Exchequer Secretary David Gauke MP has set up a study group to consider the introduction in the UK of a General Anti Avoidance Rule (GAAR).   With a new GAAR he hopes to raise billions in extra tax revenue.  Tackling tax avoidance is successfully marketed as fighting crime or immoral behaviour.  But it is like another tax increase: the GAAR will tax today what was not taxed yesterday.

Ever since a judgement by Lord Templeman in 1986 the methods of reducing one’s tax bill have been divided into three categories.  On the criminal side of the spectrum is tax evasion: using illegal means to dodge tax.  Tax mitigation is the opposite: using expressly legal means to pay less; e.g. by saving in an ISA.  Tax avoidance relates to the opaque world in between: where the law is not 100 per cent clear.  In those cases courts try to find The Intention of Parliament to decide on the legality.

Some measure of vagueness and ineffectiveness is intrinsic to every law.  One can never foresee every situation.  Courts interpret and find a reasonable legal outcome.  When avoidance becomes widespread and/or the courts’ interpretations off the mark, parliament can change the law.  Some now think that for tax law the doctrine of legislative supremacy and judicial interpretation to deal with an uncertain world in a reasonable manner isn’t good enough anymore.

An effective GAAR must allow the taxman to tax whenever there are doubts or unforeseen circumstances.  To cover all those situations a GAAR cannot be precise; it must be a blanket legal cover for whatever HM Revenue comes up with.  This is extremely dangerous.  Actions previously believed not to be taxable may suddenly become taxable at the say-so of the taxman. Parliament’s express intention is no longer sought before independent judges: it is the unelected civil servants in HM Revenue who decide on legality. Entrepreneurs will constantly have to seek HM Revenue guidance, a bureaucratic and lengthy process.

This evolution towards discretionary tax law is nothing new.  As I pointed out in an earlier article, during Labour’s tenure three methods were used to increase tax.  Under the taxed by law and untaxed by practise principle, wide tax laws are introduced and specific categories of people are then exempt.  Principles-based tax law sets out tax principles rather than precise rules, making tax law unpredictable, and dependent upon HM Revenue guidance.  The third iniquity is retrospective tax law.

With discretionary laws legal certainty and a proper balance between state and individual go out of the window.  Knowing when tax will be owed, an intrinsic part of the cost/benefit analysis of every business transaction, becomes increasingly difficult and costly. A discretionary GAAR will be seen for what it is: just another tax rise, and another costly administrative burden on business.

The hunt for potential taxpayers is driven by spenders, short-term politicians, and the media.  Spenders never cut, they always rise.  In the short-term politicians like the GAAR as it will bring in more tax – moving to another jurisdiction takes some time.  And now Tax Planners get the same negative press as Bankers.  To some, empty coffers are not the result of excessive spending, but simply of tax avoidance and evasion.

For an entrepreneur, paying tax experts is just another commercial consideration: the higher the taxes, the more potentially lucrative it becomes to employ experts to avoid it.  They have been very successful in this: notwithstanding the increase in taxes and taxes rates the total tax take has remained more or less stable at 36 – 38 per cent of GDP over the last two decades.  Yet instead of endangering the rule of law with the introduction of a discretionary GAAR, there is a much easier way of reducing tax avoidance and increase revenues.  It is to simplify and reduce taxes to make the economy and the taxable mass grow.

All of a sudden everyone is talking about Ricardian Equivalence.  Ed Balls yesterday on the Daily Politics.  Anatole Kaletsky today in a Times column that has got Left Foot Forward incredibly excited.  Balls didn’t appear to have a clue what Ricardian Equivalence meant.  Kaletsky at least understands the concept but presents an incredibly misleading account of its genesis and ignores the empirical support the theory has received over the years.  It’s pretty painful and torturing such an important debate shows how shallow the Keynesian argument against the cuts has got.

