time. In 1986, the final income of the bottom fifth of households was 28% of the final income of the top fifth. in 1996, it was 26%. In the figures for 2011, released yesterday, it was just below 28%. There has not been much change in the distributive impact, then.

This doesn’t reveal, however, the most striking change. In 1986, many households on lower incomes were pensioners, and others were single people. The average number of people in a household in the lowest fifth was 1.9, and in the highest fifth it was 3.3. In 2011, rather more of the households on the lowest incomes were families with children. The average number of people in a household in the lowest fifth was 2.7, and the average number of people in the households in the highest fifth was 2.4. So the relative share of an individual in the bottom fifth has fallen from 49% of the final income received by the top fifth in 1986 to under 26% now.

What independence can do, and what it can't

The debate on Newsnight Scotland yesterday was intended to deal with the perspective of women about independence. One of the questioners asked what independence could do about gender-related violence. Now, regardless of where one stands on the independence debate, and regardless of how important the issue is, this is not a field where either ‘yes’ or ‘no’ has much to offer. I think we can say with reasonable certainty where all the parties in Scotland stand on violence against women: they are against it. And with equal certainty, we can say what difference new constitutional powers would make: none, because it will not create any powers that are not available to Parliament now.  If the issue could be legislated away, there’s nothing in the current constitutional arrangements that would have stopped it.

The Scottish Parliament already has competence in a range of fields – the legal system, education and health. If independence was to make any difference, it would be in fields that are currently ‘reserved’ under the Scotland Act.   I’m not a constitutional specialist, and this may need correction and amendment, but here is a quick list.

Areas where the Scottish Parliament already has authority to act Currently reserved areas where independence would give the Scottish Parliament the authority to act

 

 Currently reserved areas where the primary competence would remain with the EU
  • Health
  • Social care
  • Housing (subject to limitations on finance)
  • Planning
  • Environment
  • Education
  • Policing
  • Emergency services
  • Criminal justice
  • Civil law
  • Family law
  • Local government (subject to limitations on finance and competence)
  • Culture and heritage
  • The constitution
  • Economic policy
    • Taxation and fiscal policy
    • Monetary policy
  • Public expenditure
    • Aspects of local government and housing finance
  • Benefits
  • International relations
    • Foreign policy
    • Defence
    • Overseas aid
  • Immigration and nationality
  • Access to information
  • Business
    •   Insolvency
    •    Employee protection
    •    Minimum wages
  • Consumer protection
    •    Gambling
  • Energy
  • Transport
  • Broadcasting
  • Trade
  • Financial services and markets
  • Fisheries
  • Competition law
  • Intellectual property

 

It seems to make sense to say that the discussion of prospects for independence ought to be focusing on the second column, and that issues which fall outside it are part of a different debate.

The Winter Fuel Payment

Ed Balls, the shadow chancellor, has declared himself in favour of removing the Winter Fuel Payment to richer pensioners. The basic rate of WFP is a flat rate payment of £200, with more for those over 80.
The arguments about principles are well known, but the key issue has always been about mechanisms. Denying benefits to richer people means, of necessity, that there has to be some way of identifying who the richer people are, and means-testing benefits is complex, error-prone and expensive. Balls also commented on the free TV licence for those over 75; while he might be minded to withdraw it selectively, there wasn’t a practical method of doing so.

How, then, is Winter Fuel Payment different? The answer seems to be that 600,000 pensioners pay the higher rate of tax, so that when their taxable income is declared, the money for the Winter Fuel Payment can be clawed back. That is reasonably practical, which is more than can be said for some of the other proposals to means-test universal benefits. It will, however, mean that some pensioners will decide not to claim, and so that the tax regime will then have the problem of verifying who does, and who does not, receive WFP. It would be simpler to pay it to everyone regardless and then to raise what’s needed from the tax system.

There is a neglected aspect of Winter Fuel Payment that is worth saving. Forget the name of the benefit – this isn’t about fuel. Winter Fuel Payment is the only benefit paid to every pensioner, in the same way that Child Benefit is the only benefit relating to every child. It is, therefore, the most practical mechanism available to distribute resources to pensioners. Ed Balls wants to revitalise the economy by stimulating demand; his best shot to date has been to propose a temporary reduction in VAT and (as any shopkeeper can tell you) that’s a long way from being simple or straightforward. He could inject cash into the economy more rapidly, more effectively, more precisely and more progressively by putting it out through Child Benefit and Winter Fuel Payment. Governments should think twice before they throw away their best tools.

The euro or the pound? Both, please

There’s a continuing controversy in Scotland as to whether an independent Scotland could or should be part of a ‘currency union’ with England. The assumptions are invalid; England cannot ‘stop’ Scotland from using the pound. The EU’s position is more complex – negotiations on entry to the Euro might be part of a negotiation about EU membership – but this seems unlikely to be a sticking point.

There’s another option, however, and it’s an option for the UK as well as Scotland. It’s not necessary to sign up to anything, or to be part of a currency union, to use a currency. For example, by convention oil production in Scotland, and I assume in the rest of the the UK, is traded in dollars. What’s important is to have the facility to hold, spend or trade the currency, and that’s currently not possible for most of us – the UK banks don’t let customers hold Euro accounts on the same terms as sterling. Why ever not? A rule that provided for banking in Euros would open the possibility for people to use either currency, or both, at their convenience.

