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31 March 2018

An Open Letter to the Chancellor of the Exchequer

Tag(s): Politics & Economics
Dear Mr Hammond

I was out of the country when you delivered your Spring Statement to the House of Commons so I both missed the actual broadcast and the comment it generated. Nevertheless, I have read the published statement and think it falls short of what the country needs in a number of ways. I believe you were right to break the habit of making ‘hundreds of tax and spending changes twice a year’. Your predecessors introduced this practice for political reasons but it had the effect of weakening the Chancellor’s position as well as confusing both individuals and businesses about their tax status. Making a Spring Statement without such announcements should give you the chance to introduce big ideas without necessarily providing the detail. Then you could consult on the best ways to implement these before confirming or indeed dropping them in the annual Budget Statement now set for the autumn.

I also welcomed the upbeat tone of your statement with its rightful pride in our language, legal system, international and finance and professional services, world-class universities, culture, talent and innovations.   However, there are several areas which require more attention.
  1. Economic growth.
 You say that the economy has grown every year since 2010. The political implication of this is obvious but in terms of growth per capita it is almost zero. The economy has grown largely because the population has grown, and this has mainly been through net migration. You quote the OBR forecasts ranging from 1.3% to 1.5% growth over the next five years but if the population continues to grow, which is virtually certain, such growth rates are meagre and will constrain your ability to increase public expenditure enormously. These are pitiful rates of growth and require much more radical action by you and your colleagues.
  1. Public Finances.
You make much emphasis on improving the public finances but admit that debt will be £45.2 billion this year. This may be down from £108 billion in 2010 but your predecessor forecast back then that it would all have been paid off by now.  Instead it has increased every year since as a percentage of GDP. The deficit may have reduced but the debt has increased and will be 85.6% of GDP in 2017-18, a terrifyingly high level. You rightly say that “We're not so naïve as to think we have abolished the economic cycle”, a veiled reference to the disastrous Gordon Brown. However, you quote forecasts of growth every year until 2022. If achieved that would be an unbroken run of 12 years, but I am afraid it is quite likely, even probable, that there will be another recession in which case the debt will be an intolerable burden. That is the situation Italy finds itself in and because of its mad decision to join the Euro it is unable to fix it. We at least have fiscal independence but it would still be very tough.
  1. Budgeting
You describe how you think responsible people budget:

“First you work out what you can afford.
Then you decide what your priorities are.
And then you allocate between them.”

That may be right, but in your decisions about priorities and allocations that is perhaps the real skill of a Chancellor. There is a limit to how much tax you can raise in a slowly-growing economy. The left seem to think that we can raise more from the rich but this is not the case. The top 1% of earners pay 27% of all income tax. The marginal rate of income tax and national security rises to 69% at £100,000. My own Financial Adviser will not join your party because you and your predecessors have failed to address this scandal. He knows of surgeons and other professionals who turn away work rather than go over this threshold.

On the spending side you talked of increasing spending on the NHS. That is no doubt because it is such a hot political potato. But you should not increase spending on the NHS until it has been properly reformed. Its wastage on procurement and other areas is infamous. And its management of labour is hopeless. It is obviously a seasonal business with high demand in the winter and much lower in the summer. But it employs the same full-time workforce all year round. Other sectors with peaks and troughs in demand vary their employment by using seasonal labour.

Strangely you did not mention Defence in your statement, but there is considerable evidence that that has been cut too much. If we can’t increase spending on Defence, the first responsibility of any government, then we should abandon Trident and invest the savings in a proper level of conventional forces as well as defence against the increasing threats of cyber-crime and terrorism.