I wrote about what was wrong with Ed Balls’ use of Ricardian Equivalence in my ConservativeHome article this morning:

“Bizarrely Ed Balls cited Ricardian Equivalence on the Daily Politics.  Either he is ignorant of the meaning of the concept or he butchered it in a dishonest attempt to make his point sound credible.  The point of Ricardian Equivalence is that people know deficits will have to be paid for and adjust their behaviour in light of that, consuming less so they have the money to cope with the forthcoming spending cuts or tax rises.  As a result Keynesian attempts to prop up the economy with deficits tend to fail.  To the extent Ricardian Equivalence is correct, spending cuts to reduce a deficit will not weaken the economy ever, let alone ahead of time as he was suggesting.”

Anatole Kaletsky at least understands what Ricardian Equivalence is but presents an incredibly misleading account of the debate over it.  Here is the critical section of his piece extracted by Left Foot Forward:

“This faith is based on a theory traced back to the works of David Ricardo, perhaps the most respected economic thinker of all time. In a paper written in 1820, Ricardo examined whether a government that went to war would be better off collecting £20 million in taxes or borrowing the same amount at an interest rate of 5 per cent or £1 million a year. “In point of economy, there is no real difference,” he concluded. “For £20 million in one payment and £1 million per annum for ever … are precisely of the same value.

This was seized on by conservative anti-Keynesian economists as Ricardo’s endorsement of their view that government borrowing was indistinguishable from taxation — and therefore that cuts in borrowing would automatically boost private spending.

This came to be known as Ricardian equivalence, but conservative economists failed to mention that Ricardo himself poured scorn on this simplistic idea, pointing out that it was based on unrealistic assumptions about human nature. Just after the passage about the theoretical equivalence of public borrowing and taxation, he added: “But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly … It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1,000.” In other words, Ricardo himself doubted the Ricardian equivalence on which the coalition’s entire economic policy depends. After yesterday’s figures Mr Osborne had better take note.”

That is an extremely cheap shot.  Ricardian Equivalence is named after David Ricardo because his comments were the earliest speculation about the basic idea.  But the theory we discuss today was created by Robert Barro, and was never based on the authority of Ricardo but on the theoretical underpinning of rational expectations theory – which rose to prominence out of the failure of crass Keynesianism in the 1970s – and a fair bit of empirical evidence.  Attacking Ricardian Equivalence the way Kaletsky does is like rejecting Darwinian evolution on the grounds that Darwin never gave serious consideration to the possibility of the double helix structure of DNA.  Or refusing to fly in helicopters because Leonardo da Vinci couldn’t make his plan work.  Funnily enough, in 1820 a concept that was only properly explored for the first time and then empirically studied in the 1970s wasn’t ready yet.

Ricardian Equivalence is controversial, and like lots of the most useful economic theories, the assumptions probably don’t hold for it to be true in its strongest form.  There have been criticisms from left and right.  But there is good reason to think it holds up under scrutiny imperfectly but strongly enough to render Keynesian policy ineffective, which is the key point for the purposes of the debate over policy.  In 1993, in the Journal of Economic Literature, behind the academic firewall unfortunately, John J. Seater summed up the evidence:

Needless to say, so revolutionary a theory has not gone unchallenged, and its revival has led to extensive research, both theoretical and empirical, into the effects of government debt on the economy.  The fruit of that effort is the subject of this essay.  Although the aggregate effects of public debt and deficits have not yet been fully determined, two overall conclusions are now clear.

The first appears uncontroversial: it seems almost impossible that Ricardian equivalance holds exactly. The theoretical foundations for any effects of debt on the economy depend on subtle concepts such as the intensity of intergenerational altruism, the possibility of strategic behavior by individuals in their family relations, the nature and extent of liquidity constraints, and the effects of various kinds of uncertainty on the household maximization decision.  Careful examination of those factors suggests that exact Ricardian equivalence is implausible.

