It's official: the government have firmly hopped on the anti-driver bandwagon, with more legal discrimination against motorists being proposed. This time it is slashing reclaimed costs for motorists who successfully challenge speeding and other driving penalties in court.

The new proposal has sparked a Downing Street petition, which has already attracted support from over 2,000 protestors, many of whom will have no doubt experienced the pangs of an unjust penalty charge. Indeed, the figures support the complaints that some driving penalties are undeserved. Currently around 400,000 motorists successfully win in court against motoring penalties. This figure equates to about 1 in 4 motorists who challenge their penalties.

With a quarter of drivers being successful, something is surely amiss with the motoring penalty system. Yet instead of addressing these legitimate claims the government wishes to financially punish drivers who are acquitted. Those who suffer the most will of course be individuals of modest means, as they will be forced to accept unjust penalties because they cannot afford the legal bills. Meanwhile the government firmly cement arbitrary and unjust motoring penalties as a means to raise revenue.

The fact that this proposal is a blatant example of legal discrimination is reinforced by the petition being backed by many within the legal world. 15 QCs, the Bar Council, the Criminal Bar Council, the Health and Safety Lawyers Association, and the London Criminal Law Solicitors’ Association have all signed the petition. Every driver should have a fair opportunity to clear their names if they feel they have been hit by an unjust penalty. This opportunity should not just be given to those who can afford to foot high legal bills.

It is clear that drivers are the losers here. They will not only be at risk from unjust motoring penalties (as shown by the high number of motorists who successfully challenge these penalties in court), they are also placed in a position of serious disadvantage within the legal system.

Adam Lent has written a frankly ridiculous blog for the TUC:

"I’ve just done a Sky News debate with Matthew Elliott of the Taxpayers’ Alliance.  He suggested a new way of cutting public spending which breaches a whole new frontier in economic illiteracy (even for the TPA).
 
His brilliant idea: the public sector should follow the example of some manufacturing firms and put all staff on a four day week!  By my calculations that would remove just over £30 billion from the economy in the particularly fragile area of household demand and cut about £7 billion from the Treasury’s income tax revenue (and this doesn’t include further tax lost due to reduced VAT and corporation tax resulting from the obvious decline in spending)."

Leaving aside transfer payments like pensions and benefits, paying staff is a huge part of public spending.  With massive deficits, there need to be cuts in public spending in order to balance the books without imposing a massive tax hike that would impoverish ordinary taxpayers or cripple the economy.  You can't do that on a sufficient scale without cutting staffing costs and, while part of that should take the form of a cut in pay, there also need to be cuts in the amount of labour the public sector is buying; the number of full-time equivalent staff.  We set out some areas where we think cuts could be made in our report (PDF) with the Institute of Directors.

Delivering those staffing cuts can be done in two ways.  The first is simply to make people redundant.  That will sometimes be necessary but has certain financial (redundancy pay) and social (potential unemployment) costs.  For that reason, the second mechanism, reducing the number of hours certain staff work, is an option that should be considered in some cases.  Matthew just pointed that out.  Trying to misrepresent such a quite reasonable point as a proposal for a blanket four day week across the public sector, which the TPA have never advocated, is ridiculous.

We never thought that everyone would agree with the proposals contained in our report.  But, we expected that opposition from the unions might at least have some substance behind it.  Instead, all we're getting is this kind of superficial nonsense.

As we pointed out in our response to Polly Toynbee's article yesterday, they appear to have got the numbers wrong in their own research on the costs of public sector pensions as well.  If the unions want to have any credibility in the debate over how we best respond to the fiscal crisis, they need to up their game.

By Corin Taylor, Mike Denham and Matthew Sinclair

We have had many positive responses to our report (PDF) on how to save £50 billion in spending, and the Chief Economist at the IPPR on the Today programme and Jackie Ashley in the Guardian today have both said that, while they disagree with parts of our report, they think that some of our recommendations should be adopted.

