Why the Tories are wrong on the economy.

Recent History

Gordon Brown notoriously claimed that he had ended boom and bust – just before the banking crisis inflicted the deepest recession on us since the Great Depression. But I am not going to sit here just to take pot shots at him, because I too was beginning to develop some confidence that we had cracked the challenge of macroeconomic management. What caught us both out was the emergence of a separate global economic cycle triggered by spikes and troughs in the oil price, which proved to be, and still is, out of phase with our domestic cycle. I am of course overlooking here the additional regulatory failures on both sides of the pond.

That was Keynes’s view too, though as it turned out matters were not so simple in the 1930s either. Keynes’s solution was public works, and it did indeed have some success at first because to ‘dig a hole’ in those days required huge teams of navvies all wielding picks and shovels. They had to be paid of course, and it was the spending of those wages that increased local consumer demand and helped to regenerate the local economy. Nowadays such a project would be carried out by one man and a JCB, so the effect is not the same. As Jim Callaghan succinctly put it in 1979, you cannot spend your way out of a recession.

Keynes has also been criticised for the assumptions behind his famous book The General Theory of Employment, Interest and Money. Classical theory held that supply would create its own demand; in other words if you had a given supply of a commodity, be it fish on the quayside or hours of labour, then if you price it correctly you will just be able to sell it all. He expected to see unemployed workers offering their labour for lower wages. But he didn’t. So he assumed there must be something wrong with the classical laws of economics and, having just witnessed the transition from classical to modern physics, he may have thought something similar was required in the field of economics.

In fact, as we now know, the reason why workers were unable to find work at lower wages during the 1930s was because of the Unions’ closed shop. Even after the war the closed shop continued to undermine our economic performance, eventually manifesting itself in the form of stagflation. Milton Friedman first made the analysis of this in his Nobel lecture of June 1977 when he attributed stagflation to what he called “unanticipated increases in aggregate demand”. In plain English this becomes “Union extorted wage increases above the natural level that balances supply and demand for labour”.

Proof of Friedman’s theory came later with Margaret Thatcher’s reform of the Unions, because since then we have not seen the slightest whiff of stagflation. Indeed the term has practically dropped out of the dictionary, and now we are instead experiencing concerns about deflation. Also the phenomenon of zero-hours contracts indicates that workers are now able to price themselves back into work once again, which is supply creating its own demand as the classical laws predicted. This is the final nail in the coffin of Keynes’s General Theory. Of course we all want proper full-time employment, but this will depend on the economic recovery. In the meantime surely it is better to have half a job rather than no job. At any given time in the economic cycle there is only so much money in circulation available for wages, so sharing it out this way is surely better than making higher unemployment carry the full burden of the shortfall.

It was the boom and bust of the late 1980’s which fully demonstrated the effects of demand mismanagement. One of the first things Geoffrey Howe did as Chancellor in 1979 was to remove all remaining exchange and credit controls. This led to people taking out ever greater mortgages to chase up house prices, due to the chronic shortage of housing we have always had in this country. By the mid 1980’s the economy was booming and the yuppy phenomenon was upon us. That would have been the time to take your foot off the accelerator and start moderating demand. Instead Howe’s successor, Nigel Lawson, not only failed to reintroduce credit management but also introduced some of the biggest tax cuts in recorded history (just before an election, of course!). The basic rate of tax came down to 25% from 27% (and 29% the year before) and the top rate to 40% from somewhere up in the stratosphere. Immediately people used the extra money in their pockets to jack up their mortgages still further and the whole thing just blew up in their faces. I am all in favour of tax cuts of course, but timing is crucial!

It does however demonstrate the potency of demand-side management. Whilst Jim Callaghan was absolutely right in saying you cannot spend your way out of recession (supply side), that does not mean you cannot cut taxes (or increase benefits) your way out of recession (demand side and increasing the deficit). This is a point the Tories appear to have missed. As I see it stimulating the economy is like trying to move a piece of string lengthways. If you push it, either by fiscal spending or by excessive quantitative easing (QE) the string will just crumple. You have to pull it from the front end. Of course if there is insufficient QE that will pin the trailing end of the string down, so you have to get it just right. The Bank of England (BoE) appear to have been using the FTSE 100 as their indicator since that has been moving sideways for the past fifteen years, but increases in other asset prices, including house prices and the FTSE 250, would suggest they have overdone it.

Which brings us to the introduction of monetary policy in the late 80’s and early 90s, and the exit from the ERM. The big advantage of monetary policy is that it acts directly on consumer demand. Also because it is reviewed on a monthly cycle it provides much finer tuning that the annual fiscal cycle. It could be argued that fiscal policy was always too late to have any counter-cyclical effect, though that said Harold Macmillan’s government seemed to manage it pretty well in the late 50’s and early 60’s. Perhaps the housing market wasn’t so critical then.

With the benefit of hindsight I would say that John Major was wrong to rely solely on interest rate rises to bring inflation back under control. He needed something much stronger than that, and something which would not undermine the rest of the economy as well. I suspect that the reintroduction of credit controls and mortgage limits would have had a more positive and immediate effect. I do see why he was determined to remain within the ERM, as this stopped any devaluation causing further inflation, but what is interesting is that when we did eventually tumble out of the system in September 1992, no inflation resulted. This demonstrates that, contrary to Ken Clarke’s recent remarks, devaluation can be a very useful tool in the right circumstances. In other words if you have high unemployment and a recession, then that is the time to do it if you need to, because the increase in import prices is simply absorbed. The exit from the ERM set us up for the following ten years of solid economic growth, and it was at this time that I started to form the view that we had it sorted. But I had reckoned without New Labour, Gordon Brown and the development of the global economic cycle! Also without his undermining of the Bank of England’s role as City regulator, thankfully now restored.

This piece would not be complete without some reflections on the banking crisis. Four separate factors came together to create the perfect storm that was the banking crisis. Two of these, the subprime housing collapse in the US and the haircutting of Greek sovereign debt (another catastrophic EU decision), both of which caused contagion to spread across the global banking system, were factors beyond the control of any British government. The other two, namely the failure of UK banking regulation and the buildup of national debt, were. Strictly speaking the size of the national debt and deficit did not cause the recession, but it meant that the Coalition had to spend two years reducing the deficit before they could start reducing unemployment.

