Thanks so much for inviting me to speak today.
And particular thanks for holding your conference this year in Westminster so close to the Institute of Economic Affairs’ offices. For those of us who seek to influence thought and opinion in all political parties, it is wonderful to finally have a party conference on our doorstep.
Because a number of my IEA colleagues and I have recently returned from the Liberal Democrats’ annual gathering in Glasgow.
What a depressing experience. Faced with a still enormous budget deficit of £120bn, a very fragile economic recovery and an ongoing squeeze on the cost of living, what were the LibDems’ major policy announcements of the week?
A 5p tax on plastic bags and a £600mn splurge on ensuring that the young children of rich parents can enjoy a free school dinner. I’m not even sure these interfering, expensive policies are internally consistent. If little Johnny wants to take home the remains of his lunch in a doggy bag, does he still get it for free or does he have to stump up five pence like the rest of us?
These are the great affairs of state that the Liberal Democrats are grappling with.
But, look, I’m not here to talk about the Liberal Democrats. I’m here, I hope, to provide some food for thought for you guys in the United Kingdom Independence Party. And I’m not going to talk to you about the European Union, I’m barely going to mention it. No, I want to give you some ideas about how we might tackle our domestic problems here at home.
Your party is perhaps best known for its commitment to leave the European Union, but in recent times you’ve broadened your agenda to include a whole swathe of policy ideas that are closer to home. And I think you’re right to do so, because even if you achieve your aim, even if the UK commits to leaving the European Union by the end of the week, there is a whole lot of mess to clear up right here in Whitehall and an enormous amount of domestic reform required. Put simply, the British state is far, far too large and the private, free side of our economy is far too small.
UKIP points out the trivial, petty-minded, meddling, invasive nature of the Brussels bureaucracy. But we mustn’t kid ourselves that the corridors of power here in London are awash with free market libertarians, just aching to be untied from the Brussels leash so they can go about slashing red tape, eliminating waste and cutting government spending down to a reasonable size. Sir Humphrey Appleby is not a Thatcherite free market capitalist.
In order to give you a sense of the tide of possible regulation we face – not just from Brussels but homegrown – let me just give you a heavily abridged list of policies that are currently on the agenda of the public health lobby.
A minimum pricing for alcohol, plain packaging for tobacco, a twenty per cent tax on fizzy drinks, a fax tax, a sugar tax, a fine for not being a member of a gym, graphic warnings on bottles of alcohol, banning parents from taking their kids to school by car, a ban on gambling machines in betting shops, a ban on smoking in cars, a ban on anyone born after the year 2000 ever buying tobacco, a ban on the sale of hot food to children before 5pm, a ban on multi-bag packs of crisps, a complete ban on alcohol advertising, a ban on electronic cigarettes, a ban on menthol cigarettes, a ban on large servings of fizzy drinks and a complete ban on advertising any product at all to children.
And these are just the policies proposed in the last few months.
Or look at the financial services sector. Supposedly a hive of devil-may-care, Wild West, free market capitalism. The last time I looked at the FSA regulatory handbook contains 10 sections.
The section titled ‘Prudential Standards’ is divided into 11 sub sections.
The sub section ‘Prudential Source Book’ for banks, building societies and investment firms is made up of 14 sub sub sections.
The sub sub section ‘Market Risk’ is divided into 11 sub sub sub sections.
The sub sub sub section of ‘Interest Rates’ has 66 paragraphs.
There are over a million paragraphs in the rule book.
Until the late-1970s, bank supervision was performed by the Bank of England with a team of around 30 employees. When the Bank of England was given statutory responsibility over bank supervision in 1979, fewer than 80 people were engaged in the supervision of financial firms. Since, then the number of UK financial supervisors has increased dramatically, rising almost forty-fold to around 1,200.
In 1980, there was one UK regulator for every 11,000 people employed in the UK financial sector. By 2011, there was one regulator for every 300 people employed in finance.
