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Westlake Legal Group > Posts tagged "Pensions"

Ryan Bourne: Don’t fret about this debt – at least not yet. Big tax rises would choke economic recovery.

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

What are we going to do about all this new Government debt? It is testament to George Osborne’s legacy that commentators already ask this question – spoiling to re-run post-financial crisis debates.

As borrowing spirals with tax revenue collapses and emergency spending programs (the Government plans to sell an additional £180 billion of gilts between May and July alone), focus is quickly turning to “how to pay for it.”

The implied message is that it is necessary to run tighter public finances after the pandemic to reduce debt-to-GDP back to where it would have been without the crisis. James Forsyth already reports Conservative ministers saying that “austerity [through spending cuts] is just not politically possible.” Plenty of Tories therefore seem to think big tax rises are inevitable or desirable.

I am fiscally conservative. I supported the last deficit-reduction programme, although not all details of timing and incidence. But such discussion seems misguided and premature.

For now, we should be relatively unconcerned about the additional public debt, given the extraordinary conditions driving it. More importantly, it’s simply too soon to tell what consequences this pandemic will have on the structural government deficit. If this proves a temporary blowout rather than permanent, accumulated debt levels being modestly higher looks manageable, with small fiscal adjustments over long periods. Major tax rises today for a rapid debt payoff, on the other hand, would be a sure-fire way to kill-off a restarting economy.

Today’s situation is different conceptually from 2010. This pandemic was an unforeseen shock that will pass in a year or two. With governments mandating business closures, and little market pandemic insurance, there was a strong case for taxpayers to step in to avoid good businesses going bust and to insulate people from complete income collapses, at least temporarily.

This, of course, raises Government debt through new borrowing – the Centre for Policy Studies estimating up to £300 billion more of it, or around 15 percent of GDP, in this year alone.

But here’s the key point: just as with wartime expenditure, pandemic-related spending eventually stops. Once our market economy adjusts to new demand and supply conditions, tax revenues pick up. We have no real reason to just assume that the crisis will permanently expand the underlying budget deficit, other than the small uplift in debt interest payments.

So while the level of accumulated debt will no doubt rise owing to the crisis, the on-going gap between spending and revenues afterwards might not. Debt may settle at a higher level, but without this crisis affecting much its future path.

The post-financial crisis situation was markedly different. Yes, near-term borrowing had spiked due to the downturn and stimulus programs. But it soon became clear that permanent changes to the Government’s budget had also occurred. Tax revenues associated with finance were permanently lower.

The UK had sailed into the crisis running large “structural” budget deficits, too. The Office for Budget Responsibility estimates that the structural deficit – the part that would not disappear as the economy recovered – was over eight percent of GDP in 2010. Absent deficit reduction, debt was therefore on an ever-rising and unsustainable path.

This is shown by the fact that only in 2017 did the debt-to-GDP ratio peak, after years of spending restraint and tax rises. This time, after winding down explicit relief programs, we might not face a much larger “structural” deficit at all. Our public finance question, in this case, would not be “how quickly should we stop rapid new debt accumulation?” but “should we reduce accumulated debts through rapid fiscal consolidation?”

I’d argue “no.” Just like a major war, a pandemic is the type of emergency that government debt should really act as a shock absorber for. The net debt-to-GDP level may well rise from 81 percent to 100 percent of GDP, reflecting the socialisation of pandemic risk.

But spreading that risk over current and future taxpayers is the very point of government intervening. With current financing relatively cheap and little inflationary pressure, we do not face an impending funding crisis. And provided the structural deficit hasn’t risen significantly, good economics would suggest we engage in “tax smoothing,” spreading the costs of that debt with very minor budget adjustments over long periods of time. That allows us to keep tax rates low and maintain better incentives to work, save, and invest – crucial conditions to a robust recovery.

Of course, this approach may require reassessment. As we exit the crisis, we may find the economy’s growth potential permanently reduced or find that the Government is unwilling to end emergency support even as normality returns.

Perhaps a large number of people will suffer lung damage, impairing productivity. Maybe the Government will decide it needs to give NHS workers a huge pay rise, or provide more generous benefits from Universal Credit. Maybe the Keynesian drumbeat for a “fiscal stimulus” will be heeded.

If these occur, sign me up to some nearer-term deficit reduction to stop debt ever-spiralling or to prevent unjustified transfers from future taxpayers. But let’s not put socialising pandemic risks in the same bucket as borrowing for on-going spending or old-school demand management.

Now some people I respect highly make a political economy argument for larger temporary tax rises. Philip Booth worries that if today’s population experience the relief without costs, a “something for nothing” budget view will entrench itself.

But large, temporary income tax rises to pay back debt immediately, or even the more destructive capital levies Ed Conway writes about, would really just precipitate the economic hardship the relief sought to avoid. I am not sure that gifting people large financial burdens after lockdowns will win hearts and minds for balancing future budgets.

To be clear: we do indeed face genuine longer-term public finance challenges that require action. This pandemic inevitably leads us into them in worse shape. Population aging will bring a fiscal tidal wave that punctures a huge permanent, ongoing hole in the budget.

The OBR calculates that, on unchanged policies, rising spending on health, social care, the state pension and debt interest will increase the deficit by 18 percentage points of GDP over five decades. These are real (inflation-proofed) claims that cannot be inflated away. Future large tax rises or reforms to these programs – i.e. deficit reduction – will certainly be inevitable.

But it’s difficult to think of a worse time to make headway on this issue than when an economy is spluttering back into life following forced closure. No, for now, fiscal conservatives should sit tight and wait and see what the budget looks like once normality returns. Plotting large tax rises today is heedlessly destructive.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

James Heywood: The virus has exposed the urgent need to reform how we treat the self-employed

James Heywood is a Senior Researcher at the Centre for Policy Studies.

While the Government’s response to the economic impact of the Coronavirus crisis has mostly been warmly received, it was widely accepted that the self-employed were the elephant in the room.