There has, I think, been a lot of very muddled thinking over the banking crisis. It’s not the bail-outs that were the problem. The taxpayer will come out of these with nice fat profits (which would have been even bigger at RBS if Gordon Brown had taken convertible loan stock in the first instance, until he knew the full extent of the losses, rather than equity), and both depositors and creditors were protected as well. Only shareholders, which of course include you and me through our pension funds, lost out. The recession was caused by a combination of contagion and regulation failure (as the banks in retrospect pulled in their horns). Many of the measures taken by the Coalition, such as the bail-in procedures and the ‘electrified’ ring fence, appear to be designed to make it easier for banks to go bust rather than less, which means that any future recession will be even greater! And the decision to increase equity ratios in the middle of a recession is crazy. Surely it would have been better to leave decisions to raise or lower equity ratios to the discretion and timing of the Bank of England?

One small and rather technical point we could look at however would be to remove limited-liability status from retail bank subsidiaries. As I am sure you know, under company law the creditors of a bankrupt subsidiary company have no recourse to the holding company for restitution. Normally this encourages investment and economic growth, but in the case of retail banks security is more important. Such a change would place the group at first port of call for any bail out instead of the tax-payer, and create a more arms-length relationship preventing the group from treating its retail subsidiary as a cash cow for its rather more dodgy ‘casino’ activities.

But the real problem is the relationship between shareholders and directors. It was the former who lost money whilst the latter were swanning about playing ‘masters of the universe’, and paying themselves the earth to boot. The Coalition is proposing yet more red tape to hold directors more directly responsible, but I suggest that such an interventionist approach may well backfire and undermine the status of the City. Instead I am proposing the introduction of Supervisory Boards for all publicly quoted companies (not just the banks), not to put Unions on them like the Germans do, but to comprise the five or six largest shareholders on the register when the meeting is called, together with perhaps a couple of non-execs and the Chairman and Chief Executive, so that the shareholders have the majority. Company law would give these boards authority over capital reconstructions, takeovers and mergers, and over the appointment and remuneration of the directors. Such an approach would enable the principal shareholders to be involved in these key decisions well before resolutions for general meetings are formulated, whereas the Coalition has merely given shareholders a slightly larger rubber stamp than they had before. Such a structural change would reflect the ownership of the company rather than have the government intervening with yet another raft of red tape.

Future Policy

So where are we now? What are the challenges facing the first UKIP Chancellor? I suggest these can broadly be considered under following four headings:-
1). Wage compression and the cost of living,
2). Employment, the output gap and eliminating the deficit,
3). Funding our public services to an acceptable standard,
4). Paying down the National Debt.

Wage compression is simply dealt with by coming out of the European Union combined with imposing consequently a complete moratorium on the immigration of unskilled labour. That’s the only way to do it. Simples – it’s just old-fashioned supply and demand, the price mechanism as it applies to wages. General inflation is the least of our problems at present, and that in turn suggests that an increase in the minimum wage might not only help people struggling with the cost of living but also provide some protection against deflation. I accept that increases in the minimum wage can make reducing unemployment more difficult, but there are other ways we can do that, again not least by limiting immigration. At present a third of all new jobs are going to new immigrants. Ending the green deal will also help.

It is over the output gap that the Tories are really going wrong. Last week the TaxPayers’ Alliance published a massive tome designed to cut public expenditure by £77bn, the element of the total deficit of £90bn they claim to be structural. Now I am not against cutting expenditure where it should properly be transferred to the private or charitable sectors, e.g. overseas aid, or where it is identifiable waste. I dare say the TPA have come up with all sorts of excellent ideas on that score. What I am concerned about here is the assumption that most of the deficit is structural, and cannot therefore be reduced by reducing unemployment. The TPA offer no support for that figure.

Historically the output gap has been defined as the percentage of unutilised industrial capacity. Once all your productive assets are being fully utilised you cannot increase real GDP any further. That means unemployment cannot be reduced any further, which in turn means tax revenues cannot be increased and welfare payment reduced; what is known as the cyclical element of the deficit. However two points arise. The first is that industrial capacity is not the only resource that is involved, labour including relevant skills are also critical as are energy supplies and other resources. The question is which lie on the critical path. The second point is that few of these resources are inelastic in the longer term. Indeed the more slowly you approach them, the less inelastic they will be. It all depends on what timescales you are looking at, but if we cap immigration as we intend then labour will in due course be the critical factor once full employment is achieved, not industrial capacity.

At present British industry is generally profitable and has accumulated substantial savings which it is holding back from investing. That suggests to me that industrial capacity should be viewed at least over the medium term as non-critical. Energy I will leave for another discussion. Labour is the interesting one. It all depends on whether you believe the government’s employment figures. Given the high incidence of part-time working and zero-hours contracts, the level of self-underemployment and the number of people sanctioned off benefits even though they are still fully unemployed, frankly I don’t. It’s all smoke and mirrors designed to win an election. This assumption is backed by reports from HMRC that income tax revenues are below expectations. One of the first things a UKIP Chancellor will have to do is get himself some decent employment statistics.

So if at present neither industrial capacity nor employment are critical, the deficit is not structural. For every one percent reduction in unemployment, the deficit reduces by between 20 and £25bn. So a further reduction in unemployment of between 4 and 5% is possible and would wipe out the deficit entirely without either cutting essential expenditure, like the Conservatives, nor increasing taxes, like Labour. But you can only reduce unemployment by this amount by limiting immigration, and you can only do that by leaving the European Union. QED.