A currency union

We’re told again that England is “unlikely to let a separate Scotland use the pound”.  I’ve made the point before in this blog, both in relation to Scotland and about comments made about “forcing” Greece to leave the Euro, that this is not something that a government can stop.  Despite the bluster, the Treasury paper on currency union makes a central point clear: if Scotland decides unilaterally to use the pound, it can.  When George Osborne asks, then, why the UK should accept a formal arrangement with an independent Scotland, the answer is plain: because that way you have some say, and otherwise you have none.

The policies of Mrs Thatcher: "we will not reflate"

Margaret Thatcher’s political approach was founded in a central belief in individualism.  Milton Friedman famously commented:  “the thing that people do not recognise is that Margaret Thatcher is not in terms of belief a Tory.   She is a nineteenth-century Liberal.”  Her assertion that ‘there is no such thing as society’  was not a slip of the tongue, nor was it misrepresented; it echoes related statements by Bentham and Hayek (who she much respected), and it was central to her beliefs. 

The strong political convictions were not accompanied by any understanding of economics.    In 1981, 364 economists signed a letter in which they wrote: “there is no basis in economic theory or supporting evidence for the government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment”.   Mrs Thatcher was still prepared to say in 1985 that  “we will not reflate”.  The statement is listed in the Thatcher archive as being followed by applause; as I remember the broadcast, there was rather more embarrassed silence.   She had just said that the government would do nothing to support economic growth (reflation) in the apparent belief that she was saying that the government would not devalue the currency (inflation). 

Her  economic policy was based not just in a belief in markets, but the argument advanced by Bacon and Eltis in the 1970s that the public sector stood in the way of the growth of the private sector and that markets  had to be permitted to operate.  Most economists recognised in the 1970s that Britain had fundamental economic problems, reflecting its reliance on the ‘old staples’ – coal, cotton, and heavy engineering.  The Wilson government had sought to modernise and ‘redeploy’, moving workers gradually to new industries and guding the relocation of industry to move work to workers.  The Heath government initially said it would not support ‘lame ducks’ but relented when it realised the implications for national defence and stepped in to save Rolls-Royce.  Thatcher, the first Prime Minister too young to have served in the war, pledged not to support declining industries regardless of the consequences.  Cuts, widely  condemned by economists at the time,  exacerbated the slump.  Unemployment soared to over 3  million – it would have been 5 million if the government hadn’t repeatedly changed the way unemployment counted.  Manufacturing industry disappeared.  Many parts of the country never recovered; we are still in the resulting slump.

In terms of social policy, however, Thatcherism is remembered more for what was said about welfare than what it did.  It is easy to forget, for example, that Margaret Thatcher was one of the prime movers of the 1980 Education Act, concerned with the integration of children with learning disabilities into mainstream education. If the welfare state is seen as an ideal, then Thatcherism was opposed to it; the Thatcher governments were criticised for the development of unequal provision, privatisation and the ‘residualisation’ of welfare (especially in housing). If, however, the welfare state is seen as a range of services, the practical impact seems more limited: welfare expenditure was largely maintained and even (in health and social security) increased. The greatest impact seems to have come not from the reduction of state welfare, but from the reform of public sector administration and management intended to imitate the workings of the private market. Much of the current policy of the Conservative Party today is concerned with the more fundamental task – a programme which may be presented as austerity, but has little to do with economic management and everything to do with ‘rolling back the frontiers of the state’.

The coverage of Margaret Thatcher’s record in the last week  has emphasised how divisive her politics were, and still are.    The Economist notes in their appreciation that in the early 1980s  “She was, for a time, the most unpopular prime minister on record.”  In July 1984, a Gallup poll for the Daily Telegraph showed that 34% thought Mrs Thatcher would be the best Prime Minister, when support for her party was at 37.5%;  in July 1986, Mrs Thatcher had 28% satisfaction, and 66% dissatisfaction, when her party had 33% support.  That, as I recollect, was the pattern throughout her premiership, with one exception – her management of the Falklands crisis.  It is often forgotten – and it was  denied  by her supporters at the time –  but she was consistently less popular than her party.

The cost of benefits

Discussion of the cost of benefits has been plagued by apparently conflicting accounts of what is happening.  The Office of Budget responsibility has put the figure at £182 billion; the Daily Mail has recently cited costs of £180 billion and £200 billion;  I have heard £210 billion from the BBC.  Two recent defences of the welfare system (Owen Jones in the Independent, and  Toby Helm in the Guardian), point out that 40% of the money goes on pensioners; that is a serious underestimate.

Much of the confusion happens because different figures refer to different ways of counting.  The benefits administered by the DWP are expected to cost £166 billion in 2012-13, though the latest Budget adjustment has that at £164.5 billion.  £12.1 in Child Benefit,  £5.5 billion for Northern Ireland and some other additions bring this to £182.8 billion.  Then there is £28.6 billion in Tax Credits, which are not part of the benefits system.  That means that people might cite approximate figures of £165 billion,  £183 billion and £211 billion, all of which are correct from different perspectives.

Where the commentators tend to go wrong is calling all of this ‘welfare’, and assuming that it is driven by the ‘out of work’ benefits.  Apart from the State Pension and Pension Credit, pensioners receive a range of other benefits, including not just those associated with pensioners – Attendance Allowance and Winter Fuel Payment – but Housing Benefit, Council Tax support,  Attendance Allowance,  and (perhaps surprisingly) Disability Living Allowance.  The DWP’s current tally is that £107.5 billion is spent on people over working age. That means that two thirds of the lower figure, and more than half of the high figure, goes to pensioners.