Archive for February, 2013

Osborne, Tax and Growth

Thursday, February 28th, 2013

The Chancellor now has his back to the wall. Only bits of his policy are working. Growth is not, neither is the deficit reduction. This is because it was never quite as simple as that. There are two primary problems. One is that the government spends more than it receives. The other is that the economy was built without a sustainable foundation. The two problems have different roots, but their branches are entwined, leading to a good deal of confusion.

Since the reform of income tax undertaken by the first Thatcher government, which reduced rates but increased revenue, there has been an assumption that more of the same would yield ever better results. It has not. Because income and corporation taxes do not yield enough, all sorts of other spending taxes have to be filtered in to the system to push up cash flow, as well as a much higher rate of vat than the 7.5% Thatcher inherited. The whole structure is now so over tinkered with that it has become dysfunctional and radical taxation reform is now again called for.

The second element is that the economy never expanded as much as the gross figures suggested, since too much of it was on borrowed money. As has previously been posted on this blog, assets were inflated by excessive leverage, turnover was expanded by unrestricted credit, and even taxes were paid from borrowed money. Net the position in 2007 and you will find that compared to that, the current flat-lining economy, with its much more tight fisted attitude to borrowing, has grown quite a bit.

What is required to make it all come good is to put taxes on an equally sound footing. This blog believes that no income tax should be paid by anyone on or below the average wage and above that there should be one rate only, probably somewhere in the mid thirties. This blog also believes that corporation tax should be abolished, along with the notion of profit as a tax measurement, to be replaced by a turnover tax paid by all companies on all money crossing palms in the UK, wherever the head office is or profits are declared. Small businesses with a turnover of less than 10x the average annual wage  would be exempt, to encourage start-ups and neighbourhood enterprise.

The aim would be full employment and national self sufficiency, both aspirations worth aiming for, providing a clear vision for the whole nation. This would be boosted by a huge programme of infrastructure renewal and house building (at least a million homes) funded by quantitative easing, which thus far has boosted the City but had little effect on the rest of the economy. That would in turn reduce the value of sterling making imports very much more expensive and creating opportunities for home manufacture of consumer products as well as competitive exports.

There is a lot more that needs doing. Sorting out the energy market, where privatisation has had some success but caused many problems, suggesting that while distribution could remain in private hands, power generation should not, is a top priority. No economy can recover and prosper with our current levels of energy costs. The NHS must be detached from general taxation and have its own revenue stream related to what it has to spend to keep the nation healthy. Giving an infinite service a finite budget and expecting everything to work is as batty as giving Tesco a fixed annual sum and ordering them to feed the nation. We would have waiting lists for Marmite and targets for bacon consumption presided over by trusts, foundations, food commissioning bodies and a Gothic orgy of bureaucratic regulation. Also everyone would be hungry.

Will Osborne do any of this?

You do not have to be told the answer to that.

Pity The Liberal Democrats

Sunday, February 24th, 2013

It is one thing to fight a bye-election in a seat vacated by the resignation of Chris Huhne, a former minister whose political career has collapsed following a guilty plea to a charge of perverting the course of justice. At best it is a difficult challenge to hold such a seat. To then discover that the former top official of the party is accused of sexual impropriety (which he hotly denies) and that the party leader may have known about it at the time and done nothing (which he also hotly denies) is yet another thing and perhaps one thing too many.

The difficulty with organisational crises based on historic accusations by people against another, is the ‘who knew what and when’ element. This tends to prolong the media interest and open new lines of suspicion. Thus there is little chance this will all die down by polling day. Without the Rennard story, the very strong Lib Dem organisation with its loyal following in Eastleigh, might well have been on course to win. The new scandal makes that less likely, but not impossible. The timing of these latest allegations could not have been worse for the Lib Dems. Or better for the Tories.

Syria Crisis: Is it Out of Control?

Saturday, February 23rd, 2013

This blog has consistently lent towards the pragmatic approach of the Russians and away from the Western enthusiastic support of unidentified rebel factions whose post Assad agenda is far from obvious and whose vision of a new Syria is far from clear.  The point of contention has been principally whether talks should take place with Assad in place or whether he has to go first. The nature of  Syria is that if the Assad regime collapses, so will the state. This cannot be a good thing for the people of Syria, nor indeed for the people of Israel, who have managed a long era of peaceful stand-off with a regime with which they had a degree of mutual understanding.

