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Posts Tagged ‘Theresa May’

One of my favorite charts shows how nations achieve great results when they engage in multi-year periods of spending restraint.

The most important benefit is that the burden of government shrinks relative to the private sector, but it’s also worth noting that the symptom of red ink begins to disappear when there is a serious effort to deal with the underlying disease of excessive spending.

But sharing this chart also a bittersweet experience since it shows – in almost all cases – that it is just a matter of time before politicians go back to fiscal profligacy.

This is why I’m a huge fan of a permanent spending cap, ideally as part of a nation’s constitution.  Jurisdictions that have adopted this approach, such as Hong Kong and Switzerland, have very strong long-run fiscal performance rather than just temporary blips of good policy.

At the risk of understatement, it’s increasingly obvious that the United Kingdom needs this kind of permanent structural reform.

As you can see from this chart I shared back in February, there’s been some decent spending restraint in that country ever since 2010.

Let’s augment those numbers. I pulled together the data on government spending from the OECD, the IMF, and the UK government. They all have slightly different methodologies with slightly different numbers, but they all tell the same story.

Ever since 2010, the burden of government spending has expanded by an average of about 1.6 percent annually. Spending is still growing, needless to say, but the private sector has been growing faster, so British policymakers have been satisfying my golden rule.

And because the productive sector of the economy has grown faster than government, this means that relative burden of spending has declined. Which is exactly what we see in this chart.

That’s the good news.

The bad news is that politicians are tired of being responsible. They are salivating at the prospect of a new spending binge. Even Tory politicians now want to play Santa with other people’s money.

The U.K.-based Times has some of the unpleasant details.

Ministers are pushing to delay or abandon a series of tax cuts to fund an increase in public sector pay, The Times has learnt. Philip Hammond, the chancellor, is being urged to scrap commitments to reduce corporation tax and raise the thresholds for the personal allowance and the 40 per cent income tax rate. …At a meeting of the political cabinet last week, Jeremy Hunt, the health secretary, Justine Greening, the education secretary, and Sir Patrick McLoughlin, the party chairman, are understood to have called for more money for public sector workers.

Opening the spending spigot would be a terrible mistake. Especially to finance higher pay for bureaucrats.

The Wall Street Journal recently opined on this new threat to fiscal responsibility on the other side of the Atlantic.

…the Prime Minister’s Tories now want to abandon their claim to fiscal discipline. Rather than blame a feckless campaign, wobbly Tory leaders have decided that voters are exhausted with “austerity” and government employees are happy to step in with spending demands. Those government workers and their patrons in the opposition Labour Party are demanding an end to the 1% annual pay-rise cap imposed by former Prime Minister David Cameron and Chancellor George Osborne in 2013 after several years of pay freezes.

Even worse, they want to cancel tax cuts and/or impose tax hikes to finance more money for the bureaucracy.

…cabinet grandees Boris Johnson and Michael Gove…seem willing to pay for it by reducing scheduled corporate tax-rate cuts or increasing individual taxes by reducing the threshold at which the second-highest 40% rate applies.

You won’t be surprised to learn that British bureaucrats (just like their American cousins) are not underpaid compared to workers in the economy’s productive sector.

Britain’s government workers aren’t suffering from a pay crisis compared to their peers in the private (that is, productive) economy. For most of the period since 2000, average weekly nominal earnings for public employees have exceeded the private average, according to the Office for National Statistics. And that excludes government pensions that are far more generous than what most private employees enjoy. Government workers were also shielded from the worst of the post-2008 downturn. The 1% cap amounted to steady nominal wage growth while private wages fell sharply…. Government workers were also spared the worst of the job cuts private employers imposed. …The 1% nominal pay cap mainly has given private workers an opportunity to catch up to government pay. …Voters are frustrated by an economic recovery that has largely failed to deliver inflation-adjusted earnings growth. But the solution isn’t to further stifle wage growth in the private economy by raising taxes to benefit public employees.

Tim Worstall also explains that the bureaucracy is not suffering from a lack of compensation.