This is not simply down to neglect by the Chancellor, who has actually done his level best to do right by the self-employed, recognised that more needed to be done for them, and has now announced sensible solutions.

But the confusion over the issue speaks to a wider problem with the way our labour market and tax and welfare systems work. We still tend to operate on the assumption that almost everyone is an employee, pays PAYE and earns a steady wage each month, but this increasingly does not reflect the modern UK workforce.

Over the last two decades, the number of self-employed people has increased by 54 per cent and now stands at five million. Nearly one in three of the net jobs created since 2000 have been people becoming their own boss. Now, for every five employees there is one self-employed person.

More people working for themselves is a great thing both for them and for the economy, and many value the freedom and flexibility it brings. A lot of the growth in self-employment has been a result of technological changes which have made it easier for people to set up business in their backroom with little more than a laptop.

However, the phenomenon also poses major challenges for policymakers. As shown by the Coronavirus crisis, self-employed people are particularly vulnerable to sudden fluctuations in business and it is not as easy for the government to help them as it is for a normal employee. More widely, there is an ongoing debate around the gig economy and employment rights, and the self-employed have also been largely left out of the wider success story on workplace pension saving and auto-enrolment in recent years.

There are also anomalies in the tax system which are overdue reform. As the Chancellor said in his statement: “it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in the future.” 

Self-employed people pay a nine per cent rate of NICs compared to the 12 percent paid by employees (and the latter’s employer also pays NICs on their wage bill). This lower rate is meant to reflect the more generous State Pension entitlement enjoyed by employees but, under the new State Pension introduced in 2016, Class 4 NICs entitle you to the full amount ,just as Class 1 NICs paid by employees do.

Some can gain from setting themselves up as a limited company and taking their income as dividends. I personally know of people who have joined large, established companies and have been told by their colleagues on arrival that they should set up as a contractor, like everyone else in the office, meaning they can do the same job at the same desk but save themselves and the company thousands in tax. The Office for Budget Responsibility has previously calculated that the tax benefit for an employed person earning £30,000 of incorporating themselves as a company would be £3,300 per year.

Some people and companies can exploit the tax system to pay far less than their fair share while making no greater contribution to the economy than they would doing the same job with employee status. Not only does that make little economic sense, it also means the authorities end up being unnecessarily suspicious of genuine sole traders who are driving growth, for example through the controversial IR35 compliance rules.

There is a strong case for the tax system to reflect the risks involved in running your own business and the reduced entitlement to employment rights and some state benefits, but this should be proportionate and well-targeted and should take into account the heterogeneity of the self-employed population.

As the Institute for Fiscal Studies have pointed out, the tax advantages enjoyed by some are unfair on ordinary employees doing effectively the same work. The tax benefits of being self-employed or an owner-manager should be geared towards incentivising investment and innovation, and should reflect genuine value added relative to normal employment.

As an indication of how confused things are right now, it is currently entirely possible for someone to be classed as a worker under employment law but as self-employed for tax purposes. We need to think seriously about how exactly we want to define self-employment – how we can ensure that it does not expose people to insecurity and exploitation, and how its status should be recognised by the tax and welfare systems in ways which are fair on other taxpayers and provide economic benefit. There are millions of people working for themselves who are driving growth and increasingly form the backbone of our economy. If we can manage this in the right way, we can maximise the benefits of modern technology and working practices.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Tom McPhail: Successive governments have dodged tough choices on pension tax reform for too long

Tom McPhail is head of policy at Hargreaves Lansdown.

Not for the first time, the prospect of an impending budget has prompted an outbreak of speculation around the possibility of pension tax reform. This is not to say the speculation is unfounded: this is the first time in around 15 years a government has the opportunity and the means to undertake meaningful reform of what has become a bloated and inefficient system, riddled with inconsistencies and inefficiency. The Chancellor should announce in the Budget a consultation to review the options available and then press on with reform as quickly as possible.

Many of the myriad problems with the system are the result of previous governments’ unwillingness to make tough choices. I’ve set out here a brief summary of the reasons why change is needed, why I think now is the moment to do it, and what the options for reform might look like.

The Conservative Party manifesto had already identified two specific problems which need addressing; the Tapered Annual Allowance, which has been landing high-paid workers, including key high-paid public sector employees such as doctors with punitive tax bills; and the net pay tax relief administration system adopted by some employers, which results in lower paid employees missing out altogether on their free government-funded tax relief top up to their pension.

The Pensions Policy Institute estimates that around 64 per cent of pension tax relief is enjoyed by the 17 per cent of the population paying higher or top rate income tax. It is hard to regard this as socially equitable; to give the least support to the most needy individuals and to give the most support to the wealthiest few.

This approach only makes sense when viewed through the logic of deferred taxation, whereby tax relief is granted now to avoiding taxing money paid into a pension until the ultimate withdrawal of that money in retirement, when income tax is then levied on the withdrawals.

When viewed as an incentive to save, though, tax relief clearly makes no sense to most people. Research by the pension scheme B&CE in 2015 showed that of people actually in a pension, 74 per cent either didn’t know how tax relief worked or weren’t even aware it existed. The Government is spending tens of billions of pounds a year (roughly £30 billion to £50 billion, depending on how you want to measure it), on a scheme which is largely unappreciated by the population.

Other problems are mounting up. The Lifetime Allowance, the cap applied to limit the overall amount that can be saved in a pension without extra tax charges kicking in, now acts as a penalty on those who have saved prudently or invested wisely. It cannot be right to penalise savers just because their investments have performed well.

Conversely, on death, pension funds pass on largely tax free, thereby creating a gaping hole through which tax revenues can leak.

Retirement saving among the self-employed is alarmingly low, with just 31 per cent currently actively saving in a pension.

The Money Purchase Annual Allowance cuts the maximum amount you can pay into your pension, from £40,000 a year down to just £4,000, once you choose to draw income from your pension. This would be fine if everyone stopped work in their 60s and stayed retired.