There have been a string of foreign policy failures of western diplomacy, where even force has failed to yield an outcome remotely similar to the promise at the outset. Iraq and Afghanistan are the obvious disasters, but Libya is by no means out of the woods and without Gaddafi’s control, all sorts of factions have begun to destabilise Mali and Algeria. Tunisia seems to have problems and Egypt is a mess, even if there may be less repression of opposition. If the price for that is a dysfunctional state and a ruined economy, not every citizen thinks it is a price worth paying.

In Syria, a state invented after the first world war with little to no regard for tribe or tradition, none in the West has a clue what is going to happen or how big the calamity its muddled and impractical policy will encourage. As the fighting becomes ever more intense, the fabric of the country and the cohesion of its communities is being destroyed, to the point where there will be no coherent government of a territory in turmoil, which will be any event ungovernable. That will lead to a humanitarian disaster greater than any thus far seen in the region.

There is no certainty that anything can now stop the worst possible scenario unfolding to expose a grisly tableau of human anguish. The only glimmer of hope is for Russia and the West to begin to see eye to eye and talk in unison about realistic ways of halting the fighting. For the moment it may be necessary to talk to the Assad government in which Assad himself wields very little power. If that is the price of improvement in the toll of human suffering it should sensibly be paid. Remember the little children. As if they were your own.

Down Goes The Rating: Does It Matter?

Saturday, February 23rd, 2013

The news that Moody’s has downgraded the UK credit rating comes as a savage political blow to Osborne and Cameron, but the impact damage is political rather than actual. The markets expected it, government borrowing costs have been rising because of that, and both America and France have found business more or less as usual after their downgrades. This is due to the fact that all the borrowing nations of the West are battling varying degrees of debt difficulty; therefore Britain does not stand out as especially risky to those with cash. Moreover the ratings agencies, having called everything wrong before the crash, have a current problem with their own credibility and are not the benchmark they once were.

Politically it might not matter that much either but for one thing. Like the weapons of mass destruction which weren’t there (as  many suspected) which were promoted as the reason for the attack on Iraq, so the coveted AAA rating was used by Osborne as the prize for the wisdom  of his policy as well as the palliative for the hurt of the cuts. Not only has the policy failed to deliver growth but it has also failed to sustain the one tangible benefit Osborne made his policy’s raison d’etre. So where are we?

Clearly George Osborne is in a very bad place and Ed Balls is in a very good one, but that is not the real issue, unless you sit in the Commons for a Tory marginal. The issue is where is the economy going? Here the answer may in part be more positive than people think. It is true that the economy is, as Balls repeats across the media 24/7, ‘flat-lining’ . However that is not quite right. When the crash came, it came because every part of it was over borrowed and had built itself up on borrowed money. This applied to government, business and consumers.  The net position was significantly less. Even taxes were being paid out of leveraged assets ‘releasing equity’, meaning borrowing more. The FSA should proscribe the use of this misleading term.

Now all that has changed. The economy is functioning on far less borrowing, people are living within their own reduced means and successful corporations, instead of being leveraged, are hoarding cash piles. Liquidations, administrations, debt repayment plans and personal bankruptcies are all clearing the decks and creating space for new opportunities and greater financial equilibrium. This is why unemployment is falling and a million new private sector jobs have been created; the opposite of what should be going on in a flat-ling economy, as baffled economists often remark. In truth the net economy is not only holding its own, but it is growing sufficiently to take up the slack.

Osborne and the Treasury have concentrated on two areas. The first is to shrink the state as an employer and the second to reduce the budget deficit. They have been successful with the first, which they describe as rebalancing the economy. They have failed in  the second because they have not yet been able to generate growth above the level needed to take up the slack of the previous activity, which was not a reality but a founded on unsustainable debt. However the foundation for that to happen has now been laid. It has not been laid by the government or government agencies. It has been laid by industry and the people because of their hatred of the banks and a new refreshing distrust of borrowing. This is where the real re-balancing of the economy is happening.

What is no needed is a grand strategic economic plan to build upon this effort by the private sector and the people. There is no such plan in sight. Both Osborne in his budget and Balls in his response to it will come up with tinkering and marginal changes, but neither the government nor the opposition have shown any real grasp of what is happening where and what is needed from government to boost it. It looks as if it will be up to the people to go it alone. Not for the first time they may yet surprise themselves. They can be sure of one thing. If they succeed the politicians will take the credit.

Power Generation Shortfall

Thursday, February 21st, 2013

Of all the news which has percolated through the media over the last week or so, by far the most important for the United Kingdom is the warning from Ofgem concerning the perilous state of our electricity supplies.

