Unaffordable Housing

Continuing my new series taking issue with Sunday Telegraph columnists, this week it is the turn of Jeremy Warner, who yesterday wrote some very strange things under the heading ‘Unaffordable housing’.

Now to be fair his diagnosis was spot on. He reported that average real house prices in London have soared by almost 40% since the beginning of 2013, and concluded that the three primary causes of this are under-supply, intense overseas buying and virtually unbridled immigration. So far so good.

It is with his prescription that he goes belly up, writing “I’m all in favour of free movement of labour, and on high levels of inward investment, but if you are to have these things it is incumbent on the Government to ensure adequate supply and the infrastructure to service it.”

Let’s take these factors in order. Since 2004, when the immigration floodgates opened, our average real standard of living has fallen by over 20% (see ONS statistics). Indeed if you factor out an annual one percent for productivity growth, that is a fall of over 30%. Of course some of this is due to the banking crisis, but on another page Liam Halligan helpfully tells us that “our economy endured a 7.2% peak-to-trough drop after the banking crisis”. He doesn’t tell us where he got this figure from, and I suspect it is a tad understated, but let us accept it for the time being. That means that a fall of over 20% was due entirely to immigration (unless you can think of any other possible factor commencing in 2004?).

Now at first sight this conclusion might seem counter-intuitive. After all most immigrants do work hard and pay their taxes, and we are constantly being told that the NHS would collapse without them. But you know you can argue the whys and wherefores until the cows come home. I was always taught to judge by results. And those results, particularly in the week following the Paris atrocities, are unequivocal. Immigration is hugely damaging to our standard of living as well as to our security, our environment, our infrastructure and our housing provision. At these levels it also results in cultural swamping. I have no difficulty with cultural diversity, nor with our historic commitment to taking in refugees from persecution, but when the numbers and population density reach these levels we are in a completely different ball game.

Then there is the question of inward investment. For decades successive governments have preached the benefits of inward investment and have done all they can to encourage it. But again I say judge by results. Where are all these benefits? I don’t see any. What I do see is a record balance of payments deficit in excess of 5% GDP, which of course exports jobs and undermines employment. Inward investment has the effect of pushing up our exchange rate and making our currency uncompetitive.
We should stop encouraging it forthwith.
I have no difficulty with foreign ownership as all who invest here must obey our laws, but there is plenty of money sloshing around the money markets, especially post QE, and corporate savings are at high levels. Domestically sourced investment will naturally follow an increase in consumer demand.

Finally there is Jeremy’s frustration at our planning laws. Jeremy, those planning laws are there for a reason. They are there to protect our heritage, our habitat and our environment. Once these things are destroyed they cannot be recovered. I do accept that there may be insufficient brown field sites to provide the housing necessary to make good the current shortfall, particularly if mixed development is provided as of course it should be. I would also favour the creation of a new planning category for what I would call, for want of a better name, scrub land, ie undeveloped land of no particular alternative merit. I would certainly favour a big increase in stamp duty for foreign buyers of UK domestic property.

But even if we do all these things we have no chance of keeping up with ‘virtually unbridled immigration’. Balanced migration has to be the starting point, and of course that can only be achieved by leaving the EU.

Simon Heffer gets it wrong on Devaluation

I seem to have found a new hobby – taking issue with Sunday Telegraph columnists! Last week it was Janet Daley and this week it is Simon Heffer, another redoubtable writer who often has interesting things to say but yesterday talked complete rubbish about devaluation. It was just a short piece so here’s what he said in full.

“The latest thinking aloud by Mark Carney, Governor of the Bank of England, tells us that he believes interest rates should not rise until 2017. He’s wrong: but he’s changed his mind several times before, and will doubtless do so again. His remarks cheer those who believe sterling should be devalued to help our competitiveness. But that would also be helped if we improved our productivity, surely a much better idea. Those demanding a weaker currency need to be asked how weak they’d like it to be. Would like the Weimar Republic be enough? Or do they want the full Zimbabwe?”

NO, Simon, you cannot force the pace of productivity growth! In a free market economy it is simply the result of myriad decisions made by private individuals and companies. The best you can do is set optimum conditions for investment. To do that you have to stimulate consumer demand so companies have an expanding market to invest into, otherwise they won’t take the risk. But guess what? Even if we achieve this, our competitors are likely to be investing just as fast as we are. So we never catch up! Getting rid of an ingrained massive Balance of Payments deficit such as we have, which has the dire effect of exporting jobs, can only be achieved by devaluation.

Of course that is not easy, and you are right to point out the possible inflationary consequences. Inflation simply undoes all the good work and sets you back to square one. But it is not inevitable. Remember the Exit From The ERM? That was one of the most effective devaluations on record because it came when unemployment was very high so the inflationary impact was completely absorbed. As a result we got ten years of solid export-led economic growth.

The lesson here is that the best time to devalue is during a recession. Once again Osborne has failed to fix the roof while the sun has been shining (from that perspective), just as he has done by failing to set up a Sovereign Wealth Fund. However the global recession now developing may give us a second chance. Osborne should ask Mr. Carney and Treasury officials to put together a plan of action to get our BoP back into a small surplus within five years. To answer your question, that’s how weak (I prefer the term ‘competitive’) it needs to be.

Which leads us to consider what options may be open for this. What after all has caused the over-valuation in the first place? As you may have seen in my earlier post on Greece, the Eurozone and World Trade, a large part of the problem arises from the fact that capital flows through the foreign exchanges now swamp trading flows, so that the natural effect of having to finance a deficit no longer has a stabilising effect on our exchange rate. Thomas Piketty, in his recent book, observed that capital to GDP ratios have now risen to about seven, having been only around two at the end of WW2. It is a problem that affects the entire globe, and is the main reason why the Doha round disintegrated.

But it also gives us a clue as to the solution – to act on those capital flows directly. A bonus from setting up a Sovereign Wealth Fund would be that much of it would be invested overseas, thereby selling Sterling and making it more competitive. We also have at present very high levels of inward investment, which has the opposite and counter-productive effect. Partly this is due to Russian oligarchs and far eastern millionaires using the UK as a safe haven for their money (I have elsewhere advocated a big increase in stamp duty on foreign buyers of UK domestic property), but it is also due to the encouragement by successive governments of inward investment for infrastructure and industry. I say that is counter-productive and should stop. We will gain far more jobs from a competitive exchange rate that we do from mountains of inward investment.

