THE STRANGE SILENCES OF THE BRITISH POLITICAL CLASS
Facing a severe financial crisis, the British political class has failed to lead and has relapsed into silence on key issues.
INTRODUCTION
The British political class, whether MPs, Peers, Members of the Devolved Assemblies or Councillors, has failed to lead by not cutting its own salaries and expenses. In a democracy this is an absolute essential when there are to be severe necessary cuts in public spending.
This failure contrasts with the example of Ireland where the politicians led the way and enforced the biggest proportionate cuts in ministers’ rewards.
Apart from failure in leadership to control its own affairs the British political class has failed to be honest with the public about necessary and essential cuts in public sector pay, pensions and welfare benefits.
It has also maintained silence about the costs of EU membership. These costs are treated as an Act of God, and beyond consideration for reduction unlike all other government expenditure.
Silence is also maintained over the massive costs of supplying the social and economic capital required by large-scale, unskilled immigration. These costs at present can be estimated to reduce GDP by 2¼ per cent per annum.
PART ONE
A SILENCE ON THE ESSENTIAL CUTS IN PUBLIC SECTOR PAY, PENSIONS AND BENEFITS
The Irish budget on December 9th cut wage rates in the public sector, cut the rates of some benefits and cut the pay of ministers. It was well received internationally but there was a reluctance among British politicians and commentators to insist the UK followed the Irish example.
THE REALISTS
Among exceptions to this stance was Allister Heath, editor of City AM who wrote on 4th January 2010, “the public has yet to accept Irish-style swingeing spending cuts, including public sector pay reductions are now looking inevitable.”
Another was Mike Denham [burningourmoney.blogspot.com] who, with the IOD/ Taxpayers Alliance, called for a “5% pay cut for the richest [sic] 10% of public employees”.
THE CONSERVATIVES: TAXES OR CUTS
It appears from their public statements, as well as internal sources, that the Conservative leadership is now giving more thought to proposed tax increases. In particular, the October 2009 George Osborne conference speech outlined really quite small reductions in public expenditure (£7 billion annually) and there has been little evidence of further firm policy making in reducing public expenditure, although no doubt one way or another they will make further cuts.
David Cameron himself in an interview with the Guardian on 15th December said, “But I just think you can’t go into an election with a 13 per cent budget deficit not saying anything about what you’re going to do”. (He meant a budget deficit amounting to 13 per cent of GDP.)
If the Conservatives do propose to increase taxes while being feeble on expenditure cuts, there will be a lot of disappointed Conservatives who might look for a new political home.
For reference, the budget deficit was forecast to be £175 billion in 2009/10 and 2010/11 with independent commentators suggesting it would be £200 billion. There is no serious commentator who does not think £100 billion per year needs to be slashed off public expenditure at a minimum.
As Reform pointed out, in their recent paper, The Front Line, it is a myth that a new government needs to wait until elected ‘to see the books’. “The government is not withholding information – it cannot find it itself among the cobwebs of the departmental budgets.”
CUTS IN PAY AND BENEFITS
This Conservative uncertainty leaves the field open for a Party with a public expenditure cutting policy with published lists of cuts not necessarily in fine detail but listed in adequate depth and tabulated to a total realistic figure. There would need to be outright reductions in public service pay, pensions and welfare benefits. This is the approach being adopted in Ireland and in some US states like California. The great advantage of such action is that the effects of expenditure cuts would be very quick. In effect, it simply means that the computers paying out wages and benefits need to be reset with lower levels of payment. In Ireland, the reduction will come into effect in January 2010, that is almost immediately.
At present, Labour is adding public sector jobs (23,000 in the October quarter) and public sector workers are getting pay increases over double the rate of the private sector. The Conservatives should counter Labour’s argument that the cuts cannot come until there is economic recovery by pointing out that, historically, government budget discipline has always been necessary after any downturn and is a precondition for economic recovery, as in 1981. There are other international examples, for example, the deep public sector cuts in Canada and Sweden in the 1990s. Going back to earlier times, there was the return to balanced budgets by President Harding in 1921 or President Truman in 1946 following massive wartime deficits. Brian Lenihan, the Irish Finance Minister, specifically rejected Labour’s argument.