There are two particular negative responses we wanted to respond to, though.  First, Polly Toynbee has written an article for the Guardian making two key points:

Public vs. private sector pensions

"For example, Tory sabres rattle at public-sector pensions, but a TUC report based on Office for National Statistics figures shows that taxpayers contribute 10 times more in pension tax relief to the richest 1% of earners than the state pays to all retired public servants. If Labour made proper use of this killer fact, they would promise instead to abolish all higher-rate income tax pension subsidies, bringing in £6bn – far more than public pensions cost."

It is perplexing to see Polly Toynbee argue that pension tax relief for the richest 1 per cent is so high relative to the cost of public sector pensions.  She should realise that tax relief for high earners has been addressed in the Finance Act this year, with relief on contributions being restricted to 20% for this group from 2011.  High earners are also restricted in the amount of the pension fund they are allowed to build up, through the Lifetime Allowance of, currently £1.75 million. Introduced in 2006, this Allowance has seen many high earners restrict, or cease, pension contributions.  So she, and the TUC, are arguing about a “problem” that has already been “solved”.

The reality remains that private sector workers are having to save for their own retirement and, through taxation, pay for the unfunded pension promises that have been made on a DB basis to pubic sector workers. As longevity rises, this is a blank cheque – a cheque the private sector can no longer afford for its own workers in many cases. The unfunded liability in the public sector is over £1 trillion, and this is the real issue. 

Polly Toynbee argues that £6 billion a year is “far more than public pensions cost”.  Well, if you look at the Treasury’s own figures (Public Expenditure Statistical Analyses 2009, Table D1 - this covers all unfunded public sector pension schemes, so ignores the local government scheme, which, while funded, costs taxpayers £4.5 billion in employer contributions each year) you will see they tell a very different story.  In 2009-10, public sector pensions in payment total £24.15 billion.  This figure is made up of £20.03 billion of employer and employee contributions (of which around two thirds will be employer i.e. taxpayer) and £4.12 billion of extra funding from the Treasury (“Contribution to TME”).  So the “cost” to the taxpayer is almost certainly at least £15 billion a year.  And this ignores the extra liabilities that are being built up, which will have to be paid in future years.  Include these and the cost, the Treasury admits, rises to £40 billion (“Total departmental AME”).

The effect of spending cuts on the recovery

"Economists Anatole Kaletsky of the Times and Martin Wolf of the Financial Times, both conservatives, this week walloped the Tory fixation with rapid and savage paying down of debt. Mervyn King, no Labour friend, has been the great promoter of quantitative easing. Robert Chote of the IFS warns Britain may already be planning to withdraw fiscal stimulus too soon."

Anatole Kaletsky may have been burned, by his repeated insistence before the crisis that everything was fine, into advocating that aggresive stimulus measures continue, and other commentators might come to the same conclusions but the most recent and best informed studies suggest this isn't the case.  As David Smith, Economics Editor at the Sunday Times, says:

"Looking back on the recent past, the arithmetic tells us that even when public spending is rising strongly, it makes a modest contribution to growth. 2000 to 2008 was Gordon Brown's "splurge" period, when public spending grew roughly 4% annually in real terms, well above the economy's overall rate of about 2.5%.

Over that period, GDP rose £224 billion, just over 20%, in real terms. Government spending rose by just over £50 billion. It contributed only just over a fifth of growth even when ministers were spending fit to bust. This kind of static comparison, more-over, probably overstates the public contribution. Had spending not risen, and the taxes needed to pay for it, private-sector growth could have been stronger.

This is the way to look at it for the future. A paper by Goldman Sachs, called Fiscal Consolidation and the Exchange Rate, argues that in an open economy like Britain's, public-spending cuts affect the composition of economic growth but not its pace. This is because sterling is a safety valve.

A tightening of fiscal policy, accompanied by a weak currency, means that what you lose in government spending, you gain in exports. Sterling is well below fair value against the euro, so this effect is ready to roll as the global economy picks up.

