Friday, 27 March 2015

Happy Easter!

Well, it's time for an Easter break. Even historians have to take a break from writing sometimes, and it's been a long, tough winter. There'll be lots to talk about when 'Public Policy and the Past' returns on Tuesday 7th April, when there'll only be thirty days until the UK General Election, and when no doubt the 'new Cold War', the economic standoff between Greece and Germany, and the continuing struggle to secure economic growth will all concern us. But for now, it's happy holidays, and enjoy yourselves out there, won't you?

Wednesday, 25 March 2015

General Election 2015: the real action will be after the polls close

Take a look at the numbers above. They're a projection taken from Stephen Fisher's elections etc website, which has been doing a great job of keeping abreast of all the statistical developments in the UK's General Election. Here he's thinking hard about what the polls mean for Britain's eventual electoral choice. The first thing that stands out? We're heading to a near-tie, in terms of seats in the House of Commons at least. The second thing? The Scottish National Party is zeroing in on a seriously, seriously good night. For which there are many reasons - a fact we'll cover in the near future.

That means that all the uncertainty is being back loaded into the days and even weeks following the election, not the remaining 42 days until the polls open. Because if little changes between now and May 7, the basic lineaments of the result are clear. Labour will do fairly well in England, not so well in Wales, and spectacularly, unbelievably badly in Scotland.

Then everything will be up in the air. What we know, or think we know, is this: the Scottish Nationalists won't help the Conservatives pass a Budget or a Queen's Speech, or come to their aid in a Confidence motion, under any circumstances at all. Labour and the SNP won't countenance a formal coalition. There's almost no chance at all of a German-style 'grand coalition' between Labour and the Conservatives.

So. Deep breaths. We've got a potential for a continuing Conservative - Liberal Democratic hookup, perhaps with support from the Democratic Unionists (who might be an MP or two stronger following an uneasy electoral pact with the rival Ulster Unionists) or a loose Labour - Liberal Democrat - SNP deal. Neither looks likely to have the numbers, or the appetite, for a stable fusion on the lines of the one the UK has lived under for the last five years.

So we're in for a period of extreme turbulence. A minority Conservative administration might struggle through a Queen's Speech before falling, letting in an as-yet unelected Labour leader (Yvette Cooper? Dan Jarvis?) who then governs with some limited SNP support. The Conservatives might scratch together enough votes to govern with the Liberal Democrats and the DUP until by-election defeats (or defections to UKIP, since a referendum on Britain's membership of the European Union might be hard to secure) brings down that administration - with the same Labour - SNP effect as before. Or Labour could take power as a minority administration, then get knifed in the back by the SNP in the autumn, or after next year's Scottish General Election, by a party that cordially loathes the Labourites who so recently defeated them in last year's independence referendum. Letting in a Conservative Prime Minister (Boris Johnson?) who can't get the SNP to vote for anything, and who proceeds to say that no government can be formed, and an immediate General Election must be held.

One thing's for sure: the constitutional tangle we've got ourselves in with the Fixed Term Parliaments Act isn't much help. Lose a Queen's Speech? Lose a Budget? You can go right on governing - as in fact the SNP showed when they ruled as a minority in Edinburgh, losing a Budget and continuing to govern after a bit of a pause for breath. The Fixed Term Parliaments Act stipulates that only losing a confidence vote means that the government has to go, and that only if another cannot be formed after a 14-day hiatus does Parliament get dissolved. So expect a hell of a lot of to-ing and fro-ing between Budgets that are lost, Bills that go awry, votes of confidence that are won, ties and narrow defeats. It'll seem like a mess, and the voters might find out that they get results that they never expected. You read it here first, by the way - all the way back in October.

We've been here before. The Conservatives were the largest party after the 1923 General Election, but that contest ended up ushering in a minority Labour administration unhappily supported by the Liberals. The Labour government of Jim Callaghan did all right without a majority for more than a year with the help of the 'Lib-Lab' pact in 1977-78. All the headlines about crisis, disaster, trouble and strife will be overdone. The country will get through somehow.