We’ve just had a massive recession and thus we are indeed worse off. That’s what a recession is all about. So the question should be: are we all sharing that pain? We are not. Public sector pay has fallen by less than private. The people paying the tax have suffered more than those who eat the tax – hardly a good argument in favour of tax-eater pay rises. …It is also true, as the IFS points out, that public sector pay rose substantially in the 2000 to 2005 period. Pay rose more and then pay fell less. I simply can’t see an argument for a public sector pay rise or the lifting of that cap here.

My colleague at the Cato Institute, Ryan Bourne, is a citizen of the United Kingdom, and he points out that one of the problems is that bureaucrat pay levels are determined nationally, which makes no sense when the cost of living varies widely across the country.

….they should phase out national pay bargaining where it remains in the public sector. Previous research by Allison Wolf has shown the high cost of having national pay scales and bargaining. …Poorer regions…suffer as very high pay relative to the private sector crowds out private sector growth.

Ryan explains that Sweden successfully adopted this reform.

Sweden shows the solution. There, collective bargaining was entirely replaced by individual contracts between staff and their local public sector employer, with little fuss. If applied here, managers would then have genuine flexibility in the creation of new posts. It would liberate them to set pay to reflect more accurately local conditions, while varying wages to fulfil difficult positions.

Of course, the ideal situation would be genuine federalism, with local communities raising their own funds and then deciding how lavishly to compensate the bureaucrats they hire. The U.K. actually took a baby step in that direction years ago by giving greater autonomy to Scotland.

I’ll close with a rather depressing observation. It was only two months ago that I suggested Tories might be poised to make big policy improvements in the United Kingdom. Now it appears that they’ll be competing with the Labour Party on how to spend other people’s money. The great Margaret Thatcher is probably spinning in her grave.

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There’s an election next month in the United Kingdom, though there’s not much political suspense.

The Labour Party is led by Jeremy Corbyn, a crazed Bernie Sanders-style leftist, and British voters have no desire to become an Anglo-Saxon version of Venezuela. Or, since Corbyn’s main economic adviser actually has said all income belongs to the government and Corbyn himself has endorsed a maximum wage, maybe an Anglo-Saxon version of North Korea.

Given the Labour Party’s self-inflicted suicide, it is widely expected that the Conservative Party, led by Theresa May, will win an overwhelming victory.

But what difference will it make? Will the Tories have a mandate? Do they actually want to change policy?

Let’s start by asking whether policy should change. The good news is that the United Kingdom is ranked #10 according to Economic Freedom of the World. That means the U.K. is more market-friendly than the vast majority of nations (including the United States, I’m sad to report).

The bad news is that the U.K.’s score has been slipping throughout the 21st century. Basically, there were a lot of great reforms during the Thatcher era, but policy in recent years has been slowly deteriorating.

More worrisome is that the U.K. – like most developed nations – has a demographic problem.

In the absence of reform, the burden of government automatically will increase.

And that’s a big problem in a nation where a majority of people already are net dependents. In a column for the Telegraph, Daniel Mahoney of the Centre for Policy Studies analyzes this major threat to the U.K.

This week, the Office for National Statistics published figures showing the level of net dependency on the UK state. …The figure now stands at 50.5 per cent. In the 1980s and 1990s, this figure was just over 40 per cent – that is to say that around four in ten households received more in benefits than they paid in taxes. But this dramatically changed in the New Labour era, which left office with well over half of the population being deemed net dependent on the state. …Labour’s enormous increase in spending on public services and welfare was equally responsible for this worrying trend. Public spending grew from just 34.5 per cent of GDP in 2000 to 41% of GDP just before the financial crisis hit the UK… There has been some progress in recent years, …but levels of net dependency remain too high. Over half of households are still net dependent on the state. …It is important for the next Government to reduce dependency further.

But rather than move policy in the right direction, there’s considerable concern that Theresa May is a British version of George W. Bush.

Thatcherites are worried.

Theresa May has been warned not to abandon Margaret Thatcher’s free market economics as she prepares to reveal the most interventionist Tory manifesto for generations. …The Prime Minister has already announced an energy price cap and is expected to clamp down on executive pay and empower workers on boards in her election pitch. …cabinet ministers who served under Mrs Thatcher were scathing of the Prime Minister’s energy price cap when speaking off the record. One said it would create “incredible distortions” in the energy market, while another warned that Government cannot “force water uphill” by trying to stop free-market forces.

