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From taxes to cats, May’s government has been an affront to Tory ideology

From taxes to cats, May’s government has been an affront to Tory ideology

Theresa May has finally announced her resignation. How can we capture the flavour of her tenure in office?

This can be found in the dry and measured content of the Economic and Fiscal Outlook from the Office for Budget Responsibility (OBR).

The OBR stated in its latest publication in March 2019 that: “the tax receipts-to-GDP ratio ends the forecast in 2023-24 slightly higher than its 2018-19 level”.

Of course, this is a forecast, and all the usual caveats need to be attached. But, remarkably, it was the intention of a Conservative government for taxation to be higher in five years’ time than it is now.

Already, taxes are high. Taxes as a percentage of GDP in 2018/19 were higher than at any time since 1979, the first year with Margaret Thatcher as Prime Minister.

Gordon Brown effectively ran economic policy from 1997 until 2010. Even at the time, he was satirically referred to as the Great Helmsman, a name bestowed upon leaders of centrally-planned economies such as Joseph Stalin.

Brown could not resist detailed meddling of the most microscopic variety, exactly as if he were in charge of a Five Year Plan in the old Soviet Union. But during his long reign, taxes as a percentage of GDP remained lower than they are now.

And it’s not just taxes but regulation too where the government under May is behaving in a decidedly un-Conservative manner.

Despite what the Tories like to say, the culture of interference seems to have got even worse under May.

A rather minor issue symbolises the mentality of the May regime. This is the Cats’ Bill, a private member’s bill sponsored by Rehman Chishti, Tory MP for Gillingham and Rainham. Michael Gove has described the bill as an “inspiration”.

There is undoubtedly a problem with cats being hit by motor vehicles. Campaigners estimate that 250,000 are either killed or injured every year in this way. These incidents create a great deal of stress and unhappiness for the owners. It would obviously be good if the number could be reduced.

The bill would force owners to microchip their cats so that they could be identified. This seems reasonable. But Chishti proposes that a motorist hitting a cat should be required not just to stop, but to report the incident to a vet, on pain of a fine of up to £20,000.

The bill is brought in with the very best of intentions. But it will simply create another regulated industry.

Vets will demand that the motorist pay a fee for their effort in making a record of the accident – even better, that they get a special subsidy from the taxpayer.

Civil servants will be recruited to check that the vets’ forms are correctly filled in. There will be demands for new regulations on vets to ensure that they are trained to comply with the new law, and a way to enforce these rules for drivers.

None of this seems to have occurred to Chishti. For him, a problem exists, and the way you solve it is by state intervention.

Another way, of course, is for owners to take more personal responsibility for their cats, but that doesn’t seem to occur to politicians.

From cats to taxes, May essentially created a social democratic government, not a Conservative one.

As published in City AM Wednesday 29th May 2019

Image: British Cat by Colicaranica via Wikimedia is licensed under CC BY-SA 3.0
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Puzzled over Australia’s shock election result? Economics can help explain

Puzzled over Australia’s shock election result? Economics can help explain

The surprise of the week was the re-election of the centre-right Coalition government in the Australian General Election.

The Labor opposition had led every major opinion poll for the past two years. But Scott Morrison of the Coalition is still Prime Minister – and it is his Labor opponent who is resigning as leader.

Economists, regardless of their own political views, can take pleasure in this result. It is yet another illustration of the importance of what economics calls revealed preference over stated preference.

The concept of stated preference is the bedrock of the entire polling industry. People are asked to give their views on hypothetical questions. Who will you vote for? Do you prefer Pepsi or Coke?

George Gallup introduced opinion polls in America in the 1930s. His flash of genius was to combine questionnaires with what at the time was the infant science of statistical theory. He used the latter, for example, to work out that a broadly accurate picture of opinion in the whole of the US could be obtained from a sample survey of only a few thousand people.

Since then, polling techniques have become much more sophisticated. Their fundamental problem is not the statistical science, but the fact that their results depend upon stated preference. In contrast, with revealed preference people quite literally reveal their preference by making an actual choice. They vote for the Coalition and not Labor. They buy Pepsi and not Coke.

