Osborne promised to match Council Tax rises of less than 2.5% with treasury funds, effectively freezing Council Tax for two years. This is a foolish policy: it will spell diaster for the coalition in two years time and lead to a Labour landslide in the 2014 local elections.
Council Tax has the dubious distinction of being Britain's most hated tax. Who can forget the pensioners - people like retired social workers and former vicars - who went to jail rather than pay Council Tax rises of 12.9% in 2005?
We may be heading for a 1980s-esque confrontation between local and central government and very serious Council Tax rebellions. I'm predicting extremely serious problems for the coalition in two years and a big swing to Labour in the 2014 local elections.
You don't have to be a genius to see that an end to the Treasury's matched funding is enough to cause large Council Tax rises in the fiscal year 2012-2013. Assuming that inflation averages out at 2.5%, that central grants and redistributed business rates keep pace with inflation and that local government's costs increase with inflation - all three generous assumptions - there will be a 7.7% increase in 2012-13.
However, that doesn't begin to take account of cuts. Local government spending is not a ring-fenced budget, and assuming that health/aid remain ring-fenced and that defence/education face cuts of 10%, it is likely to be cut by a third.
But how much scope is there for such large local cuts? I've spoken to Shire councillors who think they can do it - we will see. But metropolitan areas in particular are going to really struggle, and 60% of District councils think that relatively modest efficiency savings are not achievable.
Part of the reason is that local authorities have already made cuts. Local authorities were asked to make 3% of efficiency savings in 2008-09 and a further 4% during 2009-10, and were the only part of the public sector to meet the targets set in the Comprehensive Spending Reviews in the last few years of the last Labour government. Many of the inefficiencies that exist in other parts of the public sector no longer exist in most councils.
Tory-run Dorest council declared last week that “We are now starting to look at which of our statutory services can have any excess trimmed. We have virtually no discretionary services left to cut.". Discretionary services are anything that local authorities don't *have* to provide by law, including libraries, swimming pools, museums, parks, meals-on-wheels and the like. Even after pretty much getting rid of all those things, Dorset isn't anywhere near making the required cuts. I don't see how they can possibly do it - particularly as there are minimum standards for statutory services, those councils have to provide.
Compounding this is great public misunderstanding. Last year, only 16% of local authority income came from Council Tax, and the majority comes from grants. This leads to an effect called "gearing". If funding coming from the grant system is cut by 1%, this requires more than a 5% rise in Council Tax for local authorities to . Vice versa, if inflation causes the cost of providing services to rise by 2% p.a., and the grant stays static, this requires a 10% p.a. increase in Council Tax just for spending to keep pace with inflation. You can quickly see how any real-terms cut in the grant quickly causes massive Council Tax increases, AND councils are going to have to deal with relatively high inflation AND they are going to have to deal with demographic pressure as the number of elderly requiring social care increases AND they are facing Herr Pickles telling them to increase the frequency of rubbish collections. Councils who don't meet the unrealistic level of cuts expected over less than 2years are going to need absolutely thumping Council Tax rises in 2013-14, and I think this will be the majority of councils.
My crude modelling predicts that the average local authority which only manages to cut by 10% in real-terms will have to raise Council Tax by - wait for it - 169% in 2013-14. And I thought the 12.9% rises in 2004-05 were bad: Osborne is literally sleep-walking into a complete disaster.
(I'm making the following broadly accurate assumptions: it remains true that grants finance 50% of expenditure and Council Tax finances 16% giving a gearing ratio of 3.125, councils have no significant liquid capital reserves, inflation stays at 2.5%, matched funding ends in 2013-14, income from service charges and business rates stays static, grants are cut by 33% and there are no serious changes to the system).
Unfortunately for the coalition, the public are unlikely to appreciate the reasons for thumping Council Tax rises. Most of the public don't understand how local authorities are funded, assuming that Council Tax funds 70-80% of local authority expenditure. And, of course, when faced with these rises the public usually don't go to the council, they go straight to central government and ask them to cap Council Tax and set local authorities new budgets, exactly what happened in 2004-05.