And here’s a further twist. A failure to agree a new trade deal with the EU after exit could be a blessing in disguise. Just suppose that, in a fit of pique, Brussels chose to cut off their nose to spite their face and refuse a deal. What would happen? Well they would raise tariffs on their imports from the UK, reducing our exports. But of course we would give as good as we got, reducing our imports from them, which are far greater. What we would lose on the export swings we would more than gain on the import-substitution roundabouts. The deficit would be scaled back, and fewer jobs would be lost. Not only that, the import tariffs would provide useful extra fiscal revenue. A little bit of protectionism could be just what the doctor ordered!

Janet Daley misfires on tax credits.

Janet Daley is one of the Sunday Telegraph’s more robust commentators and often has interesting things to say, but yesterday she completely screwed up over the arguments for reforming tax credits. You can find her article here, but the most offending passage reads as follows:-

“What was missing from the Osborne defence was a very persuasive moral argument against government topping up low wages and thus creating a low-pay trap. The economist Arthur Laffer has said: ‘If you pay people to be poor, you will get more and more poor people.’ He was referring specifically to the benefit-dependent underclass held in permanent poverty by the welfare system that created perverse disincentives to work. But the same principle applies to tax credits: if you pay people to be low-paid, you will get more and more low-paid people. Instead of low-wage jobs simply being an entry point to employment, or a temporary stop-gap at particular stages of life, they become the permanent condition of a whole tranche of the population. Because low rates of pay automatically trigger the government tax credit system – raising the total income to an acceptable level – there is no pressure on the employer to offer more or the worker to seek anything better.”

NO, Janet, tax credits do NOT cause employers to pay low wages. Only one thing does that and that is the balance of supply and demand for labour. Wages are low partly because we are still in recession and partly because of high levels of immigration. Have you ever met anyone who does not wish to be better off? Even millionaires want to be billionaires! It depends on their negotiating position and on what employers can afford.

Where you are right is that there is indeed a strong moral case for reform. Reform to deal with structure and perverse incentives rather than to reduce the cost per se. The cost is cyclical and will come down as unemployment comes down. Unfortunately unemployment is now more likely to rise again due to a combination of austerity at the wrong phase of the economic cycle, high rates of immigration and the government’s interventionist intention to increase the minimum wage.

Tax credits are a duplicate welfare system which were originally introduced as a way of overcoming the poverty trap (‘making work pay’ in modern parlance). A much better, cheaper and more efficient way of doing that is to increase the earnings disregards under the old system, now aka Universal Credits. Yet Osborne has done precisely the opposite by reducing them. As so often with this government and the coalition before it the rhetoric says one thing and the action says completely the opposite. Work pays less now than it did before!

Osborne is not an intellectual. He runs for the hills at the slightest challenge. We saw it in 2012 and we are seeing it again now. That is why he cannot make the case. For a more detailed review see my previous post here.

PS. Since posting this on the Telegraph’s page I received there a couple of interesting comments concerning the Iron Law of Wages and the Speenhamland system. I responded as follows:-

“I don’t know what the unemployment rate was in 1834, but I suspect it was quite high. Hence the downwards pressure on wages.

One point that does come out of this discussion though is how comparatively rare it is that governments manage to get unemployment down to the sorts of levels that would produce sustained wage increases. It seems to boil down to how we manage inflation.

Back in the 70s and 80s any wage inflation quickly developed into a comparative wage-price spiral, forcing the government to slam on the economic brakes. With union reform that may no longer be the case, but now we have property price inflation instead.

It seems to me that there are at least four different types of inflation that require quite different policy responses: wage inflation, import inflation, property inflation and general inflation. I would welcome both wage and import inflation at a moderate and constant level; the latter because we need a much more competitive exchange rate to stop jobs being exported. These are both cost-push types of inflation and so not particularly volatile. That means measuring each separately and managing property inflation by restricting mortgage availability and only general inflation by increasing interest rates. Wage and import inflation could then be given much more leeway.

I would also welcome a change in the way we determine public sector wages, which are invariably reduced to a political football much to the detriment of our public services. No successful private sector employer would underpay his staff because otherwise he would lose them, and all the investment he has made in recruitment, training, team and experience building would be written off. The general approach is to look at staff turnover rates and increase wages when they are getting too high. We should do the same in the public sector, permitting any local HR manager to appeal for an increase on the basis of auditable high staff turnover rates.

I maintain that the rate for any job has nothing to do with comparatives but is determined by the balance of supply and demand for that particular skill in that particular location and at that particular level of seniority. And maybe some other factors as well. An appeals process would enable public sector wages to be increased when and where it became necessary.”

The Story of the Economist, Three Fishermen and a Politician.

Just back from Conference, where the atmosphere was upbeat and united in prospect of success in the OUT campaign (despite as usual what the press had claimed!). I was also intrigued by a fringe group called FreeKip, run by Councillors Bill Etheridge MEP and Paul Brothwood and by Phil Henrick, which is putting together ideas on economic policy and which, as you will know, is very much my own core interest. They have produced a document called The Mount Charles Charter, and I shall be responding to it fully shortly. You can find it here.

At dinner that evening I was at first sitting next to a spare place when a delightful young lady came and sat beside me. We fell into conversation and it transpired that she had recently joined UKIP from Labour. I asked what areas of policy she was most interested in and she soon said that she knew little about the private sector.
Now this should have been a red rag to a bull, but I found myself waffling somewhat and afterwards felt I had not done justice to the subject. So here, with the benefit of hindsight, and in case I see her again, is my Story of the Economist, Three Fishermen and a Politician.

“Once upon a time there was an Economist. Now this was in the days before fishing and politics, whereas of course there have always been economists with us. Our economist liked nothing better than to sit upon the beach looking out to sea and to ponder the ways of the world.

And it came to pass one day as he sat there that he spotted a large shoal of cod swimming about freely in the sea. So he said to himself “Hm. Those fish look good to eat and the people are starving. I wonder how much they are worth?” So he thought, and he thought, and he thought, but eventually he concluded that they weren’t worth anything at all. After all anyone could go out and catch them, but also there were no buyers out there in the sea. So if demand is zero, value must also be zero. Indeed he concluded this principle applies to all natural resources in situ; it is only when Man extracts them that value is added to them.

Now as he sat there, savouring his new-found wisdom, a young man came along and sat and entered into conversation with him. And when he learnt of the fish in the sea he said “Wow. I wonder how much money I could make if I caught those fish and sold them to the people, who are starving”. And the Economist encouraged him, saying that barriers to entry to this industry are low. And so he did.

