It has been a favourite weapon of governments over the years: fiscal drag. In other words, don't fully compensate taxpayers for inflation or earnings growth in terms of tax allowance. I don't blame the Coalition Government for using it, but quire a few people are going to be surprised to find that they are paying a marginal tax rate of 40 per cent.
Before Labour came into office in 1997 there were only 2.1m higher rate taxpayers in Britain. This rose to 3.87m just before the recession struck and has fallen back to 3.1m now.
Quite reasonably, the Government is seeking to make sure that increases in the starting tax rate intended to benefit the least well off do not also benefit the most prosperous. Quite how many people will fall in the higher rate tax band by the end of the Parliament is open to question:
1. Grant Thornton estimate the number will go up to 6.1m, i.e., almost double.
2. The Institute for Fiscal Studies estimates 5.7m by 2014-15: that's still nearly a doubling.
3. It is possible to interpret Government figures in a way that gives a figure of 6.25m.
Anway, it's clearly going to more or less double. Given that commuters into London are going to face (yet again) above inflation increases in rail fares, some voters in marginal seats in the south-east may not be happy bunnies.
James Brown at IFS argues that this increase is not contrary to past principles: that there is a very long basic rate tax band and only a few high earners should pay more.'
There is also now a higher band of 50 per cent which is not going to go any time soon so introducing, say, a 30 per cent band for the first 5k above the basic rate band would make the system even more complex when ideally one wants greater simplicity to reduce transactions costs for the tax authorities and taxpayers.
Tuesday, 29 June 2010
Monday, 28 June 2010
Ring fencing the NHS
The British Medical Association, the doctors' trade union, has complained that 'haphazard' cuts are harming the National Health Service: Cuts This announcement comes on the eve of their conference, but also when Conservative backbenchers are starting to complain about 'ring fencing' the NHS in the Comprehensive Spending Review.
If one does that, and also tries to keep cuts in defence and education down to ten per cent, that means that some departments could have to cut expenditure by a third in real terms which is very dificult to achieve without, for example, drastically cutting environmental protection services.
Some cuts could hit the NHS directly, for example cutting back on social care for the elderly could make it more difficult to get them out of hospital, leading to bed blocking. Warwickshire County Council is already proposing increases of fees for some services delivered to the home of 1,000 per cent, admittedly from a very low and hopelessly uneconomic base level.
The NHS does face the problems of an ageing population, an expanding medical technology frontier that drives up costs and rising patient expectations. Howver, here are a few suggestions:
1. Mrs Thatcher famously said 'we have dealt with the opticians' (or words to that effect, I don't have the transcript in front of me). I went my first eye test last week and it was free. Should that be the case for someone who is not poor? I was also interested to read on the back of the form that I was given that I could get a voucher towards my spectacles if I was a prisoner on leave.
2. Should prescriptions for free for everyone who is elderly? Or should the better off be at least asked to pay for a season ticket of £100 or so a year?
3. Anyone who was talked to GPs infornally will know that patients make considerable differential use of the service regardless of their state of health. Should charging be introduced, again with exemptions? Of course, that would really hit at the idea of a NHS free at the point of use and need and would probably be too politically controversial.
The Conservative pledge on the NHS was politically expedient. But does it make for good policy? Vince Cable didn't think it made economic and political sense and the former Labour health minister doesn't think it makes sense now.
If one does that, and also tries to keep cuts in defence and education down to ten per cent, that means that some departments could have to cut expenditure by a third in real terms which is very dificult to achieve without, for example, drastically cutting environmental protection services.
Some cuts could hit the NHS directly, for example cutting back on social care for the elderly could make it more difficult to get them out of hospital, leading to bed blocking. Warwickshire County Council is already proposing increases of fees for some services delivered to the home of 1,000 per cent, admittedly from a very low and hopelessly uneconomic base level.