There are few other issues which better illustrate political failure by successive governments of all parties, than the systematic unravelling of Great Britain’s traditional energy self-sufficiency and nuclear power pre-eminence.  When we look back to the early nineteen eighties we find electricity, gas and oil all in plentiful supply at reasonable cost for all, including industry and commerce as well as the elderly and those in need. There were interruptions due to industrial action, but not to failing plant.

Decisions about future energy security were called for as a matter of sensible planning, in addition to which came anxieties about the effect of fossil fuels upon the climate. This required political brains to mobilise realistic science and invest in meeting future need. What we got was ideology, flawed economics, dithering, cowardice and abdication of responsibility from one government after another.

Thatcher began the rot with the notion that the private sector could do the job better than the state, a nostrum with some validity in the right business, but taken way beyond its functionality by so called Thatcherism. This is because for capitalism to work, business must be able to fail. Indeed the majority of private businesses do fail in the end. It may even be that the attributes needed to prosper in their initial area of success will cause downfall in different conditions and not all business has the flexibility to adapt, or should even do so.

In modern culture, certain services are a matter not just of economic necessity to sustain the structure of society and its living standard, they are literally a matter of life and death. Such a service, note the term service, is the generation of electric power. The industry should never have been privatised. The outcome of near monopolistic giant corporations operating in a free energy market driven by speculators and watched over by regulators is one of the worst anyone could have conceived. Add to that the refusal of government after government to face campaigners and pressure groups of every sort and kind, and reach timely decisions about the need for modernisation and rebuilding of the nation’s capacity to meet its growing power needs and you have the required ingredients for a new economic crisis and a good deal of individual suffering.

We are now governed by a coalition full of inexperienced people with good intentions, trying to please everybody as well as each other, who have managed to on the one hand to fail to organise or entice private expertise to build new nuclear capacity and on the other to accelerate the programme to shut down coal stations before any form of replacement is in view. As a consequence of this failure of public policy for which there is absolutely no excuse whatsoever, the only solution, aside from whimsical observations about ‘wind and wave’, is to build a clutch of new gas fired stations in  a hurry.

The problem with that is we have run short of our own natural gas and will therefore have to buy a high percentage of this new fuel need on international wholesale markets, where prices are predicted to rise hand over fist as economic recovery in the rest of the world speeds up. Our own economic recovery, which is still fragile and happening in spite of and not because of government policy, will be put once more at risk. This is because for it to really take root, there has to be a significant fall in the value of sterling, which has for years been far too high. That will make the energy even more expensive, impacting costs and competitiveness at every level.

Some years back an Italian commentator was interviewed on BBC radio about the relative qualities of Italian and British politicians, in the light of a new corruption scandal in her own country.

I recall her reply.

‘In Italy we are governed by knaves, but in Britain you are governed by imbeciles.’

New Look Blog

Thursday, February 21st, 2013

Welcome to the new look blog. I hope your visits will be visually more engaging. You can be assured that the quality of the content will remain at a high standard and continue to challenge orthodox opinion on current affairs both at home and abroad.

Britain and Germany: An EU Pact?

Monday, February 11th, 2013

The historic significance of the deal achieved by Cameron to reduce EU spending was not the fact that it happened, but how. The how part may have far reaching impact not just on the budget, but on the future shape of the EU and especially Britain’s place in it.

For most of the history of the EU and its previous incarnation of the EEC, France and Germany (initially West Germany) have been the natural partners against whom Britain had to argue its case. Indeed it was the alliance between these two former enemies which was the foundation of unity across the whole continent and contributed in no small measure the the idea that Britain saw itself as left out or only a part time member. Nevertheless it stood it’s ground, fought it’s corner and mostly got its way.

Partly for electoral reasons and partly because of genuine sympathy for the British view of financial realism, Germany abandoned its former partner France and went with Britain. The force was unstoppable. France had to gave in. Everybody else had to fall into line. This is one of the most significant events in the history of the EU.

Because, although they fought against each other twice, it is the two great protestant powers, Britain and Germany, who are historical friends. This is why we have a German royal line to replace the one with French connections and Catholic leanings. This is why the Prussians helped save the day for Wellington at Waterloo. This is why the consorts of Victoria, Edward VII and George V came from Germany. This is why all Prince Philip’s blood is not Greek, but German.

When the two friends fell out, largely due initially to the unbalanced Kaiser Wilhelm II, Europe suffered its most terrible period of destruction, slaughter, depravity and human suffering in all its history. As far as the EU goes the partnership between Germany and France has produced a bureaucratic and uncompetitive economy and an ungovernable currency. It has also produced peace  and that for sure is the greatest prize of all. But if Germany and Britain walked hand in glove again, not only would peace be guaranteed no matter what, but Europe would be knocked into a competitive shape with a well managed currency. It would also join China as one of the two world superpowers of the twenty first century.