The second conclusion is far more controversial: despite its nearly certain invalidity as a literal description of the role of public debt in the economy, Ricardian equivalence holds as a close approximation. Although there is much empirical evidence appearing to reject Ricardian equivalence, a dispassionate reading of the literature leads to the stated conclusion. Testing theories of government debt’s effects is not trivial. Estimation is sensitive to the treatment of specification, simultaneity, and data stationarity, as well as simple measurement of the quantities involved, so that careful attention to interesting issues of econometric methodology is essential. Much of the published evidence on Ricardian equivalence, both favorable and unfavorable, fails to attend to those issues and is sufficiently flawed to be uninformative.  When attention is restricted to the more methodologically sound studies, it is difficult to find statistically significant effects of debt, suggesting that Ricardian equivalence holds approximately.

Anatole Kaletsky writes up Ricardian Equivalence as a lazy appeal to the authority of the 19th century economist.  In reality, it is a concept that has been fleshed out in a serious theoretical and empirical debate over the last three decades.  He has misled his readers.

This morning I have an article on the ConservativeHome website about the policies needed for economic growth.  Essentially the Government need to take key opportunities to reduce the burden they impose on families and businesses without compromising on the fiscal adjustment.  While I was writing that article yesterday though, an incredible example of the lack of seriousness in their approach to growth landed in an inbox from the TPA, in the form of a press release from the Cabinet Office.

That press release included the list of members of an Independent Advisory Panel, chaired by Lord Heseltine, who will play a key role in handing out the £1.4 billion Regional Growth Fund.  Here is the list:

• Lord Heseltine, Chair
• Sir Ian Wrigglesworth, Deputy Chair
• Felicity Goodey (Businesswoman, former senior BBC journalist)
• Tony Greenham (Programme Head, New Economics Foundation)
• Richard Lambert (Director General, CBI)
• Jon Moulton (Chairman, Better Capital equity group)
• Caroline Plumb (Entrepreneur, Freshminds)
• Sir David Rowlands (Chair of Gatwick Airport Ltd and Angel Trains Group Ltd)
• Mark Seligman (Chartered Accountant and Banker, Credit Suisse)
• Andrew Shilston (Finance Director, Rolls Royce)
• Lord John Shipley (Former Leader Newcastle City Council)
• Tony Venables (Academic Economist, Oxford University)

The one that really standards out is Tony Greenham, from the New Economics Foundation.  The NEF has attained a significant scale thanks to extremely generous taxpayer funding but which has incredibly radical views.  For example, they have twice produced the Happy Planet Index which argues that Burma, Saudi Arabia and Haiti are better economic models than the UK, US and Sweden as they show that “achieving, long, happy lives without over-stretching the planet’s resources is possible”.  They produced an animation about why economic growth is unsustainable called The Impossible Hamster (only click on that link if you have a powerful tolerance for nonsense), ignoring the vital differences between 6 billion brilliant humans and a big fat hamster, like the ability to innovate and make use of new resources over time.  Brendan O’Neill at spiked has written a good rebuttal of the idea that the long term outlook for growth is really so hopeless.

Why exactly is there a representative of an organisation that doesn’t support economic growth getting a key post advising on how to spend a growth fund?

The Regional Growth Fund is a bad enough idea anyway.  Businesses pay far more than £1.4 billion a year in tax so why not let them keep the money, rather than taking it away then giving it back in grants to select projects favoured by this panel of worthies?  The last thing regions crippled by dependence on government need is more spending.

But this appointment pushes the scheme over the edge from questionable idea to a bit of a joke.  The Government need to take creating the conditions for economic growth more seriously.

The IPPR has a new research note out, you can read it here.  They claim:

“Analysis of the historical data on debts and deficits shows the UK’s fiscal position in 2007–08, immediately ahead of the recent recession, was reasonably sound.”

They provide some context, they are trying to support this political strategy of the Labour leadership:

“Reports of a recent shadow cabinet meeting suggest its strategy is to insist the deficit was not caused by overspending or fiscal carelessness. It will continue to argue that deficits have increased in all developed economies as a result of the financial collapse and recession, and that the government’s finances were in a healthy position before the crisis began.”