In the longer term of course UKIP wants deliberately to restrict the availability of unskilled labour, other than on a temporary basis. You therefore eventually come up against a choice between full employment and crude GDP growth. I say crude because of course GDP is a nominal figure which includes both inflation and population growth. We should instead be concerned with real average standards of living, and these have plummeted over the past ten years. Two years ago I downloaded some statistics from the ONS website and constructed an index for real average standards of living which I set at 100 for the year 2000. It rose to 105.3 in 2005, dipped to 105.2 in 2006, up to 105.6 in 2007 and then plummeted to 83.4 in 2012. Obviously the fall after 2007 is principally caused by the recession, but it is the very slow growth before that and the dip in 2006 which are interesting. If one allows 1% pa for normal productivity growth, modest when you consider the phase of the cycle, there is no reflection of the growth in personal credit and the fact that we were living ‘beyond our means’ by 2007. Both strongly indicate an adverse effect from immigration. Also the sheer size of the fall afterwards surely cannot be attributed solely to the recession? This is logical when you consider that standard of living is real GDP divided by population. So if population rises faster than real GDP our standard of living falls. It’s just mathematics. That is the evidence.

Many people overlook the fact that anyone living here is consuming as much as they are producing. You have to be a higher rate taxpayer or net saver to be contributing more than you take out, and at the other end of the scale those on benefits, living on increasing credit or sending money overseas are taking out more than they are putting in. Everyone else in the middle is neutral, except that any increase in population spreads our available resources more thinly leaving less for each. This is as true for an increase in the birth rate as it is for immigration, but that is another story.

There are other impediments to reducing unemployment of course, and our strategy must include them. Principally these are:
1). A regional policy designed to achieve an even level of percentage employment across the land (see my previous post),
2). Effective welfare reforms designed to provide a better balance of carrots and sticks to entice the unemployed back into work. I advocate a big increase in the earnings disregards to really ‘make work pay’, and
3). Better education for the least able or most distracted children. We must introduce procedures to identify these children much earlier, perhaps by introducing GCPEs, so that we can then tailor their education directly to their needs.

As listed elsewhere UKIP’s policies are likely to make over £40bn of extra money available both for funding public services and for cutting taxes. It is money the other parties simply won’t have. Leaving the European Union is central to achieving it.

Finally there is the question of how we deal with the National Debt itself. As I set out in my election address, the answer is obviously to set up a Sovereign Wealth Fund to hedge it. With interest rates on the floor we have had a golden opportunity to do this, yet Osborne has completely flunked it. Sheer negligence.

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Housing, Regional policy and the Dis-economies of Devolution.

The one thing we shouldn’t be worrying about over the provision of social housing is funding. With interest rates on the floor it is a simple matter to raise the funds required through the issue of 30 year gilts, currently costing less than 3% pa, and transfer those funds on to the Housing Corporation in the form of 30 year mortgages. The Housing Corporation in turn would pass the funds on again over perhaps 25 years to housing associations, local authorities or indeed anyone else wanting to build and rent social housing. This way the capital is fully repaid by the time the gilts mature, and the quarterly repayments can be used partly to pay the interest and partly to invest in a repayment wealth fund. With rents at the levels they currently are it should be easy to make the finance work, and of course any strain would be taken by housing benefit. That in turn will reduce as unemployment falls. Important of course that rents are set at market levels for this to work.

Encouraging private landlords into social housing is just as important. Historically private landlords have avoided social housing like the plague, as they regard the whole system as hopelessly unreliable. I remember once ringing round six different estate agents in Oxford to find private social housing for someone, and every single one of them said ‘no’. Three said it was a matter of company policy, and the others admitted they did not trust the system. And I can see why. Benefits officials tend to shoot first and ask questions later, leaving the claimant unexpectedly stranded, even though there may be nothing wrong with their claim. On top of that we now have the Coalition proposing an end to direct payments. One of the things I remember from my time as Finance Director at PCHA is how much time our housing officers had to spend with tenants just helping them with simple domestic budgeting. Direct payments were often key to getting the rent paid on time.

To overcome this, and hugely to increase private sector investment into social housing, I propose the setting up of a Landlords’ Guarantees Agency. In return for a small commission off the rent, sufficient to fund the agency’s costs, the agency would offer landlords charging a social rent guaranteed payment of that rent, less commission, on the nail in advance every month. The agency would then collect the rent from the tenant which, with all the powers of the state behind it, it would be in a much stronger position to do. The arrangement could also benefit the tenants since if necessary the agency could press the landlord to fulfill his own obligations under the tenancy agreement, such as for maintenance for example. It would provide protection from rogue operators on both sides of the fence.

I also propose the introduction of a flat rate benefit for the homeless. Perhaps at a rate of £100 pw or thereabouts, this would allow people who are entitled to housing benefit but who cannot actually claim it, because there is insufficient social housing available and who therefore quite literally end up on the streets, to take the initiative to sort themselves out. Their ‘demand’ would encourage the charitable or private sector provision of hostels or they could find lodgings, though what they actually do with the money would be entirely up to them. This way the most vulnerable of all in our society would no longer be caught up in the dependency culture the current system creates through having to wait for some bureaucrat to fall out of bed the right side that morning. They can get on with it themselves. The cost would be nothing, as the money is already mandated in the form of housing benefit.

UKIP have quite rightly said that all new housing must be built on brown-field sites, and that the starting point will be to set up a register of where they all are. I was relieved to hear that about one third of these are thought to be in the South East, where presumably most of the homeless are, but it is not something to leave to chance. Essentially the aim must be to build the houses where the brownfield sites are, and then to create the jobs where the houses are. This requires an effective and structural regional policy.

This is not the only reason we need such a policy. Regional imbalance is also an impediment to reducing unemployment, as well as a factor in dealing with devolution and the Barnett formula.

Regional policy has never been successful in this country, and the reason I believe is that it has always been applied to the supply side of the economy. Stimulating the economy, which is essentially a matter of increasing consumer demand, given that investment follows demand, is like trying to move a piece of string lengthways. If you push it (supply side) it will just crumple. To get the whole thing to move you have to pull it (demand side). This became obvious in the late 1980’s. The relatively rapid recovery of the economy in the early eighties was caused by the removal of credit restrictions so that people started to chase up house prices by increasing their mortgage borrowing. When on top of this Nigel Lawson then cut taxes in his 1987 budget people used the extra money to jack up their mortgages even further and the boom just took off. I suspect this memory inspired George Osborne’s Help-to-Buy policy, which indeed has had some success. So it works at the national level; it just remains to apply the same principles at the regional level. It also chimes with UKIP’s policy of lower taxation.