But they don’t; in fact the concept of ‘retirement’ is becoming redundant. Increasing numbers of people pass through a transitional process of tapping into their pension savings in their 50s, whilst managing an ebb and flow transition into retirement and not becoming fully economically inactive until their 70s. Currently this happens largely by choice, increasingly in the future it will be by necessity.

Into this muddled environment has arrived a Conservative government with a very different agenda from the one that reviewed pension taxation in 2015. Then, the review initiated by George Osborne ran aground on the rocks of opposition from the right-wing press and from a pensions industry that couldn’t see beyond its short-term interests.

Now, the world is very different. Auto-enrolment has transformed retirement saving, bringing ten million new savers into the fold and their employers are on the hook to pay for it, whether they want to or not. The 2015 Pension Freedoms which revolutionised the choices available for retirement income withdrawal also now demand people make more decisions. The challenge is no longer about getting people into pensions, it is about persuading them to engage with their savings and to save more.

Meanwhile, we have a Conservative government with a very different focus compared to the past. It recognises the need to address the interests of voters in those ‘Red Wall’ seats in the Midlands and North. Voters who in the main are not higher earners, who aren’t much interested in the principles of deferred taxation but who would know a good deal if it was presented to them. The challenge is to craft a good deal out of the existing system.

Unfortunately, you can’t touch pensions policy without upsetting someone. Any redistribution will mean losers as well as winners. Given the real winners today are the high earners (but not the very high earners, who have largely given up already and left the field), and members of final salary schemes, this is where opposition is likely to come from.

Employers are also likely to find themselves being asked to pay a little more; whilst employer pension contributions are still very generous in pockets of the economy, largely a legacy of the final salary system, for most of the ten million new joiners in the auto-enrolment system, employer contributions are around the statutory minimum of three per cent of pay.

So what changes could we see? To simply scrap higher rate tax relief would be an act of fiscal hooliganism; it would punish the high earners and severely undermine such self-employed retirement saving as does still exist, whilst doing nothing for lower earners. Subtler options include moving away from tax relief altogether, either in favour of a flat rate top up, or a combination of more generous employer contributions, combined with higher Treasury top-ups applied selectively. We think it is possible to create a new system where, in effect, every £1 paid into a pension by an individual would be doubled, either by their employer, or by the government.

Other aspects of the system potentially up for grabs include: imposing Employer’s National Insurance on their contributions, worth over £11 billion a year; introducing a death tax on pension funds; scrapping tax relief on workplace employee pension contributions (after all, why give tax relief if employers are doubling your money anyway?); or reducing the tax free lump sum at retirement, which would seriously undermine confidence in the system for the future.

Given the complexity of the system, the first step should be to open a consultation for review.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Garvan Walshe: How the majority needed to deliver Brexit will thwart the reform needed to make a success of it

Garvan Walshe is a former national and international security policy adviser to the Conservative Party. He runs TRD Policy.

If the polls are right, and the electorate indeed returns a Conservative majority in a week’s time, we can expect the Withdrawal Agreement to be passed, and the UK to leave the EU in short order.

The Prime Minister has promised not to take up the option of extending the transition period provided. Let’s allow ourselves a moment of optimism, and suppose that the majority is large enough to enable him to carry what agreement he can make by the end of 2020 – thus avoiding a repetition of the paralysis caused by Parliament refusing to accept leaving without a deal while simultaneously refusing to accept any kind of deal that could be agreed by both the UK government and the EU.

Britain will then have left the EU, along the lines expressed in the Political Declaration that accompanies the Withdrawal Agreement, with a free trade deal that sets goods tariffs at zero. To conclude such a deal, the EU will require the UK to accept what it calls “level-playing field” provisions on state aid, environmental policy and labour market regulation.

Though the Spartans might balk at this, it does not, in fact, amount to a significant price. Agreement on state aid is actually a bonus: it will stop future Labour governments subsidising failing industries. The Government, after all, intends to continue Britain’s leading role in efforts to combat climate change. Nor is it signalling any intention of deregulating the labour market. Its record in office, from the introduction of real-time information, to automatic pension enrolment and increasing the minimum wage, has been to increase the burden borne by employers, not to reduce it. A Conservative majority that depends on keeping seats in Bolsover and Ashfield is not going to have room for Thatcher-style economic reform.

Nonetheless, the type of Brexit entailed by the Withdrawal Agreement will produce significant economic disruption (and if it did not, what would be the point?), and with it the opportunity for economic reform that would allow Britain to make the best fist of its post-Brexit circumstances.

The kind of trade agreement envisioned by the Withdrawal Agreement has a number of implications for trade policy. Trade agreements themselves don’t generally move trade volumes that much. More important is leaving the Customs Union, which will take Britain out of pan-European manufacturing supply chains, because the need to complete customs formalities as a good goes back and forth from Britain to the EU (and Northern Ireland) will make a lot of that trade unviable.

Such manufacturing that survives will have to make do with a local supply chain, and assemble products from their components in the UK rather than optimise for cost and quality: in other words, British goods will become more expensive, and will be able to make use of a smaller range of components. So it will makes sense to specialise in high value products, from Aerospace to Scotch Whisky, in which British-made goods will still be competitive.

If there is an upside to the gloomy economic models that predict sharp drops in manufacturing output from a hard Brexit of the type planned, it is that the City of London escapes relatively unscathed. Though some activity will move to the EU, most can still be profitably carried out in London. This will have implications for regional distribution: to deal with manufacturing troubles, London will have to subsidise the rest of the country, particularly those manufacturing heartlands with newly-minted Tory MPs.

An island that spurns advantageous trading arrangements with its nearest trading partners, and so reduces the attractiveness of trading with Europe vis a vis the rest of the world, should specialise in goods and services where distance is a less important factor, and transport costs a smaller proportion of the price. Much of this will need to take place by air, and accordingly it follows that the UK should increase its airport capacity. It didn’t build a runway in London during the 40 years it was inside the EU, even though air travel has increased dramatically. It won’t be able to afford to waste the next 40 as well.