But at least it won't be boring.

Thursday, 19 March 2015

Why is the UK Budget like a hockey stick?

Take a look at the graph above. Notice anything strange? It's from the official Office for Budget Responsibility (OBR) reaction to yesterday's UK Budget, and it shows the public spending assumptions implicit in that document. And yes, your eyes are not deceiving you - the numbers show a huge, huge fall in public spending over 2016/17 and 2017/18, before a rather lighter and more familiar austerity is resumed in 2018/19. Then we get what Fraser Nelson of The Spectator calls 'a weird public spending splurge' - probably at the behest of the Prime Minister, worried about being accused of being a mad, ideologically-motivated cutter during a General Election campaign. The Government just drew a great big hockey stick of a wiggly line across the public accounts.

We're sorry, but this won't wash. It's intellectually incoherent and impossible, in practice, to deliver.

Now we've always known - and always said here - that the Chancellor's planned cuts for the next Parliament just won't happen. If we take 'protected departments' out of the mix - education, the National Health Service, overseas aid and the like - we'd be looking at chopping out something like a third of all public spending. Would you like to see a policeman? Have your elderly relatives looked after? Help the young reskill in Further Education? Hold down the interest rates on student loans? Well, if these went through, you can forget all that. And lots more.

Which is a pity, because there were some things to welcome and admire among yesterday's announcements. Abolishing Class 2 National Insurance payments and the paper tax return, while allowing the self-employed to spread their payments. Some chunky tax cuts for North Sea oil and gas (the forecasts for which look as scary as a horror film). Some small-scale help for fast broadband and church roofs. There's nothing particularly controversial there.

Yesterday's Budget did ease up on some of the planned austerity. The Chancellor, George Osborne, used the windfall from much lower inflation to reduce the pace of cuts. But he massaged down his planned late-Parliament surplus in order to do just one thing: shoot Labour's fox by stopping them going around saying that spending is about to fall to the lowest levels since the 1930s. Of course, on some measures it'll now fall to what it was in the late 1950s, or in 1964, but that's beside the point. Mr Osborne didn't want to look like a Gradgrind Chancellor, grinding the faces of the poor into the dirt. So he agreed with No. 10 to chuck in loads of cash at the end of the period - which will be more than conveniently forgotten about in a few years. But he still wanted to get to a surplus in one Parliament, before helping his Conservative colleagues throw around some tax cuts as they move towards another election. The graph above is the consequence of that political decision. It's that simple.

Don't think anyone's getting away with anything. This Budget means well over £20bn of cuts overall - and maybe about £40bn between now and 2018/19 (don't take our word for it, ask the independent Institute for Fiscal Studies). The Chancellor has been 'softening' this line as regards actual goods and services only by saying he'll take something like £12bn or 13bn out of the welfare budget, and raise £5bn chasing tax avoidance and evasion. £18bn off £40 is £22bn, if our maths are right - a slightly less ludicrous figure. Mr Osborne won't actually say how he'll do that: he'd have to abolish child benefit, make social housing tenants pay some more of their rent by reducing Housing Benefit, and freeze all working tax credits for the whole of the Parliament to make those welfare savings, for instance. Even that'd only just get him there. It seems less than do-able, to be honest. Even if it was possible, to meet his targets Mr Osborne would still need about £22bn from the Home Office, Defence, Business, Innovation and Skills and local government. In just four years. The whole of the current annual budget for BIS is about £16bn, just so you know, and the Home Office and Ministry of Justice dispose of about £32bn for public safety and the law. This level of cuts basically means gutting non-protected departments. It's that serious - which is why it won't happen.