I propose therefore that a second personal allowance be introduced into the income tax system, applied on a local post-code basis and related to local levels of unemployment, and perhaps also to housing availability, by an appropriate formula, so that people living in areas of higher unemployment would pay less tax for a given income than those living in areas of lower unemployment. I am sure this would go down very well in places such as Clacton, Rochester and Margate! It would regenerate local communities from within, which is by far the best way to do it.

I also advocate the setting up of a chain of Local Community Banks, on the German model but owned by the Bank of England, to take in deposits and lend them on to local small and medium-sized businesses (SME’s). They would not get involved in payment clearing or mortgages in any way and would not therefore replace the clearing banks. But they would allow lending criteria to be skewed in favour of areas of higher unemployment, a sort of localised quantitative easing (QE) if you like, whilst keeping its overall lending book balanced.

These policies would have the effect of creating a much more even level of percentage employment across the land, which in turn would enable average unemployment to be reduced much further before London and the South East trigger inflation. This is essential not only to deal with housing mismatch but also to reduce the deficit. As I have said elsewhere, UKIP can eliminate the deficit entirely by reducing unemployment by between 4 and 5% because for every one percent reduction in unemployment the deficit reduces by between 20 and £25bn. However there are a number of impediments to reducing unemployment this much. The first of course is immigration, but regional policy comes a close second. Both are required, and I would argue also for a big increase in the welfare earnings disregards in order to ‘make work pay’, something Universal Credits does not appear designed to achieve, but that is really a separate subject.

A separate regional policy will enable us to lift regional considerations out of issues such as HS2 and devolution. UKIP has of course committed to abolishing HS2 anyway, but the argument that regional policy is dealt with separately adds further grist to the mill. Devolution is a more interesting matter.

Many of you may remember the old rating system that used to exist in London whereby it was always the poorest boroughs that charged the highest rates. Margaret Thatcher always argued that this was due to their profligate loony-left policies and there may well have been an element of that, but the principle reason surely must have been that they had fewer taxpayers and higher costs. Although there was supposed to have been a redistributive balancing formula, it never seemed to work.

All public expenditure, with the possible exception of transport which is largely user financed, involves a transfer of wealth from rich to poor. Our progressive tax system is based on this principle, as is the principle of allocating expenditure according to need. A moment’s reflection will indicate that this will only work if both taxpayers and recipients are all in the same pot. If you compartmentalise the pot then you are likely to end up with most of the rich in one compartment and most of the poor in another, and the transfer mechanism is broken.

There is also the question of where you locate expensive and scarce facilities. You may not be able to afford to supply one for each pot, or there may be insufficient demand to justify one for each smaller pot. In the case of Aisha King’s cancer treatment the NHS could not afford the required machine at all and he had to go Prague, which was of course private sector and therefore available to anyone across the globe. This is what I call the Dis-economies of Devolution.

Much of the upsurge in popularity for the SNP is I am sure due to the recession; what the medical profession calls a ‘referred pain’. It is illogical to suppose that if you are independent then that somehow gives you access to more funds or that you could use them more efficiently. Almost certainly that is not the case for Scotland, both because I suspect that a disproportionate number of higher-rate taxpayers live south of the border (not an issue that was discussed at all during the referendum campaign as I recall) and because the referendum has now highlighted the fact that Scots receive more public funding per head, about £1,500pa as I recall, than the English.

Devolution means we can no longer allocate expenditure according to need (the management mechanisms necessary to do this are now entirely missing anyway) and it follows we must go for a ‘fair’ equal allocation of funds per head instead. Of course the Scottish government can always add their own layer of taxation to make up the shortfall (which probably will be less than popular!), but what they can’t do is subtract from UK taxation. UKIP is committed to revising the Barnett formula onto this basis, though my proposed tax-based regional policy would go some way towards redressing the balance on an equally fair basis.

Funding the NHS and other public services.

The first and easiest thing to say, as I did in my election address, is that UKIP is the only party able to fund adequately the NHS and other public services on account of the money we will save by coming out of the European Union, by transferring overseas aid to the charitable sector, by imposing a turnover tax on global companies and a number of other measures. Nigel Farage has committed £3bn of this to the NHS, which leaves plenty for other things, including tax cuts. He has also reiterated that we want a publicly owned, publicly funded and in-house managed NHS. I fully endorse both of those statements.

However I want to take a longer term look at the options available with a view to attaining the highest standards of health care in this country, free at the point of delivery for all, whilst at the same time reducing the burden on the taxpayer. UKIP stands for small government and low taxation, so any improvements in management and funding efficiency are a step in the right direction. I shall address issues to do with the way we manage our public services in a future article. In this article I shall concentrate on funding.

The main efficiency problem with all our public services is that they are monopolies. No monopoly has any incentive to be efficient unless it is underfunded, in which case shortages develop. These can take the form of prolonged waiting times, hasty attention or, in our schools, large class sizes. You can only achieve both sufficiency and efficiency at the same time in an open competitive market. That is an economic truism. A quick look at supermarkets will illustrate what I mean. Whilst not everyone likes the impersonal nature of supermarkets, I don’t think many will dispute their high standards or value for money. When you go to a supermarket you don’t have to make an appointment, book or stand in a queue (except at the checkout perhaps); you can drive straight in and park, find what you want already waiting for you on the shelves, and on the odd occasion where this is not so you can drive a few miles down the road to another one where it will be.

It is important to understand that such a situation would drive a Treasury mandarin mad, because of course in the public sector he would regard it as over-provision and thus a waste of taxpayers’ money. Competition only really kicks in when supply exceeds demand, because that is when customers truly have a choice. It’s no good trying to reproduce this in the public sector because you could never produce a wide enough range of customer choice. In the private sector, when a new product market develops, such as for mobile phones for example, the first supplier into that market makes huge profits. However those profits attract other entrants until the level of supply rises to and overtakes the level of demand. From then on weaker suppliers are likely to find the going much tougher and may not survive.