The first important point to note is that no one has accused the last Government of fiscal irresponsibility before 2000.  While they stuck to the previous Government’s spending plans the fiscal position continued to improve as it had since the end of the early nineties recession and the country ran a healthy surplus.

After 2000 the problems began as the Government put in place a massive rise in spending, which led Britain to leave the rest of the OECD far behind.  Spending continued to rise and, while there was a particular spike connected to the recession which was seen around the world, that spike was considerably larger in Britain and took spending to well over 50 per cent of national income.

General government total outlays, per cent of nominal GDP, UK and Total OECD, 2000-2010

Despite a strong economy and healthy tax revenues from a booming financial services industry in particular, that translated into increasingly large deficits relative to the rest of the OECD.  The advantage from the relatively healthy recovery of the public finances from the previous recession was eroded and then lost.  Even before the latest recession, Britain was borrowing substantially more than the OECD average and had been for several years.

General government financial balances, surplus (+) or deficit (-), per cent of nominal GDP, UK and Total OECD, 2000-2010

The extent of the problems in Britain’s public finances are widely acknowledged, here are just a few of the sources that show the extent of the problem:

• In November 2009, an IMF report put Britain’s structural primary balance at the second worst in the G20 advanced countries.
• Eurostat statistics show that Britain had the third highest deficit of any country in the EU27 in 2009, behind only Greece and Ireland (both being bailed out).
• A report from the Bank for International Settlements in March 2010  showed that Britain has among the worst long term fiscal problems in the developed world.  They reported that:

“The results plotted as the red line in Graph 4 show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable. This is confirmed by the projected interest rate paths, again in our baseline scenario. Graph 5 shows the fraction absorbed by interest payments in each of these countries. From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom.”

Even with a substantial fiscal adjustment they still projected an unsustainable rise in our debt ratio.

The IPPR report avoids these basic realities primarily by avoiding the context, not including a comparison with other countries in their time series data.

The Labour party can try to blame the problems on an international recession.  The reality though, is that when the economic tide goes out, you find out who is swimming naked.  Gordon Brown’s economic failure was that a decline in our economic competitiveness and fiscal position from 2000 meant that, despite a long run of economic growth, we were poorly prepared for any kind of downturn and increasingly exposed to one.

That doesn’t excuse the Conservatives of some responsibility for what went wrong.  A far more legitimate Labour response to attacks on their fiscal responsibility would be to point out that, for a period immediately before the crisis, the Conservatives were pledging to match Labour’s spending plans.  To that extent, the fiscal crisis is a result of a collective failure of the leaderships of both major political parties.  Attempting to pretend that their fiscal policy was responsible will not wash though, and it is inappropriate that a charitable think tank like the IPPR is trying to write such disingenuous talking points for a political party.

Nick Clegg today reaffirmed his party’s manifesto commitment to substantially increase the personal allowance (the amount of money everyone can earn before having to pay tax) and Left Foot Forward has pointed out the Treasury wouldn’t confirm the policy. This tax reform was perhaps the single most attractive proposal the Liberal Democrats made before the election.

Increasing the personal allowance to £10,000 would remove many low earners from the income tax system altogether and significantly ease the tax burden on those whose incomes are not much greater. As well as the obvious attraction of not taking money out of the pockets of those who don’t have much in the first place, it will also shift the balance of incentives to make work pay for more people.

As Mr Clegg said in the Sun:

“Now more than ever, politicians have to be clear who they are standing up for. Be in no doubt, I am clear about who that is. That is why the Liberal Democrats made a promise to voters on the front of our manifesto.

That no basic rate taxpayer will pay any tax on the first £10,000 they earn.”

Great news. But ‘when?’ is a vital question when talking about money. £10,000 was worth a lot more 20 years ago than it is now. And it will be worth a lot less “by the end of this Parliament”, when Clegg told the Today programme that the policy would be implemented, than it is worth in 2011/12, which is when he promised it would be delivered in his manifesto:

“To put in place the necessary tax changes in order to raise the personal allowance to £10,000 for the start of the financial year 2011–12.”

