IEA Blog

Plans to introduce a minimum price of 50p per unit of alcohol in the North-West of England – apparently supported by David Cameron – are deeply misguided. In all markets price-fixing is a bad idea and alcohol is no exception. Problem drinkers may simply forego other goods in order to pay the higher prices. Minimum prices could also encourage drinkers to buy alcohol in other areas or switch to low-cost, “informal” sources such as home-brew or “booze cruises” across the Channel. The policy is therefore likely to be ineffective and could even prove counterproductive if alternative supply routes expand. A further important objection is that it will unfairly penalise moderate drinkers.

A better approach than minimum prices would be to focus on eliminating the ways in which the government facilitates alcohol abuse. In particular, binge drinking is in some ways a direct consequence of the welfare state. If the government offers to pay for any treatment people need, they will make the most of it. They can live dangerously, safe in the knowledge that the NHS safety net will catch them.

Such “moral hazard” can be addressed by charging those who repeatedly seek treatment for self-inflicted injuries and illnesses. The best solution, of course, would be to scrap the NHS entirely and let the private sector fill the gap. If people had to pay for their own healthcare, they would have strong incentives to adopt healthier lifestyles. The burden that alcohol abuse imposed on taxpayers would also be reduced substantially.

Today David Cameron has spoken of his ambition for the UK to break into the top five tourist destinations in the world, from its current sixth position. This apparently entails moving away from the neo-socialist “Cool Britannia” to focus on Britain’s heritage.

According to the Prime Minister, tourism’s contribution to the economy could grow by over 60% to £188 billion in 2020, from the current £115 billion, bringing significant employment benefits.

Cameron’s enthusiasm for “rebalancing the economy” may, however, translate into a policy of “picking winners” – an approach that has proved economically disastrous in other sectors. There could be government initiatives to invest in tourism or subsidies to incentivise new entrants into the market. Evidently, there are significant opportunity costs associated with allocating public money in these ways, and current very high levels of government borrowing make it particularly inadvisable.

A better approach would be for the government to improve the incentives for private investment through lowering taxes and removing regulatory constraints. Another worthwhile strategy would be to privatise national heritage sites to maximise their profit potential.

If it is serious about encouraging growth in tourism, the coalition must also act to make the UK more accessible to visitors. It should be much easier for foreign tourists to obtain visas. The high level of red tape inherent in the process needs to be cut. Tourists are unlikely to visit Britain if faced with border controls and security measures that treat them like criminals.

David Cameron has stated that his government will consider ending security of tenure for social-housing tenants. Those tenants who were in employment would be “encouraged” to rent in the private sector or to buy, so freeing up a scarce resource for those in severe housing need. Such a policy would bring social housing into line with the private rented sector where assured shorthold tenancies are the norm.

Currently social housing is means-tested only at the point of entry, and this means that a lucky few can receive a tenancy for life regardless of how their circumstances might change. However, time-limiting tenancies means that households can be means-tested at regular intervals (perhaps every three or five years). If their income is above a certain threshold their tenancy would not be renewed. A less punitive scheme would be to offer incentives for a household to leave, such as helping with a deposit to purchase a dwelling.

The idea of time-limited tenancies is not, however, a new one. It has been around for a number of years and Ruth Kelly was apparently very keen on the idea when she was Secretary of State at DCLG in 2007. New Labour saw this a means of helping the homeless without the huge outlay of building new social housing. But, as with many policies, changes in ministers and the dead hand of Gordon Brown put paid to it.

Whilst the idea has some attraction, especially with over 1.5 million households on housing waiting lists, it does have a number of problems. In particular, it runs completely counter to the government’s welfare to work agenda: time-limited tenancies mean that households would have to leave when they find work to be replaced by workless households. This would massively increase their housing costs and perhaps encourage them back onto handouts. A social tenancy would remain for life only if you stayed poor and on benefits.

Second, we should consider the impact that the policy might have on social housing estates. As Iain Duncan Smith argued last week, there are certain estates in Britain that are work-free zones, inhabited by families who have not been in employment for several generations. The policy of time-limited tenancies will institutionalise this and ensure that an even larger percentage of tenants are dependent solely on benefits.

Third, the policy contradicts policies aimed at encouraging shared ownership and key worker housing funded by housing associations. It would seem perverse to insist that working tenants leave their dwelling, whilst allowing nurses, teachers and policemen to become part-tenants of social housing.

More sensible, as I argued in my IEA monograph in 2006, would be a common tenancy for all rented housing – private and social – with financial support offered to households and not landlords. This reform could be quite readily tied into the DWP’s proposed unified benefit system and allow for proper competition between landlords instead of the collusion that exists at present where social rents can be set according to government targets and not based on the market. Imposing time-limited tenancies on the social sector without undertaking more fundamental reforms would be counterproductive.