So it came to pass that in due course the young fisherman landed his first catch upon the quayside. And as he did so the Economist called out to him and asked “How are you going to price your fish? If you price them too high you won’t sell them all, but if you price them too low you won’t make as much money as you might have done.” But the young fisherman was canny and replied “I shall adjust my price as I go along so that I just attract enough customers to buy all my fish.” And so he did.

At the end of the day the young fisherman was ecstatic. “Look at all this money I have made. Let us go to the pub and celebrate”. But the Economist was cautious, saying “That is not your profit, that is only your income. By moving the fish from the sea to the quayside you have added value to the fish because the balance of supply and demand on the quayside is more favourable than it was in the sea. And by finding the marginal price you have maximised your income. But you will not know if you have made a profit until you have deducted your costs.”

It was only at this point that it dawned upon the young man that his costs, which were not inconsiderable, were an entirely separate and unrelated figure to the value he had added to the fish. Only if his income was greater than his costs would he have made a profit, but it might just as easily be the other way around, making him a loss. So he hastily totted up his costs and, to his great relief, discovered that he had indeed made a large profit.

As he and the Economist sat drinking in the pub a second young man came and sat and entered into conversation with them. And when he learnt how much money the first young man had made he exclaimed “Wow. I could do that too, and become as rich as you are”. And the Economist encouraged him saying that barriers to entry to this industry are low. The first young man was also at first pleased at the prospect of having a friend in the industry. And so he did.

But when in due course the second fisherman landed his catch beside that of the first upon the quayside, the first fisherman quickly realised that something was wrong. Although he was doing nothing different, and although the level of demand on the quayside remained unaltered, the supply had doubled, which meant that the marginal price had fallen. He was furious and remonstrated with the Economist, but the Economist reminded him that the law required open competition and that there was nothing he could do. So the two fishermen continued to fish and both made reasonable but not excessive profits.

And it was not long before a third young man came and saw the two fishermen making a reasonable but not excessive profit. So he said to himself “I could do that too.” And so he did. But when he landed his third catch beside the first two, the marginal price fell still further and thence all three fishermen made a meagre profit just above the breadline.

Indeed a fourth young man also came and considered becoming a fisherman. But when he saw the meagre profits the first three were making he decided there was not enough money in it. And so he didn’t. But the people were delighted at the plentiful supply of cheap fish in the shops and considered themselves much better off. As the Economist observed, they were better off because they could now satisfy a greater proportion of their needs.

It was at this juncture that the Politician arrived on the scene. He was under pressure from his voters who were demanding better public services and a more reliable welfare state, and wanted protection from many nasty foreigners who wanted to enslave them in volumes of red tape and regulations, and to chop their heads off. The Politician replied saying “You can have all these services but you must pay taxes for them as they do not grow on trees.” But the people were angry and protested violently saying “These are our Human Rights. They must be freely available to all. If you want to tax anyone, go and tax those fat fishermen over there. Do not tax us as that is not fair.” And so he did.

But the Politician, not being of the UKIP variety, had not done his homework and when he did as the people demanded and imposed a profits tax on the fishermen he discovered it produced very little revenue. So he went back to the people and said again they must pay taxes for the services they wanted. But the people grew even angrier, shouting ‘conspiracy’ and ‘tax evasion’ and ‘fraud’, so the Politician had to find other ways of taxing the fishermen.

So he imposed business rates, and employers’ national insurance, and insisted the fishermen take expensive training courses to obtain qualifications they did not need. And lo his friends in local government joined in too, imposing parking charges and other restrictions, and painting yellow lines all around.

But the fishermen were sore afraid because they knew their costs would now exceed their income. And so they did, and they all went bust.

And the people were by now indignant also, asking “What has happened to that plentiful supply of cheap fish which was in the shops and which is no more, for we are starving once again.” And they blamed the Politician for mismanaging the economy, even though he had simply done as they had demanded.

So they all lived miserably ever after. Indeed quite a lot of them died.”

Why the Single Market is a Bad Idea

Many people who are prepared to consider changing our relationship with the EU still say that remaining a member of the Single Market is essential to our economic future. But why, exactly? Do they actually understand what it is? Let’s have a closer look.

As I see it there are three principle characteristics to the Single Market as follows:

1). The harmonisation of commercial standards and procedures. Yes – all jolly good stuff. But it’s been done now and is water under the bridge. Nobody is suggesting we revert to the old arrangements, so it’s not an issue. In any case we can always voluntarily choose to adopt new standards at any time if we so wish.

2). The removal of tariffs and other barriers to trade. Again all very useful, but done now and nobody is suggesting they be resurrected in the event of Brexit except as a mirror image on our side of what is now there [Also see PPS below]. It is certainly not in Brussels’ interests to do so as we import more from the continent than we export. Roger Helmer also has some interesting perspectives on this here. In any case if we had to go back after Brexit to trading under WTO rules both imports and exports would reduce so the deficit as a whole would reduce, which would help conserve employment within the UK! A blessing in disguise? Certainly we can handle it either way, so it’s not an issue.

3). The creation of free movement of people between member states and of capital within the eurozone. This is the crux of the matter and has created massive instability within both the eurozone and the EU as a whole. It has been like removing the bulkheads from within an ocean-going oil tanker. As soon as the first big wave comes along all the oil slops down one end and the tanker up-ends and sinks.

Ask any economist or businessman what they consider to be the single most important precondition for steady long-term economic growth, and almost certainly they will say ‘stability’, or something similar. So why do they contradict themselves when it comes to membership of the Single Market? Roger Helmer may again have the answer here, where he observes how Brussels will stop listening to any large organisation that does not toe its party line.  The access that their size and wealth affords these organisations to lobby the EU creates a lumpy playing field to the detriment of all who have to compete with them. It is SME’s that create most jobs.

It is also noticeable how many will jump to unfounded conclusions. For example Labour claim that all EU laws now on our statute books, including employment protection legislation, will automatically be erased. It won’t. Academic institutions, who ought to  to know better, assume that all international cooperation will come to a standstill. Nobody is suggesting that temporary residence will be a problem, and as for citizenship the aim is simply balance.

I would say ‘balance and stability’ in all things. Balance in our fiscal accounts, our external trade, in monetary policy, regional policy, the balance between employment and inflation, between left and right (equality vs free enterprise and aspiration) and of course balanced migration. Indeed that is how I would describe UKIP’s position on the political spectrum as a Centre party.