The NHS does face the problems of an ageing population, an expanding medical technology frontier that drives up costs and rising patient expectations. Howver, here are a few suggestions:
1. Mrs Thatcher famously said 'we have dealt with the opticians' (or words to that effect, I don't have the transcript in front of me). I went my first eye test last week and it was free. Should that be the case for someone who is not poor? I was also interested to read on the back of the form that I was given that I could get a voucher towards my spectacles if I was a prisoner on leave.
2. Should prescriptions for free for everyone who is elderly? Or should the better off be at least asked to pay for a season ticket of £100 or so a year?
3. Anyone who was talked to GPs infornally will know that patients make considerable differential use of the service regardless of their state of health. Should charging be introduced, again with exemptions? Of course, that would really hit at the idea of a NHS free at the point of use and need and would probably be too politically controversial.
The Conservative pledge on the NHS was politically expedient. But does it make for good policy? Vince Cable didn't think it made economic and political sense and the former Labour health minister doesn't think it makes sense now.
Friday, 25 June 2010
Grasping the retirement nettle
It looks as if the Government is going to tackle the state pensions timebomb by bringing forward the increase of the retirement age to 66 to 2016. After that it seems that the plan is to increase the retirement age every five years on through a link with life expectancy on the Swedish model.
So far we have dealt with the increase in the pensionable population by holding the pension down at a level below most comparable countries. No one could live on it and it has to be topped up by means tested benefits for some but those are not always claimed.
The unions have objected that it is not possible for people to carry on undertaking strenuous manual work beyond their mid-sixties and that a lot of people will be effectively transferred to the unemployment register. What one needs, however, is a labour market that will make other sorts of jobs available, particularly part-time work. We need to move byeond the 'falling off a cliff' fixed retirement age.
As it is, a lot of people cease being economically active, or at least stop working full-time, before the state retirement age, although economic activity rates in the pre-retirement group have been increasing. Raising the retirement age means that some of these early retirements would take place somewhat later.
As for the argument that extending working life denies younger people jobs, that is to subscribe to the 'lump of labour' fallacy. For many younger people there are still problems with skill deficiencies and attitudes to work.
Some grumbles about raising the retirement age have come from the holiday industry as apparently the early retired are important customers for the 'shoulder' season. Certainly travelling the world is a preoccupation for many of the early retired. I am looking forward to spend less time in airports and on lomg-distance flights.
So far we have dealt with the increase in the pensionable population by holding the pension down at a level below most comparable countries. No one could live on it and it has to be topped up by means tested benefits for some but those are not always claimed.
The unions have objected that it is not possible for people to carry on undertaking strenuous manual work beyond their mid-sixties and that a lot of people will be effectively transferred to the unemployment register. What one needs, however, is a labour market that will make other sorts of jobs available, particularly part-time work. We need to move byeond the 'falling off a cliff' fixed retirement age.
As it is, a lot of people cease being economically active, or at least stop working full-time, before the state retirement age, although economic activity rates in the pre-retirement group have been increasing. Raising the retirement age means that some of these early retirements would take place somewhat later.
As for the argument that extending working life denies younger people jobs, that is to subscribe to the 'lump of labour' fallacy. For many younger people there are still problems with skill deficiencies and attitudes to work.
Some grumbles about raising the retirement age have come from the holiday industry as apparently the early retired are important customers for the 'shoulder' season. Certainly travelling the world is a preoccupation for many of the early retired. I am looking forward to spend less time in airports and on lomg-distance flights.
Thursday, 24 June 2010
Peter Walker
The death of Peter Walker announced yesterday reminded me of a couple of incidents that happened round about 1980. I happened to get in the lift at the Department of Trade and Industry building in Victoria Street at the same time as the 'mad monk' Sir Keith Joseph. As we ascended to the top floor, Sir Keith stared at me all the time as I was something that the cat had brought in.
In the old MAFF building in Whitehall Place, I got in the lift with Peter Walker. 'How are you. How's everything going?' he asked. He didn't know me, but clearly thought I was a relatively junior civil servant.