Something is going to have to give. So, what can the coalition do about it?
The simplest solution would be to take use a more realistic target of 10% real-term cuts over 2years and instead make greater cuts in central government, which started cutting later and more shallowly than councils and has more slack. But Osborne has bottled this, instead pushing local government to one side and hoping it goes away. The other option would be to drop the Council Tax pledge, which was made in 2008 without thought of the consequences. In other words, get some large inflation-busting Council Tax increases out of the way now whilst cuts are popular and spread the pain. It would be sensible, but again the coalition has bottled it.
A more controversial option would be for local authorities to slash and burn to meet their targets any way they can. But as I've already argued, they've already cut and the scope simply isn't there. For a council like Dorset to meet its targets, it would quite literally have to close every park, library and pool it has; demand ridiculously large social care fees; cut high-way maintenance completely and move to monthly rubbish collections. That is the kind of cut we are talking about in some cases.
The final solution would be to fundamentally overhaul local government finance - as recommended by every councillor, every academic, every think-tank and every review of the area that I've ever come across. If councils are to be accountable to local people rather than Whitehall beauraucrats, then that has to come with a good degree of financial autonomy. Unfortunately, the general concensus seems to be that no national politician will ever risk touching Council Tax after the poll tax brought down Thatcher. Shame.
Wednesday 30 June 2010
Thursday 24 June 2010
Whatever happened to conviction politicians?
What happened to politicians who took a view and argued for it it, rather than trying to be all things to all people?
During the budget speech I was struck immediately by Osborne's language. Early in the budget he asserted that he wanted "An economy where the state does not take almost half of all our national income, crowding out private endeavour", i.e. a much smaller public sector. But when actually announcing his plans, many of them covering the full 5-year period of this parliament,
he concentrated completely on the "its unavoidable" argument.
Of course, the two justifications imply a totally different rationale and depth of cuts. Saying "I want to reduce the size of the public sector", and "I just want to get us through this economic mess" are two very different things.
The most likely explanation is that Osborne would like to roll back the state, but the "we have to do it because we have too much debt" argument is much more palatable to voters. But failing to make the case for a smaller public sector at the out-set and focusing almost exclusively on the "necessity" of cuts doesn't avoid political arguments about the size of the state. It simply postpones them a few years to a time when people are unlikely to have much appetite for more cuts. By failing to make the argument now, Osborne has ducked his best chance to win the private sector vs. public sector debate.
It is unsurprising, then, that the Tories are trying to fight Labour on their own turf. I lost count of the number of times that Osborne claimed that the budget was "progressive", and extensive space is given in the budget document to graphs demonstrating this (though, as the IFS pointed out today, this is basically a complete lie given that the graphs stop in 2012 just before the real cuts are planned to begin). Even as a Labour-ite, I think this is a disaster. Osborne is allowing Labour to win the redistributive argument by proxy: the Tories are implicitly accepting that budgets should be a redistributive as possible. If they truly believe in the foot-steps of Thatcher and Lawson that a smaller public sector, lower business taxes and a lower top rate of income tax are the best routes to priority, that argument needs to be made now. Otherwise, it is going to be almost impossible to convince the public to move away from the distribution argument that was completely accepted on Tuesday.
During the budget speech I was struck immediately by Osborne's language. Early in the budget he asserted that he wanted "An economy where the state does not take almost half of all our national income, crowding out private endeavour", i.e. a much smaller public sector. But when actually announcing his plans, many of them covering the full 5-year period of this parliament,
he concentrated completely on the "its unavoidable" argument.
Of course, the two justifications imply a totally different rationale and depth of cuts. Saying "I want to reduce the size of the public sector", and "I just want to get us through this economic mess" are two very different things.
