My suggestions yesterday as to what I would do in the Budget have generated a bit of a debate on the comments section of this blog, thank you to those that commented. My view remains that the UK is on the edge of a precipice and needs to announce substantial measures going forward to make sure that events do not get out of hand. This is why I would have a rise in Value Added Tax to 20% from 2011/12 as well as looking for substantial public spending efficiencies and reductions. Over the past 2/3 years our existing government has announced all sort of efficiency measures but appears to implemented none of them, for example public sector employment was supposed to have been cut back but I suspect I was not alone in noticing in last weeks unemployment figures that public-sector employment had instead risen by 7000 since September 2009. An intriguing defence of this was that public sector employment had been affected by taking some banks into its figures, which is a strange defence as of course they have been cutting jobs, so in fact the underlying position is probably worse.
It is because we as a nation lack credibility in reducing public spending and also because we face a very difficult task where our “structural deficit” as estimated by the International Monetary Fund is virtually 10% of Gross Domestic Product that I feel a tax rise is required too. Raising VAT is not a perfect choice but all types of tax raising are flawed and I feel that this is the best choice. We also need to consider when we make changes at the moment what the rest of the world thinks of us and a rise in VAT would be understood. Please look at my section on Greece for a description of how interest rate costs on new and maturing government debt can start to get out of hand. This is a reason why my initial move on the “poverty trap” is not to look to end it immediately as I feel that we cannot afford to (sadly). I understand that this is a difficult concept to get across but having worked for many years in government bond markets I understand that if they lose faith in you it is often not a gradual fall but for ages it feels like nothing is happening and then the tipping point occurs and it is too late, again I quote Greece as an example of this.
Having started on what can be done to reduce spending I have another suggestion. Scrap any replacement for Trident. I do follow analysis of our defences and plan to write on this subject but for now I can see a saving of the order of £20 billion over time with few implications. You see we have both cruise missiles on our non-Trident submarines and the Storm Shadow missile for the Royal Air Force. There is no reason why we could not put nuclear warheads on them (and may already have done so) and it would appear that cruise missiles have proved very effective when used and crucially if you buy a decent amount of them you can buy them for around £200,000 each. As we already are buying Eurofighters and the RAF is both buying more than it needs and is planning to use some of them for bombing attacks then for once we can make some efficiencies in defence spending! We may even have spare nuclear warheads for them.
The National Health Service (NHS)
There is a sacred cow in the UK that it is virtually a treasonable event to criticise or to suggest in any way that it could be improved and it is the NHS. Both the main political parties have “ring-fenced” NHS spending.This makes me think that hidden behind such an attitude is probably quite a lot of inefficient practices and may well therefore be the area where paradoxically most savings could be made. I would wish to maintain services as an my objective but increase efficiency and reduce costs. On this I have two initial thoughts.
There has been an increase in the managerial class in the NHS both in numbers and salary paid to them. At times I have met some and have been left with the feeling that those I have met are paid more than the going rate for their skills and this is before one factors in the high cost of their index-linked pensions. So I would cut salaries and numbers here.
Another more difficult area is that of General Practitioners or GPs. This is more difficult because in general these people are viewed much more favourably. But the truth is that the reforms in this area were based on targets and these targets were incompetently set (if I remember correctly Patricia Hewitt was involved at the time and at the moment she is in the news for other foolishness). So we now vastly overpay many GPs and this is exacerbated by the fact that they retire on career average pensions (which are revalued at 1.5% over the Retail Price Index for each passing year) and then are index-linked against inflation in payment. So we will be paying extra in future too when these GPs come to collect their pensions which as time goes by will be increasingly based on higher earnings levels. You see being incompetent they did not realise that if you set targets for motivated people they will set out to achieve them.
Having had faith in GPs myself I have to confess that I am starting to hear of incidents where rather than improving the service is deteriorating. The out of hours service has been weakened and criticised and indeed worked poorly for a member of my family recently, where mistakes were combined with arrogance. We have managed to pay more for less. Accordingly I feel that it is possible to reduce costs and improve service whilst still paying GPs a salary commenserate with their skill set.
With these two efforts and my suggestions from yesterday I believe that we have the basis of a credible plan. The better things go the more ammunition I will have for my attack on the “poverty trap” which so blights our tax and benefits system.
Today’s inflation figures showed an interesting picture. I am sure many will concentrate on the fall in the Consumer Price Index to 3% in February and it may escape them to point out it is still 1% over target. They may miss the fact that the Retail Price Index for all items remains at 3.7%. Our previous measure which was used to target inflation was Retail Price Index excluding mortgage interest payment which is at 4.2% and fell by 0.4% compared with January. So it exceeds its “target” (2.5%) by more than the current measure.
We should be grateful that there has been some improvement and because of the strong effect of the change in VAT rates as we came into this year then forecasters were predicting a drop back this month. However I have been looking at the reasons for why RPI all items did not fall and the explanation is.
By far the largest upward contribution to the change in the RPI annual rate came from housing. This upward effect was driven mainly by mortgage interest payments, which fell by 0.2 per cent this year but by7.3 per cent a year ago, following January 2009’s half point decrease in the Bank rate from 2.0 per cent to 1.5 per cent. Within housing, there was also a large upward effect from house depreciation, which rose this year but fell a year ago. This reflects movements in the Department of Communities and Local Government’s smoothed house price index that is used to calculate this component.
You know my views on house prices. Also of the total of 3.7% on this measure some 2.1% comes from motoring expenditure. The CPI equivalent is transport which contributes 1.6% of its annual rate of 3%. It is interesting that they have quite different measures and answers. Put another way the two main parts of RPI are its measures of housing costs and fuel for motoring. Of course it actually under records housing inflation as we discovered in the run-up to the credit crunch but at least it tries to measure it.
The BBC records the fall in CPI as a “sharp drop” forgetting to mention it is still over target. However a more sober analysis is to allow oneself a sigh of relief. We need some improved news, although caution should be combined with it for three reasons.
1.We are still well over target on our inflation measure (our old measure is even more over target).
2. We appear to be in the middle of a residential housing price bubble and CPI does not measure this at all which was a contributor to policy mistakes in the run-up to the credit crunch.
3. Fuel prices are rising. The Office of National Statistics also published a report on weekly fuel prices today. Over the week to March 22nd then both petrol and diesel rose by 1.1 pence per litre. Compared with a year ago unleaded petrol is 26.4 pence higher and diesel is 17.8 pence higher.
Just purely on personal experience I refuelled 3 weeks ago at 111. 9 pence for diesel and the cheapest in my area is now 116.9 pence an increase of nearly 4.5%. My brother works as a driving instructor and says that since the beginning of this year it now costs him between £10/12 extra to refill his tank which he does for obvious reasons much more regularly.
There is a planned increase in fuel duties of approximately 3 pence per litre due on April 1st. So we are not out of the woods on inflation yet.