We don’t do hypothecation and for damn good reason
This is one of those terrible ideas that needs to be stamped upon, hard.
Rachel Reeves’s Treasury is looking to keep millions of pounds levied on polluting water companies in fines that were meant to be earmarked for sewage cleanup, the Guardian has learned.
The £11m water restoration fund was announced before the election last year, with projects bidding for the cash to improve waterways and repair damage done by sewage pollution in areas where fines have been imposed.
However, the Treasury is in discussions about keeping the money to use it for unrelated purposes at a time of huge pressure on the public finances and rising debt interest costs.
Of course the Treasury should keep the money as part of the general revenue. Of course.
The idea that money raised in a particular manner should then only be spent in a particular manner is known as “hypothecation”. It’s something we do not do in Britain. We do not do it in Britain for damn good reason too.
The first such reason is simply logical. There is no connection - none, zip, nada - between how much is, or can be, raised from an activity and what needs to be spent upon either that or any other activity. Say we had a tax upon cigarettes. Say we also had costs resulting from those who smoke cigarettes. Insisting that the money raised from taxing ‘baccy must be spent upon the effects of ‘baccy would be absurd. We’d, in the current world, end up either spending some triple what we currently do on treating lung cancer or cutting the ‘baccy tax to a third of its current level. Or, say we spent the ‘baccy tax upon aid to poor people in other countries? There is no link between how many Britons kill themselves over the decades and the needs and requirements of those poor people.
No, think on it. If fewer Brits smoked then that would mean less aid to poor foreigners. Even, those who would like more aid might go around handing out ciggies to teenagers so as to up that tax take.
We tax cigarettes because demand is - relatively - inelastic so we can tax ‘baccy lots and lots. This puts lots of money into the central pot so that we can spend on all sorts of good things. As well as - come on, this is politics - a certain leakage into simple micturation up against the vertical bricks.
But the other reason is historical. Allowing the bureaucracy to raise money to be spent as that bureaucracy pleases takes us back to early Stuart financing of government. And we fought a civil war about that, lopped the head off one King and drove another from the land.
Parliament is sovereign, not the sovereign nor government. So, Parliament decides where money comes from and Parliament decides where money goes. That’s simply the basic constitutional settlement.
Now, there are things to like about the Stuarts - better hair than their opponents for example. But returning to their constitutional settlement could be thought of as retrograde.
The basic system is and should remain. All money raised, from wherever, goes into the one pot to then be allocated. No hypothecation.
Tim Worstall
As we can’t why not stop?
In December the ONS pushed back the publication of the overhauled labour market statistics to 2027, the latest of several postponements from spring 2024.
The statistics agency has sought to improve the monthly survey owing to a sharp drop in response rates — down to record low of 12.7 per cent in the three months to September 2023 from about 50 per cent a decade ago.
So we’re not gaining the data to be able to do detailed management of the economy.
The response rate to the Department for Work and Pensions’ Family Resources Survey sank to only 25 per cent in the most recent year from 60 per cent 15 years ago.
We’re really not gaining the data necessary to do detailed economic management.
Another survey crucial to the agency’s monthly GDP estimates, the Living Costs and Food Survey, has also suffered a tumbling response rate to a record low of 22 per cent last year from about 60 per cent at the turn of the millennium.
We’re really, really, not gaining…..
So, let’s just stop then. As we can’t get the data - something that as Hayek pointed out will never be good enough anyway - we can and should just stop doing that detailed economic management.
One possibility is that people might go off and do something economically useful instead of dodging filling out ONS surveys.
We do though have a decent example from elsewhere. Hong Kong went, post-war, from grossly poorer than the UK to wildly richer. Sir John Cowperthwaite, the fiscal manager during that process, banned anyone from collecting even GDP statistics. On the grounds that “some damn fool will only want to do something with them”.
Or as we were told a quarter of a millennium ago, peace, easy taxes and the tolerable administration of justice.
Well, quite, let us gain that highest degree of opulence by banning this lowest barbarism of data.
Tim Worstall
But, but, why is it that people might have less than total trust in politics?
We thought this was interesting:
The Conservative government spent more than £130m on IT and data systems for the scheme to send asylum seekers to Rwanda, which will never be used, the Observer can reveal.
Digital tools needed to put the forced removal programme into effect made up the second-largest chunk of the £715m spent in little over two years, behind only the £290m handed directly to Paul Kagame’s government.