The most likely explanation is that Osborne would like to roll back the state, but the "we have to do it because we have too much debt" argument is much more palatable to voters. But failing to make the case for a smaller public sector at the out-set and focusing almost exclusively on the "necessity" of cuts doesn't avoid political arguments about the size of the state. It simply postpones them a few years to a time when people are unlikely to have much appetite for more cuts. By failing to make the argument now, Osborne has ducked his best chance to win the private sector vs. public sector debate.
It is unsurprising, then, that the Tories are trying to fight Labour on their own turf. I lost count of the number of times that Osborne claimed that the budget was "progressive", and extensive space is given in the budget document to graphs demonstrating this (though, as the IFS pointed out today, this is basically a complete lie given that the graphs stop in 2012 just before the real cuts are planned to begin). Even as a Labour-ite, I think this is a disaster. Osborne is allowing Labour to win the redistributive argument by proxy: the Tories are implicitly accepting that budgets should be a redistributive as possible. If they truly believe in the foot-steps of Thatcher and Lawson that a smaller public sector, lower business taxes and a lower top rate of income tax are the best routes to priority, that argument needs to be made now. Otherwise, it is going to be almost impossible to convince the public to move away from the distribution argument that was completely accepted on Tuesday.
Tuesday 22 June 2010
The Budget
The Budget has ignited debates about tax and spending. But both the Budget and the public debate ignore two enormous elephants: Pensions and Housing Benefit.
Pensions
Osborne will take some comfort from the fact that this year's borrowing requirements for the current financial year have been predicted down from the £170bn predicted by Alastair Darling in March to £143bn as predicted by the OBR. We heard that the government will begin to pay down the national debt in 2014-15.
But there is a ticking time-bomb that is simply being ignored. The State Pension already costs £63bn, and will balloon further as the number of pensioners rockets. The IEA estimate that, including pension liabilities, the national debt is over 270% of GDP - the kind of figure quoted by people like John Redwood when they claim that every man, woman and child owes something in the region of £60,000. Osborne paid lip-service to pensions, but there was little in the way of action. Moreover, his rhetoric focused only on public sector pensions and ignored the wider issue of the state pension - perhaps focusing ire at a particular group is politically easier than dealing with benefits that affect everybody?
That wouldn't be a problem if we took our current pensions arrangement at face-value. After all, current national insurance contributions are supposed to pay for current pension payments. But this ignores the nature of the state pension. We've heard plenty about how public sector pensions are unsustainable, and about how final-sector salary schemes are unsustainable. But the state pension is a scheme whereby current expenditure pays for current pensions - in other words, it is run on the basis of final-salary schemes rather than on the basis of investment schemes. The state pension in its current format is utterly unsustainable, and will mandate vast future tax increases on those of working age to pay for the failure of pensioners to get to grips with pension funding. Yet all three political parties have shown a remarkable lack of political will in failing to get to grips with it. The Budget would have been the perfect time to get all our difficult spending decisions out in the open, instead we have more procrastination and yet another spending review, yet more time wasted on recommending the bloody obvious.
Housing Benefit
Much of the public and politicians, particularly Daily Mail readers, focus on ballooning benefit bills and on "scroungers" claiming unemployment benefit. The truth is that unemployment benefit is relatively trivial, costing less than £3bn. On the other hand, Housing Benefit is over ten times bigger costing over £30bn. And as Osborne noted in the budget, HB has risen an incredible 50% above inflation over the last ten years, though he omits to mention that it's rise has been inexorable ever since the Thatcher years.
Again, Osborne paid lip-serve to the costs of HB, but only tinkered with the margins by setting an upper-limit and discussing the small minority of expensive cases. This is completely ignoring the real problem: a dire lack of affordable housing, and a Benefit system that doesn't reward tenants for negotiating the lowest possible rents. When the state is prepared to pick up the bill for housing costs at the bottom end of the spectrum fairly indiscriminantly, at the same time as making new development difficult through planning laws, then it is unsurprising that there has been massive rent inflation. This is set to continue.