PS. 03 Feb 2016. Article by Roger Bootle in the Telegraph entitled “We should not be swayed by sound-bites and slogans about Europe.”

PPS. 16 Nov 2016. Unbalanced free trade is also a danger. See my later post “Do I believe in Free Trade?”


In this post I argue the case for the following changes to the state and public sector pension schemes, as I believe the recommendations from Lord Hutton’s report in 2011 fell far short of what is both required and possible.

1). Funding the state and public sector pension schemes, thereby saving in excess of £20bn a year in employer (taxpayer) contributions, and hedging future demographic risks,

2). Removing employers from public sector pension schemes altogether thereby creating a purely bilateral relationship between members and administrators. This can be achieved simply by adding employers’ contributions to salary and treating them subsequently as employees’ contributions. This would then :-

a). enable members to tailor their schemes to their individual requirements. They would be able to set two of the three parameters – contribution level, retirement age and pension level – and obtain a quote for the third,

b). amalgamate all of the many thousands of public sector schemes into one, thereby saving millions on administration costs as well as addressing Hutton’s concerns over local accountability and scheme variation. Hutton actually doubled the number of schemes required, each with its own board of trustees and administrators,

c). allow members to move between the public and private sectors without suffering a break in their pension arrangements,

d). enable the defined-benefit arrangement to be retained by presuming an underlying growth rate of 4% (Piketty’s 5% unmanaged average – see below – less 1% risk premium). The taxpayer would still bear the risk of any shortfall, but would benefit from fund growth in excess of 4% (more likely). It is the 4% fund growth allocated to the scheme that enables the contribution rates to be reduced. However during the transition from the pay-as-you-go to the funded basis the cash-flow shortfall would be made up from additional government borrowing as for the Sovereign Wealth Fund. Borrow twice what is required for cash flow and the extra will grow sufficiently over 30 years to pay off the full amount on redemption plus interest. If funds are not available at 3% or less the transition is simply extended until they are once more.

3). If necessary introduce clawback to state pensions to balance the books. This is in any case in line with the insurance principle indicated by the name NIC’s. These measures give the lie to those Ponzi-scheme artists who propose ever greater immigration to fund future pensions.

4). Limiting the amount of cash lump sum withdrawals from any pension, public or private, so that the member could not end up back on benefits later on.


It is around this time of year that my pension schemes send me their annual statements showing whether my funds have grown or not. I have a couple of defined contribution (money-purchase) schemes, and it is twenty years now since I stopped paying into them. They are both now invested fully in global managed funds of one sort or another, though in the early years there were some fixed interest and with-profits funds as well. Each year I calculate the net growth after charges and before income draw-down. So this year I thought I would calculate also the average net growth over twenty years. You can do this in two ways. You can either calculate the annual rates first or then average them, which give you a compounded rate, or you can take the growth on the opening value and divide by twenty, which gives you the simple rate. On the first basis the results are 6.2% and 7.4%, and on the second 10.4% and 13.2%. I also looked up the performance of one of the leading investment trusts, the Alliance Trust, and found a corresponding growth in share price of 5.4% and 7.4% respectively. That of course is ex-dividend, so you can add another two or three percent to get the full return.

These all compare favourably with Thomas Piketty’s 5% long term compounded rate of return on capital. Clearly his is an unmanaged average. Any half-competent fund manager should be able to beat it. I mention this also in the light of my previous recommendation to hedge the National Debt with a Sovereign Wealth Fund.

When I read Lord Hutton’s report on the reform of public sector pensions four years ago I scoured it for his conclusions about funding. In fact there is only one short sentence in the entire report about it in which he states that the “benefits of funding are not clear”. I have to say I suffered something of a Victor Meldrew moment when I read that! Not clear? Try going to Specsavers, m’lord! And then the penny dropped. To anyone with experience of corresponding with HM Treasury and its Ministers, this phrase “the benefits are not clear” is standard mandarin-speak for “over our dead bodies”. What is clear is that poor old Lord Hutton had been squished by the Treasury long before he had even sat down to write his report! I can quite see that he would want to continue on a defined-benefit basis, but that doesn’t rule out funding. I can also see that there would have to be some form of interim funding to cover the cash-flow switch from using contributions to pay current pensions in payment to investing them, but with 30-years bonds currently only costing 3% pa the same conclusion applies.

Hutton provides tables which show the level of contributions typically paid into public sector schemes. There are in fact thousands of them, one for each employer, including local authorities, and a few of them are funded or semi-funded. Some, where early retirement is normal, such as the Fire and Armed Services have combined contribution levels over 30%, but most work out at about 20%. Of these typically 30% of the totals are employee contributions.

In the late 80’s I was involved with the setting up of two employer money-purchase (defined contribution) schemes. I cannot recall exactly what contribution levels we settled on, but I am pretty sure the combined contributions were less than 10% of salary. This indicates that at least half of the public sector contribution levels could be replaced by fund growth. According to Hutton the cost of the public sector employer contributions (70% of the combined total) is around £30bn, so half the combined total would be in excess of £20bn.

Employer Participation

Employer participation is rooted in the days when employers adopted a patrician attitude, and when jobs were for life. For me this simply does not fit with a libertarian approach or with the flexibility people now require for careers involving many different employers and for varying life-styles. The employer’s pension contributions are all part of the salary package and in my opinion the employee should have maximum flexibility on how that is deployed.

The simplest way of doing this is to set the reduced total contribution rate, 10%, as the employee’s contribution by adding the amount transferred from the employer’s contribution onto gross salary. That would on average represent an increase in gross salary of 4%. The resulting benefits in terms of transportability, flexibility and administrative cost were set out above and are I trust self-explanatory. In the early years the employers’ contributions would still be required for cash-flow purposes, but would phase out later as the fund builds up, though as these would boil down to borrowing either way there is no need to retain the link.

The next question is should this be a compulsory employee contribution, or could employees opt to receive some or all of it in pay now? The national interest surely does not extend beyond ensuring that as many people as possible are not dependent on the state for non-pension benefits in retirement, so we have to look at the overall position.

The role of the State Pension

Many people have noted the absurdity of the National Insurance system when there is no separate insurance fund to pay for those services. In fact almost all the NIC contributions go towards paying for the state pension on a pay-as-you-go basis. Total NIC receipts in 2014/5 were £110bn whereas the total cost of both state pensions and pension credits came to just over £95bn. However ONS forecasts suggest this cost will have risen to over £435bn by 2062/63, or nearly £500bn if you add in other benefits paid to pensioners such as housing benefit and disability benefit. Clearly this is unsustainable unless massive changes are introduced.