They included a database for anticipated complaints to a “monitoring committee”, which was set up to oversee the deal’s compliance with human rights laws, and systems to enforce the Tories’ attempted legal duty to remove asylum seekers arriving on small boats.
Labour announced that it was scrapping the policy shortly after winning the general election, with home secretary Yvette Cooper calling it “the most shocking waste of taxpayers’ money I have ever seen”.
Well, yes. Under the Brown Terror Yvette was - for a time - Chief Secretary to the Treasury. Which is when this happened:
If there were an award for the world's most mismanaged national health project, England's National Programme for IT in the NHS would be a strong contender, if not outright winner. Started in 2002, Tony Blair's brainchild has, like the computer in 2001: A Space Odyssey, gone badly wrong.
The main aim of the project was to create a fully integrated centralised electronic care records system to improve services and patient care by 2007. The budget for the undertaking was a substantial £11·4 billion. 9 years on, the Department of Health has spent £6·4 billion on the project so far, failed to meet its initial deadline, and has had to abandon the central goal of the project because it is unable to deliver a universal system.
No, we are not blaming Ms. Cooper for this or any other error. Well, not right now we’re not.
It’s also quite obvious that her comments about the Rwanda scheme are a party political ding on the other people. Which is to be expected in a political system, obviously.
But then that’s why there might be less than total trust in politics. That economy with the actuality, that dinging of the opponents rather than a careful and sensible estimation of reality.
That reality being - perhaps - that the British government cannot plan anything and most certainly we should never allow it any near anything at all to do with computers? That observable reality?
Tim Worstall
How glorious that we have such regulators to guide us!
The United States on Friday grounded SpaceX’s Starship and ordered Elon Musk’s company to investigate why the spaceship spectacularly disintegrated in a fiery cascade over the Caribbean during its latest test mission.
Authorities in the Turks and Caicos Islands confirmed they diverted all flights from their airspace during the incident and urged residents not to touch fallen debris, warning it could be hazardous.
“The Federal Aviation Administration is requiring SpaceX to perform a mishap investigation into the loss of the Starship vehicle during launch operations on Jan 16,” the agency said.
We are so lucky. Lucky that civilisation has reached such a peak of administrative excellence that the FAA is able to issue such a command.
For of course a man - even, an organisation - that has just watched $90 million of rocket turn into a pretty shooting star shower, thus risking the entirety of a $5 billion investment plan, would not think of doing that without regulatory prompting and insistence.
This is instructing an entire room full of matriarchs on the correct gumming technique for shelled zygotes of Gallus gallus domesticus. With the added joy that not only will the FAA be congratulating themselves on their both perspicacity and firmness, we’ve got to pay for them to do so as well.
Tim Worstall
The fault is not in our suppliers but ourselves
And rarely have stories named the ultimate authors of this disaster: ExxonMobil, Chevron and other fossil fuel companies that have made gargantuan amounts of money even as they knowingly lied about their products dangerously overheating the planet.
Other claims about how much climate change is responsible for the LA fires - as opposed to idiot forest management policies perhaps - can be argued about and no doubt will be for a long time. The insistence that the media must propagandise for the author’s preferred explanation is of course vile.
But let us stick with this one major claim here. Big Oil is responsible because the fossil fuel companies sold the oil (and gas, coal etc) which causes climate change. It’s just not true.
Who are the beneficiaries of industrial civilisation? That’s us, us consumers out here. We live higher on the hog than any other group of humans ever. Yes, there are externalities to that and we should do something about them. But who are the beneficiaries? Us.
The profits made by the fossil fuel companies exist, sure they do. But the vast majority - by the Nordhaus calculation, 97% - of the profit made from the use of fossil fuels flows to us as consumers. We’ve had a couple of centuries of cooked food, toasty homes and cheap and efficient transport. We’re the beneficiaries, we’re the people who have been making the profit.
If we’re the people who have benefitted, if we’re the people who created the demand for the products, then we’re the people responsible for those externalities.
It’s us, not them.
No, this is more important than a mere allocation of blame - or even the creation of some target for righteous confiscation. Given that we are the users of fossil fuels then it’s going to have to be us changing our behaviour to not use fossil fuels. At the cost of whatever benefit fossil fuels provide to us. It’s not just that there’s no them, no other, that caused all of this it’s also that there’s no them, no other, who can carry the cost of it not happening.