Privatisation only works where whole new marketplaces are created, involving multiple suppliers and multiple customers all interacting with each other. That is what happened with the public utilities in the 1980’s with huge improvements in efficiency, as anyone who can remember previously having to wait weeks for a new phone line from the old GPO can confirm. Whereas if you try to outsource a service from a monopoly you will just end up with an outsourced monopoly, which will be as tempted to profiteer as any other monopoly. Just look at what happened to the court interpreters for example. The Ministry of Justice outsourced the provision of interpreters to a single private agency, presumably thinking that the cheap price they achieved was a reflection of their purchasing power. In practice the new agency simply reduced the fees it paid to the interpreters, until eventually the interpreters decided it was no longer worth the candle and simply stopped working. As a result the supply of interpreters dried up and the courts were left in chaos. Much the same sort of thing happened with security at the Olympic Games, where eventually the Army had to step in to fill the gap.

Outsourcing is used effectively in the private sector, as for example where a company outsources its IT department, but this only works because the person purchasing the service is also the person receiving it. They can then see immediately if quality of service is failing and react to it, ultimately if necessary by cancelling the contract for breach of its provisions. In the public sector this does not work because the person receiving the service, you and me, has no relationship with the person commissioning it. The feedback loop is entirely missing. Not only that, workers tend to have much greater loyalty and are much more likely to go the extra mile where they feel they are part of an organisation that people respect and need.

So where does this leave health, education, legal aid, care and support for the elderly, child care and a host of other such services? Are we doomed to having to put up with inefficient monopolies for ever?

I don’t think so. An open competitive market inevitably will produce higher standards and better value for money, and people are often prepared to pay for that. You only have to look at the survival of independent schools to see it. The question is can we likewise encourage the private sector to compete and grow alongside public services such as the NHS without directly impinging on them, but do so in a way where the private sector alternative is also free at the point of delivery?

Further, can we do this so that the patient or other user can make an affordable choice, available to all without exception, between the sectors without requiring bureaucratic approval? The pitfalls were clearly demonstrated in the case recently of little Aisha King and his brain tumour, where his parents could only find the treatment he needed in the private sector. Yet it took a huge amount of political pushing and shoving to get the NHS to pay for it.

I believe the answer to this is yes. I envisage the issue to everyone of a national credit card which can be used to pay for ‘public’ services from the private sector. The use of a credit card effectively makes the service free at the point of delivery. These services would be approved in principle, and suppliers would most likely most easily be accessible through a comparison website, which would check credentials and assess reputations on an ongoing basis. It would preferably act on a ‘blacklist’ basis so as to minimise barriers to entry, unlike the ‘whitelist’ approach, requiring expensive prequalification, favoured by New Labour and the European Union, which has quite the opposite effect and encourages profiteering.

So you slap all your purchases onto your credit card, without limit, and the government, as the credit card agency, pays them without question. However, come the end of the tax year, when hopefully you are back home fully recovered, the taxman will look at how much you have spent on your credit card, will do your tax assessment in the normal way, put the two together, apply a means test and then charge your affordable share of the cost back to you through the tax system, which for most people would mean an adjustment to their PAYE code. This is in fact just an adaptation of the old voucher system which has been mooted since the 1950’s, updated to use modern technology.

So everyone would pay something. Even people on benefits would pay a pound or two, because this is necessary to ensure a proper ‘value-for-money’ purchase decision. Benefits would be treated as income for the purposes of the means test and the charges deducted from future benefit payments as necessary. It is this decision which drives efficiency and quality, and prevents waste and over-usage. Past attempts at giving users choice have concentrated on quality only, which doesn’t work because you cannot all use the ‘best’ supplier! The system would not of course work for security and other establishment services as they have to be imposed rather than chosen.

Alongside this I envisage the setting up of a dedicated wealth fund for the NHS and wider health service, perhaps to the tune of £30bn or so and perhaps called the National Health Fund (NHF), by issuing 30 year gilt-edged securities, currently costing less than 3% pa. The more astute of you will have noticed the heavy working capital requirement of the credit card system, but in addition to that the NHS itself and many hospitals within it are desperately in need of recapitalisation, there are new medical schools and nursing colleges to build and PFI contracts to buy out. I envisage investing about half this sum with a range of City asset managers so that over 30 years it is likely to produce a surplus sufficient to repay the loan in full and all the interest thereon, leaving the other half to spend.

It may take some time for confidence and supply to build up, and the means-test rates could start quite high initially to ensure an orderly introduction. This would encourage users to take out insurance against the retrospective charges, which means both that insurers cannot interfere in the treatment and that the premiums themselves are in effect means-tested. By about year fifteen the charges should be producing additional income well in excess of £10bn a year. As users migrate voluntarily across from the NHS its budget could be reduced, and not all of that money need be transferred to the fund since the fund will be receiving the charges via HMRC as well. The excess can be used to fund other public services and reduce taxes.

I envisage that the NHF will be managed by the Department of Health subject to the restriction that any shortfall in the funds required for redemption must be made up progressively after year fifteen from the additional income. I also envisage that similar funds be set up for other public services such as education, care and support for the elderly, child care and legal aid. Once education is put onto the credit card system it would bring to an end finally the toxic social divide that still exists between state and independent schools. Although the most famous schools might decide not to accept the card, I am sure the majority of independent schools would do so as it would both secure the collection of fees and bring greater stability to the pupil population, since if a parent were to fall on hard times mid school career no one would know except the taxman. All parents no matter how poor could thence choose an independent school for their child if they so wished.

Those on the left may be worried that this will produce a two-tier system, or that the profit motive will undermine quality of service and accessibility. I believe these worries are unfounded. A two-tier system is only a problem where demand exceeds supply, whereas the whole point of this system is that we get away from shortages and restrictions on access, promoting a free choice for all between the two sectors. Furthermore there is a difference between profiting (good) and profiteering (bad). Profit can only be made in an open competitive market if you satisfy your customers. Why does it matter if a supplier makes a profit if they are providing better value for money? Whereas profiteering occurs where supply is restricted. Indeed the Treasury is profiteering all the time by cutting expenditure which in turn undermines quality of service. It is time to bring that to an end.

Greece, the Eurozone and World Trade

It would be easy and tempting for UKIP’ers to look smugly at the renewed chaos unfolding in Greece and say ‘I told you so’. Easy but unhelpful. Although small, Greece is still an export market for us, and if Greece crashes out of the Eurozone that would create massive contagion which would badly affect the whole of Europe including the UK. In any case I am sure we all wish the Greeks greater success for the future.