Getting those huge sums out of that lot, even if things go well, would feel like slamming on the emergency brakes and threatening to derail a speeding train. Before, bizarrely, firing the engines right back up again in the ditch the Government would have run us all into. How much damage will have been done to morale, networking, know-how, organisation and good old-fashioned experience in the interim, do you think? Take a look at what the OBR said about this Budget (opens as PDF):
One important consequence of all of this is that implied public services spending is on a rollercoaster profile through the next parliament, with deeper real cuts in the second and third years than we have seen to date followed by the sharpest increase for a decade in the fifth. It is important to emphasise that this profile arises from what the Government itself describes as a ‘fiscal assumption’ and not from firm and detailed departmental plans. But it will form the baseline for whichever party or parties are in government after the election and have to carry out the next spending review. This profile for implied public services spending may have ticked a number of boxes for this Budget, but it will not have made that task any easier.
For which read: this isn't happening, and we have just tied ourselves in a load more knots trying to say that it will. In a better-managed world, that graph above would look a lot smoother, and it wouldn't dive so quickly downwards after a couple of okay years at about the time of a General Election.

Our advice? Don't hold your breath for anything so rational or so obvious.

Monday, 16 March 2015

Britain's pension reforms have 'disaster' written all over them

This week's UK Budget will probably see some headline giveaways. There's an election in the offing, of course, and no-one wants to be caught flat-footed, as Labour were when Roy Jenkins announced a pretty boring, 'steady-as-she-goes' package in 1970. Labour lost that election, and many in the party blamed their Chancellor's useless rectitude. George Osborne (above), a politician to the tips of his fingers, is unlikely to make the same mistake.

One thing he's going to do - and he's already announced this - is extend savers' freedom to take money out of their pension pots to existing pensioners. He liberalised the market for people running up to retirement last year, you may remember, and this carries the changes one step forward. The Conservatives know that older Britons vote. They've made sure that those senior citizens have kept hold of their free bus basses, cold weather payments and TV licenses while boosting the overall state pension via a link to earnings. Now they can draw down some of the money they've got locked up in Defined Benefits (DB) pensions. Want a conservatory? A cruise? A flat for your children? Certainly, madam.

We advise extreme scepticism and caution about these changes. Where to start? Well, as historians, this sounds very, very like the 1980s pension mis-selling disaster, when workers were encouraged to opt out of the State Earnings Related Pensions Scheme and buy their own top-up products? The results? Well, as chapter five of Anthony King and Ivor Crewe's excellent The Blunders of our Governments demonstrates, it was a disaster that we're still living with today. Lots and lots of unscrupulous providers moved in and ate up all the business; millions of Britons ended up with pensions that were far less generous than what they would have got if they've stayed in their existing schemes. 4.3 million people opted out of SERPS; 6.5 million people bought personal pension products at the height of the late 1980s and early 1990s fashion for such products. We're still picking up the pieces, and pensioners earn a lot less than they might have done.

That's one of the dangers of this new policy. Will mis-selling become once more a real and present danger to both the taxpayer and the pensioner? Perhaps it will: the record of UK regulation in this area doesn't give us much hope that the authorities know what they're doing as regards stalling this threat. Some experts are warning of an 'open season for fraudsters'.

And here's two more thoughts while we're at it. Defined Benefits schemes are already struggling, for all number of reasons, but primarily because of the historically low interest rates that we've had with us now for many years. This is yet another reason why they might struggle further, because withdrawals from those schemes might make them less table. The potential uptake of the drawdowns seems to be pretty high at the moment, and the Treasury has come back only with an extremely unconvincing response to the public consultation round. Basically, they've just said 'we'll issue some more guidance to schemes'. Well, that's reassuring. I won't be hurrying out and putting money in a DB pension.

The third point to make is that firing off all this cash - and let's face it, much of it will end up in the buy-to-let or mortgage market - will further reduce productive investment, which we desperately need to diversify at a time when the banks are still hobbled by debt. That 'march of the makers' that we keep hearing about will disappear even further over the horizon.

Instead of being open with people, and saying 'well, if you want high yields, you have to invest more, or hope that returns recover' (and they probably will), this is just a green light to go on a spending binge. And then come back to younger Britons (and the taxpayer) saying it's all gone.