Which brings us right back to all of those correct economic questions about climate change. The most important of which is how much cost are we willing to bear, right now, to benefit those humans in potentio in the future? The general answer there seems to be not as much as some people think we all should.
Tim Worstall
A Manifesto for Lord Mandelson - a new blog series
Lord Mandelson is going to Washington as our Ambassador. What is he up to? We cannot know, but here are some ideas about how he might spend his time.
He is going to be negotiating with Trump’s new appointee as Secretary of Commerce, Howard Lutnick. He should be seeking to turn the UK’s notorious weakness, our inability to choose between America and Europe, into a strength, by getting each to show us some leg.
This means that the UK should enter into parallel conversations with the EU to see what they’ll put on the table to stop us throwing in with the US. There is no harm in letting the Americans know what we’re doing: Trump respects toughness in a negotiating partner.
To anticipate our conclusion, at this point in our history the Americans seem to have more to offer than the EU, as (1) the US economy is motoring; (2) the EU is at a low ebb; and (3) we have largely exhausted our economic possibilities with Europe over the near-fifty years of our engagement from 1973 to 2020.
On the other hand, for all that we share a language, history and many aspects of law, the economic, social and political culture of the US is not ours. In addition, America is currently led by some people who are making a shibboleth out of not liking our government at all. Our new Ambassador will have his work cut out.
We kick off with the following notes on what the UK does not want. Over the next few weeks this will be followed by pieces on:
What the UK wants and what it can offer.
Defence.
Piecemeal inward investment.
Labour markets.
Housing.
Energy.
Public services.
A Conclusion.
The Difficulties
America: A trade deal with the US is a big ask. It is not just politics or Obama’s “back of the queue”. The US is a continental country embracing innumerable commercial interests, which trade officials struggle to marshal into a negotiating position - the EU has similar problems, for similar reasons. The approach we take in the following posts is to focus on specific sectors, where each side has something big to ask or to offer - we hope this can result in a coordinated response. This means that we ignore such incendiaries as chlorine-washed chicken, hormone-fed beef, or “privatising the NHS”, though we do address agriculture and healthcare, and instead look at how a trade deal can come about.
Europe: The position with the EU is simpler: the agony of Brexit makes clear that we do not want surrendered sovereignty, dynamic alignment or suchlike. It has also become apparent to those in the know, that the Customs Union and the Single Market have always been something of a chimera for the UK. International bodies and academics in the field collect econometric data on international trade. This shows that leaving the EU presented the UK with negligible trade downside, if not paving the way to redress drawbacks intrinsic to membership.
The Customs Union put British exporters of goods to the EU at a consistent disadvantage. This is because the post-WW2 decline in duties from c.12% to under 4% puts emphasis on non-tariff measures (NTMs), where the EU is a notable offender. In 2019, the OECD’s figures showed that the EU had higher internal NTMs than the UK in 20 out of the 22 sectors measured. Such differentials have been present for as long as the figures have been compiled, telling us that other member states could sell goods to us more easily than we could to them.
In August 2020 the EU’s own analysis of business services showed that internal and external barriers for competition are identical in 104 of 115 measures. This means that by this measure, the Single Market is close to unavailing all round.
Advocates of Britain’s membership of the EU are given to dwell on the sheer proximity and size of the European market, following the “gravity model” of trade, but the reality of the EU‘s rigged or deficient arrangements make this irrelevant. So it will have to be other stuff.
Next: what the UK does want and what we can offer.
(Tax) Breaking the Subsidy Debate
‘Our government is in thrall to private sector greed – supporting the privileged and the polluters to the detriment of everyone else and at the country’s expense. Think about the £14 billion in subsidies the government gave to oil and gas companies between 2016 and 2020. Or the almost £2 billion spent annually on handouts to private schools.’
This is the narrative spun by some tax commentators and outlets like the Ethical Consumer and Paid to Pollute, and given by the mainstream media. It is based on an accounting slip which harmfully misrepresents UK realities.
A scan of the UK tax code bores a hole in this characterisation. Before the Government’s most recent changes, the overall tax rate paid on oil and gas company profits was 75%. Now, after these changes, it is 78%. Britain’s inheritance tax rate is one of the highest in the world, more than 3 times the global average. A managed decline Budget last October saw hikes to Employers NI contributions, CGT and the removal of IHT exemptions for farmers.
This does not suggest a government that favours corporate or entrenched interests. But why then these subsidies?