On social media, people – perhaps unwittingly – reveal a great deal about themselves, their opinions, and their emotions. Analysis based on this data will surely supplant the existing approaches of the polling industry.

This is of course by no means the only close result which opinion polls have failed to call. In our own 2017 election, for example, most polls indicated that Theresa May was heading for a comfortable majority.

But the Australian election is also particularly interesting because of the issues over which it was fought, reflected in the results.

There were big swings against Labor in Queensland, for example. A key issue here is coal mining – in particular, a major new mine proposed by the Adani company.

A secret opinion survey was leaked on 14 May. It claimed to find that in Queensland itself the coal mining industry was “nearing crisis” and had “strong negative perceptions”.

Yet on 18 May, the Queensland electorate swung decisively against Labor, which had made climate change and emissions control a major part of its platform.

Similarly, Labor campaigned on the policy of abolishing franking credits. These may seem esoteric, but the effect was widely understood: pensions would become taxed more heavily. As a result, over-65s voted overwhelmingly against Labor.

No matter how right-on they may seem and how much support they get in polls, many environmentalist policies are not popular in practice. The gilet jaunes movement in France is further testimony to this.

And people reveal a consistent preference for paying less rather than more tax.

Whoever becomes Conservative leader might find it useful to learn from the Australian result.

As published in City AM Wednesday 22nd May 2019
Image: Australian Voting Booths by Australian Electoral Commission via Wikimedia is licensed under CC BY 3.0 AU
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Bereft of new ideas, Jeremy Corbyn’s Labour Party is dead set on sticking its head in the sand

Bereft of new ideas, Jeremy Corbyn’s Labour Party is dead set on sticking its head in the sand

One of the most dispiriting aspects of the Labour Party conference, which ended last week, is how deeply conservative the political left has become. Its remedies for Britain’s problems look to the past and not the future. Far from embracing new technology, the left is hostile to it.

This was not always the case. Labour under Harold Wilson won a closely contested election in 1964. Wilson’s key phrase – “the white heat of the technological revolution” – became the butt of parodies. But it encapsulated Labour’s appeal. Tony Blair, for all his faults, projected an image of modernity with his “Cool Britannia”.

Now, we have the grim pledge to turn the clock back and renationalise the railways. This was first done in 1948. But there is no sense that anything innovative will be done.

In fact, the old British Railways, as it was then called, was subsequently plagued by massive underinvestment in modern technology and equipment.

Ironically, given Labour’s attacks on the short-termism of the City, it was precisely in the nationalised industries that such behaviour was rampant.

If fares had to rise to fund new investment, the political incentive facing the Minister of Transport was to refuse the increase. Given the choice between political popularity in the here and now, and the longer-term benefit to the industry, guess which one usually won.

Labour argues that the profits currently being made by the private rail companies would be ploughed back to improve the service. The much more likely outcome is that the money will be used to featherbed jobs and boost the pay of those employed in the sector.

Let’s leave aside the fact that Network Rail, the one part of the railways still in public ownership, has shown itself to be unfit for purpose.

The problems started immediately after nationalisation 70 years ago. The historian John Bew published a magnificent biography of Clement Attlee in 2016. Attlee led the 1945-51 Labour government, by far the most radical in British history. Attlee himself served with great bravery in the First World War, was a fervent patriot and supporter of the monarchy, and stressed individual responsibility as much as individual rights.

An ordinary railwayman features in a snippet in the book. He had been a keen supporter of nationalisation, but six months after the event, he had changed his mind.

Why? Because “where there used to be one inspector, now there are two” – jobs for the public sector middle class. Little wonder that Corbyn’s Labour is so keen on the idea.

The left in general seems bereft of new ideas and lives in fear of new technology. They want to ban Uber and AirBnB. They want to bring Google and Facebook to heel not by innovation and competition, but by regulation. Their house journal, the Guardian newspaper, is filled with savage attacks by liberal arts graduates on “algorithms”.