Nor is this just theory. "It is worth looking at what happened to the economy the last time the UK tightened fiscal policy aggressively, during the mid-1990s," write Ben Broadbent and Adrian Paul of Goldman Sachs. "It performed well. Coming out of deep recession, and aided by a small acceleration in eurozone activity and a big decline in the currency, investment and exports bounced strongly. Aggregate demand grew by 3.5% a year."

This time it may be different, for other reasons. But we should not worry unduly that putting the brakes on public spending will kill recovery."

Will Straw's new "Left Foot Forward" blog has posted a number of criticisms.  We won't be able to cover all of them, but here are some key responses:

Public sector pay and competition with the private sector

"The Institute for Fiscal Studies record that, “Other things being equal, holding public sector pay below the levels available in the private sector is likely to lead to recruitment and retention difficulties and/or reductions in the quality of staff willing to work in the public sector.”

What this blog doesn't mention is that the IFS report was published back in January 2008, well before the crash and the sharp rise in unemployment. Since then, unemployment has increased by 800,000 and private sector pay increases have slumped (see here). In the current environment a public sector pay freeze would be most unlikely to cause recruitment and retention problems.

Job losses

"These figures fail to take into account any of the efficiency savings already announced by the Government. In the IoD/TPA report there is no mention of the Treasury’s Operational Efficiency Programme which has delivered more than £26.5 billion in savings, and plans to deliver a further £35 billion by achieving greater efficiency in a number of cross-cutting areas. As there is no mention of this it is unclear whether the IoD/TPA are proposing a further 10 per cent on top.

The report records that there are 70,880 non-frontline staff in schools, 313,853 non-frontline staff in the NHS, and 526,000 civil servants. This implies 91,000 job losses."

We don't attach much credibility to the dubious Gershon programme.  For reasons set out in our report.

The headcount reduction in the public sector implied by the policies described in our report is likely to be around 100,000.  Although it could be less if it was delivered through reduced hours.  Between March 2008 and March 2009, the most recent ONS data available, the private sector lost 683,000 jobs, while the public sector gained 285,000.  The public sector just hasn't faced up to the financial crisis it is facing and needs to take the kind of steps to cut costs that the private sector has.  In that light, cutting 100,000 public sector jobs is necessary.  There is no way of seriously addressing the crisis in the public finances without some jobs being lost.

Sure Start

Firstly, the data on SATS test scores that we cite is the most up to date available.  Hence our statement “two out of five of this year’s 11 year olds (a cohort who would have had at least some access to Sure Start schemes from age two) will go to secondary school this September without having reached a sufficient level of competency in all three core subjects” is not affected, neither is “Illiteracy and innumeracy remain a stubborn feature of Sure Start area primary schools (those with a high percentage of children on free school meals): in 2003 the percentage of pupils on free school meals achieving the expected Level 2 (or above) at Key Stage 1 was 69 per cent; in 2008, that figure had not changed, remaining at 69 per cent.”  So there is a genuine issue about whether the programme has improved the education of disadvantaged children; and it will be interesting to see whether the “fully functioning” sure start programmes will make any real difference to these numbers.  Based on existing evidence, it seems unlikely. 

Secondly, the later National Evaluation of Sure Start report does contain some qualifications, acknowledging that some of the difference between its conclusions and the first NESS may be down to methodological differences between the two reports.  It also says “Nevertheless, however consistent the benefits detected in the current phase of impact evaluation, they should not be exaggerated, as all positive effects of SSLPs detected were modest in magnitude [emphasis added].”  So the second NESS report acknowledges that the programme is not making a big difference.  The National Audit Office report of 2006 found that neither Councils nor the centres themselves were aware of what activities cost, and were therefore unable to use resources cost-effectively. 