LEADERSHIP - THE IRISH EXAMPLE
But the political class would have to show leadership and lead the way with cuts in their own pay and expenses as in Ireland. There is little sign of that at present and plenty of scope for alternative offers of reducing the salary and expenses of the political class. As Brian Lenihan said in Dublin, “Those at the top will lead by example in this national downward readjustment of pay”.
A cut of an average 12 per cent of all public sector pay, pensions and benefits would (allowing for lost tax income) reduce the deficit by about £50 billion.
A further way to enforce large cuts would be to reduce all departments to the spending of 2005/6. The economy has shrunk to the size of 2005/6 so government spends should shrink to that level.
Finally, there needs to be further outright cuts of vast swathes of government spending – often useless but this will take time. At present, it is on this rather intractable area, where there will be many bureaucratic and vested interest obstacles to overcome, that political debate has focussed.
The situation in Ireland in terms of the size of the deficit and the type of economy is similar to the UK (except for Ireland’s membership of the eurozone).
It is worth noting that Ireland has agreed with the EU to reduce its deficit by:
2010 4 billion euros (Ireland has already made substantial expenditure cuts & tax increases in its 2009 budget)
2011 4 billion euros more
2012 4 billion euros more
2013 3 billion euros more
15 billion euros annually by 2013
The equivalent for the UK of these cumulative cuts is about £200 billion annually by 2013. (Ireland’s economy is about seven per cent of that of the UK.)
In Ireland there will have to be further cutbacks after 2013.
The Irish budget of 9th December 2009 has indeed included cuts in the wages of the entire public sector, cuts in some benefits, cuts in unemployment pay, cuts in future public sector pensions, cuts in Ministers’ pay. Nevertheless, Irish commentators criticize the omission of reductions in Old Age Pensions.
This Irish Budget followed a revolt by Fianna Fail backbenchers against a proposed ineffective arrangement with the Irish TUC that Prime Minister Brian Cowen was working on, with the backbenchers insisting on financial disciplines.
Brian Cowen’s Fianna Fail government, which had low levels of respect and political popularity, suddenly showed leadership.
Brian Lenihan summed up his policy, “Put simply, we have priced ourselves out of the market. We will not be able to stop the haemorrhage of jobs until our prices and the costs of doing business have moved down in line with our main trading partners”.
Such needed discipline has had its results in a respectful press. The Irish Times commented “the decisions taken rise up to the occasion financially. They were courageous, bold, above party politics, above sectional interest and they appear to have put the country first”.
This respectful comment is worth more than the millions spent by political parties in spin and media massaging.
While many politicians and commentators in the UK applaud the resoluteness of the Irish, there is a strange reluctance to discuss the necessary wage, pension and welfare cuts in the UK preceded by a reduction in the salaries and expenses of the political class.
PART TWO
SILENCE ON CUTS IN CONTRIBUTIONS TO THE EU
EU CONTRIBUTIONS
At present, EU gross contributions (less abatement) by the UK (£11 billion) are regarded as untouchable by Labour, the Conservatives and the Liberal Democrats. Indeed, the EU budget is increasing for 2010 and there is a dispute between some member states and the EU Commission over whether to pay an increase of 3.7 per cent to EU staff for 2010. Then there are also the agreed increases to UK contributions by Blair which impact from 2009 quite severely. It has been reported on 9th November 2009 by Open Europe that House of Commons’ researchers have calculated that the Blair concessions will raise the cost of EU budget contributions by £2.5 billion p.a. between 2009 and 2013 making the gross contribution (less abatement) £13.5 billion p.a. (This paper ignores the other costs of EU membership such as higher prices, regulation, etc.)
When cutting this expenditure, as with any expenditure, the gross contribution to the EU less abatement is the only correct bookkeeping figure to consider.
