Investors Chronicle: Will the stimulus package work?

Published in Investors Chronicle here (26 November 2008)

YES, says Will Hutton, executive vice chair of the Work Foundation:

Extraordinary times call for extraordinary responses. And that’s what we saw from the Chancellor earlier this week: a package of measures that only months ago would have been unthinkable in its scale looks today like a bold and positive response to the challenges the UK is facing.

I’m more upbeat than others about the potential impact that temporarily reducing VAT will have on our spending habits; this increase in personal spending, combined with bringing forward some £3bn of capital spending into next year, should give a desired jolt to demand. Jobs will be created.

Alastair Darling’s focus on mitigating the impact of higher unemployment is welcome. JobCentrePlus will inevitably face greater flows of people and needed to increase its capacity. The rapid response initiative will enable a more nimble reaction to those made unemployed, while the employment partnership should ensure that vacancies don’t stay unfilled for long. Small businesses, employing around 60 per cent of the workforce, will have been bolstered by his measures that guarantee loans, keep flows of credit open and allow more flexible tax payments.

In this new settlement, the political lines are being redrawn too: raising the top rate of tax for those earning above £150,00 to 45 per cent - and in doing so, rolling back on Labour’s commitment not to increase tax for the highest earners - will have more impact on the backbenches than on the balance sheet. Ideology feels like it is coming back again.

There were omissions. There are risks in delaying the introduction of measures that that would encourage the flow of mortgage finance and I would have liked to see Mr Darling go further in stimulating bank lending – the genesis of this crisis. An economic plan that – with a fair wind – will only balance out in 2016 seems like a huge risk, politically and economically. No one can possibly know the state of the public finances so far away and George Osbourne’s publicly-expressed anxiety about the value of sterling unquestionably found its mark. In addition, if Mr Darling proves to have been overly optimistic in his expectations of how the economy will respond to his interventions, borrowing will be even further north of his already high forecast. But if it’s a gamble, it’s a gamble that deserves to pay off. All credit should go the Chancellor for a bold, imaginative PBR. Crisis has given Labour a renewed sense of mission.

NO, says Tom Clougherty, policy director at the Adam Smith Institute:

What stimulus package?

Is a measly (and temporary) 2.5 per cent off VAT really going to accomplish what high streets full of half price sales and buy-one-get-one-free offers couldn't, and get people spending again? I doubt it.

Anyway, VAT isn't charged on food, children's clothes or mortgage payments, and is already set at 5 per cent on domestic fuel. Petrol isn't going to get any cheaper, because the Chancellor has hiked fuel duties, and the same goes for alcohol. Few will see much benefit.

Most economists can't imagine the VAT cut prompting any significant change in consumer behaviour, or doing anything to stimulate the economy. But that's still more than can be said for the rest of the pre-budget report.

Lower taxes boost the economy by strengthening incentives to work and invest, and by increasing productivity. Yet most of the PBR goes in the opposite direction. National Insurance contributions are set to rise by 0.5 per cent, while high-earners will be hammered by marginal rates of up to 60 per cent. And we are still going to get higher corporation taxes for small business and retrospective rises in Vehicle Excise Duty, just not straight away.

Meanwhile, the UK's budget deficit is set to hit 8-9 per cent of GDP, as borrowing reaches £120bn a year. Public sector debt is likely to top 60 per cent of national income and exceed £1trn by 2012. These will be the worst figures on record. The taxes needed to service this debt will be a significant drag on the economy for years to come.

And for what? To finance wasteful public spending that we already know doesn't boost the economy? Japan spent the 1990s trying to overcome a recession with infrastructure spending, and achieved nothing except debts amounting to 180 per cent of GDP. Massive public spending increases in the US in the 1930s, 1960s and 1970s all failed to increase economic growth rates. And let's not forget 1970s Britain. "Priming the pump" hasn't worked in the past. It's not going to work now.

Ultimately, the Chancellor's only idea is to tax, borrow, and spend. This is not the route to recovery. This is the road to ruin.

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The Times: Roll up, roll up for the national fire sale

 By Francis Elliott and Emily Gosden (November 26, 2008)

Published in the The Times here

Lock-keepers’ cottages, assorted forests, a conference centre, military radio frequencies and a uranium enrichment company – the sale to help to plug Britain’s £1 trillion deficit is now open.

Buried in the Pre-Budget Report is a list of state-owned assets with “potential for alternative business models".