Possible ways of meeting this cost could include:
• Increasing the statutory retirement age (already increased to 68 by then)
• Funding
• Increasing employee NIC’s
• Introducing clawback where pensioners have other income over a certain threshold, say £25k. A clawback rate of 50% would then give a taper up to around £40k. This would also be in line with the insurance description of the contributions.
• Allowing Inheritance Tax relief (or CGT relief in the hands of the beneficiary if IHT is abolished but replaced by CGT) for legacies paid into a pension fund (or to pay off student loans for that matter!)
• Allowing members to switch state pension funds into other pension schemes for a reduction in qualifying years.

The answer probably lies in a combination of all of these, but I do also suggest that when an individual’s total pension provision, taking state, employer, private schemes and SIPPs all added together, at any age exceeds the annuity cost of providing a pension from that age at the top of the benefit tapers, then they should no longer be required to pay NPCs. The same test could be applied to reducing public sector contribution rates.

Constitutional Reform

Am I the only person in the country to think that an elected House of Lords is a thoroughly bad idea? I suppose I am coming at this with my professional management consultancy hat on, under which I advise that it would destroy single-point accountability by Parliament as a whole. The House of Commons and the House of Lords are essentially doing the same job; creating our laws and managing the statute book. What happens when something goes wrong? Who would you blame? For as sure as eggs is eggs each of your two elected members would blame the other! It is recipe for buck passing and unresolvable chaos.

Nor is it necessary. As Confucius once say, it only takes one link in a chain to break and the whole chain is broken. In other words it only takes one House to be democratically accountable and Parliament as a whole is democratically accountable. Making the House of Lords elected as well adds nothing. Except chaos. I would rather abolish the House of Lords altogether than make it elected.

But then the House of Lords does have an important role to play as a revising chamber. It is a bit like the quality control stage at the end of the production line. To do that job effectively you need people with talent and experience. Unfortunately talent and experience are seldom high priorities in an election, and indeed there is rightly no requirement for a representative to have them. People generally go for someone local or with a similar background to themselves. To acquire people with talent and experience you need an appointment system.

The only question is: who does the appointing? The problem we have at present is that the House of Lords is the private fiefdom of the Prime Minister of the day. He can, and does, stuff it with as many of his own party cronies as he can get away with. Even then we seldom get people with talent and experience! I don’t actually have a problem with the size of the membership, as members tend to attend only when they feel they have something to contribute. Given the almost infinitely wide range of subjects involved, a wide range of members and interests is a benefit if not indeed essential.

I accept that the person or group doing the appointing must themselves be democratically accountable; all that is necessary is that they are independent from Parliament. I also observe that in fact there are a number of functions and issues in which Parliament itself has too much of a vested interest. How about these for starters?
• The Judiciary
• The Armed Forces
• Granting of the Royal Assent (as a purely constitutional compliance matter)
• The Honours system
• MPs’ pay and conditions
• The Boundaries Commission
• The Parliamentary Commissioner
• The National Audit Office
• The Office for National Statistics
• The Office for Budget Responsibility
• In fact all constitutional matters and matters that should be kept independent from politicians generally.

My proposal is that we elect a quite separate Constitutional Council – it needn’t be large – perhaps just a dozen or so regional members with a minority of co-opted law lords as well, and perhaps chaired by the Lord Chancellor, who would be elected from within their own number – to take responsibility for a written constitution as well as for the above responsibilities.

In my book a sovereign constitution is about the institutions and procedures necessary to uphold democracy. It would not incorporate anything such as a bill of rights as that properly belongs on the statute book. Thus Parliament would be responsible for the Statute Book, and the Constitutional Council for the Constitution. Two quite separate tasks and documents which do not overlap.

None of this would adversely affect the monarchy, of which I am a strong supporter. An elected president could never provide the continuity and experience that all the Queen’s prime ministers, on both sides of the political divide, say they valued so much from their weekly audiences with the Queen. Nor does the monarch have any absolute powers. She has the right to be informed, and the right to advise, and that’s it. Everything else she does she does on the advice of her ministers. As a result democratic accountability is simply not relevant.

However, regrettably, we have so undermined the authority of the monarch over the past century that she can no longer act in any proactive way as custodian of the constitution. This profound weakness in our current arrangements was notoriously brought into focus by the adoption of the Lisbon Treaty. If a Constitutional Council had been in place it could have advised HM not to grant the Royal Assent to that Bill, at least pending a referendum in accordance with a written constitution, and no-one would have thought that undemocratic. Changes to the constitution itself could also require a referendum. They should not need to be frequent.

Finally I would advise that a written constitution should require all foreign treaties to contain a five-year break clause. These could default to a continuation, but the point here is that it should not be possible for one Parliament to bind its successors. I would also personally favour a clause prohibiting the courts from awarding financial compensation for non-financial loss. After all, life and limb are priceless.

Constituency Newsletter

UKIP Ealing Southall logoDear Ealing Southall Constituent (and one or two others),

You are receiving this email either because we were in contact during the recent general election campaign or because I thought you might be interested anyway. If you would prefer not to receive further newsletters please let me know and I will remove you from the circulation list.

If you have your own list of local contacts please feels free to forward this on to them.

The views expressed in this newsletter are my own and may not therefore correspond exactly with UKIP official policy. However I am not aware of any conflicts.

July 2015 Budget: Osborne announces a 1 million increase in unemployment.

Well, he did not put it quite like that of course. What he did say was that the Office for Budget Responsibility (OBR) has forecast the creation of 1 million new jobs over the next five years. What neither he nor the OBR added however is that, on the basis of current trends, we will by then have 2 million more new immigrants. Simply deducting one figure from the other shows how net unemployment will increase. And it won’t be the immigrants who are unemployed, though many will be working for scant wages as part of some board and lodging scam, thereby adding to wage compression for the rest of us. The young, the old and the disabled are all set to find jobs more difficult to find.

He also tells us that unemployment is down to 5.5%, but omits to include the thousands of people now classified as self-employed but who are not earning a penny, the thousands more sanctioned off benefits, and the many thousands in part time jobs who want full-time employment. It’s pure window-dressing. The real danger is that he believes his own propaganda, which in turn will lead to further mismanagement of the economy.