The solution is very simple: build more houses. Over the medium-long term period, and given that construction costs are currently low, it is possible to recoup land and construction costs through (albeit subsidised) rents. Capital investment in housing and a real system to reward local authorities who build council houses (we were promised this in the election campaign - where is it????) are the only ways to keep Housing Benefit down, whilst simultaneously improving the quality of life for the millions currently in overcrowded housing. Indeed, the small number of outrageous HB bills that do exist only exist in the first place when local authorities cannot find any suitable housing for unusual residents. A better housing stock would simply solve this problem overnight.
So there you have it. Not an awful budget, and a good mix of different proposals. But it is not the "tough" or "brave" budget that many pretend: it fails to get to grips with the really significant long-term drivers of public spending, and instead settles for tinkering on the margins of tax. This is a temporary budget, not a budget for the future.
Pensions
Osborne will take some comfort from the fact that this year's borrowing requirements for the current financial year have been predicted down from the £170bn predicted by Alastair Darling in March to £143bn as predicted by the OBR. We heard that the government will begin to pay down the national debt in 2014-15.
But there is a ticking time-bomb that is simply being ignored. The State Pension already costs £63bn, and will balloon further as the number of pensioners rockets. The IEA estimate that, including pension liabilities, the national debt is over 270% of GDP - the kind of figure quoted by people like John Redwood when they claim that every man, woman and child owes something in the region of £60,000. Osborne paid lip-service to pensions, but there was little in the way of action. Moreover, his rhetoric focused only on public sector pensions and ignored the wider issue of the state pension - perhaps focusing ire at a particular group is politically easier than dealing with benefits that affect everybody?
That wouldn't be a problem if we took our current pensions arrangement at face-value. After all, current national insurance contributions are supposed to pay for current pension payments. But this ignores the nature of the state pension. We've heard plenty about how public sector pensions are unsustainable, and about how final-sector salary schemes are unsustainable. But the state pension is a scheme whereby current expenditure pays for current pensions - in other words, it is run on the basis of final-salary schemes rather than on the basis of investment schemes. The state pension in its current format is utterly unsustainable, and will mandate vast future tax increases on those of working age to pay for the failure of pensioners to get to grips with pension funding. Yet all three political parties have shown a remarkable lack of political will in failing to get to grips with it. The Budget would have been the perfect time to get all our difficult spending decisions out in the open, instead we have more procrastination and yet another spending review, yet more time wasted on recommending the bloody obvious.
Housing Benefit
Much of the public and politicians, particularly Daily Mail readers, focus on ballooning benefit bills and on "scroungers" claiming unemployment benefit. The truth is that unemployment benefit is relatively trivial, costing less than £3bn. On the other hand, Housing Benefit is over ten times bigger costing over £30bn. And as Osborne noted in the budget, HB has risen an incredible 50% above inflation over the last ten years, though he omits to mention that it's rise has been inexorable ever since the Thatcher years.
Again, Osborne paid lip-serve to the costs of HB, but only tinkered with the margins by setting an upper-limit and discussing the small minority of expensive cases. This is completely ignoring the real problem: a dire lack of affordable housing, and a Benefit system that doesn't reward tenants for negotiating the lowest possible rents. When the state is prepared to pick up the bill for housing costs at the bottom end of the spectrum fairly indiscriminantly, at the same time as making new development difficult through planning laws, then it is unsurprising that there has been massive rent inflation. This is set to continue.
The solution is very simple: build more houses. Over the medium-long term period, and given that construction costs are currently low, it is possible to recoup land and construction costs through (albeit subsidised) rents. Capital investment in housing and a real system to reward local authorities who build council houses (we were promised this in the election campaign - where is it????) are the only ways to keep Housing Benefit down, whilst simultaneously improving the quality of life for the millions currently in overcrowded housing. Indeed, the small number of outrageous HB bills that do exist only exist in the first place when local authorities cannot find any suitable housing for unusual residents. A better housing stock would simply solve this problem overnight.