Peter Walker came from a skilled working class background in London (something we share). By the age of 30 he was self-made millionaire. As chairman of the Young Conservatives, he bagged what was then a safe seat at Worcester (Worcester Woman delivered it to New Labour in 1997 and it has only just returned to the Cameroonies).
Walker got over his antipathy to the common market and hitched himself to Ted Heath's bandwagon, running his successful leadership election campaign in 1965. His managerial approach fitted in with Heath's modernising style and he headed up the new Environment department in 1970 before going to Trade and Industry.
However, he lacked that extra something that singled out a future party leader and in any case his brand of Conservatism was going out of favour. He could certainly spot an emerging issue as in the case of the 1972 Deposit of Poisonous Wastes Act which presaged later environmental legislation (and about which I wrote a case study in our book on the CBI). However, it is arguable that he botched the reform of local government and also took a 'courageous' decision to invest heavily in the steel industry just when it was going into decline.
Mrs Thatcher, whom he had turned down as a minister of state, put him into the relative backwater of the Ministry of Agriculture. Here he bought into the productivist agenda, producing a white paper called 'Food From Our Own Resources'. He wasn't too pleased to be shifted to Energy but was then in charge of defeating the miners' strike, as well as privatising British Gas and laying the groundwork for electricity privatisation (arguably not well done).
Before the 1987 election he was so much on the edge of the platform that he was in danger of falling off at an election launch event involving the Cabinet. However, he outlived all the other 'wets' in the Cabinet like Sir Ian Gilmour and Jim Prior. This was exemplified in the title of his memoir 'Staying Power'.
Mrs Thatcher made him Secretary of State for Wales and gave him a free hand to pursue interventionist policies in the principality where he went down well. 'Just look at what Peter Walker is doing in Wales,' Ian Gilmour once said to me.
Peter Walker had a happy family life. He stayed married to Tessa and had five children. He had few interests outside business and politics, but he pursued those interests to the full.
In the old MAFF building in Whitehall Place, I got in the lift with Peter Walker. 'How are you. How's everything going?' he asked. He didn't know me, but clearly thought I was a relatively junior civil servant.
Peter Walker came from a skilled working class background in London (something we share). By the age of 30 he was self-made millionaire. As chairman of the Young Conservatives, he bagged what was then a safe seat at Worcester (Worcester Woman delivered it to New Labour in 1997 and it has only just returned to the Cameroonies).
Walker got over his antipathy to the common market and hitched himself to Ted Heath's bandwagon, running his successful leadership election campaign in 1965. His managerial approach fitted in with Heath's modernising style and he headed up the new Environment department in 1970 before going to Trade and Industry.
However, he lacked that extra something that singled out a future party leader and in any case his brand of Conservatism was going out of favour. He could certainly spot an emerging issue as in the case of the 1972 Deposit of Poisonous Wastes Act which presaged later environmental legislation (and about which I wrote a case study in our book on the CBI). However, it is arguable that he botched the reform of local government and also took a 'courageous' decision to invest heavily in the steel industry just when it was going into decline.
Mrs Thatcher, whom he had turned down as a minister of state, put him into the relative backwater of the Ministry of Agriculture. Here he bought into the productivist agenda, producing a white paper called 'Food From Our Own Resources'. He wasn't too pleased to be shifted to Energy but was then in charge of defeating the miners' strike, as well as privatising British Gas and laying the groundwork for electricity privatisation (arguably not well done).
Before the 1987 election he was so much on the edge of the platform that he was in danger of falling off at an election launch event involving the Cabinet. However, he outlived all the other 'wets' in the Cabinet like Sir Ian Gilmour and Jim Prior. This was exemplified in the title of his memoir 'Staying Power'.
Mrs Thatcher made him Secretary of State for Wales and gave him a free hand to pursue interventionist policies in the principality where he went down well. 'Just look at what Peter Walker is doing in Wales,' Ian Gilmour once said to me.