Here's a thought: if you're British and you're under 45, you're likely to work pretty much until you drop. And these changes make that even more likely. You can draw your own conclusions about the fairness, the efficiency and the efficacy of the deliberate set of calculations that your leaders have made.

Thursday, 12 March 2015

The need to diversify Scotland's economy just got a lot more acute

So when we last left you, we were talking about the need to diversify Scotland's economy. It's based on oil, financial services and whisky. That's too narrow a base, especially for a small country that may aspire to statehood in the medium term. It's not enough to aspire to the level of public services that Scots (rightly) demand and require. Hopefully this was uncontroversial.

It's a warning that just got a whole lot more newsworthy, for this year's Scottish Government and Expenditure Revenue report makes for dire reading. Scotland's net spending deficit is 8.1%, and getting better, but there's more red ink than for the rest of the UK (rUK), which is running at a nominal 'loss' of 5.6%. Put another way, that's £800 more net spending per head in Scotland, taking everything into account, than across the rest of the country. Scotland's running a £12bn budget deficit, much more per head than rUK. Not all of that would have to be cut were the London Exchequer not responsible for public spending everywhere, but some of it would - especially if Scotland were thinking of establishing its own currency, joining the Euro, or indeed just preventing capital flight from uncertainty should there be Full Fiscal Autonomy or independence. Getting to the rUK deficit level, right now, might cost £4bn in public spending cuts.

And that's not the most worrying thing. Take a deep dive into the data, and (weighting for capital spending) the balance of the non-oil economy is slipping further behind rUK norms too. And remember - this report applies to 2013/14. It's got little to do with the recent dive in the oil price. That might add yet more cash to the deficit - perhaps £2bn in next year's GERS report alone. In the slightly longer term, the independent Institute for Fiscal Studies reckons that the decline in oil and gas revenues might see Scotland's deficit mount up to £6-7bn more than rUK's. Another £2bn of potential cuts and/ or tax rises on top of where we are now. Another massive dose of austerity.

Now a lot of this stuff is pretty technical, and it's unlikely to make a big difference to the landslide win that we expect the SNP will be able to pull off in May - an electoral triumph really unparalleled in modern political life since the Irish part of the 1918 General Election. This General Election will probably be a triumph for the SNP. Will their Scottish opponents really want to go about saying 'we're too poor for autonomy, we're using up more taxes than we're paying in?' Er, no, because they'll be sent away with a flea in their ear. If they're lucky.

Independence-minded Scots will also point out that, if we take a ten-year look at the situation, Scotland is nearly in budgetary balance with the rest of the country. Over a thirty-year period, Scotland has probably 'paid in' quite a bit more than it's 'got out'. Which is absolutely fair enough, and a point we've made here many times. That wouldn't help Scotland now. Not at all. But it's important to bear in mind, as unpleasant anti-Scottish sentiment rises in England, that anyone who says Scotland is a 'drain' is talking through their hat.

But the facts as they are now can't be shifted, argued about or moved. Scotland's SNP government argues that more powers would mean that they can shift productivity figures and help obviate some of this spending gap. Well, no - or not, at least, on any timeframe that would alter these figures before the huge public spending cuts would have to come in. Governments across the developed world have been searching for the key to productivity increases for decades. Are we economists any closer to finding one? Not really. More immigration and a renewed focus on diversification would help, and an independent Scotland might be in a better place to effect those changes, but there's really nothing on the horizon that would effect the kind of productivity shifts that would help any time soon.

Scotland's budget deficit is bad, it's not getting better at the same rate as the rest of the UK's, the country's public spending is much higher than its revenues - and that situation is about to get worse. A lot worse. The ten-year picture isn't too bad looking backwards, but in four out of five of the last financial years Scotland's situation has been worse than rUK's. Independence is off the table for now, partly for just this reason. Full Fiscal Autonomy will also probably get dropped straight away if there are any post-election negotiations to be had at Westminster. Why? Because it would amount to the budgetary equivalent of machine-gunning yourself in the face while burning your own house down.