Liberalism, empowerment, responsibility, redistributing power so that people in their everyday lives don’t turn to officials or central government for help, but instead help themselves and their own communities – finally, we’ve got Cameron’s definition of the Big Society and it’s a clear and important one. But how we get there is as muddled as ever.

Cameron is arguing for something desperately needed – a revolution in the tired approach to public services which has sucked the life out of many communities, broken the connections between people and encouraged us to think there is no need for us to take responsibility for ourselves, let alone for those around us. Yet it is hard to see how he makes the leap from his visionary starting point of enabling people to the conclusion that the main way to improve this situation is for the state to take more responsibility. David Cameron’s primary commitment seems to be that the government will give people the tools to realise their vision for their local communities.

The precise point of civil society is that the tools people need to realise their visions cannot be given by central government. If enabling people to live a good life was a question just of public money or central organisation then with public spending at 52% of GDP things should be looking a whole lot better than they are.

People help themselves and those around them when they see the necessity of doing so. They understand their local problems and issues; they have flexibility to adapt and to meet need in a messy and diverse way. Cameron fears that if government pulls back, people won’t be there to take up the slack. He suggests that it is up to the government to build the Big Society. But government cannot build the Big Society; a Big Society will only develop by government pulling back and leaving room for people and communities.

A radical reduction in the size of the state is required if philanthropy, community building and personal responsibility are to flourish. This means reducing the number of functions perceived as the responsibility of government rather than individuals, with a corresponding cut in taxes, regulation and bureaucracy. Cameron seems to understand this with his approach of devolving more financial freedom to local communities to decide how their local budget is spent and with ideas such as helping local groups to overcome red tape, but he needs to apply this same principle to other areas.

Should David Cameron worry that restraining public spending will hurt his chances of being re-elected? Recent political history will reassure him.

In the 1980s and 1990s countries such as the UK, Canada, New Zealand, Sweden, and Ireland had governments that exercised fiscal restraint. In some cases they actually cut spending in real terms. Margaret Thatcher, Paul Martin, Sir Roger Douglas and their counterparts were faced with protests and strikes. They were also opposed by much of the media and academia. Just like we’ve recently seen in the papers, many commentators believed fiscal tightening would undermine economic recovery. Indeed, the policies of Mrs Thatcher and her chancellor Geoffrey Howe were heavily criticised by 364 economists. The leaders were all advised that they would lose the next election.

In each case the critics were proved wrong. The economy quickly improved and the ruling party was re-elected to government. Margaret Thatcher was Prime Minister from 1979 to 1990; the Canadian Liberal Party only left power in 2006. In most instances over the last three decades where decisive action has been taken to tackle budget deficits, it seems the party in power has been re-elected.

Now all three major parties have launched their manifestos it’s clear that no one is being honest about the true state of the country’s finances. The Conservative manifesto is scarcely more ambitious than plans published by the government or the Liberal Democrats. The timing and magnitude of proposed deficit cuts are slightly different, but taxes will rise significantly whoever wins on May 6th. This comes after 10 years of huge increases in discretionary government spending both in real terms and relative to national income, with tax rises following in their wake.

In a briefing paper issued earlier this week, we show that spending cuts of £167bn would be necessary to prevent the tax burden from rising in real terms over the next five years. This should be the minimum objective – spending cuts of about 25% across the board. Now is the time for radical action. In one Parliament we must reduce taxes dramatically, simplify the tax system and pull the poor out of tax. To do this requires a reduction in the proportion of government spending in national income to well below the levels that existed in 1997.

It seems, once again, that we have returned to the “socialist ratchet” described by the late Sir Keith Joseph. The greatest ambitions of the Conservatives are to reduce the growth of the state or, at best, roll back some of the advances of government power made by Gordon Brown in the last 12 years.

This is deeply worrying. A Labour government was elected in 1997 that has increased the role of government in economic life dramatically. It may then be followed by a Conservative government that is content with accepting that much of that ground cannot be reclaimed.

The fiscal problems the UK faces cannot just be communicated by reference to the very high level of government spending as a proportion of national income. We also have an appallingly complex tax system and a tax system that penalises the poor when they start to earn relatively small amounts of income. As the pressure group Care has shown, families in the UK also have amongst the highest tax burdens in the OECD.