Treasury ministers rejected claims that the privatisation drive amounted to a firesale that would leave taxpayers short-changed. “This is about preparing assets for market where that is appropriate. If it doesn’t make sense to sell, we won’t," said one yesterday.

Included in the list are bodies that have eluded previous attempts at privatisation, such as the Royal Mint, the Tote, Ordnance Survey and the Met Office. Other organisations freshly offered to the markets include the Oil & Pipeline Agency, which manages a 1,500-mile (2,400km) network of underground fuel distribution pipelines and 46 storage depots. Around half the network – built to supply the military in an emergency – is mothballed.
Darling's £1 trillion debt gamble

Alistair Darling stored up big tax rises for the better-paid and huge public spending curbs in his fight against recession. Watch video

The people of Marlow Road in Maidenhead, London give their verdicts on the economy
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More prosaically, bidders are sought to help the Government to realise its “long-term objective of disengagement" from the Covent Garden Market Authority. The Queen Elizabeth II Conference Centre in Central London is up for sale, as is British Waterways’ “canalside property portfolio". The Forestry Commission has been told to consider what it can sell.

The prospect of squeezing extra cash out of the Dartford Crossing is raised in the Pre-Budget Report’s so-called Red Book, as is the exploration of “options for the commercialisation of other transport assets", a phrase that will send a shudder through toll-weary motorists.

One asset with the potential to realise billions of pounds is the state’s 33.3 per cent stake in Urenco, a uranium enrichment company.

The man chosen to manage the sell-off is Gerry Grimstone, a former Treasury mandarin, who will reveal next spring how much he believes can be raised. Officials emphasised that an outright sale was only being considered for some organisations. Others, such as the Met Office and Ordnance Survey, will be helped to exploit commercial opportunities, they said.

Even advocates of privatisation said that taxpayers could lose out if assets were sold now. Nigel Hawkins, of the Adam Smith Institute, said that the Government would, for example, be “very hard pressed" to achieve the £500 million valuation put on the portfolio of British Waterways this year.

Matthew Elliott, the chief executive of the TaxPayers’ Alliance, said: “It is great news that the Government is looking to offload assets that unnecessarily burden the public. It is of the utmost importance, however, that the timing and structure of these sales provides the best possible deal for taxpayers. The last thing the country needs now is a repeat of Gordon Brown’s disastrous bargain-priced sale of British gold reserves."

Dai Hudd, deputy general secretary of the public sector union Prospect, said: “Any attempt to sell them off now would be economic madness. It would be a case of sell in haste, repent at leisure. The Government will face the justifiable anger of taxpayers if they see these national assets sold at bargain-basement prices."

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Business Standard: The global financial crisis

By Deepak Lal, Senior Fellow in Globalization (November 25, 2008)

Published in The Business Standard here

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Tom Clougherty calls for tax cuts on The World This Weekend

23 November 2008

Click here to listen to Tom Clougherty, the ASI's policy director, calling for tax cuts on Radio 4's The World This Weekend. You will need to fast-forward to 8 minutes into the programme.

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ASI calls for £12,000 personal allowance

24 November 2008

• Raising the personal allowance to £12,000 would take 7 million low-paid workers out of the income tax net altogether. People earning the minimum wage or less would pay no income tax at all.
• It would make the average UK household £100 per month better off, reversing substantial falls in household disposable income over the last 12 months.
• This tax cut would put almost £19bn per year back in people's pockets, allowing considerable additional spending and investment in the productive, private sector economy. This is the key to overcoming recession and restoring economic growth.

The Adam Smith Institute (ASI) has today called on Alistair Darling to substantially raise the personal income tax allowance in today's pre-budget report. Author Tom Clougherty advocates a personal allowance of £12,000 – which is roughly equivalent to the minimum wage, or half the average wage.
 
As well as stimulating the economy by giving people more disposable income to spend and invest, raising the personal allowance to £12,000 would strengthen incentives to work, help to eliminate the 'benefits trap' and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.

If the higher rate threshold were kept at its current level, rather than raised in line with the personal allowance, this policy would cost the Exchequer just £18.9bn in lost revenue.
 
The authors argue that such a sum could easily be offset by cutting government waste, and urge against further government borrowing, noting that the taxpayer already spends more than £30bn a year servicing government debt:
 
In the face of a recession, every business and household in the country is looking to find economies and make savings. There is no reason why government, with an annual budget in excess of £600bn, should be any different.
 