Whatever happens politically - devo-plus, Full Fiscal Autonomy, confederation, independence, all potential endpoints on our journey - these outstanding facts are the elephants in the room. In fact, they're not even an elephant. They're an entire zoo. Everything that the UK and Scottish governments do should be aimed at diversifying Scotland's economy before that country's shift into the red tests relations between Scots and other Britons even further than they are being stretched at the moment. Unionists and Nationalists can and should unite around this cause.

No-one will be served by ignoring these stark numbers. No-one.

Monday, 9 March 2015

How can we diversify Scotland's economy?

One of the main reasons Scots voted 'no' to independence last autumn was fears over the economy's vulnerability to external shocks. Now, events since then have entirely borne out the wisdom of the electorate's doubts. Oil has plunged in price. It would have punched a £5bn-a-year hole in the accounts of an independent Scotland. Massive austerity would have followed. On this, as on little else, there can be no argument, no counterpoint, no debate, no controversy. It's just a fact - a set of risks the silent 'no' constituency that said little, but then came out and voted 'no', just weren't prepared to take. Fortunately for them.

But let's leave all this to one side. It's just a totally boring and otiose argument now, and we're unlikely to have another independence referendum for a little while. There's no point raking it all over again.

Let's look instead about what that massive potential hit tells us about the Scottish economy. And it's this: it's too specialised. Its tax base is too narrow. It depends on oil and financial services to a greater extent than almost any other OECD country. It needs more strings to its bow. Many more.

It needs diversifying, a case to which everyone can put their shoulders. For if the Scottish economy was more diverse - if the tax raked off from the oil fields wasn't more than ten per cent of the whole net take from the entirety of the Scottish economy - then those of us who are very sceptical about Scottish independence could rest easy. Polls show that the Scottish National Party is about to win a historic victory in Scotland's part of the UK Westminster election, a potential landslide so huge that it's hard to write about it in sensible, relative psephological terms. The SNP will then move on to try to win another majority in the Edinburgh Parliament, before perhaps thinking about another referendum late in their third term in charge there.

They are much more likely to win the 2016 Scottish elections, and then have much more chance of actually triumphing in an independence referendum, if they have a coherent set of answers to Scotland's economic challenges. So, we say again: how to diversify the Scottish economy?

Well, the first thing to say is that there's plenty of raw material to work with. Scotland's whisky industry, for instance, makes up for 25% of all the income of the UK food and drink industry. It brings in £5bn a year and ensures the employment (either directly or indirectly) of more than 40,000 people. Look elsewhere and you've got plenty of other bricks to build with. Scotland's universities are some of the finest in the world. Tourism; computer games; high-end engineering; financial and business services. All solid. All thriving.

But how to bring them together? Well, a good old export drive never goes amiss, and the 2014 announcement of a Scottish Food and Drink Export Partnership was a step in the right direction here. But such moves are usually palliatives. They can make a difference at the margins, but structural transformation is also required.

Here's three or four ideas. Scotland is now able to borrow much more in its own right, following the adoption of the Calman Commission proposals on the Scottish constitution before the independence referendum campaign had even got going. It could use some of these to get its sleeves rolled up in the North Sea and help support oil and gas supply, exploration and re-equipment. The Scottish government could then take a stake in the management and (if there are any) the profits in the long run. Many Scots have talked of becoming a second Norway for many years. Maybe now's their chance.

Then there's earnings from Scottish airports. The Smith Commission that followed the 'no' vote to independence recommended Scotland take control of Air Passenger Duty. Cutting it would divert numbers from Heathrow and Gatwick, thus relieving the pressure on London's skies while earning up to £1bn more for Scotland.