Food for thought. Merkel is already thinking. If Cameron does likewise he will save himself, his party and the Union with Scotland. The two together will give the EU a future transformed.

The Tory Party In Trouble

Thursday, February 7th, 2013

It would be bad enough for the Tory party if all that was wrong was that their economic policy is good in parts, but not working overall. That fact alone would be enough to put paid to a majority after the next election. But between now and the election in 2015 they might be able to pull an economic hat out of the bag and come good in the end. The road of political opportunity would be open. Unfortunately for the Tories in 2013, it is not a matter of what is wrong with their policy. It is a fundamental matter of what is wrong with them.

They are a party split on fundamental issues, diametrically opposed each side to the other. The collapse of the old Liberal party in the inter-war period from which it never recovered and the wilderness years of Labour from 1979 to 1997 tell us that the crisis will either be terminal or that it will last a generation. Split parties fail. Put brutally, the split is at worst terminal and at best will have to wait until a generation aspiring to the dark ideals of the past has died off.

Three issues have highlighted the sad state of affairs for a party that once believed that, like another national institution now floundering in ideological fratricide , the Church of England,  they were an integral and vital part of the state which would go on and on. What they have missed, like the Cof E, is that the state as moved on without them. The modern British state sees itself as multi-cultural, tolerant and global, opposed to prejudice, inequality and judgemental posturing.

The position of the Tory right on House of Lords reform, Europe and non-discriminatory marriage demonstrates a distasteful tendency to promote all of those discarded verities upon which the majority of the population of their country have turned their backs, simply because time has moved on and both the country and the world have moved on with it.

Labour suffered the irreconcilable split with its Marxist left as socialism fell out of fashion and communism faltered; until a new young generation of politicians able to articulate a fairer society at peace with itself took over, Labour was unelectable. The Liberals, split between the Lloyd George and Asquith wings, could not get to grips with the new politics of the left . That proved terminal.

When it comes to the crunch and having weighed all the possible consequences, the majority of the people would be likely to approve an elected House of Lords, a majority both in the country and in the Commons approves non-discriminatory marriage and in spite of the fervour and conviction of the sizable minority opposed, the majority will, in the end, vote to stay with Europe. People never vote to lose their jobs.

Where does this leave the Tory Party? The answer is it leaves it free of responsibility for any of these things. 2015 is already all but lost.


Wednesday, February 6th, 2013

The shocking conclusions of the inquiry into the bad treatment and cruelty which became the hallmark of the Stafford Hospital  should prove a wake up call to the nation, which is so emotionally attached to the NHS, that it refuses to accept what an inefficient and ham fisted organisation it has become. True in a crisis it saves lives and works miracles. The problem is that most medical treatment is care, not crisis, driven. It is routine and procedure based. For the most part it does not work miracles; rather it helps the patient to recover if not to full health, to a reasonable quality of life. It is in this routine mass of daily care that cruelty is rife and incompetence common. Three things need to happen.

The first is that the  quasi-independent structure of trusts, which are now called commissioning bodies are, however they are organised, re-organised, re-titled, re-constituted or re-arranged, not fit for purpose and will never work. This is a public organisation paid for out of taxation for the general benefit of everyone.  It   is not a private utility, nor is it at arms length from the government of the day. The government should stop being responsible for reorganisations and instead take responsibility for the performance of the NHS as a whole. The Minister must take responsibility and exercise it through  single local managers publicly empowered to lead all and held accountable for everything. Maybe this person should be elected like the new police commissioners.

Second, all the Royal Colleges and the British Medical Association need to up their game and change their allegiance from protecting their members to protecting the patients. To these must be added the General Medical Council. This is a partial and ineffectual organisation engaged in systematic whitewash of medical failure. It acts only in the most flagrant cases and lets the others off the hook. If it cannot reform it should be shut down and replaced with a government inspectorate which really will go after the guilty and bring them to book.

Finally it is time to accept that you cannot provide an infinite and expanding service with ever increasing capacity to heal and cure, coupled to ever increasing demand for this service, from a finite budget plucked from general taxation, even less one frozen or reducing. It is no longer possible to provide world class healthcare from this financial model. The cash must grow with usage, like any other economic activity. It is time to look at a new model which is partially or fully insured. Whatever the emotional trauma this causes, no other proposal will deal with the root problem of trying to do too much with too little.