Tom Clougherty, the ASI's policy director, added:
 
Tax cuts are not a silver bullet, but there they are the most powerful, pro-growth policy tool that the government has available to them. The government is right to want to cut taxes: they should start by putting more money back in  people's pockets, and this means radically increasing the personal allowance.
 
ENDS
 
The full briefing paper can be downloaded for free at <http://www.adamsmith.org/images/pdf/personal-allowance-briefing.pdf>

Notes for Editors
 

1. The Adam Smith Institute is the UK's leading proponent of free-market economic and social policies. The Institute is politically independent and non-profit.
2. The £100 per month better off figure assumes a single-earner household. Dual-earner households would in fact show greater savings from the reform, due to the availability of two increased personal allowances.
3. According to ASDA's monthly income tracker, disposable incomes were 9.6 percent lower in September 2008 than they had been 12 months earlier.
4. It would cost an additional £6bn to raise the higher rate threshold in line with the personal allowance – taking the total cost of this reform to £25bn. 
5. Tax calculations were performed by Richard Teather, a Fellow of the Adam Smith Institute and an Associate Senior Lecturer in Taxation at Bournemouth University.

 
WHY ALISTAIR DARLING SHOULD RAISE THE PERSONAL ALLOWANCE is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL.

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Scotland on Sunday: Tories take a backward step

By Kenny Farquharson (November 23, 2008)

Published in Scotland on Sunday here

ALEX Salmond has been unwell all week (get well soon, First Minister), and I sincerely hope he has been avoiding the news bulletins as he tries to make a full recovery.

I especially hope he managed to miss reports of David Cameron's extraordinary U-turn on the Tory attitude to tax. If Salmond did happen to catch this, I bet the groans from the Bute House sickbed were all the louder.

Cameron has spent the past month standing loyally by Gordon Brown's side as Britain wrestles with the financial crisis. The Tory leader expressed quibbles about the detail, but rightly judged that what the country needed was singularity of political purpose. It was no great sacrifice. After all, Cameron had already pledged to stand by Labour's broad economic strategy when in Government, including matching its spending plans until 2011. Last week Cameron abandoned this. In doing so, he did spectacular – perhaps irreparable – damage to his chances of moving into Downing Street.

Until this past week, Cameron seemed reluctant to differentiate the Tories from Labour to any great extent. He even gave the impression of wanting to be a kind of Tony Blair Mark Two, taking every opportunity to echo the former PM's nostrums. Cameron's hopes rested on a simple belief that voters would feel that he – rather than the dour and unsympathetic Brown – was more in tune with their hopes and instincts. Polls suggested he was right.

So why change tack? I suspect we need look no further than the US election. Just as Barack Obama had the presidency sewn up when he bested John McCain on the banking bailout, so Cameron has come to realise that if he cannot beat Brown on the economy he has zero chance of seizing power. And to beat Brown on the economy, the Tories have to offer something both distinctive and appealing. Hence the return to those golden oldies of Tory manifestos from yesteryear – fiscal restraint, low spending and low taxation.

British politics has a decidedly retro feel this weekend. It's Labour Keynesians versus Tory Monetarists. They'll be bringing back clackers and ra-ra skirts next. The Tory right is delighted. They haven't been so happy since Iain Duncan Smith beat Ken Clarke for the leadership and the party was characterised by its rabid anti-Europeanism and it's sourness towards immigrants. And we all know how well that went down with the great British public. The real Tory party has Cameron back in its clammy clutches. I'm reminded of that scene in Shaun Of The Dead when the zombie mob drags the character played by Dylan Moran out of the safety of the pub and devours him alive.

Just a few months ago, Cameron looked like a prime minister-in-waiting. All he had to do was stay alive, stay smiling and avoid any black-tie reunion dinners of the Bullingdon Club. Now, he finds himself having to re-sell Thatcherism to a sceptical public.

For Salmond and the SNP, this is a disaster. The more "clear blue water" Cameron puts between the Tories and Labour, the more difficult it is for the Nationalists to claim the two parties are actually one and the same. The more the next election becomes a genuinely ideological battle between left and right, the harder it is for Salmond to argue that it should be a vote on Scotland's constitutional future. And the SNP's back-of-an-envelope strategy for independence (Britain votes Tory; Scots are disgusted at Tory rule; Scotland opts for full sovereignty) becomes a far harder sell.