Next comes movements in public spending. Scotland already has the slower austerity that the SNP has been calling for (in many ways rightly) across the UK as a whole: the Barnett Formula guarantees it much higher public expenditure than England and Wales, and makes sure that this total won't fall much - if at all. It means that Scottish debt is guaranteed by the UK exchequer, greatly to Scots' advantage. But Scotland next desperately requires a shift in that public spending, from spending on in-work benefits to investment. Welfare spending is by far the single greatest part of the public spending mix in Scotland, and reducing inequality (very similar in Scotland to the rest of the UK outside London), as well as raising wages, would chip away at that total. There has been little challenge, in Scotland or across the rest of the UK, to the idea that we just have to accept this and pay for it. But a fundamental re-alignment of our political economy is required here. A living wage campaign, a higher top rate of income tax in Scotland, and a whole different set of tax thresholds (all now possible, following the Smith Commission) might all help.

Better public transport could be a fourth element in the mix. The new Borders Line, from Edinburgh to Galashiels, is a great start here. Scotland's population is concentrated in a relatively small and dense strip between Glasgow and Edinburgh. More advanced investment, faster trains, a re-nationalised railway (and wider roads across the rest of the country) are further potential means of economic advance that could help Scotland take advantage of the clustering that all modern economies need. Again, further borrowing (and slower austerity) could be adopted to pay for such projects.

So here are four ideas that might help us all out: take out a government stake in North Sea oil and gas; cut Air Passenger Duty; shift public spending away from supporting economic inequality and failure; use some of the proceeds to speed up Scotland's public transport.

The main challenge to Scotland's prosperity - independence or no independence, fiscal autonomy or no fiscal autonomy, separation, devo-max or devolution - is its over-concentrated economy. It lives on oil, financial services and whisky. It's exposed to fundamental exogenous shocks just like the energy price crash we're living through now. If it could build up more of its smaller battalions - give more room to the sharp shooters, rather than the behemoths - it would be far, far safer and wealthier if it does strike out on its own (or even if it becomes fiscally autonomous within the Union, the probable and potential long-range alternative).

Whoever is in power, in Edinburgh or in London, and however we govern our affairs, this reality will be there, day in, day out. It needs addressing, urgently, before the oil's gone entirely. In all the punch-up and all the tears over powers and authority, we could work together and start thinking about that challenge. Ladies and gentlemen, shall we begin?

Thursday, 5 March 2015

This is why Labour is losing this election

Well, we're nearly there. Nine weeks today, the polls will only be open for a few more hours in the UK General Election - and politicians will be asked, none too politely, to stop hassling voters for another few years.

But it's an election that's showing up the faultlines in British politics. Like a sudden lightning strike, everything is illuminated: all the cracks and divides, all the follies and foibles.

The first thing that's been illuminated is the precise reason Labour is finding things such tough going. Sure, they're holding off the Conservatives for now, still just about at parity in the opinion polls, and making great hay with such issues as tax avoidance and the Prime Minister's reluctance to take part in one-on-one television debates with Labour leader Ed Miliband (above). But there's no doubt that Labour's long-established lead has now evaporated altogether, and that the party is very likely to trail the Conservatives in both seats and votes come the May election. That's partly because they're about to be administered a historic and catastrophic beating in Scotland, only the scale of which - and whether it leads in short order to another Scottish independence referendum - is now really in doubt.

The Conservatives have much more to spend as we enter the short, formal phase of the campaign. The country will be covered in anti-Labour posters - and you'll get quite a few glossy Conservative flyers through your door if you live in anything like a marginal seat. They also have a great big load of cash stashed in the Treasury, ready to fire from the big bazooka of tax cuts they're going to wheel out in the Budget. They are increasingly confident. Why do you think Mr Cameron is refusing to debate Mr Miliband? It's because he's convinced that he's already won, and all that remains is to count the votes.

We've been heading this way for some time. Back in 2011, we at 'Public Policy and the Past' pointed out that Labour's performance in local (and Welsh and Scottish elections) was way below par. That Labour should be doing much better in the polls than they actually were. Then, in 2013, we ruled out the possibility of a Labour majority government. Late in 2014, we noted how senior Labour figures now approached the very idea of the General Election with dread, rather than a sense of opportunity. Earlier this year, we made the call that it was the Conservatives who were likely to be in power for the next few years. Have a look at pretty much any data-driven model right now. They show that we were right: Labour is just not strong enough to win this election.