Semi-skilled physical and white collar work has been becoming a thing of the past over those last 40 years, too. As technology advances, this will continue. Routine clerical and manual work will be further automated, and the opportunities for people without an education to earn a living will be concentrated on those where human interaction, which forseeable AI technology is not capable of reproducing accurately, is at a premium. Demand for semi-skilled labour in areas like tourism and social care will however stay strong.

Long-term education and skills policy needs to adapt accordingly: as well as developing mathematical skills, softer aptitudes and verbal skills – the premium the best British private schools provide — will need to be developed in more of the population. Just the thing perhaps for a Clacissist Prime Minister with a way with words.

Until that transition to a high skill economy can be made (and it’s something Britain has had difficulty doing, which is why it has had to import so much high skill labour from the rest of the EU), something will need to be done to occupy the people who aren’t ready for it. A silver lining might be in dealing with climate change. Though decarbonising the power sector is a matter of high tech engineering, improving energy efficiency is essentially a construction industry task. That, plus housebuilding, where a major labour shortage is expected as a previous generation of construction workers reaches retirement age, could provide some of the necessary labour demand. The question, as always, is: how it is to be paid for?

Brexit will require a transition to a high tech, high skill, green and low manufacturing economy. In many ways, Britain is already some of the way there, but its current mood of nostalgia for an obsolete manufacturing life will have to be replaced by determination to transform the economy. It remains to be seen whether this be done with a majority based on Northern, post-industrial Britain.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

An idea for McDonnell. Pledge £1 million to every voter in Britain.

Last week, John McDonnell said that Labour had fully costed its manifesto.  As Mark Wallace pointed out on this site, these weren’t the full costs, the only costs…or the last costs.

And so it has proved.  The Institute of Fiscal Studies points out that its scheme to pay older women adversely affected by the equalising of the state pension age would lead to “another £12 billion of borrowing every year for the next five years”, on top of what Labour has already promised to spend”.

The Institute Paul Johnson concludes that the move “drives a coach and horses immediately through the manifesto pledge to get to current budget surplus to remain at current budget balance.”  Not so much horses and a coach as a brand new T-14 Armata tank.

In short, Labour first said that it had fully cost its manifesto, and now casually chucks another £58 billion into the mix.  If the party really is so desperate as to tear up on Sunday what it promised on Friday, so be it.  And where it has started it might as well continue (which it will).

McDonnell might as well pledge £1 million to all comers.  Might as well make it £1 billion while he’s at it. It would be no more or less credible than all his other plans.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Guy Opperman: Only Capitalism can tackle the Climate Emergency – and our pension funds can lead the way. 

Guy Opperman is the Minister for Pensions and Financial Inclusion, and is MP for Hexham.

I’m delighted to have been reappointed as Minister for Pensions and Financial Inclusion by Boris Johnson. In the past two years, we’ve achieved so much, from supporting the introduction of the Mid-Life MOT, to pioneering the Pensions Dashboard. But there is so much more to do, and now is the time to keep moving forward.

One of the most exciting changes I am proud to have been part of is the work we are undertaking to tackle climate change. This October, a change is coming that will have a bigger effect on tackling climate change than almost any other decision by government.

Why?

We are taking a massive step forward by introducing new Environmental, Social and Governance regulations, or ESG for short. ESG requires occupational pension funds to invest with environmentally sensitive principles and take account of climate change. With our UK pension funds managing well over £1 trillion in assets, their investment power is immense.

When saving for a pension, I am convinced that most people want two key things in return. Firstly, and indeed crucially – a balanced portfolio that produced a secure, long-term return to live on in retirement. But also that our investments have a higher purpose. That when our pension is invested, it should be invested in an ethical way.

We know that the world is facing a Climate Emergency. We can all see that we are losing the ice pack, endangered species and our tropical forests at an alarming rate. The term ‘emergency’ may sound alarmist, but if we don’t address these long-term problems now, there won’t be a long term. 

As a country, we have already made great strides to reduce our carbon footprint; carbon emissions have fallen by 25 per cent – the largest reduction in the G20. We’ve just had the longest coal-free run since the 1880s, and green energy is on track to produce most of the Britain’s electricity this year for the first time.

And in June, Britain became the first major economy to legislate for net carbon zero by 2050 – meaning that our contribution to climate change will end in a little over three decades. Our net zero target is undoubtedly ambitious, but if we all – from government down to individuals – make small but significant changes, we can make a real difference. 

There are some MPs on the opposition benches in Parliament who believe that the only way to halt climate change is to overthrow capitalism – to introduce a new economic system. I am afraid they are utterly wrong. I believe that it is capitalism itself that can save our planet. 

For too long, there has been a perception by too many pension trustees that the environmental practices of the firms they invest in are purely ethical concerns that they do not need to worry about. This is utterly wrong and cannot continue. Under the new ESG regulations, trustees now must consider the environmental practices of the firms they invest in before taking investment decisions to create a balanced portfolio. This will make a real difference and give pensions trustees the nudge they need to do their part to tackle climate change. But going forward, we can do so much more. 

Our pension funds have exactly what we need to tackle this problem. A lot of capital, an ability to think very long term, and no political agenda. Clearly, if we do not harness the financial muscle of these massive pension portfolios, we are missing a trick. 

Britain has Greentech firms innovating to help tackle consumers tackle climate change and drive down the cost of providing energy, but they need investment to continue innovating. So going forward, as part of a balanced portfolio, pensions trustees should be supporting our climate friendly companies.

Thanks to the government’s automatic enrolment programme, more than ten million employees have been enrolled into an occupational pension – now saving eight per cent of their annual income. It is undoubtedly one of the greatest success stories of the Conservative and coalition governments.