Third, as we argue in the report, it would be better to free up schools to deliver what communities need, rather than impose at the local level a top-down programme from Whitehall.  There is no reason why good schools cannot also provide good early years education. 

Providing good education for disadvantaged children is important, but the evidence shows that Sure Start is not delivering.  We do not have the luxury to be able to afford to continue with a programme that at best has mixed results.

Cuts in Non-Ministerial Departments

"The Crown Prosecution Service and the Serious Fraud Office are both non-ministerial departments. This would, therefore, result in the largest ever cut backs for these departments and could mean 10 per cent fewer serious crimes ever coming to justice."

When the National Audit Office investigated the CPS (see here) it found huge inefficiency, with prosecutions routinely collapsing because CPS lawyers weren't properly prepared, had mislaid files, or couldn't produce the appropriate evidence.
 
Non-ministerial departments are riddled with waste and inefficiency. HMRC is one of the largest and is crucial to Britain's fiscal probity. Yet it is so inefficient its losses to fraud and error on the payment of tax credits have recently increased to around £1.75bn pa, and it has just had its accounts qualified by the Auditor General for the seventh straight year (see here and this blog).

There is no reason to think that the response to a 10% cut in the budgets of the NMDs would need to be a 10% cut in the service provided.

Educational Maintenance Allowances

The blog selectively quotes our report and is therefore misleading.  Our full quote reads:

“Chart 2.1 shows that while there has been an increase in the percentage of 16-18 year olds in education or training since the EMA was launched, from 75.7 per cent in 2004 to 79.7 per cent in 2008, this is negligible in the context of the historical trends.  Over the same period, there has also been a decrease in the proportion of 16-18 year olds in employment, from 14.7 per cent to 10.0 per cent.  This suggests that a number of teenagers who were previously in employment are now in education or training.  At the same time, the number of 16-18 year olds not in education, training or employment (NEETs) increased from 9.6 per cent to 10.3 per cent between 2004 and 2008.”

A programme that has effectively taken people from work into training but has failed to halt the rise of the 16-18 NEET population is not a programme that we can afford to continue.

That’s £50,000 for every man, woman and child in the UK

In their new book Fleeced! Matthew Elliott, CEO of the TaxPayers’ Alliance and David Craig, author and management consultant, expose the financial, fiscal and political crisis resulting from a decade spent under the stewardship of Gordon Brown. The book is a devastating indictment of Gordon Brown’s time as Chancellor and Prime Minister. The authors bring together for the first time figures of Government spending before and during the recession, and Government losses since the recession began and argue that the cost of Gordon Brown’s mishandling of the economy has hit an eye-watering £3 trillion.

The authors, who were the first to reveal the shocking truth about Brown’s overspending since 1997 in their previous books, show that:

• Since 1997 around £1.5 trillion of taxpayers’ money has been squandered on an acceleration in profligate government spending fuelled by the economic boom; and around another £1.5 trillion has evaporated in the bust

• Government spending has more than doubled in real terms since 1997 to the extent that even if the next government tries to trim spending by 5 or 10%, it will take years, probably even decades, to bring it back under control, and could cost upwards of a further £1 trillion

• Gordon Brown has taken public spending to the level reached by Harold Wilson and James Callaghan in 1976 – when the country went bankrupt and needed the IMF to bail us out

• Gordon Brown’s failure (as both PM and Chancellor) to tackle the public-sector pensions time-bomb means that the estimated future costs of public-sector pensions have risen from around £360 billion in 1997 to, at the very least, £880 billion today, and some estimates believe it could reach £1.2 trillion

Fleeced! How we’ve been betrayed by the politicians, bureaucrats and bankers…and how much they’ve cost us is the very first book to bring together the total cost of government spending, the bailouts, the banking crisis and Westminster expenses scandal in one comprehensive book. The book lays bare the terrible truth about Gordon Brown’s criminal miscalculations and will add to the pressure currently being placed on the Prime Minister in the run-up to Labour Party Conference.