The Tories are right to believe that tax is the touchstone issue in politics. You can talk yourself hoarse about civil liberties, the constitution and privatisation, but it's remarkable how voters start paying attention when the debate gets round to how much cash the Government is taking from their pay packets. Since 1991 the Adam Smith Institute has worked out when we should celebrate Tax Freedom Day, the day of the year when we start working for ourselves instead of working to pay into the Treasury coffers. This year it fell on June 2, a full week later than it did in 2002. Politicians ignore this at their peril. Just ask Salmond, whose 'Penny for Scotland' rise in income tax is often identified as a contributory factor in the SNP's failure to win power at Holyrood in 1999. No party is more attuned to this public mood than the Tories.

Yet there are flaws aplenty in Cameron's reasoning. All the evidence suggests that people are happier paying tax if they have a clear idea of where the money is going. When Gordon Brown raised National Insurance by 1p in 2002, he promised the £40bn it raised would be devoted entirely to the NHS. This 'hypothecation' took some of the political sting out of Brown's raid on our wallets.

The tax hike we'll be suffering in two or three years' time will be surely be seen in a similar light. We'll be footing the bill for the emergency measures that were necessary to stop Britain's recession turning into depression. Seems like a pretty good cause to me. Are the Tories really going to argue that the tax cuts shouldn't have been so generous? Or that the subsequent attempt to balance the books shouldn't be so prudent?

Cameron last week appealed to voters to ignore Labour "propaganda" that the new Tory strategy meant cuts in public spending. It was, he insisted, simply a slower rate of growth. This is true – but unsellable. Labour isn't in the clear yet, but Cameron is now in danger of being yet another Tory 'nearly' man.

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Tom Clougherty discusses tax cuts on the Today Programme

11 November 2008

Click here to listen.

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Telegraph.co.uk: Novels 'better at explaining world's problems than reports'

By Stephen Adams, (6 November 2008)

Published in The Telegraph here

People should read best-selling novels like The Kite Runner and The White Tiger rather than academic reports if they really want to understand global issues like poverty and migration, a study has claimed.

Fiction - including poetry - should be taken just as seriously as facts-based research, according to the team from Manchester University and the London School of Economics (LSE).

Novels should be required reading because fiction "does not compromise on complexity, politics or readability in the way that academic literature sometimes does," said Dr Dennis Rodgers from Manchester University's Brooks World Poverty Institute.

He said: "Despite the regular flow of academic studies, expert reports, and policy position papers, it is arguably novelists who do as good a job – if not a better one – of representing and communicating the realities of international development.

"While fiction may not always show a set of presentable research findings, it does not compromise on complexity, politics or readability in the way that academic literature sometimes does.

"And fiction often reaches a much larger and diverse audience than academic work and may therefore be more influential in shaping public knowledge and understanding of development issues."

Khaled Hosseini's The Kite Runner "has arguably done more to educate Western readers about the realities of daily life in Afghanistan under the Taliban and thereafter than any government media campaign, advocacy organisation report, or social science research", said the report.

It also praised the winner of this year's Man Booker Prize, The White Tiger by Aravind Adiga, for its "passionate depiction of the perils and pitfalls of rampant capitalism in contemporary India".

The novel "deftly highlights the social injustice and moral corruption that underpin the country's apparently miraculous economic development during the past decade," it said.

Brick Lane by Bangladesh-born British author Monica Ali, that deals with a young woman who speaks no English coming to London, has arguably "contributed to wider public understandings of global development issues in ways that no academic writing ever has," it concluded.

The report's title - The Fiction of Development: Literary Representation as a Source of Authoritative Knowledge - may give a hint about its authors' political leanings.

But co-author Dr David Lewis, an international development specialist at LSE, defended their argument.

He said: "Storytelling is one of humanity's oldest methods of possessing information and representing reality. The stories, poems and plays we categorise as literary fiction were once accepted in much the same way that scientific discourse is received as authoritative today."

Professor Michael Woolcock, director of the Brooks World Poverty Institute, said they were "not arguing that poets should replace finance ministers."

He said: "Fiction is important because it is often concerned with the basic subject matter of development. This includes things like the promises and perils of encounters between different peoples; the tragic mix of courage, desperation, humour, and deprivation characterising the lives of the down-trodden."

Tom Clougherty, policy director of the Adam Smith Institute, said fiction was "a useful tool in aiding people's understanding, sparking their interest, and humanising issues".

But he warned: "There's a problem. Fiction works by appealing to people's emotions, not their intellect or rationality."

He said issues like poverty and international development were "emotionally charged" and consequently solutions often failed to take into account hard, unpalatable facts.

"Years of aid won't sort out fundamental problems," he said, concluding: "Fiction absolutely can't replace factual, evidence-based analysis."

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