Ethical investment can no longer be a niche. It needs to be mainstream. What bigger challenge is there than addressing the climate emergency? As I said, if we don’t address these long-term issues now, there won’t be a long-term. 

My colleagues in Parliament tell me that pensions are not sexy, but this time it could be pension power that is the force for good to address our twenty-first century problems.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Bob Seely: Saving Britain billions. Ideas for the contenders in this leadership contest.

Bob Seely is a member of the Foreign Affairs Select Committee, and is MP for the Isle of Wight.

Throughout this coming week, the candidates for the Conservative Party leadership launch their campaigns in earnest.

Whoever wins faces a massive challenge. Not only do we have to deliver Brexit – and until we do Britons won’t listen to us on anything else – but we also need to introduce a raft of domestic and foreign policies to renew us in office.

We badly need new ideas and new projects , some of which will need new cash. We also need to cut taxes. To help with the coming battle for ideas, and to support Liz Truss’ work on the spending review, here below are ideas to save between £50-100 billion. That figure doesn’t include the £39bn from a nodeal Brexit.

– – –

First, some basic facts. Government spending made up 38.5 per cent of GDP in 2017-2018. Departmental budgets set by spending review (DEL) amounted to £358.4 billion in 2017-2018, but the total departmental expenditure, including spending which is difficult to predict, manage or forecast (AME) was £812.9 billion in 2017-2018. Of that, £734.9bn was spent on services.

So where could we save money?

High speed rail

First, scrap the planned High Speed Rail link – HS2 – and save £50-100 billion. HS2 initially cost £33.4 billion, then rose to £42.6 billionIt is now costed at £56 billion. One government-commissioned estimate suggests it could total a breath-taking £403 million per mile. The Institute of Economic Affairs estimates the real cost to be £80 billion, and even that may be too little.

Terry Morgan, former chair of HS2 Ltd, told the Lords “everybody has their own guesstimate” of cost and “nobody knows, actually, the number”. Doug Thornton, HS2’s former Land and Property Director, has said the valuation of properties along the route was “enormously wrong”The National Audit Office found that the estimated net cost to acquire land and property for Phase One was £1,120 million in 2012 (2011 prices) ,but £4,316 million was budgeted at the 2015 spending review (2015 prices). Every honest review has considered it bad return for the taxpayer. The Lords’ respected Economic Affairs Committee has suggested delaying HS2. Let’s bite the bullet and bin this white elephant.

As with all the ideas here, the money could be better used by giving it back to taxpayers in the form of tax cuts, or supporting local and regional infrastructure projects to counter London’s domination of infrastructure spending, or to right the injustice faced by female pensioners – the so-called WASPI women. Alternatively, the next Conservative Government could pledge to ensure fibretopremises broadband nationwide to deliver near unlimited broadband speeds.

The farce of HS2 highlights a wider issue; UK public projects cost much more than in other countries – construction cost per mile of HS2 maybe as much as nine times that of its French equivalentMegaprojects run over-budget and over-time – time after time.

Cost overruns for the Channel Tunnel were 80 percent and for the National Health Service IT System up to 700 percent. The Scottish Parliament was estimated to cost between £10 and £40 million. It cost £414 million and was delivered three years late. An excellent study by the Taxpayers Alliance found that 57 per cent of over 300 public schemes overran by an average of 33.7 per centAnother study in 2009 found total net overrun on 240 projects was more than £19 billion. Even by Government standards, these are eye-watering sums. Running public projects to time and budget would allow us to slash taxes and still leave billions for education, policing or defence.

Overseas aid

Second, reallocate the 0.7 percent legally defined amount that the UK needs to spend on overseas aid. Many traditional Labour and Conservative voters alike are losing faith with this figure.

Why? Because we now spend more on overseas aid than we do on policing. To keep public support for overseas aid, which is important, and to integrate our overseas policy, we need to change the definition of aid to give us more flexibility in how we spend, as I outlined in a Henry Jackson Society study six months ago.

We should continue and even increase the basic lifesaving and humanitarian development aid that we are rightly proud of. But there are other elements of the £14.5 billion aid bill that we can re-allocate to provide much-needed support to the Foreign & Commonwealth Office(FCO), Ministry of Defence (MoD) and Department for International Trade (DIT). The DfID money should fund:

  • The BBC World Service TV and Radio, tasking it with becoming the global broadcaster of integrity to counter the propaganda output of authoritarian states such as Russia and China.
  • Minstry of Defence peacekeeping operation.
  • Some of the Department of International Trade’s work, especially where that trade represents a moral as well as economic good, such as providing new and greener technologies for developing nations.

Whilst the above doesn’t offer money back to the Treasury, ieffectively gives a spending boost of £85 million to the FCO, £269 million to our Armed Forces and tens of millions to our trade missionswithout having to raise taxes or borrowing. In addition, £254 million for the World Service that comes from the licence fee can be returned to taxpayers or reinvested in the service.

Health and social care

Third, integrate health and social care with local government. This has a potential for big efficiency savings, allowing money to frontline services rather than bureaucracy.

Attempts to make this idea work so far have floundered. The Better Care Fund was intended to save £511 million for departments and partners in the first year. It failedNevertheless, the idea is a valid, one and the council in my constituency of the Isle of Wight is hoping to win Government support to set up a pilot scheme.

In an increasingly complex world integration, be it in overseasspending, or public servicesintegration is key to efficiency and delivery. Artificial Intelligence, tele-medicine and better use of big data will support this, especially in more isolated communities such as the Island.

Cut corporation tax

Fourth, cut tax to raise more in revenue. The principle is a sound one – we cut top rate tax in the 1980s and dramatically increased the tax take.

Slash rates of corporation tax to 12.5 per cent.  Britain has been willing to give the fiscal firepower to “pull every lever we’ve got” a no-deal BrexitDown from 28 per cent in 2008, Corporation tax will soon be set at 17 per cent, the lowest in the G20 – yet receipts have never been higher at £56.2 billion. Lower corporation tax would increase the demand for labour, which in turn raises wages and increases consumption.