The authors have been charting the massive waste at the heart of government for the past three years in the Bumper Book of Government Waste, published in 2006 and updated and extended in 2007, and 2008’s Squandered; warning readers who were enjoying the credit boom of the dire potential consequences of unrestrained government spending.

Now, during the deepest recession in Britain since the Great Depression, they reveal the horrifying mistakes, jaw-dropping incompetence and widespread greed and malpractice in Whitehall and the City which will cost British taxpayers over £3 trillion – which if measured in £10 notes, would make a pile larger than the House of Commons.

Fleeced! also shows how Gordon Brown is not the first Labour Prime Minister to have bankrupted the country. In the 12 years since 1997, Gordon Brown has almost exactly copied the 12 years from 1964-76 when James Callaghan increased spending as a percentage of GDP to almost 50% forcing Britain to go to the International Monetary Fund for a bailout, granted on condition that the then Labour government would make significant reductions in public spending.

To make matters worse Government borrowing to make up for the collapse in tax revenues due to the recession will be at least £703 billion; and could escalate very quickly if the UK does not make Alistair Darling’s very optimistic return to sustained growth of over 3% by 2011.

Matthew Elliott, Founder and Chief Executive of the TaxPayers’ Alliance said,

‘It would be easy to dismiss the figure of £3 trillion as being too big to contemplate or unreasonably high, but to do so would be to ignore the sheer scale of the financial disaster that twelve years of Gordon Brown’s tax-a-lot and spend-more policies have done to the British economy.

‘In the light of our analysis, £3 trillion is actually a best possible scenario and relies upon the UK making a far quicker recovery than most expect. We hope that Fleeced! finally ends the Prime Minister’s oft repeated and frankly slanderous claim that Britain’s credit crunch began in the United States. Had this Government not spent at levels far beyond our means while the economy was booming, the UK would have been in a much better condition to withstand the collapse in the US markets.

‘This is the third book I have released in three years warning of Gordon Brown’s financial incompetence, the only difference this time being that Britain is in its first recession for a decade, the government is as unpopular as swine flu and the number of those out of work is close to 3 million. I can only hope that this time the Prime Minister finally sits-up and takes notice.’

• Joint study lays out detailed proposals to save £50 billion a year of public spending
• 32 specific measures offer savings of £42.5 billion from 2010-11, and a further 2 measures would save £7.5 billion from 2011-12

A groundbreaking new report jointly produced by the TaxPayers' Alliance (TPA) and the Institute of Directors (IoD) lays out detailed proposals to save £50 billion of annual public expenditure. Inspired by the dire state of the public finances, which both David Cameron and Chancellor Alistair Darling this week said requires action, the two organisations – the leading bodies representing taxpayers and company directors, respectively – have joined forces to produce a series of 32 practical steps which have the potential to save £42.5 billion a year from 2010-11 and a further 2 steps saving £7.5 billion that could be introduced from 2011-12.

As well as laying out how to make such sizeable savings, the report discusses the urgent need for reductions in public expenditure, and compares the behaviour of the public sector, which has continued to grow through the recession, to the widespread streamlining and improvement of efficiency that businesses have been forced to carry out in order to remain profitable or even to survive. Notably, the report does not rely on generalised efficiency savings, but on reducing or removing unproductive items of government expenditure that don’t work, or are not essential.
 
The report's authors also urge the Government to make its expenditure more transparent, in order to allow the IoD and the TPA, along with the rest of the British public, to identify further savings.
 
The full report can be read here (PDF).
 
Key Findings
 
The full programme of 34 proposed savings consists of:

For full details of each proposal, please see the relevant section of the full report, which is available online here (PDF).

Miles Templeman, Director General of the Institute of Directors, said:

"The UK is in the middle of a government debt crisis and our report sets out tangible proposals to cut the deficit.  Businesses are right now making savings and cutting back on costs to get through the recession, and there is no reason why the public sector should not have to do the same. Any cut in spending naturally has the potential for some pain, but our list shows that large sums can be saved without hurting vital services.  We hope this will start a serious public debate about the best ways money can be saved, and whether the state needs to withdraw from certain activities it can no longer afford.”