The issues are interconnected. We need cuts: big cuts. Past history suggests that small spending cuts will be delivered in a way that produces the maximum political pain. Cuts are administered by incumbent bureaucrats. It is well known that bureaucrats implement them in a way that minimises the harm to themselves whilst maximising the publicity impact. Important services are cut first; cutting waste is an afterthought. We are familiar with this not just from “Yes Minister” – but from our experience of spending cuts in the Thatcher era.

Quite simply we may as well think big and use a completely different approach to cutting government spending.

Instead of starting at current spending levels and trying to negotiate spending reductions from current levels, the IEA paper proposes that we should clear the decks. Government has become so dysfunctional in every area that we should start from scratch. Over a five-year period all government functions should be subject to a new kind of Beveridge report that radically looks afresh at everything that is done, if it should be done and how it should be done. The results would be different from the wartime Beveridge report of social insurances but the decisions should be just as radical. The reports should be undertaken by people sympathetic to minimising the role of government and maximising the space for the private sector and the “big society” in solving economic and social problems. And the reviewers should have analytical minds – like Beveridge’s – so that they produce new approaches to public policy that achieve limited objectives efficiently and do not entrench bureaucratic interests.

In implementing reforms it would be known in advance that there would be an overall cap on expenditure of 30% of national income and proposals for reform would only be accepted if they could be enduring – that is if they did not entrench vested interests that gradually expanded the role of government.

In education, for example, the aims might be to require parents to ensure their children were educated and for the state to provide finance to parents ring-fenced for that purpose. An Act of Parliament could lay out what was defined as education and local authorities could simply be responsible for taking cases to court where they did not believe that the ring-fenced funding was being spent by parents in the way defined in the Act. The poor would be helped, competition would raise standards and parental choice would be paramount.

Armies of bureaucrats at central and local government level would simply have no function and would have to go. Government education spending would be way below current levels: perhaps only 50% of 2009 spending, though parents could spend more if they wished from higher post-tax incomes.

Similar approaches need to be taken across each government function such as policing, health, pensions and welfare. Huge swathes would be cut out of public spending but standards of provision would rise.

In summary, every government department must be razed to the ground. The reality is that if the next government is not going to raise taxes, they must cut spending by at least £167bn. This can be done but not by starting from where we are today. A Conservative government that really believes in a free economy should have a spending target of 30% of national income by the end of its first Parliament, financed by a flat tax. Minds must be focused on how that target will be achieved by 2015. The aim should be for the electorate to be happy even if Sir Humphrey is enraged.

Cameron’s “National Service” plans are not the answer to youth social problems.

The Conservatives’ “Broken Britain” narrative rightly diagnoses that “… too many of our young people appear lost. Their lives lack shape or any sense of direction. So they take out their frustrations and boredom on the world around them. They get involved with gangs. They smash up the neighbourhood. They turn to drink and drugs.”

But many of our young people don’t fall into this category; they are part of functioning, vibrant communities. The key question is how to help those who are struggling without damaging in the process those who don’t need help. Rolling out a national programme like this is an ineffectual way of trying to tackle societal issues. For the young people who are thriving, trying to replace the communities and traditions that are already working perfectly well with a uniform country-wide “rite of passage” is not only unnecessary, but also serves to send a message that the good work being done by families isn’t good enough. This costly scheme could well undermine the diverse and complex fabric of society.

For those young people who do need intervention, allowing local communities (families and community organisations) to deal with the unique issues faced in their local context in their own distinctive ways is the best way of addressing this.

It would be wonderful if the answer to gang violence, addiction and youth dysfunction in general was as simple as a two-month national programme, but people are messier than that and the solutions must be too.

Tory leader David Cameron scored well on rhetoric yesterday – but fell down badly on detail. His vision is of “a society where the leading force for progress is social responsibility, not state control.” That should be music to the ears of free market liberals everywhere.

But, his actual proposals for a “Big Society” include, amongst other things, the creation of a 5,000 strong “neighbourhood army” to identify community leaders and bring people together, the factoring in of community service as part of civil servants’ annual appraisals and – most ludicrously of all – establishing a national “Big Society Day” to celebrate the work of local groups and encourage more people to “get involved.”

It’s all very well for the Conservatives to wax lyrical about the merits of a post-bureaucratic age, but their prescriptions for society’s ills do seem to involve employing a large number of bureaucrats.

To the Conservatives’ credit they seem to accept that direct state action is not always – or even usually – the answer to vast swathes of the country’s problems. But, infuriatingly, they remain wedded to the view that politicians and civil servants can nearly always play a useful, facilitatory role.

The reverse is true.

If you want to encourage me to become more active and involved in my local area, the last thing I want is a bunch of government-appointed do-gooders traipsing around my estate in search of community leaders and inviting me – if I pull my weight sufficiently – to a patronising pat on the head on “Big Society Day.”