Winter fuel payments

Fitth, there are more difficult areas to cover. For example means test winter fuel payments would not be popular but could save £2 billion a year. Despite being estimated to cost £1,967 million in 2018/19, these were described by the Work and Pensions Committee (114.) as a “blunt instrument” which “gives a cash payment to many households do not need it”.

According to the Social Market Foundation, pensioners, who are by far the wealthiest age group in society, “are likely to save rather than spend the value of the windfall. It asked: “Why should older, wealthier pensioners receive more money than poorer, younger ones?”

An estimate for 2012-13 stated if payments were only made to those in receipt of pension credit, expenditure would only be £600 million in 2012-13 (to nearest £100 million). Surely it is better to spend the money on increasing the basic state pension, or increasing the amount that poorer pensioners receive, than giving it to those need is less.

Street and motorway lighting

Next, there are smaller but no less valuable schemes that we could champion. For example, do we need to keep streetlighting on overnight in rural areasThere’s no link between having lights off or dimmed and an increase in crime. Do motorways lights have to be on throughout the night? On the Isle of Wightwe can vary our lighting from a central point. That has the potential to save tens or hundreds of thousands of pounds per annum.

Roadside verges

Next, why don’t we cut roadside verges less. They represent a natural habitat for wildlife, but often the way they are cut today during flowering season kills wildflowers and replaces them with thick grass which need more cutting. There are parts of verges, in roundabouts, on curves, which will need very regular cutting, but if we adopted verge cutting to encourage wildflowers and pollinators such as bees, we would beautify roadsides AND save moneyDorset saved £93,000 by ‘greening’ their verge cutting, and Monmouthshire County Council estimates it has saved £35,000 annually from reducing verge mowing. For councils’ up and down the country, every little helps, especially if it has an environmental and quality of life benefit.

Legalising cannabis

Sixth, there are other potential tax streams which have not been examined. Should we examine legalising cannabis, for example, especially weaker strains of it, not only to raise tax but also for reasons linked to mental health and crime reduction.

Colorado, with a population of under six million, raised $247 million in 2017 alone from marijuana tax. One of the most comprehensive studies into legalisation estimates that between £397 million and £871 millio, could be raised annually. A US-style system here could generate up to £2.26 billion a year from tax and fees.

n addition, there is money saved. The Taxpayers Alliance estimates that by legalising cannabis, the UK could save at least £891.7 million a year in reduced spending by police, prisons, courts and the NHS through pain relief treatments. Do we need a Royal Commission on this subject? Should we be treating cannabis, especially in mild form, as yet another sin tax, like smoking and alcohol?

Doing things better

Seventh, we need to do simple things better. There are more prosaic aspects of best practice, such as procurement.

Procurement amounts to around one third of public spending in the UK. In 2016/2017, the UK public sector spent an estimated £355 billion with external suppliers. Efficiencies, such as buying common goods and services on behalf of the whole government, saved £255 million through the Crown Commercial Service and £879 million through specialist commercial expertise.

We need a systematic method of driving procurement best practise across all of Government, from paperclips to tanks, and supporting new, smaller entrants into a market dominated by bigger players who too often bid, take their cut and sub-contract.

Finally, by leaving the EU we will have more power over procurement, buying locally as far as free markets allow. Some organisations believe that EU regulation costs the UK as much as £33.3 billion per year, potentially moreBy taking a common sense attitude to regulation post Brexit, we could save Britain billions.

– – –

These ideas are just a start. Ensuring a Conservative Government after the next General Election requires two things. First, we must deliver on Brexit, second, we need to produce ideas and policies that renew in office.

This is a contribution to the debate. Let’s see what the candidates offer in the week ahead. I wish them well.

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Penny Mordaunt: It’s time for servant leadership that will listen to the people

The author is Secretary of State for Defence, and is MP for Portsmouth North.

So the opening shots of a Conservative leadership contest have been fired against the backdrop of disastrous European election results. In both the Conservative and Labour parties, the post-mortems have begun. There’s general agreement that Brexit (or the lack of it) seems to be cause. But is that the whole story?

For while the main parties argue about Brexit, 25,000 desperately worried steelworkers across the country anxiously wait on news of their jobs. Last week, Panorama revealed how vulnerable disabled and autistic people at Whorlton Hall were being taunted and abused by carers. This was in much the same way as others had been eight years ago in a similar abuse case at Winterbourne View. Overseas, serious tensions are brewing as regional and global powers square off.

Set against this, the public now has to endure a parade of leadership candidates speaking to Westminster, from Westminster, about Westminster. Policy has given way to presentation. A game plan on Brexit, some animated soundbites, and a rallying cry to get better on social media and a fresh face seems to be all that’s required. Policies – or to be more accurate spending commitments – will be announced with little thought or consultation just for something plausible to say on a topic. Policy created in a vacuum never works: just look at the 2017 Conservative general election manifesto.

We’re facing a breakdown of public trust in our politics and our leadership. The compass is spinning, and across the political spectrum tactical presentation has replaced strategic policy. Some members of the same Party are not on speaking terms. One half is appalled at what the other voted for. The other half is appalled that we have not delivered Brexit yet. Others have left to form new political parties.

To blame this division solely on Brexit would be wrong. It was there previously, across many dimensions. It existed between urban and rural areas, men and women, high and low incomes and old and young. Brexit has tracked along these fault lines. The referendum, when it came, promised clarity at least on Europe – a clear mandate to leave. No wonder the British people are so dismayed at the last three years.

The disappointment about Brexit felt by the membership in the Conservative Party is echoed in that of the nation. The people haven’t lost faith in politics. They’ve lost faith in politicians who have lost faith in them. And they are calling for change.

The inadequacy of politics today goes beyond Brexit. It’s much more profound. And it requires Westminster and Whitehall to recognise that the world around them is changing, perhaps more rapidly than they realise.