Because the other big mistake he makes is to treat welfare expenditure as fixed. It’s not. It’s cyclical. It goes up and down with unemployment. He tells us that “Britain is home to 1% of the world’s population; generates 4% of the world’s income; and yet pays out 7% of the world’s welfare spending”. Frankly that is precisely what I would expect in the middle of a recession. Historically the surplus/deficit changes by about £25 bn for every 1% change in unemployment. And he knows this because he is only trying to save £37 bn over the next five years when the deficit is over £75 bn, and yet predicts a surplus at the end of it. Either that, or he can’t add up – you can take your pick!

Not that I hold any candle for tax credits, nor for the effect they have on breeding for benefits. There is certainly scope for savings there, and that is the big thing he got right. Credit where credit is due.

And then there is the news that average weekly earnings are rising by 3.3% per annum. What we are not told is how the rich are once again surging ahead at the expense of the poor.

For a fuller analysis of the budget please see my blog article here, and on Welfare reform here.

Wheelie Bins

Hot topic in Ealing just at the moment. But how many of you realise that in fact you don’t have any choice in the matter anyway? It is the result of an EU Directive (No. 2008/98, which you can read here if you are a masochist) which requires every council to recycle at least 50% of your waste. This can only be achieved with wheelie bins, so that you can sort your ex-stuff out for them. You might get some influence over the time of collection, or even the size of the bins, but what you can’t avoid is having to sort your waste. And that requires multiple bins. Thought you lived in a democracy? You don’t. You just have to do as you’re told.

So if you want to go back to living in a democracy there is only one action that should achieve this – voting OUT in the forthcoming referendum.

Executive Pay: A closed market.

The perennial problem of excessive executive pay is raising its ugly head again, this time as regards the BBC and NHS.

Now I am a capitalist in the mould of Adam Smith, who observed that capitalism is only of benefit to society if it is contained within a strong framework of law, both to control fraud and prevent deceit, and to ensure open competitive markets. It is open competition which ensures profits not profiteering, and these are the constraints which make capitalism a form of socialism.

Yet these days executive recruitment is entirely conducted behind closed doors by head-hunters. It is a closed shop. We don’t tolerate closed shops from the Unions, so why should we do so from head-hunters? You can find a broader discussion of the situation on my blog here. In essence I am proposing the introduction of a procedure I call Cheapest Competent Candidate. At it’s simplest it would require all recruiters for positions above a certain pay level, in the public sector at first but ultimately in Company Law for public companies as well, to produce a short-list of at least five names, and then to require each of them to bid for the job just as you would do with a contractor, appointing the lowest bidder.

Obvious, isn’t it?

Greece: The Dance of the Dunces.

We all of us I am sure have the greatest sympathy for the Greeks in their current predicament. So it has been with considerable frustration that I have watched the negotiators on each side make such a pig’s ear of sorting it out.

Of course Nigel Farage is absolutely right to say that the best solution for Greece is to abandon the euro and leave the European Union. However we have to accept that, for the present at least, the democratic wish of the vast majority of Greeks is to keep both. So the question arises: was there any other way they could have agreed a constructive way forward? I believe there was and still could be, and I described it more fully on my blog here.

Those of you who read my election address will recall how I castigated the Coalition for not setting up a Sovereign Wealth Fund to hedge our own national debt. Here we have an even more critical situation where one side wants to write off the debt and the other doesn’t. Hedging it could satisfy both.

Clearly this was a case for Economic Superman. Trouble was, nobody beamed me up! Ok I know that sounds a bit superior but honestly, when you are forced to watch a fiasco such as this, how else can you feel?

Calais: Global Migration into Europe and the UK.

They can’t come here. And they can’t go back. So simple logic tells us they must be provided for somewhere else in a secure and decently run refugee camp. So what have our glorious politicians done about it? Absolutely nothing.

Now I have never visited the Falklands so I could be mistaken, but at first sight they would appear to make an ideal location for such a refugee camp. The west or south islands in particular. A long way from the UK. Because they are secure and under British sovereignty we could make sure the camp is properly set up and run. Of course it will be expensive, but not half as expensive as any acceptable alternative, and it could be paid for, pro-tem at least, out of our overseas aid budget. Nor do we have to wait for the EU to sort itself out. We can get on with it unilaterally and immediately. Both genuine refugees and economic migrants to the UK could go there straight from Calais or wherever they are found, with the paperwork and appeals sorted out after they arrive. They could be given a small allowance to enable a local in-camp economy to develop which would, through trade, be of benefit to the islanders as well. They would eventually be taken back directly to their home countries, with new passports obtained for them where necessary, when they themselves decided they wanted to go.

So what are we waiting for?

The coming Referendum Campaign.

It is now clear that the OUT campaign will involve many disparate and well funded groups, of which UKIP is but one. You can read how our effort is coming along here. Do please consider making a contribution. This is YOUR future we are talking about. Watch out for future newsletters tackling in detail the issues involved.

UKIP is onto a winner either way. If the referendum is successful then our raison d’etre is fulfilled and we can all go home. If not it will leave UKIP as the ONLY remaining route out of the EU and our support will rocket. There would then be a real chance of UKIP filling the vacuum left by Labour and the LibDems as the only competent left-of-centre alternative to the Tories.

Our Values: Reflections on my 2015 General Election campaign.

I have a confession to make. I was over-confident. And as a result lost my deposit. Not what I expected at all. Even so, everyone else thought 4.1% was good going. My mistake was to get distracted for a few days by family matters; not to send an article to the Ealing Gazette like the other candidates; and missing one important hustings. Also if I had canvassed the Southall Green ward, which I hardly touched, as thoroughly as Southall Broadway, where I personally delivered a leaflet to every house and had many street conversations, and where most of my votes came from, I would probably have reached 8 or even 10%. Ah well, as my mother never ceased to tell me, pride comes before a fall. Whether having had some helpers and a budget of more than £1500 would have made any difference I am not so sure. Personal contact was everything.

I was also disappointed not to be offered a closing speech at the declaration. So for the record here is what I would have said:

“Well, it was not to be. Even so it has been a pleasure and a privilege for me these last few weeks to meet so many of you as I have canvassed around, and I can only regret that I managed to cover so little, about a quarter, of the constituency in all. Most of you I found to be open-minded and genuinely interested to discover for yourselves what UKIP stands for, and on the odd occasion where that was not so I was glad of the opportunity to correct some of the misconceptions that appear to have arisen about us.