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said:

"Families and businesses have had to tighten their belts with the onset of the recession, so it is now time for the Government to follow suit. It is absolutely essential that public spending is reduced to rebalance the nation's finances. After years of simply spending more and assuming the taxpayer will pick up the bill, the situation has changed. These proposals offer practical, reasonable ways to save large amounts of money and politicians in Westminster would do well to take them on board. Taxpayers cannot afford to sustain the current rate of spending, and they want to see an end to their money being spent unwisely."

The Treasury have proudly announced that they are giving out the first round of payments under the Child Trust Fund, £250 for each seven-year old:

"From this month onwards, children who turn seven will get a £250 birthday boost to their Child trust Fund account. The extra money will benefit 700,000 children per year, with children in lower income families also receiving a further £250."

Who do they think is going to pay for that £250?  Has Alistair Darling found some kind of magic money tree in the gardens at 11 Downing Street?  No, the same children who are being treated under this scheme will pay for the national debt racked up by this and other government policies.

The Spectator CoffeeHouse produced a national debt counter recently, it shows that the national debt is currently around £27,538 per family.  Those seven-year olds might be happy to receive their £250 trust fund but they'll be the ones who have to pay back a debt which is more than a hundred times as large, per family.  By the time the Government are finished, that bill will be a lot higher and, unless aggresive action is taken to cut spending, will mean a huge burden on the children that the Government is today pretending it is providing for.

The Government's energy policy is disastrous.  By trying to push renewables into action prematurely, on a massive scale, they have imposed huge costs on businesses and ordinary taxpayers.  14 per cent of the average household electricity bill is now the result of climate change regulations, the figure is even higher at 21 per cent for industrial consumers.  Despite that, renewables generate less than 2 per cent of Britain's electricity.  We're spending a fortune and getting very little in return.

Those policies also tilt the balance away from generating power using coal and towards gas.  Gas power gets hit less by policies such as the Emissions Trading Scheme and it can provide back up for the large quantities of highly volatile wind power being added to the grid.  Unfortunately, Britain's domestic gas reserves are dwindling and that means big increases in the extent to which we employ gas-fired power stations will mean becoming increasingly dependent on importing scarce gas from international markets.  There could easily be severe spikes in the price British consumers have to pay if other countries go down a similar route (many of the policies driving this change are being formed on a transnational basis) and there are supply disruptions.

The situation is made considerably worse in the short term by the European Large Combustion Plant Directive (LCPD) which mandated that certain plants would have to make extremely expensive investments in upgrading their equipment or close.  Those that took the option to close are scheduled to go offline and the Telegraph reports that the resulting sudden loss in capacity could mean blackouts by 2017.  Similar concerns have been raised for some time by groups like the Renewable Energy Foundation.  It might be possible to avoid blackouts with further investments to fill that gap with even more gas capacity, but getting even more dependent on a single fuel would be incredibly bad news.

Placing a huge burden on the poor, vulnerable people who suffer most when electricity prices rise is a serious matter.  So is adding to the bills of energy intensive manufacturing industries.  Blackouts would be dangerous and a huge blow to the country's standing as a place to trade and invest.  Politicians need to stop putting our national interest at stake gambling on the renewable energy fairy tale.  The Emissions Trading Scheme and the Renewables Obligation should be scrapped and we should ignore EU directives that threaten to lead to disastrous consequences for ordinary Britons.

There's an excellent article in the New York Times from Michael Lynch that comprehensively refutes the idea that we should be really worried about reaching, or having already reached, "Peak Oil".  That argument is often used to support the idea that we should impose greater green taxes or regulations like the Renewables Obligation and the Emissions Trading Scheme that now make up 14% of average household electricity bills.