The public are impatient for reform, yet legislation is achingly slow. We cannot regulate at the speed needed to enable British scientists and entrepreneurs to bring their inventions to market and to be based here. Nor right social wrongs, even when all are agreed it is the right thing to do, even when funding is there, even when the expertise is there, as has been the case with Winterbourne. Successive administrations have failed to facilitate benefits our citizens could have – access to new drugs and treatments. And governments have limited our ambition as a nation by what the Treasury alone can afford, resulting in pilots, roundtables, short-term grants and little real impact.

Political leaders have failed to notice and failed to protect people from failed leadership elsewhere. Corporate leaders have stolen pensions, avoided tax, presided over the collapse of the financial system and sheltered money offshore. Spiritual and charity leaders have covered up sexual abuse. Tech giants who have used our personal information against us and failed to protect the vulnerable. So, it’s no surprise people feel let down by their leaders.

In recent times, our politics has sometimes failed to read – and therefore failed to lead – those it serves. There is little focus on the torn social fabric of the UK.

In our United Kingdom, you can get married or have a civil partnership or access particular healthcare solely dependent on your postcode. Is this how we planned that the massive benefits of devolution – national and local – would make the United Kingdom stronger?

Apart from a string of worthy reports, the major challenges for our country, from social care to social mobility, still largely reside under a thick layer of dust in the “too tough” in-tray. And the focus on the major challenges facing the world, and the inspiration for us all to tackle them, appears not to be driven by brave politicians but by Blue Planet film makers and schoolchildren.

People are so passionate about their country and their communities, and they want to positively affect the world around them. Their frustration comes from the fact that they want to help, they have solutions, ideas and enterprises, but we don’t listen. They want to be part of a team that is working towards the same goals. They want their nation to pull together to deliver on the issues they care about. Instead, we seem to be pulling things apart.

That is how it feels. And how it feels matters. It affects our ambition. It affects what we believe is possible. And it affects our direction as a nation. It must change, and it can change. To be a political leader now, when we need to restore trust, confidence and hope, will take more than the usual tired routine.

And so this leadership contest cannot mirror those of the past. It has to be more than a fight against competing factions. We must articulate national missions that we can all unite around. How do we ensure that every citizen can reach their full potential, access the best healthcare science has discovered, protect the environment, provide social care and living support, and a secure home for all? That is the only way everyone will be able to contribute, to get different sectors to work together and to get real long-term investment. We will only arrive at those missions and the means to deliver them by listening to and being guided by our citizens.

To unlock our nation’s potential requires a different kind of leadership. Britain needs some humility from its leaders, not just from the candidates in this contest, but from us all. We should trust the people with more than just Brexit. It’s time for some servant leadership.

And that starts with listening. So next week, I will host with some of my colleagues what could be the largest live consultation our party has ever undertaken. It will allow views to be expressed on the national missions and how we deliver on them.

If we come together, listen to each other, take on the challenges and embrace the opportunities of our times to enable all that our party and nation has to offer, then there will be nothing we cannot do. To lead, we must listen.

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Onward, Hancock – and the delusion of leadership candidates retreating to their comfort zone

James Frayne is Director of Public First and author of Meet the People, a guide to moving public opinion.

Reading Matt Hancock’s piece in the Sunday Times a couple of weekends ago previewing Onward’s interesting new publication, Generation Why, and watching a clip of his speech at the publication’s launch, reminded me why I gave up talking to people in politics about football nearly 20 years ago.

A weird link? Let me explain. There comes a time when, despite theoretically sharing an interest in the same subject, you have so little actual shared experience of that subject that it becomes impossible to have any sort of meaningful conversation about it. You might as well be talking to each other in a foreign language.

As a youth of 16 or 17, playing at the bottom of the non-league pyramid, my favourite place to play was Heanor Town. For those that don’t know the East Midlands, Heanor is a small town in the North of Derbyshire. The football pitch was located at the top of the slope of the cricket pitch. While badly sloped, the pitch was impeccably cut whatever the weather (usually cold or freezing), the floodlights worked, and the dressing rooms had the intense smell of deep heat. Most importantly, the locals absolutely loved football and sport in general. Heanor was a football town.

When you talked to the locals about football, they didn’t just talk about Man Utd or Derby or Forest; of course, they did talk about them, but they’d be as happy talking about the last game against Kimberley Town, or Jeff Astle’s last song on Fantasy Football, or how Notts County fans moaned all the time. In short, when talking about football there was a shared understanding that you were talking about the game as a whole. It was expected that everyone knew practically everything there was to know about the game since they were a child – about players, fans, grounds, songs, old kits and all the rest.

When I arrived in London politics, full as it was with privately educated, mostly Southern staff that hadn’t played much, that shared understanding was totally absent. While many professed a love of the game, their entire way of speaking about it was alien. They’d talk almost entirely about the top of the game over the last few years since they became interested or – increasingly and weirdly – about football statistics. Nobody knew what the Anglo-Italian Cup was, let alone the FA Vase. And because nobody had really played at school, nobody knew what it was like to get hit on the thigh with a Mitre Multiplex in January. The Fast Show’s “I love football” sketch was no longer an amusing parody, but reality. Talking about football was a bizarre and depressing experience. So I stopped.

Which takes me back to Hancock’s article and speech. In giving advice to the Conservatives in appealing to the young, he wrote: “First, we need to get our tone right. Sometimes Conservatives can sound, as Ruth Davidson succinctly put it, a bit ‘dour’. Of course, it’s our job to be the pragmatists, but nobody wants to hang out with the person always pointing out the problems, rather than the one hopeful about the solutions…” At the event, he said:  “As well as delivering better economic prospects for people, we’ve got to sound like we actually like this country. We’ve got to patriots for the Britain of now, not the Britain of 1940. And enough about being just comfortable with modern Britain, we need to champions of modern Britain.”