Regulatory reporting requirements have risen too. In 1974 returns could have around 150 entries. Today, UK banks are required to fill in more than 7,500 separate cells of data - a fifty-fold rise. And forthcoming legislation could see that rise to between 30-50,000 data cells spread across 60 different regulatory forms.
I don’t know how you’d describe such a legal framework. My description probably can’t be stated in polite company, but it certainly can’t de described as unregulated free market capitalism
But it’s not just the scope of the state in regulating private business which is the problem, it’s the enormous scale of government spending.
For all the talk of savage cuts and austerity, the coalition is reducing government spending in real terms by, at best, 1% per annum. By the time of the next general election, David Cameron will be spending about 97p for every £1 Gordon Brown was spending when he left office. George Osborne will have added about £600bn to the overall national debt – about £10,000 for every man woman and child in Britain and the overall national debt, including our off-balance sheet liabilities, will stand at around £6trn – or about £100,000 for every man, woman and child in Britain. The government will continue to spend money at the rate of over £80m an hour for every hour of every day.
If that’s austerity, I dread to think what largesse looks like.
The state will still account for nearly half of all total spending in the UK. Nearly half. To put that into context, some of the fastest-growing economies in the world have a state sector that accounts for only around 20% of their total national income. Most estimates suggest that the former Soviet Union had a state sector accounting for about 70% of its income. The UK today therefore has a public sector that is perhaps closer in size to that of the USSR than that of some of the most rapidly growing economies.
This has to change.
We don’t just need to eliminate the deficit as soon as possible, we need to make much greater savings in the public sector overall.
And I have to tell you that making those savings – seeking, perhaps, to reduce the size of the state to only about 30% of GDP over the medium term - will require some brave and difficult political choices.
Sure, we can shut down some wasteful quangos. We can stop some of the more egregious examples of preposterous government spending. I also think there are whole government departments that can be closed down entirely. The Department of Culture Media and Sport? Culture, media and sport should belong to the people not to the state bureaucracy. The Department of Business, Innovation and Skills. Business. Innovation and Skills. Surely, the three things governments are worst at. That can go too. But these sort of savings only get you so far.
To really get state spending under control, you have to tackle some of the big areas. Let me take one. Welfare. Total welfare spending – including state pensions – will stand at about £220bn next year. For that sum of money, you could shove £10,000 in used banknotes through the letterbox of every front door in the country. Yet we still apparently have not solved the poverty. If £220bn isn’t enough what is? £250bn? £300bn? £400bn? It’s time to admit that the welfare system doesn’t work.
Let me suggest two ways you should seek to change it.
Firstly, rather than always seeking to tackle poverty by transferring income, we need to put an end to government policies which put the cost of living up and start to embrace the sort of policies that would force the price of living down. We need to overhaul our antiquated and inflexible planning laws which have made buying a home a near impossible dream for many young people. We need to end agricultural protectionism in the form of the CAP – or any other possible UK national equivalent – to reduce the price of food. And we need to reverse the disastrous energy policies which make heating bills a huge burden on the average household. In the name of combating global warming, we actually risk people being unable to heat their homes and dying of hypothermia!
Secondly, and I know this is an area your party is presently looking into, we need to overhaul our tax system. It needs to be flatter and simpler. But I’d encourage you to also consider whether we need to re-embrace the contributory principle. National Insurance Contributions have, to most intents and purposes, become just another income tax.
Why not split the tax system as follows. Every worker would pay a certain proportion of their salary into their own personal national insurance account – not a general pot, their own account. This might amount to, say, 10% of your earnings, up to a certain amount. This would be ringfenced as a personal savings account for you – not a cash cow for the government. If you required support because you were out-of-work, you’d dip into this pot. As you built up the pot over the years, it would pay for your pension and social care when you needed it in old age. This personal savings account would be yours. Part of your estate for you to call upon in times of need.
Secondly, there would be a fairly low level of income tax, perhaps kicking in at around £11,000 or so per annum. This money would be used to pay for the general necessities of society – the armed forces, the police, the judicial system and to top up the monthly contributions into the personal savings accounts of the poor