So what would we do in their situation? To answer that we must first remind ourselves of why all the Mediterranean Eurozone countries are so determined to keep using the euro. It’s not just the War and history of invasion, it is also that all of these countries are incorrigibly corrupt. Their citizens no longer trust their own politicians and so turn to the European Union as a mechanism to counter this. So it’s no use telling them to ditch the euro. They might still do that, but only out of sheer desperation.

There are two quite separate parts to the Greek, and other Mediterranean country, economic crises: they have a fiscal deficit on government taxes and expenditure, and they have a balance of payments deficit on external trade . The former causes the more immediate challenge, and hence gets the attention of the EU, ECB and IMF ‘troika’, but the external trade deficit is just as, if not more, debilitating in the long run. It is the external deficit I want to examine in this article, as we have a very similar problem.

The UK’s balance of external payments is now running at a deficit of over 5% GDP and getting worse. And that during a recession! You would normally expect your external payments to move into surplus during a recession as imports fall. In theory if you have a deficit the need to fund that deficit creates a need to purchase foreign currency, which in turn devalues sterling. That in turn makes our currency more competitive and so help to boost exports and reduce imports, thereby re-balancing our external trade automatically. In theory. In practice capital flows have grown and overwhelmed trading flows, and as the French economist, Thomas Piketty, pointed out recently, capital to GDP ratios continue to increase across the world.

Greece of course can’t do this anyway as they have in effect a fixed exchange rate by using the euro. Part of the idea behind austerity was that costs would fall thereby achieving an ‘internal devaluation’, but whilst costs in Greece have fallen substantially over the past five years it has not led to any regeneration in the economy. In fact perversely it has simply led to Greece’s debts becoming a higher proportion of GDP as GDP has fallen, whilst unemployment has continued to rise.

It was Adam Smith who originally observed that the wealth of a nation is the product of its labour. So if you want your country to get richer (and generate higher tax revenues) you must get unemployment down as low as possible without triggering inflation. Yanis Varoufakis, the new Greek finance minister seems to have remembered this whereas the troika have not, and is now coming up against the sort of block-headed intransigence from the European Union we in the UK know so well. Even under the most primitive of jurisdictions, if new evidence comes to light you reopen the case. The failure of austerity clearly constitutes new evidence, yet Wolfgang Schrauble, Germany’s finance minister has simply said that the new Syriza government is bound by the contractual terms of Greece’s E245bn bail-in, and that “Elections change nothing. There are rules”. We can only wish Mr. Varoufakis the best of luck with that one.

But even suppose Greece does manage to secure terms for a debt restructuring and recovery, that is not going to change their external imbalance. Indeed it will make it worse as more imports are sucked in. So we need to look for a new solution to the problem of trade imbalances both for within the Eurozone and across the rest of the world as well. There are now massive trade imbalances around the whole world, not least between China and the United States. Further the old GATT/WTO rounds of trade talks aimed at reducing trading tariffs so as to promote world trade generally have ground to a halt for some time now, since such talks have little chance of success if they start from a position of imbalance.

The Bretton Woods conference, master-minded by John Maynard Keynes after the second world war, aimed at creating stability in world trade through a system of fixed exchange rates. It held for a couple of decades before collapsing because different countries experienced different rates of inflation. Britain in particular, due to a succession of weak Labour governments and the Heath government pursuing inflationary policies for political reasons, experienced a whole series of ‘runs on the pound’, and made the collapse of manufacturing in this country inevitable. Eventually we floated the pound in 1971 and a new international regime of floating exchange rates followed, with mixed success. However it can undoubtedly be said that Britain’s exit from the ERM in 1992, coinciding as it did with a time of high unemployment, which meant that the inflationary effects of devaluation were absorbed, laid the foundation for ten years of solid economic growth. So strong in fact that it took Gordon Brown quite a while to ruin it!

Thomas Piketty’s research is very relevant here, and while in my opinion he rather loses the plot when drawing conclusions from it, the value of his book, Capital in the 21st Century, lies in that research. The continued increase in capital to GDP ratios means that we cannot allow things to continue unchanged. The imbalances will only get worse as international capital flows increase. The irony is that the solution lies in precisely the very thing that successive rounds of GATT/WTO talks have been trying to reduce; import tariffs.

It has always been recognised that the danger of import tariffs lies in the fact that they can become competitive and create trade wars. However if you set up a successor Bretton Woods regime under which only deficit countries were allowed to set import tariffs, and the IMF were to set limits for each country according to the size of their deficit, then that would not happen. It could be applied separately to Greece as the new regime would be currency-independent. That would create a partial devaluation for Greece in that it would promote import substitution, though of course it would do nothing for exports. But it would also provide an additional fiscal revenue stream which can be used to stimulate the economy and reduce unemployment.

In a world where the environment is under threat, the continued expansion of world trade in itself must be questioned. I would venture that it is the balance of trade that matters far more than the volume of it. Of course world trade gives consumers much greater choice, and it allows small countries with limited resources of their own to join in. But ultimately Adam Smith was right. It is the product of your labour that makes you rich, what today we call ‘adding value’, and a country that only exports natural resources will return to poverty when those resources run out.

In Britain however there is a further way we can improve our competitiveness. By setting up a Sovereign Wealth Fund to hedge the National Debt. As you may have seen in my election address, I have castigated the Coalition for overlooking this. But what I did not say there is that funds nowadays are invested globally. It follows that a substantial proportion of the wealth fund would be invested overseas, which would involve the selling of sterling, which in turn would make it more competitive. The Chinese have always had a high propensity to save, and it was by investing in US Treasury bonds that their export boom and consequent high rate of economic growth was created. We can do the same.

Threats to and nature of our Free Society.

Several events recently have caused me to reflect upon the nature of our free society and the way it is under threat from various quarters, including of course from our membership of the European Union. For example Lord Freud’s attempts to address the serious issue of finding work for the disabled, the assassinations at Charlie Hebdo, the phenomenon of internet trolling, the private members bill to make permanent a commitment to spend 0.7% of taxpayers’ money on overseas aid; and there is also Lord Leveson’s recommendations on privacy to consider.