But what are the really deep-seated, long-burning reasons for this? Despite popular opinion (and much off-kilter comment), it's not much to do with Labour's rather unpopular leader, failure to eat bacon sandwiches and slightly daft lack of photo opportunity nous notwithstanding. It's much more fundamental than that, and it speaks to the reason why all social democratic parties, across the developed world - but especially in Europe - are struggling to make an impact.

It's because Labour is trying to bridge a vast intellectual gap in tough times. Between the Greens and the Scottish National Party to their Left, and the central weight of most of middle England's swing voters to their Right, there is a fixed gulf. There's not much of a divide between the bulk of actual Scottish and English voters, we should note, but we'll come to that another time.

But Labour is trying to hold on to left-leaning defectors it's gained from the Liberal Democrats while still appealing to 'practically-minded', moderate and apolitical people who don't really think of themselves as having much of an ideology at all. The result is some indistinct messaging. So Labour wants to allow state-run agencies to bid for rail franchises, but it can't back full-on renationalisation. It backs massive new powers for the Scottish Parliament, but not budgetary independence. It will reduce, but not eliminate, austerity. All of those policies may or may not be good ones (mostly they're right, in our view), but they do not have the virtue of clarity. Labour, unlike the SNP and the Greens, cannot say 'we're going to bring austerity to an end'. That's because it might actually have to try to form a government. But unlike the Conservatives, it doesn't want to to put out (and doesn't believe in) a string of platitudes about how great deficit reduction really is. So it ends up trying to be all things to all voters.

Consider this quote from a voter talking as part of one of Lord Ashcroft's focus groups: 'Cameron is cutting council budgets, but is Miliband going to do anything different? So you might as well go for someone who gives you confidence'.

Labour is between a rock and a hard place: more radical left parties menace its flank, but it can't turn aside and fight them without losing a load of voters to its right. Labour can't be Syriza. It can't be a nationalist, leftist liberationist movement. It's too much of a broad church for that. 

It also faces the classic problem of hard times, just as it did when it split in 1931, and its more centrist MPs defected to join the National Government alongside the Conservatives and many of the Liberals: who should bear the brunt of budgetary choices? Where should the money come from, if we want to spend and invest our way out of trouble? And most of all: just how radical can a party that aspires to be truly national really afford to be? Labour in the 'thirties was threatened on its right by a centrist, national-minded, 'progressive' Conservative leader in Stanley Baldwin, and on its left by the Communists and the Independent Labour Party. Well, Mr Cameron is no Stanley Baldwin, that's for sure, but the cruel vice of fate looks rather similar.

At the moment, in trying to avoid or slide over those questions, Labour is stretched to breaking point trying to straddle the entire political spectrum from radical Greens to the most centrist ex-Conservatives in England's suburbs. It's no wonder that the effort bids fair to fail.

Sunday, 1 March 2015

Unanswered questions about Labour's university fee reform

So Labour have finally grasped the nettle. They've done what they always said they would, and always hinted that they wanted to - said that they'll reduce English university fees to £6,000 if they win the next election.

Now that's qualified good news for the nation's finances. It reduces the risk that the university system will bankrupt the entire country if allowed to go on building up a ballooning debt that the taxpayer shells out for, but only ever sees half of the money back. We've addressed that danger here again and again, and it needs so reiteration.

So two cheers for at least some sense on the public finances. But of course the system still remains largely in place, and although this will probably reduce the debt by a third and more (because higher interest rates will be levied on those loans that are paid out), the Exchequer is still going to be left with an enormous bill twenty or thirty years into the future.

And, rather more worryingly, key elements of the Labour plan look a little bit sketchy from this vantage point. The first principle of most public life is: there's no such thing as a free lunch. And in this case, we can rephrase: he who pays the piper calls the tune. So we can expect more state control. Who thinks that the Government is going to give out about £3bn of taxpayers' money every year without wanting something in return? You can see that in Scotland, where many universities are desperate to say that they want some form of graduate contribution to relieve the pressure on their budgets, but are afraid of speaking out and offending their own government in Edinburgh.