We are of course a multi-ethnic, multi-class one-nation libertarian party. We believe that all races, all colours, all creeds and all faiths should be treated equally. We do not condone discrimination of any kind, positive or negative, and believe that selection should always be based on merit alone. We see ourselves as a left-of-centre progressive party with an agenda not only to create greater fairness and equality of opportunity in society, but also with a passion to re-establish Britain’s independence, her freedom to create her own laws, and to have a government that is accountable only to the British people and to no-one else.

Listening to the television coverage as it has unfolded this evening, it now seems that we shall have a small majority Conservative government. And whilst I share with you many reservations about that, I do rejoice that now, almost certainly, we shall get a referendum on Britain’s future independence from the European Union. I look forward to that campaign, and in particular to the opportunity to have a debate about the future of our country free I hope from the divisive party loyalties and prejudices that so often disfigure political discourse in this country.

Let us now come together as one nation, and as one society, to make this momentous constitutional decision. I am confident that the British people, including of course all of us here in Ealing Southall, will have the courage to stand up for our country, for her freedom and for her independence, as valiantly as any previous generation. Of course there will be the nay-sayers, and the appeasers, including much of big business, too timid to countenance any change at all. But we shall expose their bland assertions, and their lazy assumptions, and establish beyond all reasonable doubt the case for leaving the European Union.

So until then it only leaves me now to thank all of you who have made this election today run as smoothly as it has, to congratulate Mr. Sharma on his emphatic victory, and to wish all of you good night, such as is left of it, and god bless.”

Southall Count

Incidentally, you may be wondering where I am in this photo of the declaration platform published by the Ealing Gazette? So am I! As I recall Mrs. Sharma was standing close by her husband’s left shoulder, and I was close next to her. We both appear to have been airbrushed out! Ve-ry in-ter-est-ing! I shall leave you to draw your own conclusions.

New UKIP Ealing Website

Our local party covers the three constituencies Ealing Southall, Ealing North and Ealing Central and Acton, and our joint website is being updated in advance of the referendum campaign. You can find it here.

With best wishes to you all

John Poynton BSc. FCA FIMC
UKIP Parliamentary Candidate for Ealing Southall 2015

Breeding for Benefits and Welfare Reform

Just as Iain Duncan-Smith jumped for joy when he heard during the budget speech that the minimum wage, now aka the living wage, is to be increased, so also I jumped for joy to hear that child tax credits were being cut back. Until, that is, I realised Osborne was going to do it in one go rather than phase it in so that no-one would be worse off overnight. He could have done that by applying the cuts only to new-borns. However his actions did make me wonder if he had seen copies of an exchange of letters I had had with IDS, via my MP Cheryl Gillan, a couple of years ago when I asked for details of the breeding rates for families claiming benefits compared to those not doing so.

In that exchange IDS drew my attention to some DWP statistics released in response to an FOI request. They are available on the DWP website here. They show that for all families on benefits 23% have three or more children. Separately in his covering letter he stated that on average for all families only 14% have three or more children. If you then pro-rate the figures you can calculate that for all families not on benefits only 11.5% have three or more children. In other words families on benefits are breeding at double the rate of families not on benefits. However he had not analysed the numbers in this way and had therefore missed their significance and message. I wrote back to say so.

High breeding rates, particularly amongst the poor, are as much a burden to this country as high immigration rates, and it is not difficult to see why this has occurred. Child poverty is an emotive subject, and weak politicians are always prone to buying a few votes by increasing child benefits, allowances or tax credits, allowing the provision to become bloated and disproportionate. Further, the definition of child poverty adopted by New Labour, which was set as a percentage of average family incomes, included a built in escalator as standards of living rose. Paradoxically the recession has reversed this process, so that apparently fewer children are now in poverty by this measure as a result, which is absurd. I noted that George Osborne could not resist saying that child poverty had fallen in recent years – without saying how he was measuring that!

The government’s separately announced intention to review the basis on which child poverty is measured is welcome, but we must be careful what we are looking at. Clearly some parents are simply creaming off some of these benefits for themselves, leaving their children no better off, else why would we get these results? Parents are primarily responsible for their children, and the state should only intervene where there is clear evidence of deprivation or danger. A much more targeted, evidence-based and non-financial approach is required. Indeed, the emergence of food banks is an admirable example of the ‘big society’ in action, and their use should be encouraged for families who insist on having more children while they are claiming benefits.

Osborne has now acted to remove this perverse incentive, though in my opinion, as mentioned above, he should have withdrawn the benefits only for children not yet born. He could also have attenuated the benefits for each subsequent child after the first to reflect the fact that it is cheaper to live in a large family than a small one, and he could have offset the cost to working families by increasing the earnings disregards for Universal Credit clawback. Indeed welfare payments are a key component of consumer demand which should be maintained during a recession to help reduce unemployment. His actions may well cause unemployment to rise, as well as create a political backlash, and thereby cause the deficit actually to increase. Only after unemployment has fallen, which in itself will help to reduce welfare costs, should structural reductions be undertaken, and a focus on children not yet born would be consistent with this. In addition he has not acted to make work pay, despite the rhetoric to the contrary, and he is also completely at sea on housing.

Making work pay is all about sticks and carrots. You need both, but with the carrots being generally available and the sticks only being used where there is wilful non-cooperation. This government seems to think that it is simply about starving people into work. It is not. There will always be some unemployment. There has to be or else the economy will seize up and inflation go through the roof. So what are those unemployed people to live on? I am a strong supporter of the welfare system and believe it to be as much an icon of our civilized way of life as the NHS. However if the structure of it is not right then the incentive effects are perverse. As far as making work pay is concerned this means a big increase in the earnings disregards before clawback is calculated. That way you can say to people that the first £75 per week, say, that they earn will not be subject to any deductions at all. To someone on benefits that is worth getting out of bed for, even if they are only making a few pounds in a part-time or low-paid job. Whereas Osborne has done precisely the opposite and reduced the disregards. Even the Institute for Fiscal Studies was flummoxed by that one, and said so.

And then came this. “Mr Deputy Speaker, we are also going to end the ratchet of ever higher housing benefit chasing up ever higher rents in the social housing sector. These rents have increased by a staggering 20% since 2010. So rents paid in the social housing sector will not be frozen, but reduced by 1% a year for the next four years.” My mouth fell open. As an intervention into the workings of the free market this was every bit as economically illiterate as Ed Miliband’s frozen energy prices! He knows perfectly well why rents have gone through the roof. It is due to a combination of unlimited immigration and failure to build the new homes required. Supply and demand. Reducing rents by intervention is only going to reduce the supply still further.