The French have now suffered for over two centuries from Napoleonic Law, a highly proscriptive form of law which says in effect that you cannot do anything unless the law explicitly permits it. It is a form of law that has spread widely across the continent and which now forms the principle mind-set pervading the European Union. Different nationalities react to it in different ways, so for example the Germans meekly do whatever they are told, whereas the French invariably try to do the opposite.

Either way it is now being imposed on us through European Law. It’s effect is to treat adults like children which, as we all remember from the old adage, means that sooner or later they all start behaving like children. Even the most fleeting glance across the Channel will confirm what I mean, whether it be at the sight of farmers tipping lorry-loads of tomatoes on motorways, or the nature of the cartoons in Charlie Hebdo. I base the latter observation on Christopher Booker’s recent article in the Sunday Telegraph in which he reports that most cartoons the magazine publishes contain little or no satirical content whatsoever. Instead they use ‘freedom of speech’ to justify the publication of purely gratuitous provocation at any passing figure of authority, like teenagers pushing their boundaries to see what they can get away with.

English and Scottish law on the other hand approaches matters from the other end of the spectrum, saying that you are trusted to exercise adult moral responsibility except in regard to certain activities which must be proscribed in the interests of maintaining public order. As a result we have been brought up to exercise moral responsibility voluntarily using our own individual discretion, and because most of us do so it works.

European Law is toxic to our British concept of a free society. If we become infected with it our culture will perish and we will all end up behaving like the French. Once gone it will be almost impossible to revive, as it is was accumulated over generations. It is one of the most powerful reasons to leave the European Union.

I suggest that the core principle here is not ‘freedom of speech’ but the ‘pursuit of truth’. As a result we expect our cartoons to make a serious point, albeit at the expense of passing figures of authority. Of course freedom of speech is essential to enable us to pursue the truth, but unfortunately it doesn’t follow that the reverse is true. Freedom of speech does not necessarily require the pursuit of truth. Freedom of speech is therefore a means to an end rather that an end in itself. It lies very much in that part of the domain of morality which we in UKIP, as British libertarians, leave to the discretion of the individual.

To us ‘small government’ means not only a small fiscal public sector and consequent low taxation but also restricting the scope of the law to what is necessary to maintain public order and to provide essential public services. I would myself say that the law is there to protect us from harm or loss at the hands of third parties and in our dealings with second parties, but it is not there to protect us from our own choices in life, provided of course we do not cause harm or loss to others in the process, and nor is it there to coerce us into patterns of behaviour which are purely of convenience to the state.

The value judgements of the majority often conflict. If you ask everyone if they want lower taxes they will say yes. But if at the same time you ask whether more should be spent on public services they will again say yes! I call these value judgement conflicts ‘technical issues’, the technicality here being that you cannot vote for two and two to equal five. It is theoretically the role of representative government, our MPs in Parliament, to sort out these technicalities on our behalf, though it is a moot point whether many of them are up to the task. What it does do is make the case for a written constitution in which the scope of the law is limited, as well as support UKIP’s commitment to greater use of referenda.

Anyway, how do we deal with the subject of causing offence when cartoons, or remarks such as Lord Freud’s, do have a serious content? I suggest that in such cases the pursuit of truth should always prevail, since that is the core value upon which our entire civilisation is based. If anyone is offended in the process then tough. We all get offended at times. It is not fatal and we should just deal with it as and when it occurs.

We thus end up with three types of offence, the first being where it incites criminal behaviour, and should therefore itself be a criminal offence; the second being purely gratuitous provocation which although it does not in itself cause any harm or loss to others I unhesitatingly condemn as immoral; and the third the by-product of the pursuit of truth, which I defend.

So where do internet trolls fit into this picture? Of course if they cause actual harm or loss to those they bully, including self-harm or worse, then that is a crime in itself and the question of causing offence is superseded. But suppose the same abuse is directed at another and did not have those results, is that immoral but lying outside the scope of the law? I would suggest so. The disincentive lies in the fact that the troller cannot tell how his target will react. Repetitive abuse could be prosecuted as harassment. It follows that all trolls must be identifiable so that they can be held to account.

As an atheist I am free to base my moral values on the assessment of consequences, whereas all religions, so far as I know, take a predetermined approach, saying that it is always right to do this and always wrong to do that, which of course has the advantages of clarity and enforceability. In theory this should result in conflict, but strangely in practice it rarely does. This is probably because those who drew up the original religious codes did exactly the same thing, and were acting in an environment where the rule of law for the protection of the people was virtually unknown. Clarity and enforceability were central to success. The same situation prevails today in poorer parts of the world, which must be one of the main strengths of Islam.

In this country however our modern systems of justice take over the tasks of providing clarity and enforceability. This highlights the role of uncertainty in the pursuit of moral truth, just as Heisenberg’s Uncertainty Principle highlights the role of uncertainty in the pursuit of natural truth. The individual facing a moral decision will usually be in a far better position to assess the likely consequences of their action, which will depend as much on circumstance as on the nature of the act itself. The future is always inherently uncertain, and a generalised law cannot possible predict or take into account all the possible sets of circumstances that can arise.

In other words the law can ‘get it wrong’. The true value of our free society therefore lies in the opportunity it gives us as individuals to ‘get it right’ more often. Moreover, even when the results of our actions have become apparent, we will still never know what the results of any alternative courses of action open to us would have been. Think of the SAS in Gibraltar for example; whether to take out the IRA terrorists who might be about to set off a bomb in a crowded place, or definitely avoid causing the deaths of those terrorists. Both results are morally wrong, but it is impossible to know what they are at the time of decision, or indeed both of them ever. On the spot judgement is crucial to reducing the risks involved.

A further dimension arises in a multicultural society where many different moral codes are used. This situation likewise argues for the law to be kept to the lowest common denominator consistent with maintaining public order.