The argument is always a bit odd, if the big fear is rising fossil fuel prices why push them up now when we are likely to be better prepared as technology improves over the decades?  Michael Lynch makes it pretty clear, though, that the whole thing is a bit of a myth based on misunderstandings about things like oil discovery data.

The relationship between government spending and economic growth is quite well established, higher spending tends to mean lower growth.  A TPA study (PDF) found that Britain's GDP could be £12 billion higher if it weren't for the big increase in spending under the present Government.  Dan Mitchell, in a new video for the Centre for Freedom and Prosperity, gives eight key reasons why government spending reduces growth:

A unique collaboration between the TaxPayers' Alliance (TPA) and leading economic forecaster the Centre for Economics and Business Research (CEBR) reveals the worrying vulnerability of the public finances, and the dangerous reliance of the Treasury on optimistic predictions of the future economy. Given the Treasury's track record of making highly optimistic assumptions to balance their Budgets, the report uses detailed economic modelling of the UK economy using the experiences of comparable economies in past recessions to stress test the 2009 Budget. Testing the Budget's calculations for the public finances first in a moderate scenario of a slower, shallower recovery than the Treasury are predicting and then in a more pessimistic "double dip" recession revealed the potential for national debt to spiral over £2.3 trillion and for unemployment to reach 3.8 million – both far higher than the Treasury is willing to accept. The CEBR also tested the impact on public finances, economic growth and unemployment of the proposed 50p tax rate and an even more wide-ranging programme of tax rises.
 
The full report can be downloaded here (PDF).
 
Key Findings
 
1) Stress-testing the 2009 Budget:
 
Debt and Unemployment:

The Treasury’s optimistic forecasts of economic growth could radically underestimate national debt and unemployment figures:

• National Debt: The Government predicts national debt of £1.54 trillion by 2017/18, but the CEBR’s double dip scenario projects debt to top £2.34 trillion by that year. Even in the CEBR's moderate scenario, national debt would reach £2.1 trillion.

• Unemployment: The Treasury’s projections for the economy imply unemployment of 2.8 million people in 2011, whilst the CEBR’s pessimistic scenario modeling estimates that number could instead reach 3.8 million.  The CEBR's moderate scenario would see unemployment reach 3.2 million.

• The Treasury must come clean about the risks they are running with the future of the economy and the public finances – the potential £800 billion of extra debt and 1 million extra unemployed cannot be ignored.

Public Spending and Debt Repayment:
 
The Treasury’s self-imposed temporary fiscal rule that government debt should begin to decline as a share of GDP by 2017/18 which they believe will be met, will be breached not just in a pessimistic economic scenario but also under CEBR's moderate central growth forecasts. In even a moderate scenario, central government spending would need to be reduced by £45 billion in order to meet the rule. This would equate to reducing government spending by 1 per cent in nominal terms or 3 per cent each year from 2010/11 to 2017/18. The Government must accept that they will need to reduce spending to have a decent prospect of meeting their own targets of reducing the debt burden.

2) Alternative Tax Policies:

Having stress-tested the Budget as laid out by the Government, CEBR also tested the dynamic impact on the economy and on the public finances of attempts to raise taxes in order to reduce the public deficit.

The two policies tested were:

(i) implementing the increase in higher rate income tax from 40 per cent to 50 per cent, which is set to come in in 2010/11.
(ii) a broader programme of tax rises – increasing the basic rate of income tax to 25 per cent, the higher rate of income tax from 40 to 50 per cent and the rate of corporation tax to 31 per cent
 
The research finds that as a result of the dynamic supply side impacts of these taxes:

(i) the 50p tax rate alone will reduce economic growth by 0.4 per cent of GDP, increase public borrowing by £1.8 billion a year and increase the base unemployment rate by 0.8 per cent by 2020/21.
(ii) a broad programme of tax rises would initially raise an extra £15 billion a year for the Exchequer in the first three years, but that short term gain would swiftly decline to a situation of costing the Treasury £33 billion a year by 2020/21.
 