But anyway. Four main questions arise about what that will be, and what this reform means in practice as well as principle. Here they are, in no particular order:

1. Will the student numbers cap come on again, and if so, how will it work? The main reason why student numbers have continued to go up in recent years is that the Government has successively loosened the cap on both numbers in the system in total, and the cap 'in detail. What that's meant is that the more prestigious parts of the sector have often poured in more undergraduates (with the paradoxical effect that the 'research-intensives' now spend all their time teaching), an effect that's cascaded down the system, freeing up space (and often leaving places empty) throughout English Higher Education. Now, if some semblance of control over this up-front extra money (all of which will go out and never come back) is going to be kept, maybe the cap will come back on. That's what Labour's been saying in private. The upshot might be that those Vice-Chancellors who've gone all out for expansion (naming no names) are going to face imploding balance sheets and a serious financial crisis. Some universities have been behaving anti-socially, elbowing everyone else out of the way for the last few years: they'll now get a very, very nasty punishment for their numbers game.

2. Do Labour still imagine that they'll go over to a Graduate Tax in the Parliament after next? If so, how will that be managed, when there'll be eight to ten cohorts of students who'll be left in a system that will slowly run down? And how will they raise an income from European Union students, and non-EU students, who won't be inside the tax and National Insurance system once they've finished their studies and left the UK? It's no wonder that Gordon Brown as Chancellor abandoned his initial preference for a graduate tax, before jettisoning the idea as impracticable: is Labour now admitting the same, despite their spokesmen's avowed intention (repeated on television today) to revisit the idea once they're in power?

3. Will universities actually see the extra money that they need to plug the gap? Now, Vince Cable's not exactly sitting on a mountain of credit for his unsustainable and ultra-expensive 'reform' of English HE, but he's right when he says that all of our experience tells us that the Treasury will not just hand over all this money without a fight. If there's another economic crisis, and the deficit gets even worse than we think it will between 2015 and 2020, they'll try to claw some of it into deficit reduction - which is looking hard enough already. Then universities will be left jumping up and down with frustration, as the money they were 'promised', and was once ring-fenced as fees, disappears over the horizon. Might that be the moment that some consider going private, as a few have been doing behind the scenes for years? It still seems unlikely: but with no buoyancy in the system at all, it might become possible.

4. Has anyone actually modelled the budgetary effect of the pension changes that we're relying on to fund this change? Now, reducing the level of tax-free pension contributions you can make (which have always advantaged the more well-off in society) may well be a good thing in itself. Investing the cash in education, rather than in richer people's pension pots, might also be a good idea from a national cost-benefit point of view. But there's also a cost. Some pensioners, not so far up the income scale as you might imagine, may now be forced to rely on more state help in their old age. That will include academics. Higher-paid academics might defer retirement, in order to fill pension pots that have had their yearly contribution cap lowered (and thus take longer to build up): whether this happens, and the extent to which it does, will rely on the exact balances changed by the altered relationship between the new yearly caps on tax-free pension savings and the overall lifetime limit. Anyone have an idea what this might cost Her Majesty's Government overall, and universities themselves? Some of this will have to netted off the cash raised through these reforms, that's for sure.

So - four questions. And that's without asking why we're going to use £3bn a year to pay for graduates to have a lower quasi-tax under the existing system, or why we're not using this money on the apprenticeship and Further Education sector that really, really desperately needs the money - and has been the crucial hole in the English training effort for many decades.

They are just that - questions. They need an answer. Labour's system will likely be a bit more sustainable than that brought in by the coalition, and it will probably work - in a Heath Robinson kind of way. It's probably better than the alternative, or spraying risk and cash everywhere by letting the HE market rip - and universities to raise their own loans.

But there's a dangerous sense gaining ground that some of the implications in detail have been missed. We shall see if the whole thing stands up to scrutiny.