Private groups of citizens will spring up spontaneously and take positive action if government gets out of the way. If councils and Whitehall bureaucrats assume ever more responsibility for making our local communities safer, cleaner and smarter, then expect individuals and voluntary groups to do less. State officials – however well intentioned – always tend to crowd out and diminish the initiative and charity of private citizens.

With six weeks to go before polling day, the leader of the Opposition seems to be somewhere towards having made a sound diagnosis – that society and the state are different things – but he can’t resist the usual politician’s prescription of putting forward a raft of expensive, government-fronted initiatives to cure the country’s ills.

The UK’s deficit is running at about £180bn, on top of a trillion pounds of overall debt. We can’t seem to afford to keep our traditional army properly equipped and maintained, let alone splash out on a new army of the neighbourhood variety.

Whatever David Cameron and other politicians say between now and polling day, the next British government is going to have to make swingeing cuts in the public sector. It would be a breath of fresh air for political parties to spell out, explicitly, which wasteful and ill-thought out government projects they are going to scrap – not which new ones they can dream up.

I have various reservations about the Nudge philosophy that has been embraced by David Cameron. It is clearly attractive to the Conservatives because it seems novel without appearing to smack of market fundamentalism – and the Conservatives seem unable or unwilling to make the case for liberating the market economy directly.

One reservation that I have about “Nudge” is not about the basic underlying idea, but about the likely flaws in implementation. The authors of “Nudge” clearly intend that their proposals should be an alternative to state regulation, but it is difficult to see them being implemented that way in practice. For example, in the pensions field, auto-enrolment into personal accounts is going to be used in addition to all the current government interference in the provision of pensions: we will still have a government-provided state pension, a “second state pension”, continued regulation and tax relief. In addition to all this, people will be auto-enrolled into saving through personal accounts.

A second problem is that of who decides the direction in which to nudge people. The political elite, for example, wish to nudge the young to take out pensions but this risks making pension mis-selling compulsory. Young people will be saving in a pension whilst paying off a mortgage or even paying off credit card bills: saving and borrowing with two different financial institutions at the same time is an expensive business. Of course, the people who will lose out most are those who are not sufficiently sophisticated to shoulder barge the nudger and do their own thing.

The best way is to allow paternalism to evolve naturally in society without the interference of government. That is genuine “libertarian-paternalism” to use the phrase that Nudge’s authors use. People generally know when they are not the best judges of their own interests and they often choose to devolve decisions to others.

Read the full article on ConservativeHome.

I have written before that co-ops and similar ventures are part of the rich tapestry of a market economy. After all, before the days of statutory regulation, the Stock Exchange was a mutual – you can’t get closer to the market economy than that. Co-ops and mutuals certainly have their limitations – access to capital and corporate governance being the two main ones. People complain about profit-making banks being owned by shareholders but mutuals can be captured by management and pay poor interest rates to savers and co-ops can be captured by a senior management clique without any possibility of facilitating change. There is a big literature on all this and I hope that Osborne’s team has read it. Neverthelessm, mutuals and co-ops definitely have their place. Three cheers for George Osborne’s attempts to create co-ops in the public sector then? Not yet.

As ever with Conservative proposals the small print is not easy to understand. What is proposed seems to be worker-managed institutions which have to accept public sector wages, conditions and pensions. Furthermore, though they can keep some of “surplus” the organisation makes (for some reason it cannot be called profit) they have to provide the type and quality of service that the state would like them to provide. Who actually owns the capital of the hospitals and schools that are “co-operatised” is unclear. This model seems to be much closer to the collectivised farms and so-called co-operatives in some communist countries than something to which free-market liberals should aspire. A union leader suggested that David Cameron was using the language of socialism. That would seem to be true – for good reason as the proposals seem to be socialist. But a few tweaks could set that right.

What would free-market policy in this area look like?

1. Co-operatives would be free to determine their own terms and conditions of employment.

2. Co-operatives would own the capital of the institution that was co-operatised.

3. Co-operatives would exist in an environment of competition for health and education in which the user of the services and not the state decided what was provided and how and the user of the services was the only arbiter of standards.

4. Other organisations must be allowed to compete (including profit-making schools) – yes let school and hospital co-ops have some first-mover advantage if that helps sell proposals politically but, unless there is competition, then co-operatives will be simply a different way of managing the provision of state-controlled services. If competition is not the arbiter of quality, the state will always step in.

In some situations (village schools, for example) co-operatives may get a substantial foothold in the provision of services, in others profit-making corporations may do better. It should be the user of the service that decides upon the nature of the provider, not the government.