Well let’s take a look at how they have been classified as subsidies in the first place. Starting with private school fees, the argument is that by creating an exemption from VAT, the government’s forgoing of revenue means that this is ‘tax expenditure.’ This term was coined in 1967 by Stanley Surrey to denote policies by Congress that granted tax breaks favouring specific constituencies or interest groups for political purposes. These tax breaks were increasingly used in lieu of direct subsidy but functioned the same way.
Education is different. The product of education has never been taxed - this was formalised into a carve-out from tax by the European Union, adopted in the 1990s. Education is an investment in human capital which is taxed, like all capital, only once it generates future returns. Private education also relieves the state from its obligation, saving taxpayer funds. If migration of students from the private to state sector is higher than 25% after the imposition of VAT, the provision’s removal would actually be directly costing the state £2.5 billion – that’s not what happens when you remove a subsidy.
‘Tax expenditure’ is not an obsolete concept. Measures such as the Seed Enterprise Investment Scheme (SEIS), which give investors in early-stage startups an exemption from Capital Gains Tax, could be classified a form of tax expenditure because it runs against the otherwise prevailing precedent of taxing the value of realized asset appreciation. Afterall, the Subsidy Control Act 2022 explains that ‘the forgoing of revenue that is otherwise due’ is a form of financial assistance, and thus subsidy.
But we should be economical when using this term. We do not tend to consider the very idea of a progressive tax system (flawed though it may be) as subsidy. Anyone paying the basic rate of income tax of 20% is not generally considered to be receiving an 80% tax subsidy. Such an argument assumes an entitlement of the state to one’s entire earnings.
The case with fossil fuels is slightly different in that it is even less rooted in reality. Under tax policy recently scrapped by Rachel Reeves, the money invested by fossil fuel companies into new oil field exploration was exempted from tax as part of the normal operation of R&D tax credits. These credits apply to all other sectors of the economy, existing to encourage investment - once again, you cannot tax funds before they have generated a return. Likewise the tax exemption for the decommissioning of old fossil fuel installations, which generate worse levels of emissions, ensures firms aren’t being taxed on a loss-making activity, while encouraging an activity that creates positive externalities for the environment.
Using misleading and incendiary language about ‘fossil fuel subsidies’ simply serves to confuse the dialogue and detract from the serious questions we face. Reconciling rapid decarbonisation with improved national energy security, while not breaking the bank, is a steep task, requiring significant public buy-in. The same can be said for education reform, which is so vital to the UK’s productivity puzzle. It doesn’t help to have people radicalised by spurious and adulterated rhetoric.
Over-egging that climate change pudding
This seems rather alarmist:
Without urgent action to accelerate decarbonisation, remove carbon from the atmosphere and repair nature, the plausible worst-case hit to global economies would be 50% in the two decades before 2090, the IFoA report said.
Ah, no, that’s just the journalists at The Guardian having their usual problem with numbers:
Global economic growth could plummet by 50% between 2070 and 2090 from the catastrophic shocks of climate change unless immediate action by political leaders is taken to decarbonise and restore nature, according to a new report.
It is the rate of growth which could fall, not the economy itself.
Which, you know, is fine. For as all the right-on do say these days - degrowth and all that - economic growth is just so passe these days. We don’t need it, don’t want it and can’t have it anyway. So, that’s good then.
But where does this estimate come from? What is assumed to give us this?
The Network for Greening the Financial System (NGFS) provides analysis of a range of estimates for the negative GDP impact of climate change under a current policies scenario of 3°C of warming by 2100. These range from 2% GDP (Nordhaus & Boyer) impact to 44% GDP (Bilal & Känzig) impact by 2100.10 Alternative methodologies provide wider ranges still: up to 63%. What is important to understand is that these results are the output of complex models, which are highly dependent on the methodologies used for calculations and assumptions. A prudent approach would be to take the highest estimate of economic loss and reduce it when evidence becomes available that it is over-stated, rather than the other way round.
So we’ll add in everything that shrieking hysteria can possibly think of that might go wrong, nothing at all that might go right and our estimate of the very worst that can happen is that, in 50 years time, the rate of growth - not the size of GDP, the rate of growth of it - could halve?
Oh. Right. Seems, umm, manageable?
Further, even if it’s correct (it isn’t, as with James Hansen and his estimation that the correct carbon tax is $1,000 a tonne CO2-e. No, that’s “it could be as high as that” and that should be weighted by probability against the other possible costs and outcomes, as here) then that just takes us back into Stern Review and William Nordhaus territory. It’s worth killing how much economic growth now through panicked reactions to avoid losing 50% of economic growth in 50 years time?