So there you have it. Not an awful budget, and a good mix of different proposals. But it is not the "tough" or "brave" budget that many pretend: it fails to get to grips with the really significant long-term drivers of public spending, and instead settles for tinkering on the margins of tax. This is a temporary budget, not a budget for the future.
Sunday 13 June 2010
Banking Reform: Which way forward?
Banks are back on the agenda now that the "Future Of Banking Commission", chaired by David Davis and featuring Vince Cable has reported back. BBC report here, full report here.
Many of the proposals are pretty mundane. Stricter disclosure rules, a mandatory "opt-in" system for unauthorised overdrafts and pushing depositors up the priority list on bankruptcy all make sense. These proposals all accept free-markets and accept the fundamental desirability of individuals making their own informed choices, they simply aim to ensure that markets and competition can operate.
But what is interesting about some of the proposals is how some of them are remarkably anti-free market. In particular, the Commission wants to introduce "standard products for some basic services which all retail providers have to provide". Can one imagine the government telling Tesco that they MUST sell oranges at a state dictated price? This is truly remarkable, and makes me think of Stalinist Communism more than free-markets. Davis pays heavy lip-service to Conservative ideas with statements like "[we need to]reintroduce the rigours of effective competition and market discipline to financial services", but many of the proposals he backs are simply incompatible with any sort of ideology somewhere to the free side of Genghis Khan.
The nannying continues. The Commission appears to be concerned with "off-market" derivatives trading. Even though such trading is conducted solely by experienced professionals who fully understand the risks and are prepared to lose money, the Commission sees fit to impose registration, regulation and margin requirements. The financial crisis was caused by risk being under-priced, mis-allocated and under-estimated. In short, it happened because risk hit those who could not bear it. It is simply nonsense to try and use the crisis to regulate those who knew exactly what they were doing. In any event, institutions such as hedge funds who made investments traditionally seen as highly 'risky' seem to have done very well!
So there we have it. One of the darlings of the Conservative right has decided that markets which allow individuals to make their own choices isn't such a good idea, after all. Despite being a man of left-wing views, this report is a perfect example of how even right-wing politicians make one of the worst follies of state-hood. It sees a problem, twists the problem and regulates an inappropriate response; whilst completely ducking the real causes of the crunch.
Many of the proposals are pretty mundane. Stricter disclosure rules, a mandatory "opt-in" system for unauthorised overdrafts and pushing depositors up the priority list on bankruptcy all make sense. These proposals all accept free-markets and accept the fundamental desirability of individuals making their own informed choices, they simply aim to ensure that markets and competition can operate.
But what is interesting about some of the proposals is how some of them are remarkably anti-free market. In particular, the Commission wants to introduce "standard products for some basic services which all retail providers have to provide". Can one imagine the government telling Tesco that they MUST sell oranges at a state dictated price? This is truly remarkable, and makes me think of Stalinist Communism more than free-markets. Davis pays heavy lip-service to Conservative ideas with statements like "[we need to]reintroduce the rigours of effective competition and market discipline to financial services", but many of the proposals he backs are simply incompatible with any sort of ideology somewhere to the free side of Genghis Khan.
The nannying continues. The Commission appears to be concerned with "off-market" derivatives trading. Even though such trading is conducted solely by experienced professionals who fully understand the risks and are prepared to lose money, the Commission sees fit to impose registration, regulation and margin requirements. The financial crisis was caused by risk being under-priced, mis-allocated and under-estimated. In short, it happened because risk hit those who could not bear it. It is simply nonsense to try and use the crisis to regulate those who knew exactly what they were doing. In any event, institutions such as hedge funds who made investments traditionally seen as highly 'risky' seem to have done very well!
So there we have it. One of the darlings of the Conservative right has decided that markets which allow individuals to make their own choices isn't such a good idea, after all. Despite being a man of left-wing views, this report is a perfect example of how even right-wing politicians make one of the worst follies of state-hood. It sees a problem, twists the problem and regulates an inappropriate response; whilst completely ducking the real causes of the crunch.
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