You also did not mention Overseas Aid. For some reason we signed up to a commitment to spend 0.7% of GDP on overseas aid. Much of this has gone to countries like China and India which are able to spend their tax income on nuclear weapons and space programmes. Even more has gone to corrupt regimes. It is ludicrous to commit to a percentage of GDP and does not fit with your formula for responsible budgeting quoted above.
  1. P:roductivuty
You rightly refer to the need “to tackle our long-standing productivity challenges” but give little space to how, just  saying you ”will launch a Call for Evidence to understand how best we can help the UK’s least productive businesses to learn from, and catch-up with, the most productive”. As a successful businessman yourself, you must know that’s not how most of business works. There are always winners and losers in business, both large and small. One of the reasons businesses fail is that they do not learn from other more successful businesses. The reasons for our lack of productivity are structural and the best way for government to help is to get out of the way by reducing taxation, regulation, interference and other handicaps to enterprise.
  1. Education and Training
You made some welcome announcements about education and training, and an increase in the number of apprenticeships. I also agree that we need to understand better how investment in people pays off. Too much public expenditure is justified on the basis of numerical outcomes like the number of jobs created without looking at the quality of these jobs.
  1. Employment
You make much of the government’s record in increasing employment and lowering unemployment. At a top line this is obviously welcome but there needs to be much better understanding of what much of this entails. Firstly, the majority of new jobs created since 2010 have been taken by immigrants. Second, the majority of these are low-paid jobs. The National Living Wage may be going up to £7.82 per hour, although that is not supposed to be a political decision, but many employers continue to find ways of avoiding paying this. There are far too many zero hours’ contracts and far too many employers avoiding their legal and moral responsibilities as employers.

I commend a new book to you on this subject:  Hired: Six Months Undercover in Low-Wage Britain by James Bloodworth. [i] Bloodworth, a journalist, has spent six months working undercover in places like an Amazon warehouse experiencing relentless physical effort, aggressive bosses, minimal personal warmth, and numerous grievances. Most of his fellow workers were from Eastern Europe and were amazed to find that he was British as they thought that no Briton would work in such conditions. In Amazon’s warehouses there is a security check on each employee on entrance and on leaving. This takes quite a long time but is unpaid.
  1. Research & Development
You have made some welcome announcements about further investment in Research and Development. However, they do not go far enough. The UK languishes well behind competitors like the USA, Germany and Japan in public funding of R&D. It is not well understood but it is a fact that much of the exciting innovation in the USA was originally based on public programmes in Defence and Space. The main reason why the USA leads the world in new technology is that they also lead the world in public expenditure on Defense and Space. Much core infrastructure such as the internet and Silicon Valley are rooted in Defense expenditure.
  1. Infrastructure
You also make some welcome announcements on investment in infrastructure, especially welcome developments in high speed broadband. However, there was no mention of HS2 in your speech and I don’t understand why. This project is a colossal waste of money and will not deliver any serious economic benefit. Instead it will centralise activity on London even more than it is already. People will commute to London from Birmingham. It we want to join up our provincial cities with high speed rail connections that may be fine if it’s affordable but start with them and leave London out of it.

But you also say you are proud of the fact that fuel duty has been frozen for the eighth successive year. Surely this is not consistent with your blandishments in your speech that “this government is determined that our generation should leave the natural environment in a better state than we found it.” A huge road building programme and an unwillingness to get motorists to pay for the true cost of their pollution does not square with this.
  1. Housing.
The housing market is broken and I doubt whether much of what you announced will make much difference. It needs fundamental reform. Margaret Thatcher was right to allow tenants to buy their council houses but she was wrong to stop councils from building new ones. The developers run rings round the councils with their over worked planning departments. The developers’ clever lawyers win every time. Help to Buy has simply put the prices up! The market needs root and branch reform and I see no sign of it. Too many politicians compete with unachievable targets of the number of houses “they” are going to build but “they” never come close. But again, much of the shortage of housing is due to a rapidly growing population.
  1. Tax simplification
One of your better predecessors, Nigel Lawson, used to make it a point that in each of his budgets he would propose the abolition of a specific tax. This was not just tinkering around the edges with rates and reliefs, but fundamental reform. Since his day the tax system has become more and more complicated. It means that tax avoidance is more common as the rich can employ clever lawyers and accountants to game the system. The rest of us have to pay our full whack and possibly even more. However, I would support you if you find a way to get Google, Facebook, Amazon and the like to pay a proper rate of tax. This may require international cooperation as you indicate but there needs to be a tax on activity. Google and Facebook and many others do not even collect VAT for you as their services are provided ‘free’ to the user. So a tax on sales does not work.

I hope you find my observations and suggestions helpful and I wish you every success.

Yours sincerely

David Pearson

[i] Hired: Six Months Undercover in Low-Wage Britain James Bloodworth Atlantic Books. Once you read this book you will never buy anything from Amazon again.

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