Even with low discount rates the answer is, well, not much acshully.
Tim Worstall
Banning the export of houses is one of those…odd…ideas
Spain has a new entry in the idiot economic policy races:
British buyers will be forced to pay 100pc tax on their holiday home in Spain under new measures to fix the country’s housing crisis.
That’s British and all non-EU that is:
Spanish prime minister, Pedro Sánchez, announced 12 reforms amid an ongoing row over the impact of foreigners on local house prices.
This includes the introduction of a tax for those from outside the European Union (EU) who do not currently live in Spain, which will be paid when they purchase a property.
Proposals from the Spanish government suggest this levy could be as high as 100pc of the value of the home, much higher than current rates. Real estate purchases in Spain are currently subject to 10pc tax on newly-built homes and 6pc on old properties.
Just no, really.
The impulse is obvious, it’s the usual lefty nonsense of concentrating on the distribution of a fixed pie without thinking about baking a larger one. The solution to not enough houses is not to ban - a 100% tax is a ban, obviously - buyers from the market, it’s to increase supply. So, build more houses and sell some of those more to foreigners.
But it’s also necessary to go a little deeper. A foreigner buying a house is an export. True, it turns up on the capital account not the current but still. It’s not possible to package up a house or building - well, unless it’s some Arizona town looking for a London bridge as a talking point - and send it off. But the money flows into the country for the building so that is, indeed, the export of a house to those foreigners.
We tend to think that exports are good. Not because they are good but because that’s how we get the money for what we want, the imports. Our trade balance - deficit - is financed by the surplus on that capital account, us selling assets to foreigners. A house is an asset, the money flows inwards etc - the sale of houses to foreigners finances our imports of other things.
Now, if we had some limited number of houses that would eventually run out. But we don’t - we can build more houses.
To use an English example, take one acre of Home Counties farmland at £10,000. Build four solid houses at £250k each. We’d have foreigners lined up around the block to buy those at £2 million ea. Outlay £1,010,000, sales £8,000,000 and net margin £6,990,000. There are few other exports quite that profitable.
If people want to buy a house in a country then the correct answer is to build houses for foreigners to buy in that country. Not to go around banning the very thing that pays for the imports.
But then we do get fools who think that the economy is some fixed pie that must be distributed rather than something that can be grown.
Don’t we?
Tim Worstall
Creating, producing, AI isn’t the point - using it is
Everyone’s terribly excited about the Prime Minister’s conversion to the joys of Artificial Intelligence. As long as everyone remembers how technology actually works then so are we. But that support does depend upon everyone remembering.
The value of a new technology comes not from producing it. Yes, obviously, being the best producer of it will come with some value add, some profits and all that. But that’s not the point, not at all. Rather, the real value addition is in being able to use it.
Another version of the same lesson is that it’s not invention which is important. It’s innovation.
The plan, the man and so on. Billy Hague is already getting things at least partially wrong, marvelling at how much is to be spent - concentrating on the cost, not the benefit.
The one single paper necessary to understand all of this is Schumpeterian Profits in the American Economy by William Nordhaus. Yes, the deployment of a new technology produces value add. That’s good - GDP is value add so new techs lead to economic growth. But it is consumers who end up with 97% of the value. The inventors, the entrepreneurs, end up with only 3% or so.
The value is not in owning the companies that do this. It is in what benefits consumers gain by being able to use it. It is not in producing the new tech, it is in consuming it.
The thing we must avoid, therefore, is Mazzonomics. That idea that government must have a stake, that government should profit from whatever support it gives. Even that such a stake, profit, should come at some risk to the deployment of the new whatever it is. This is wholly wrong - the benefit so overwhelmingly comes to us out here that shouting about who gets 10 or 20% of the 3% the capitalists keep is simply an irrelevance.
We can make that Mazzonomics point another way too. We institute government in order to gain public goods. If government then produces a public good - an environment amenable to the creation and deployment of AI, say - then why does government get a second bite at the cherry for merely doing what government is instituted to do in the first place?
The point of AI - as with any other technology, canals, the wheel, computers, whatever - is to be able to use it. As long as we all remember that then sure, if government clears out of the way some of the things government currently does to prevent AI from being used then great. Any more than that though, that would be to go thoroughly Mazzo.
Tim Worstall