To make a success of Brexit, we need to embrace innovation. As far as the future is concerned, Labour is just sticking its head in the sand.

As published in City AM Wednesday 3rd October 2018

Image: Jeremy Corbyn by Rwendland licensed under CC-BY_SA 4.0
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Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Are members of the Labour Party frontbench experts in doublethink? The concept was invented by George Orwell for his novel 1984, written in the 1940s as a critique of the Soviet Union.

Masters of doublethink can hold, for purposes of political expediency, two opposing opinions at the same time, one of which might be complete nonsense.

The Leader himself set a good example during the general election campaign when he promised to abolish all outstanding student debt. Jeremy Corbyn rather backtracked on this after the votes had been cast, when it was pointed out to him that this would cost around £100 billion – over £1,500 for every man, woman and child in the UK.

His close ally, the Shadow Chancellor, followed this up on Sunday. Asked about the cost of Labour’s re-nationalisation plans, John McDonnell said that “you don’t need a number because you swap shares for government bonds”.

Independent experts put a provisional costing of around £500 billion on McDonnell’s plans. This amounts to over 20 per cent of GDP.

Imagine you want to buy a house for £10 million but have no savings. And imagine that you somehow persuade someone to lend you the money. True, you have acquired an asset worth £10 million and have a debt of the same size. Your net wealth position is unchanged.

But you face the problem of paying the interest on the loan, the terms of which may be very onerous, reflecting your credit risk.

McDonnell argues that nationalised industries will make a profit, which will take care of the interest payments.  Stretching credibility even further, Labour argues that because the interest on government bonds is currently only just over 1 per cent, the payments would not amount to much.

Yet it is obvious that the markets might want a much higher rate of interest to finance the plans of a Chancellor who wanted to add £500 billion to public debt.

Emily Thornberry, the Shadow Foreign Secretary, has also got in on the doublethink act. Challenged on TV to name any country where Labour’s policies of financing spending by issuing debt had worked, she finally came up with Germany and Sweden.

The Bank of International Settlements complies data on the ratio of government debt to GDP. There are several ways to do this, but on their preferred approach in Germany it is currently 73 per cent and in Sweden 44 per cent. In the UK it is already 116 per cent.

Much more plausible comparators are Italy and Greece, where the ratios are 150 and 173 per cent, figures which McDonnell would reach easily. In Italy, GDP is still 5 per cent below its peak level in 2007, a whole decade ago. And in Greece it is 26 per cent lower.

Are the top Corbynites cynical exponents of doublethink? Less charitable people might say they are just plain dim. As so often in economics, the evidence so far does not enable us to decide between the two hypotheses. But, either way, they are bad news.

As published in City AM Wednesday 22nd November 2017

Image: Corbyn and McDonnell by By Rwendland is licensed under CC by 4.0
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The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The German elections on Sunday went pretty much according to the polls. Another victory for Chancellor Merkel.

Much of the commentary has focussed on the success of the far-right Alternative fur Deutschland (AfD) party. One of its leading candidates eulogised the German armed forces during the Second World War – a topic even more sensitive topic there than it is here.

The AfD took nearly 13 per cent of the vote and 94 seats in the Bundestag. This puts them within striking distance of the Social Democrats (SPD). The SPD share of the vote collapsed to just over 20 per cent, barely half the support it attracted only a decade ago.

The Social Democrats – the German equivalent of Labour in the UK – were annihilated not just in areas like Bavaria where traditional centre-right parties have always been strong. They lost very heavily in the old East Germany, where the AfD secured its highest level of support.

It is no accident that the rise of the AfD and the fall of the SPD go hand in hand.

A popular myth among the liberal elite in Britain is that our country has an exceptionally high level of inequality compared to the rest of Europe. This far from being the case.

The same forces which have widened inequality here have operated in Germany, in some ways even more powerfully.