Peter Walker had a happy family life. He stayed married to Tessa and had five children. He had few interests outside business and politics, but he pursued those interests to the full.
Wednesday, 23 June 2010
Boosting the competition
This new British politics blog from LSE looks very interesting and authoritative:
LSE
LSE
Vince lays it on the line
One of the news channels commented that Vince Cable looked 'hemmed in' as he sat on the Treasury bench during the Chancellor's speech yesterday. In truth there isn't much room on the front bench, although there was a certain irony in Vince being placed next to Iain Duncan-Smith.
In this article, Vince does not trip the light fantastic, but lays it on the line about why there was no alternative to a tough budget and why he has channged his mind on some issues: Vince
In ambushing the university vice-chancellors over their pay hikes, Vince showed that he can be a grizzly bear as well as a cuddly one. He can play hard ball, which is as it should be.
One of the constitutional ironies of yesterday's performance was that it was preceded by questions to the Church Commissioners, their spokesman on earth now being Tom Baldry, the member for Banbury.
In this article, Vince does not trip the light fantastic, but lays it on the line about why there was no alternative to a tough budget and why he has channged his mind on some issues: Vince
In ambushing the university vice-chancellors over their pay hikes, Vince showed that he can be a grizzly bear as well as a cuddly one. He can play hard ball, which is as it should be.
One of the constitutional ironies of yesterday's performance was that it was preceded by questions to the Church Commissioners, their spokesman on earth now being Tom Baldry, the member for Banbury.
Tuesday, 22 June 2010
The unavoidable budget
That is how George Osborne billed his emergency budget today. He also described it as 'tough but fair'. No doubt subsequent debate will focus in part on how far it is.
The Chancellor said that a position in which one pound in every four spent by the Government was borrowed was not sustainable. Nor was it acceptable to have nearly half of national income spent by the Government. A quarter of a trillion pounds will be spent in debt interest over the lifetime of the Parliament.
77 per cent of the target of eliminating the structural deficit over a five year period would be met by spending cuts and 23 per cent by tax increases, largely through a 20 per cent increase in VAT from next January. The current exemptions from VAT remain in place.
Among the most controversial measures will be a two year pay freeze for the public sector (athough the 28 per cent of those earning under £21,000 a year will get a flat £250 increase in each year) and a three year freeze in child benefit. The Chancellor argued that means testing child benefit would have involved too many transaction costs.
One interesting commment by the Chancellor was that the UK was over reliant on financial services and a bank levy will be introduced in 2011. He also said that Conservative governments in the early 1990s made a mistake when they cut capital rather than current spending.
In a sense we will get a second instalment of the pain when the results of the public expenditure review are revealed on Ocrober 20th. However, there is now a credible medium-term fiscal strategy in place which should satisfy the international markets. Credbility with them was a criterion that the Chancellor specifically mentioned.
The Chancellor said that a position in which one pound in every four spent by the Government was borrowed was not sustainable. Nor was it acceptable to have nearly half of national income spent by the Government. A quarter of a trillion pounds will be spent in debt interest over the lifetime of the Parliament.
77 per cent of the target of eliminating the structural deficit over a five year period would be met by spending cuts and 23 per cent by tax increases, largely through a 20 per cent increase in VAT from next January. The current exemptions from VAT remain in place.
Among the most controversial measures will be a two year pay freeze for the public sector (athough the 28 per cent of those earning under £21,000 a year will get a flat £250 increase in each year) and a three year freeze in child benefit. The Chancellor argued that means testing child benefit would have involved too many transaction costs.
One interesting commment by the Chancellor was that the UK was over reliant on financial services and a bank levy will be introduced in 2011. He also said that Conservative governments in the early 1990s made a mistake when they cut capital rather than current spending.
In a sense we will get a second instalment of the pain when the results of the public expenditure review are revealed on Ocrober 20th. However, there is now a credible medium-term fiscal strategy in place which should satisfy the international markets. Credbility with them was a criterion that the Chancellor specifically mentioned.
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