The fact that some of the EU contributions are recycled back to the UK in the form of bonuses to agri-business and landowners, employment of Jean Monnet professors, etc. is irrelevant. The abolition of the gross EU contributions will have some secondary and tertiary economic effects, as all cuts in government expenditure, but it is not correct bookkeeping to take these into account.
A reduction in Britain’s EU contributions – if not abolition – could be linked with public sector cuts. Why should Britain borrow long-term from China or the Gulf States and then hand the money over to Brussels to be spent on Continental farmers or bureaucrats? For a country with a £200 billion annual government deficit, this is plainly financial lunacy. The idea that the EU is immune from any financial cutback seems to be accepted uncritically by the political class. Reductions in EU contributions should be put to the EU and should be enforced, if necessary by unilateral action.
PART THREE
THE HIDDEN COSTS OF IMMIGRATION
Another obvious area to cut back is the socialisation of the costs of immigration. The enormous costs of immigration are not recognized by the political class and there is no major party planning to face up to these costs.
Net inward migration of non-British citizens is adding some 0.5 per cent to the population each year and that means total real GDP has to increase by 0.5 per cent per annum for real GDP per head to simply stand still, and this figure ignores capital costs which are dealt with below.
In Middle Eastern and Far Eastern countries immigrants do not get welfare benefits nor are they entitled to free education or health. Incoming workers generally arrange health insurance with their employers and make private arrangements for education.
To pay welfare costs, housing costs, education and health benefits to immigrant workers is a magnet to low income workers or benefit seekers. The fact that such workers, if they work, pay national insurance, should not be seen as an entitlement or ‘fairness’ but simply a cost of working in the UK.
Further, to provide these services, there are enormous capital costs in funding housing, schools and hospitals.
It is not usually realized how costly it is to provide the assets required for a migrant.
CAPITAL COSTS
What are the capital costs of immigration? With net foreign migration at 0.5 per cent per annum of the existing population, it is plain that to maintain the stock of capital per head, there must be an increase of 0.5 per cent per annum in capital. This capital is represented by fixed assets, such as houses, roads, dams, factories, power stations, etc, as well as current assets in the form of necessary cash and stocks. The stock of fixed capital is put by National Statistics at about £4,800 billion, so 0.5 per cent of this is £24 billion. This is around 1¾ per cent of GDP, and has to be found every year to stop capital per head of the British residents from falling. It represents slightly less than 40 per cent of current total net capital investment.
Of course, in reality 40 per cent of net new capital invested is not necessarily channelled directly into creating fixed assets for migrants. The necessary fixed assets can be supplied by slightly diminishing the capital at the disposal of the resident population. For example, the number of roads or houses could remain static, just more people could be forced to use them. This is called crowding in and is an obvious diminution in wealth.
However, standing back and looking at the national picture, migration without accompanying capital means less capital assets per head of the new combined migrant/native populations.
So, examining real GDP, we have to deduct 0.5 per cent for the extra number of people brought in by migration and a further 1¾ per cent to provide the capital assets required by migrants. Thus, if headline real GDP is increasing by 2.25 per cent per annum, and if the quantity of capital assets per head are maintained, the actual real GDP per head is remaining static.
The simple solution to the costs of migration should be to deny welfare benefits, education, health and housing, etc. to new immigrants for, say, ten years. This will not affect the high quality immigrants who are wanted in the city, etc. because they do not take up such benefits. It would, however, check mass low-skilled immigration and be a major cost saver both in current as well as capital costs.
CONCLUSION
There would be great political gains to be made for the Conservatives if they really told the electorate ‘what you’re going to do’ about the budget deficit. Cuts in EU contributions and the costs of migration would also be popular since Conservative failure to address these issues from first principles is a constant weakness, leading to loss of support to new parties on the Right. Further, if the Conservatives get into power they will immediately ‘own’ these issues and, unless clear plans are made to deal with them in advance, Conservative ministers will quickly find they are defending mass immigration and extravagant EU contributions.