If you’re curious about May’s energy policy, Rupert Darwall has a helpful article in The Conservative.

For some time, politicians of all parties have been imposing policies that force up energy costs. Now they want to cut the energy bills that have been driven higher by their own policies. …the Competition and Markets Authority noted the role of decarbonisation policies in pushing up costs. “Pressure on prices is likely to grow in the future, due in part to the increasing costs imposed by climate and energy policies,” the CMA stated. …BEIS ministers have convinced themselves that there is widespread popular support for the aggressive decarbonisation policies that are making energy more expensive. They should have the courage of their convictions and acknowledge that high and rising energy bills are a consequence of the decarbonisation policies they claim are so popular. Once they’ve done that, we can have an honest debate.

Sounds like a classic example of Mitchell’s Law. Politicians pursue a policy (green energy or decarbonisation) that leads to higher prices. They then respond to the problem created by their intervention with another form of intervention (energy price caps).

All of which will cause bigger problems in the future.

But for purposes of today’s column, what matters is that this bad policy is being pushed by the leader of the (supposedly) Conservative Party.

To be sure, it’s possible that this bad policy is just a gimmicky election promise and won’t be implemented. It’s also possible that it will be implemented but will be offset by better policy in other areas.

What matters is whether the overall burden of government is expanding or receding. Maybe May will cap spending (an area where her predecessor did a good job his last few years in office). Maybe she will cut tax rates (the corporate rate already has been slashed and will be reduced to 17 percent over the next few years).

At this stage, there’s no way to predict the direction of policy. But there is reason to worry because there aren’t enough people in the U.K. making the principled case for economic liberty.

Allister Heath explains what is needed to rejuvenate his country.

Britain needs a new movement to sell free-market ideas. It is the only way that this country’s slow drift Left-wards, which began in 1997, will be halted and reversed. It’s the only way that Labour, which has reembraced Marxism under Jeremy Corbyn, and the Tories, which have fallen back in love with old fashioned economic interventionism, will ever see sense again. …Tories gave up fighting for free markets years ago, when David Cameron was elected leader…he decided…to accept all of Labour’s increases in state spending and regulation, including environmental and labour market rules…when the financial crisis struck, the Tories joined in the banker-bashing.

But it’s not just that the Tories did bad things.

They also failed to do good things.

…they didn’t fight from the bully pulpit. They didn’t stand up and explain the merits of low taxes, which boost incentives. They didn’t shout from the rooftops that we need entrepreneurs to create wealth, and that people who make money by selling their wares to the public are performing a public service. They didn’t defend privatisation. They failed to make the case for profits… They conceded too much, including the destructive idea that the private sector is less moral and less law abiding than the state sector. They deferred to egalitarians and class warriors… When the financial crisis came, the Tories didn’t explain that much of it was actually caused by misplaced government intervention, including guarantees extended to financial institutions, pro-sub prime policies in the US, moral hazard and cheap money injected into the system by over-confident central banks. …We now have Mayonomics, a continuation of this trend, and its embrace of Ed Miliband-style energy price caps and yet more interventionism.

So Allister is urging a campaign for economic liberty.

The campaign must explain why private companies that compete against one another always generate better outcomes than public sector monopolies. …All of the lessons that became part of the political conventional wisdom after the 1970s need to be relearnt and retaught, and we need a new generation of pro-free market activists to lead this struggle. It’s time for supporters of capitalism to stand up and be counted.

Sadly, the business community is unwilling to lead.

The big business lobby groups are not up to the task… With a few exceptions, they don’t support real, genuine, free-markets.

For all intents and purposes, Allister is making the argument that Britain needs to become a more ethical society. In other words, he wants a campaign to inform and educate about the value of liberty qua liberty. A belief in self reliance, work, and individual responsibility. Characteristics that could be considered part of social capital or cultural capital.

And I think he’s spot on.

I worry a lot about the erosion of social capital in America. But if the polling data is accurate, the problem is much bigger in the United Kingdom.

P.S. Brexit is a wild card in this discussion. I supported the decision to leave the European Union in large part because of my hope U.K. policy makers would feel pressure to shift policy in a more market-oriented direction.

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