The opening up of Eastern Europe in the early 1990s has had a strong effect. Employers soon realised that economies such as Poland and the Czech Republic possessed educated labour forces, whose productivity potential had been suppressed by the gross inefficiencies inherent in planned economies. German companies opened up new production plants in the old Soviet bloc countries in Europe rather than at home.

This has been combined with the impact of both globalisation and mass immigration.

The effect on wage rates of this increase in competition in the labour market has been dramatic. Christian Dustmann at UCL has examined the evolution of wage rates in the former West Germany.

The fifteenth percentile of the wage distribution is the level at which only 15 per cent of wages are lower. In West Germany, at the fifteenth percentile, real wages have fallen almost continuously since the mid-1990s.

At the fiftieth percentile, where half get more and half get less, the reduction has been less sharp. But the fall had set in by the early 2000s.

At the eighty-fifth percentile, we see the mirror image of the fifteenth: real wages grew strongly, reaping the benefits of the recovery of the economy.

In the states of the old East Germany, the problems are even worse.

The sharp rise in inequality is a key reason for the collapse in support for the social democratic parties across Europe. Their traditional voters have been the ones who have been hit the most by static or falling real incomes. They have not been defended by social democrat parties, which now represent the interests of the public sector urban professional classes.

The fact that Jeremy Corbyn’s Labour did not suffer the same fate as Germany’s SDP is a clear indictment of the Conservative campaign in the election.

As published in City AM Wednesday 27th September 2017

Image: Martin Schultz by Olaf Kosinsky is licensed under CC by 3.0
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Less austerity will always mean more tax

Less austerity will always mean more tax

There is a great deal of discussion, following the election, of relaxing or even abandoning austerity.

There is an equal amount of confusion about this, because the same word is being used to describe two quite separate concepts.

The consequences of the government changing its policy on austerity are dramatically different, depending on which one it is.

One meaning of the word is what we might call “social austerity”. From any given pot of money available to a government, its supporters believe that, in general, tax cuts should be promoted rather than public spending increased. Opponents argue that public spending as a result has become underfunded. Local councils, education, and the NHS all need more money.

Social austerity can be relieved, as even the DUP and some Conservatives argue, by increasing spending appropriately, and funding it by increases in taxation. This was an important aspect of Labour’s manifesto, and the tragedy at Grenfell Tower has intensified the discussion around it.

The main risk is purely political. Are voters really and truly willing to pay more tax, rather than just wanting someone else to pay it?

There are some potential adverse economic consequences if the policy of higher taxation is pushed too far. Former French President Francois Hollande’s 75 per cent tax rate led to several hundred thousand skilled young people leaving France, mainly for the UK. If companies are taxed too heavily, they may choose to locate to another country. Both skilled labour and capital are geographically mobile.

But, within reason, social austerity could be relaxed without perhaps too many fears in this direction.

“Economic austerity” is quite a different matter. Opponents of this want to increase the gap between government spending and tax receipts – the so-called fiscal deficit. This is funded by issuing government bonds. So the deficit in any given year goes up, and the outstanding stock of government debt also rises.

Any relaxation of social austerity is paid for by higher taxes now. Any relaxation of economic austerity is paid for by borrowing more now.

But the debt has to be repaid at some point, and the interest payments on it must be met. So taxes in the future will be higher. Either way, less austerity means more tax.

John Maynard Keynes himself made it very clear that increasing public spending at a time of full employment would simply lead to more inflation. There are areas of the country where there probably are people registered as unemployed who genuinely do want to work – the Welsh Valleys, for example. But the rest of the UK is at full employment.

The number of people in employment is at an all-time high, at 32m. This has risen by 2.8m since 2010. Meanwhile the unemployment rate has fallen from 7.9 per cent in 2010 to just 4.6 per cent today.

Any major fiscal stimulus to the economy now would simply bid up wages, leading to higher costs and higher inflation.

The public mood on social austerity may have shifted. But the case for economic austerity is stronger than it has ever been.

As published in City AM Wednesday 21st June 2017

Image: People’s assembly by Peter Damian is licensed under CC by 2.0
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