FUTURUS/20 January 2010
INTRODUCTION
The British political class, whether MPs, Peers, Members of the Devolved Assemblies or Councillors, has failed to lead by not cutting its own salaries and expenses. In a democracy this is an absolute essential when there are to be severe necessary cuts in public spending.
This failure contrasts with the example of Ireland where the politicians led the way and enforced the biggest proportionate cuts in ministers’ rewards.
Apart from failure in leadership to control its own affairs the British political class has failed to be honest with the public about necessary and essential cuts in public sector pay, pensions and welfare benefits.
It has also maintained silence about the costs of EU membership. These costs are treated as an Act of God, and beyond consideration for reduction unlike all other government expenditure.
Silence is also maintained over the massive costs of supplying the social and economic capital required by large-scale, unskilled immigration. These costs at present can be estimated to reduce GDP by 2¼ per cent per annum.
PART ONE
A SILENCE ON THE ESSENTIAL CUTS IN PUBLIC SECTOR PAY, PENSIONS AND BENEFITS
The Irish budget on December 9th cut wage rates in the public sector, cut the rates of some benefits and cut the pay of ministers. It was well received internationally but there was a reluctance among British politicians and commentators to insist the UK followed the Irish example.
THE REALISTS
Among exceptions to this stance was Allister Heath, editor of City AM who wrote on 4th January 2010, “the public has yet to accept Irish-style swingeing spending cuts, including public sector pay reductions are now looking inevitable.”
Another was Mike Denham [burningourmoney.blogspot.com] who, with the IOD/ Taxpayers Alliance, called for a “5% pay cut for the richest [sic] 10% of public employees”.
THE CONSERVATIVES: TAXES OR CUTS
It appears from their public statements, as well as internal sources, that the Conservative leadership is now giving more thought to proposed tax increases. In particular, the October 2009 George Osborne conference speech outlined really quite small reductions in public expenditure (£7 billion annually) and there has been little evidence of further firm policy making in reducing public expenditure, although no doubt one way or another they will make further cuts.
David Cameron himself in an interview with the Guardian on 15th December said, “But I just think you can’t go into an election with a 13 per cent budget deficit not saying anything about what you’re going to do”. (He meant a budget deficit amounting to 13 per cent of GDP.)
If the Conservatives do propose to increase taxes while being feeble on expenditure cuts, there will be a lot of disappointed Conservatives who might look for a new political home.
For reference, the budget deficit was forecast to be £175 billion in 2009/10 and 2010/11 with independent commentators suggesting it would be £200 billion. There is no serious commentator who does not think £100 billion per year needs to be slashed off public expenditure at a minimum.
As Reform pointed out, in their recent paper, The Front Line, it is a myth that a new government needs to wait until elected ‘to see the books’. “The government is not withholding information – it cannot find it itself among the cobwebs of the departmental budgets.”
CUTS IN PAY AND BENEFITS
This Conservative uncertainty leaves the field open for a Party with a public expenditure cutting policy with published lists of cuts not necessarily in fine detail but listed in adequate depth and tabulated to a total realistic figure. There would need to be outright reductions in public service pay, pensions and welfare benefits. This is the approach being adopted in Ireland and in some US states like California. The great advantage of such action is that the effects of expenditure cuts would be very quick. In effect, it simply means that the computers paying out wages and benefits need to be reset with lower levels of payment. In Ireland, the reduction will come into effect in January 2010, that is almost immediately.
At present, Labour is adding public sector jobs (23,000 in the October quarter) and public sector workers are getting pay increases over double the rate of the private sector. The Conservatives should counter Labour’s argument that the cuts cannot come until there is economic recovery by pointing out that, historically, government budget discipline has always been necessary after any downturn and is a precondition for economic recovery, as in 1981. There are other international examples, for example, the deep public sector cuts in Canada and Sweden in the 1990s. Going back to earlier times, there was the return to balanced budgets by President Harding in 1921 or President Truman in 1946 following massive wartime deficits. Brian Lenihan, the Irish Finance Minister, specifically rejected Labour’s argument.