The full report can be downloaded here (PDF).
 
Matthew Sinclair, Research Director of the TaxPayers' Alliance, said:

"The Treasury has a track record of overly optimistic economic projections in order to make their sums add up. If they are wrong about the length and depth of the recession, then taxpayers will be landed with an even bigger national debt bill and even higher unemployment. The Government must come clean about the economic prospects and cut back spending or our economic recovery will be hobbled by the burden. It was wrong for them to overstate the health of the public finances when times were good, but now we are in a crisis we need honesty and realism to avoid a disaster. The current strategy of keeping their fingers crossed and trying to ignore massive risks is highly irresponsible."

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said:

"This collaboration between the TPA and the CEBR is a great step forward in focussing a spotlight on the Treasury's financial plans and for informing the public policy debate on how to escape recession and create jobs. For far too long the Government have claimed to have the best forecasts in the business, but their predictions almost always prove overly optimistic. The Treasury have assumed an unlikely Darling Bounce will take place, but in reality the recovery may be far slower or we could even face a double dip recession. It is important to make sure that the public finances are planned on the basis of realistic forecasts. Without that, taxpayers are constantly left filling unplanned for black holes in the Treasury's sums. This piece of research is part of an ongoing collaboration as we expand our work in the field of hard economic research."

Douglas McWilliams, Chief Executive of the CEBR, said: 

“Our report highlights the state of public finances by considering different scenarios for the strength of the economic recovery. We find that the 2009 Budget took no serious action to control public borrowing – which is only a sustainable path under the most optimistic assumptions for growth. The most likely outcome is for the government to be forced into implementing major public spending cuts during the next parliament."

"Politicians are promoting a huge range of schemes to try and hold down unemployment but they aren't paying nearly enough attention to how their policies affect entrepreneurs, who create the vast majority of new jobs.  The new top rate that the government are proposing won't just fail to raise significant revenue, by putting off potential entrepreneurs, it will reduce employment and make it more likely that ordinary Britons can't find work.  The 50p rate of income tax was a political stunt that isn't worth the price of higher unemployment, so it should be abandoned."

"For those of us who are interested in building a truly entrepreneurial country, Tax and Entrepreneurship is a must read as it fleshes out the cause and unintended effects of current tax policy on the "goose" that lays the "golden eggs" for society – entrepreneurship."

"Entrepreneurship is recognised as a major force for job creation in the economy, something which is particularly necessary in the current recession. Any disincentives to start up a business will put a significant brake upon the creation of such new firms and the jobs that accompany them. Taxation of entrepreneurs is a particularly controversial issue, which academics and politicians have been arguing about for decades. Hopefully our report will be a landmark in this debate, given that it shows the scale of tax disincentives to entrepreneurship."

City AM reported this morning that McDonalds is joining the growing ranks of firms leaving the country.  They are relocating their European headquarters to Geneva from Finchley in North London.  As the newspaper shows in a graphic, they join WPP Group plc, Henderson Global Investors and Shire that have left for Ireland, Regus that has left for Luxembourg and Procter and Gamble, and Kraft foods and Yahoo! that have left for Geneva.

McDonalds argue that this is not a tax avoidance measure, as their annual tax rate is expected to remain between 29 and 31 per cent each year.  However, it is pretty clear that expectations of future tax rises thanks to the proposed double taxation of intellectual property earnings (which would include McDonalds' payments from franchisees) which have forced their hand.

Many companies have to be looking at the projections of massive Government borrowing over the next few years and wondering whether business can escape much higher taxes.  It would be pretty reasonable for them to assume that they'll get to keep more of their earnings if they locate elsewhere.  That will mean more companies moving and much more investment going abroad.  We need spending cuts and we need them quickly to avoid a massive burden on families and businesses now and in the future.