Just as I found it increasingly difficult to relate to most of the privately-educated, metropolitan Conservatives talking about football, hearing this, I found myself similarly thinking that I have literally nothing in common with the same sorts of people’s views on politics. It’s as if we’ve grown up in entirely different worlds. Honestly, how can anyone think that the British people are collectively optimistic, happy-go-lucky, and modernity-obsessed? How can anyone seriously think that this is the best way to engage with people? How can they imagine themselves walking into the average pub, shopping centre or call centre canteen and connecting with ordinary people with such a case? 

Ordinary people don’t want to hear about 1940 or about life before large-scale immigration; most are happy with the people they live amongst. But they also emphatically don’t want to hear politicians droning on about how great the future is going to be and how technology and 3D printing is going to change everything for the better. It’s just not how they think about the world and not how they talk about it.

Look at what most working class and lower middle class people really think about things – those that make up the bulk of electorate. They think: that the economy is, at best fine, but that they see little of the benefits of growth; that long-term careers are a relic of the past; that good pensions have gone and that a long retirement is just a dream; that home ownership is increasingly unattainable; that the cost of living is too high; that their town centres are boring; that the NHS is over-burdened and under-funded and might fail them when the time comes; that crime is rising and police numbers are falling; that their savings will get raided to pay for social care; that childcare is ruinously expensive; and they think that politicians are out of touch thieves. While this is more prevalent amongst the old in provincial England, it’s actually common everywhere.

Why get so worked up over one little speech and an article? Because it’s clear that the Conservative Party is preparing to return to its recent comfort zone – using claims of a broad appeal to the young, which would be reasonable, to justify an appeal to the tiny number of successful, highly affluent, urban voters who are basically like those at the top of the Party. It’s dressed up as daring and confrontational, but is in fact just about following a path of least-resistance in the Party, while making those that make the case feel good about themselves. If Hancock is so sure this plays well, Heanor are home to Gedling Miners Welfare on Saturday. I’m sure they’d love to hear from him.

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David Willetts: There are ways for Conservatives to win over younger voters – but they aren’t easy

Lord Willetts is Executive Chair of the Resolution Foundation. He is a former Minister for Universities and Science.

The big challenge facing British politics today is obviously Brexit. But in some ways, the main parties, and especially the Conservative Party, face an even bigger political challenge – bridging Britain’s age divide. This issue, which I wrote about a decade ago in my book The Pinch, has risen to the fore again thanks to an excellent report published yesterday by the think-tank Onward.

Onward show that age rather than class is now the best predictor of voting intention. Labour had a 29 per cent lead among 25-34 year olds in the 2017 election and Conservatives had a 36 per cent lead among over-65s. There are a host of other factors which might lie behind this age gap – older people are less ethnically diverse, less likely to live in cites, less likely to have a degree. But even after allowing for such effects there is a still a fundamental age gap in voting.

This need not itself be a problem for the Conservatives (the focus of Onward’s work). If young people vote Labour and, as they go through the life cycle, older people vote Tory then as the population ages there might even be an electoral gain for a party appealing to older voters. But this depends on voters turning Conservative as they grow older. And that is not happening.

Instead, the Conservative Party is retreating towards a cohort of ever older voters. The “tipping-point age” at which a voter is more likely to be Conservative than Labour used to be 34. It went up to 47 at the 2017 General Election and is now 51 years old. So voting Tory is not just a life cycle effect: instead a cohort of older Tories is gradually being replaced by succeeding cohorts who are more inclined to Labour. That is the existential threat which Onward urge Conservatives to face.

“Younger voters” are obviously not a homogenous group, and neither are their voting intentions. Many of them are in the middle of British politics – slightly “left” on economic and welfare issues, and slightly “right” on cultural and national issues. But that is not, of course, where the Conservative Party is seen to be.

There are some things that both parties should prioritise to win young people over. Helping them get started on the housing ladder is crucial. And that means building more homes in the places where they want to live.

The Onward polling suggests some other things young people want – more conditionality in immigration, to reduce the gap between rich and poor, more technical education and backing for people on average wages.

Many Conservatives will be encouraged by younger voters’ desire to keep their own money, rather than increasing tax, and to make public services more efficient, rather than spend more on them. Rather less encouragingly, this may reflect younger voters getting a pretty raw deal from the welfare state in recent years, as it is increasingly focussed on older people. Working age benefits have now entered their fourth year of a cash freeze, while state pensions increase under the triple lock. Just imagine the politics of treating benefits for pensioners the same way as benefits for working age families. And the NHS is mainly used by the over-60s.

This all suggests a rather acute dilemma for Conservatives – with even tougher choices than those set out in the report. After all, Onward’s polling shows that 70 per cent of voters believe that Britain needs a ‘radical change of direction’.

Older voters are the heaviest users of public services and the welfare state is increasingly for them. The areas where there are concentrations of older voters now shifting to Conservatives are heavily dependent on public services. This demographic shift is expensive, too. An ageing population and rising healthcare costs mean that the cost of maintaining the current welfare state will rise by £36 billion a year by 2030. Someone has to pay for this greying state.

What is the right way to meet this demographic challenge? Should we cut back public services to satisfy younger voters’ desire for taxes to be held down? But then core Tory voters are losing out. Or should we levy higher taxes on the working age population to pay for increased public spending on older voters? That cuts across the views of the younger voters that the Party needs to win over. And finding an extra £36 billion a year through income tax alone would require a huge increase in headline rates that no party would countenance.

There is of course another way to square this circle. What if older people were themselves expected to make more of a contribution to the public services they use? This could be done by reforming council tax so that high-value properties pay more, or expecting wealthy pensioners to make more of a contribution to the costs of social care. That is the dilemma which the Conservative Party’s 2017 election manifesto tried to confront. It may have been handled ineptly, but the underlying dilemma has not gone away.

That is where the debate is heading, whichever party is in power over the next decade. Choosing which public services you want to maintain, or what to tax more – income or capital – will be the real test of Britain’s age divide.

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