LEADERSHIP - THE IRISH EXAMPLE
But the political class would have to show leadership and lead the way with cuts in their own pay and expenses as in Ireland. There is little sign of that at present and plenty of scope for alternative offers of reducing the salary and expenses of the political class. As Brian Lenihan said in Dublin, “Those at the top will lead by example in this national downward readjustment of pay”.
A cut of an average 12 per cent of all public sector pay, pensions and benefits would (allowing for lost tax income) reduce the deficit by about £50 billion.
A further way to enforce large cuts would be to reduce all departments to the spending of 2005/6. The economy has shrunk to the size of 2005/6 so government spends should shrink to that level.
Finally, there needs to be further outright cuts of vast swathes of government spending – often useless but this will take time. At present, it is on this rather intractable area, where there will be many bureaucratic and vested interest obstacles to overcome, that political debate has focussed.
The situation in Ireland in terms of the size of the deficit and the type of economy is similar to the UK (except for Ireland’s membership of the eurozone).
It is worth noting that Ireland has agreed with the EU to reduce its deficit by:
2010 4 billion euros (Ireland has already made substantial expenditure cuts & tax increases in its 2009 budget)
2011 4 billion euros more
2012 4 billion euros more
2013 3 billion euros more
15 billion euros annually by 2013
The equivalent for the UK of these cumulative cuts is about £200 billion annually by 2013. (Ireland’s economy is about seven per cent of that of the UK.)
In Ireland there will have to be further cutbacks after 2013.
The Irish budget of 9th December 2009 has indeed included cuts in the wages of the entire public sector, cuts in some benefits, cuts in unemployment pay, cuts in future public sector pensions, cuts in Ministers’ pay. Nevertheless, Irish commentators criticize the omission of reductions in Old Age Pensions.
This Irish Budget followed a revolt by Fianna Fail backbenchers against a proposed ineffective arrangement with the Irish TUC that Prime Minister Brian Cowen was working on, with the backbenchers insisting on financial disciplines.
Brian Cowen’s Fianna Fail government, which had low levels of respect and political popularity, suddenly showed leadership.
Brian Lenihan summed up his policy, “Put simply, we have priced ourselves out of the market. We will not be able to stop the haemorrhage of jobs until our prices and the costs of doing business have moved down in line with our main trading partners”.
Such needed discipline has had its results in a respectful press. The Irish Times commented “the decisions taken rise up to the occasion financially. They were courageous, bold, above party politics, above sectional interest and they appear to have put the country first”.
This respectful comment is worth more than the millions spent by political parties in spin and media massaging.
While many politicians and commentators in the UK applaud the resoluteness of the Irish, there is a strange reluctance to discuss the necessary wage, pension and welfare cuts in the UK preceded by a reduction in the salaries and expenses of the political class.
PART TWO
SILENCE ON CUTS IN CONTRIBUTIONS TO THE EU
EU CONTRIBUTIONS
At present, EU gross contributions (less abatement) by the UK (£11 billion) are regarded as untouchable by Labour, the Conservatives and the Liberal Democrats. Indeed, the EU budget is increasing for 2010 and there is a dispute between some member states and the EU Commission over whether to pay an increase of 3.7 per cent to EU staff for 2010. Then there are also the agreed increases to UK contributions by Blair which impact from 2009 quite severely. It has been reported on 9th November 2009 by Open Europe that House of Commons’ researchers have calculated that the Blair concessions will raise the cost of EU budget contributions by £2.5 billion p.a. between 2009 and 2013 making the gross contribution (less abatement) £13.5 billion p.a. (This paper ignores the other costs of EU membership such as higher prices, regulation, etc.)
When cutting this expenditure, as with any expenditure, the gross contribution to the EU less abatement is the only correct bookkeeping figure to consider.