In examining the nature of the pursuit of truth, can we learn anything from the transition from ‘classical physics’ to ‘modern physics’. Modern physics does not replace classical physics; it merely says that when you go beyond a certain boundary of experience, such as matter moving close to the speed of light or the interaction of subatomic particles/waves, then the classical laws break down and you have to think again and find a deeper, more general theory. Might not we be facing a similar transition in morality where modern life throws up situations which lie well beyond the limits of classical experience?

This all argues for as much flexibility as possible; not a virtue of the European Union. I was delighted to see that Parliament has now approved the use of genetic modification to combat mitochondrial disease. Critics pointed to the risks involved, but you can never eliminate risk altogether. Life is about managing risk, not eliminating it, and clearly in this case the risks of not intervening greatly outweigh those of doing so.

The management of risk also affects the use of preventive law. Strictly speaking any intervention to prevent a crime is an act of prejudice and we therefore have to be very careful how we allow it. The principal role of the police is to bring to justice those who have committed crimes, not to prevent them in the first place. If you gave the police carte blanche to prevent crime you would end up with a police state, as well as intolerable pressure on and impossible expectations of the police themselves. We appear to have such a situation already with social workers and child adoption. It’s not fair on our public servants apart from anything else. What I do expect from the police is that they maintain a high degree of vigilance; that they intervene where they have clear evidence that a crime is imminent or in progress; and that they bring criminals to justice as efficiently as possible.

Does deterrence work? This is impossible to measure as you cannot count the number of crimes that have been deterred. Common sense and personal experience tells us that it does work for the vast majority of law abiding citizens, but may have less effect on those who have already crossed the Rubicon into criminality. What we do with criminal offenders is a whole new subject, but much depends on the wealth of the country. A poor society has little option but to administer capital or corporal punishment, whereas a richer one can afford more rehabilitation. It is necessary also to distinguish between the verdict and the sentence. Thus with drug use I would advise it remains a criminal offence (the verdict) but that sentencing should be directed at rehabilitation. The apparent confluence of verdict and sentence under Sharia Law is I am sure one of the chief sources of confusion between the communities.

In some cases there is a clear statistical relationship between harm and preventive laws, such as with speed limits and drink driving regulations for example or with crowd control. So I can accept them in such circumstances. The situation becomes more confused though when you consider that there is a much wider range of possible causes for any crash, such as the inexperience, medical condition or emotional state of the driver, and that speeding and drink-driving are commonplace without incident. Harsher sentencing for actually causing harm or loss can be an alternative to regulation.

Likewise we must always remember that the law of diminishing returns applies. You can no more eliminate risk than achieve the speed of light. The cost or energy required to do so is infinite, so we must accept that a line must be drawn somewhere short of it. I feel much more comfortable with a line that respects the judgement of the individual, even though occasionally mistakes will be made. The same sort of thing happens with food sell-by dates. The level of waste resulting from over-tight labelling is mind-boggling across all income levels. At our house we hardly ever throw out food, making good use of the freezer both before and after meals. I wonder if any research has been done on the sensitivity of food poisoning to sell-by date?

As I write, reports are coming in (as yet unchecked) of a UKIP NEC decision to impose stunning in abattoirs, thereby contravening the religious beliefs certainly of the Jewish community and possibly of the Muslim community as well. This seems to me to contradict both our philosophy on the nature of a free society and UKIP’s own manifesto commitment to allow greater use of local referenda. Such referenda will only work if they add to existing law on a local bye-law basis, as clearly we cannot allow them to overturn the law of the land or we would end up with anarchy. So it follows that national law should remain restricted and silent on issues of social and religious conscience. Local referenda could then be used in those parts of the country that do wish to require stunning, without thereby creating any conflict with national law. There is no need for uniformity across the land on such matters. Surely the whole point of local government is that it allows different communities to be different. The NEC have got this one the wrong way round.

We have also approached the issue of overseas aid on this basis, so this new policy is inconsistent with that as well. By no stretch of the imagination could overseas aid be described as essential to the maintenance of public order within the UK! It is virtually a contradiction in terms; a ‘reductio ad absurdum’. A further reason to leave overseas aid to the charitable sector is that there is very little national interest in it; it is almost entirely a matter of social conscience. Thus UKIP’s objection to spending public money on overseas aid is based on principle as well as being a matter of sound public housekeeping. John Stuart Mill must be turning in his grave at the sight of the LibDems proposing a permanent commitment to 0.7% of GDP spent from public funds on overseas aid. Such a policy is neither Liberal nor is it Democratic!

Either way it now leaves UKIP as the only valid inheritor of the Whig political tradition in this country. We are certainly not ‘right-wing’. This term comes from the French Revolution to describe the Bourgeoisie, who sat on the right side of the new National Assembly and who believed that inequality was part of the natural order of things and should be left alone. UKIP on the other hand supports the minimum wage and the provision of decent public services and of a reliable welfare system based on the safety net principle. One could argue in fact that UKIP now lies to the left of both the Conservatives, on account of their failure to protect those in greatest need, and Labour, on account of its continued support of the European Union, and hence of immigration, thereby undermining both our living standards and employment prospects and pushing up our rents.

So the question of where you draw the line between the law and individual freedom, including freedom of speech, is a tricky one, but I do conclude that it is a matter of maintaining public order rather than one of free speech. After all other freedoms are restricted in the name of public order, so why not self-expression? The question must arise therefore “Should we re-introduce laws against blasphemy”, applied equally to all faiths of course, and perhaps extended to internet trolling, if a strong statistical correlation between blasphemy and public disorder can be established? A true libertarian would surely say “yes”, though the exact wording would be critical. The defining words ‘gratuitous’, ‘derogatory’ and ‘provocative’ spring to mind. However at present it would be difficult to show that there is sufficient frequency of blasphemy in the UK to establish the necessary strong statistical correlation here. Almost all the instances to date have been perpetrated on the continent, which perhaps only goes to show that our own responsibility-inducing free society so far is standing up well to the Napoleonic onslaught.

Finally, what about Leveson? Applying my principle that the pursuit of truth takes precedence over freedom of speech, surely the obvious thing is to ‘do the experiment’. In other words enact his recommendations on a temporary basis by including a provision that the Act will automatically dissolve after say fifteen years. At that point we can then take a much better informed decision on whether to extend them.