And if that wasn’t bad enough he then went on to say “I’m confident that Housing Associations and other landlords in the social sector will be able to play their part and deliver the efficiency savings needed.” If that isn’t ostrich behaviour I don’t know what is. As Finance Director of one of London’s largest housing associations back in the 1980’s I can tell you exactly what is going to happen. Small and relatively inexpensive maintenance jobs will be botched or ignored. The property will then deteriorate further until it becomes an expensive major repair. The tenants will be decanted because the property is no longer habitable, but the property will remain empty, deteriorating at an accelerated rate, because the funds aren’t available to do anything about it. Finally it will be sold off at auction at a fraction of its original value. Brilliant!

So what I would have liked to have seen is the savings from fully phasing out the tax credits system, which is an unnecessary duplication, some £30bn a year, split and used three ways: to reduce the deficit in due course, to increase the disregards, and to increase the provision for housing benefit.

Given the massive shortage of social housing I also propose the introduction of a flat-rate cash allowance of perhaps £100 pw for people who qualify for housing benefit but cannot claim it because there is no social housing available. This would give them the opportunity to escape the dependency culture and make their own arrangements pro-tem – lodgings, hostels, tents, caravans, whatever – on an either/or basis with universal credits.

More thought should be given to the transition from benefits to tax. They are of course two completely different systems, not least in that benefits are family based whereas tax is not. That cannot easily be changed, but at least for single adults if the UC living allowance is set at a quarter of the personal tax allowance, the same amount for the disregard, and the clawback rate at 33.3%, then the top of the clawback taper would exactly coincide with the personal tax allowance, giving a completely smooth transition from 33.3% to 20% deductions. So for example for a personal tax allowance of £15,600pa, ie £300pw, you would get a living allowance and disregard both of £75, which is broadly the same as the current JSA allowance. This would optimize incentives to find work and progress up the income ladder whilst at the same time providing reasonable income support, sufficient for healthy survival, for the completely unemployed and underemployed.

Two further problems are apparent – the disproportionate rate of tax paid by the poorest (mainly through VAT), and the difficulty of ensuring adequate and progressive provision for the self-employed.

Increasing the personal tax allowance to £15,600 would represent an increase of £4,600, which would be very expensive. However it could be brought in with a corresponding increase in the basic rate of tax to 25%. This is not as drastic as it may sound. The break-even point is £34,000 on these assumptions – anyone earning less than this would be better off. One could then introduce an intermediate rate of 35% starting at £45,000 (currently 40% starts at £43,000 – you would be paying an extra £450 in tax at that point), and a top rate of 45% from say £75,000 (currently £150,000), eliminating the 40% rate altogether and creating a much more progressive burden.

In recent years increasing numbers have become self-employed, either by choice or as a result of welfare sanctions, yet we have no idea whether they are working the number of hours that want or earning a decent living. My solution is a self-assessed living allowance, the same as JSA at £75 per week for a single person, but automatically payable for two months (£324 per month) if claimed by someone registered as self-employed. At the end of the first month an online return of hours worked and income earned would have to be submitted to release the allowance for the third month, and so on. Further the benefit would automatically be adjusted on the basis of the income reported so that it can be reduced as appropriate on a cumulative basis throughout the year. At the year-end a final assessment would take place and any adjustment paid. There returns would then give us the information we need to determine accurately the actual level of underemployment for the purposes of fiscal policy. It would also allow small business owners to manage their drawings so as not to put their cash-flow at risk.

In summary therefore I recommend the following 6 point plan:

  1. Phase out the tax credit system, thereby saving over £30bn a year; working tax credits immediately (see below for replacement) and child tax credits phased out over 18 years by not registering any additional children.
  2. Attenuate the Universal Credit child allowances by 10% for each additional child after the first.
  3. Increase the UC earnings disregard to £75 per earner and reduce the clawback rate to 33.33%.
  4. Increase the personal tax allowance to £15,600, and the basic rate to 25%
  5. Introduce a homeless allowance for anyone qualifying for housing benefit but who cannot claim it.
  6. Introduce an online self-assessed living allowance for the self-employed.


The Banking Crisis and Executive Pay

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 build up 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! Increasing bank equity ratio requirements in the middle of a recession can only make that recession deeper. It is also worth remembering that some of the bank failures, such as Northern Rock and HBoS, had nothing to do with sub-prime; they were just simple cases of over-trading, ie. regulation failure.

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, with the former losing money whilst the latter swan about playing ‘masters of the universe’ and paying themselves the earth to boot. The Coalition proposed 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 propose 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.

All of which brings us to the subject of executive pay. What I see here is a closed shop, even more so today when everything is done behind closed doors by headhunters. As a capitalist I expect to see an open competitive market. We do not tolerate closed shops from the Unions, so why should we do so from company executives? It is not in the public interest, nor is it conducive to economic growth. Headhunters and directors like to say that there are only a few people who can run these large companies, yet a moment’s observation shows that they are no different to our armed forces, where it has become a cliché to say that you end up with more admirals than there are ships and generals that there are tanks. These large pyramidal organisations all recruit well, train well and promote well, so that you end up with a great tsunami of talent surging up into the little pinnacle at the top with nowhere to go. They also like to say that there would be an exodus of executive talent abroad, but I just don’t buy this in view of the numbers available. Even if we do lose a few bed-blockers abroad, I welcome the emigration!

I realise that recruitment is a risky business, and it is natural for headhunters to want to cover their backsides by limiting their shortlists only to people who have done exactly the same job in exactly the same industry somewhere else before and then just moving them sideways. Obviously you will find only a few who fit that gold-plated requirement, who can and then do ask for any salary they want, setting off a chain of catch-up increases across the industry, but it is a false analysis. Some years ago research in the US compared the performance of CEOs who were doing the job for the first time with those who had been moved sideways by headhunters, and found that almost invariably the first timers did a better job.

The solution is a procedure I call Cheapest Competent Candidate. Recruiters would be forced to dip their toes rather deeper into the pool of talent and produce a minimum shortlist of five names. It could be included into company law as a default that the supervisory board could overturn on a temporary basis if they really wished, and could also provide for the award of discretionary discounts to candidates of up to say 10%. Essentially however the process is then simply to ask the candidates to bid for the job, and to appoint the lowest net bidder, just as you would do with a contractor.