The fact that some of the EU contributions are recycled back to the UK in the form of bonuses to agri-business and landowners, employment of Jean Monnet professors, etc. is irrelevant. The abolition of the gross EU contributions will have some secondary and tertiary economic effects, as all cuts in government expenditure, but it is not correct bookkeeping to take these into account.
A reduction in Britain’s EU contributions – if not abolition – could be linked with public sector cuts. Why should Britain borrow long-term from China or the Gulf States and then hand the money over to Brussels to be spent on Continental farmers or bureaucrats? For a country with a £200 billion annual government deficit, this is plainly financial lunacy. The idea that the EU is immune from any financial cutback seems to be accepted uncritically by the political class. Reductions in EU contributions should be put to the EU and should be enforced, if necessary by unilateral action.
PART THREE
THE HIDDEN COSTS OF IMMIGRATION
Another obvious area to cut back is the socialisation of the costs of immigration. The enormous costs of immigration are not recognized by the political class and there is no major party planning to face up to these costs.
Net inward migration of non-British citizens is adding some 0.5 per cent to the population each year and that means total real GDP has to increase by 0.5 per cent per annum for real GDP per head to simply stand still, and this figure ignores capital costs which are dealt with below.
In Middle Eastern and Far Eastern countries immigrants do not get welfare benefits nor are they entitled to free education or health. Incoming workers generally arrange health insurance with their employers and make private arrangements for education.
To pay welfare costs, housing costs, education and health benefits to immigrant workers is a magnet to low income workers or benefit seekers. The fact that such workers, if they work, pay national insurance, should not be seen as an entitlement or ‘fairness’ but simply a cost of working in the UK.
Further, to provide these services, there are enormous capital costs in funding housing, schools and hospitals.
It is not usually realized how costly it is to provide the assets required for a migrant.
CAPITAL COSTS
What are the capital costs of immigration? With net foreign migration at 0.5 per cent per annum of the existing population, it is plain that to maintain the stock of capital per head, there must be an increase of 0.5 per cent per annum in capital. This capital is represented by fixed assets, such as houses, roads, dams, factories, power stations, etc, as well as current assets in the form of necessary cash and stocks. The stock of fixed capital is put by National Statistics at about £4,800 billion, so 0.5 per cent of this is £24 billion. This is around 1¾ per cent of GDP, and has to be found every year to stop capital per head of the British residents from falling. It represents slightly less than 40 per cent of current total net capital investment.
Of course, in reality 40 per cent of net new capital invested is not necessarily channelled directly into creating fixed assets for migrants. The necessary fixed assets can be supplied by slightly diminishing the capital at the disposal of the resident population. For example, the number of roads or houses could remain static, just more people could be forced to use them. This is called crowding in and is an obvious diminution in wealth.
However, standing back and looking at the national picture, migration without accompanying capital means less capital assets per head of the new combined migrant/native populations.
So, examining real GDP, we have to deduct 0.5 per cent for the extra number of people brought in by migration and a further 1¾ per cent to provide the capital assets required by migrants. Thus, if headline real GDP is increasing by 2.25 per cent per annum, and if the quantity of capital assets per head are maintained, the actual real GDP per head is remaining static.
The simple solution to the costs of migration should be to deny welfare benefits, education, health and housing, etc. to new immigrants for, say, ten years. This will not affect the high quality immigrants who are wanted in the city, etc. because they do not take up such benefits. It would, however, check mass low-skilled immigration and be a major cost saver both in current as well as capital costs.
CONCLUSION
There would be great political gains to be made for the Conservatives if they really told the electorate ‘what you’re going to do’ about the budget deficit. Cuts in EU contributions and the costs of migration would also be popular since Conservative failure to address these issues from first principles is a constant weakness, leading to loss of support to new parties on the Right. Further, if the Conservatives get into power they will immediately ‘own’ these issues and, unless clear plans are made to deal with them in advance, Conservative ministers will quickly find they are defending mass immigration and extravagant EU contributions.
FUTURUS/20 January 2010