By 2015/16, the last fiscal year of this Parliament, average earnings will have increased by 21% since 2011/12 according to Treasury forecasts in the 2010 budget. Adjusting the promise to keep in line with this would equate to a personal allowance of £12,100 in 2015/16 – substantially more than £10,000. But we can’t wait that long to get people off welfare, to make work pay and to stop taxing the lowest earners. Partially implementing the rise in 4 years is not good enough. Nick Clegg should ensure the coalition government adopts that Lib Dem manifesto commitment in full, now.

Call to action: send Nick Clegg an email [email protected] and let him know you want him to implement his policy in full, now.

Britain has fallen in an influential index of economic freedom. The Washington based Heritage Foundation and the Wall Street Journal lists the UK at 16^th, down from 11^th place last year and the first time out of the top 15. The index assesses ten components of economic liberty and derives a score from the sum. This fall follows on from sliding out of the top ten last year and reflects Britain’s recent government expansion, relatively poor record in controlling inflation and the introduction of higher taxes.

The quietly tightening constrictions on British economic freedom is not without cost. As TaxPayers’ Alliance director Matthew Sinclair said in the research note “The economic cost of high spending“:

“The existing literature suggests that higher government spending is associated with lower economic growth. That means the rapid rise in spending since 2000 – far greater in the UK than in other developed economies –may seriously affect Britain’s trend rate of economic growth and GDP.”

If we are to drag ourselves out of the current economic and fiscal crisis we need to maximise the economic freedom that encourages the business growth that will in turn create prosperity and boost public finances. The prescription is unambiguous: cut harmful taxes, cut wasteful spending and deregulate our markets.

The BBC reports that today David Cameron is inviting many of the country’s biggest employers to Downing Street and urging them to take on more staff.  Many of the firms attending – from Morrisons to Microsoft – have pledged to employ thousands more staff as they grow in the economic recovery.  A lot of the talk on the news this morning was about what new incentives those companies might get to encourage them to do more to help get people back into work.

What the Government really need to avoid is the temptation to micromanage, to create a “new jobs in the recovery tax credit” or something like that.  The Conservatives made that mistake before the election.  Those sorts of gimmicks normally produce underwhelming results and complicate the tax system.  Instead of creating specific incentives for new employment, they should work to establish the right environment for British firms to prosper and the employment situation will take care of itself when the economy is growing strongly.

At the same time, Cameron could be talking to the wrong people.  There is good evidence, as we set out in the report Tax and entrepreneurship, that small and rapidly growing firms that create most new jobs:

“David Birch demonstrated in the US, and more recently Trends Business Research showed in the UK, how new firms create the vast majority of the new jobs. Indeed, high-growth “gazelles” were found to be responsible for creating the vast majority of new jobs.”

While obviously thousands of new jobs at major retailers and other big firms is very welcome news, even the impressive numbers listed in the reports this morning are a small fraction of what is needed.  As well as the big corporates adding to their work forces, we particularly need to see new and energetic small firms doing well in Britain.  They particularly need tax and regulation cut to ensure that there are proper rewards if their risky ventures pay off and, while they are too small to have a compliance department, they can spend their time running their business instead of filling out forms.

In our report on entrepreneurship we set out how high the combined marginal tax rates on income earned, saved, invested in a company and passed on to children is: as high as 92 per cent with the new 50p top tax rate.  The big rewards that make entrepreneurship, and the associated risks, worthwhile are hit particularly hard by the tax system.

More recently, Dominique Lazanski set out what small businesses in Silicon Roundabout, where lots of exciting new technology businesses are developing, felt they needed to grow more quickly.  They included cuts in corporation and capital gains tax, and lower business rates.

If we want higher employment, trying to rig a specific set of incentives to encourage established businesses to take on more people aren’t the way forward.  Lower taxes can help all companies, but particularly the small and rapidly growing firms that tend to be the real source of new jobs over time.

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The shortage of housing in parts of the UK is a really serious issue.  While only an unfortunate minority can’t easily afford to feed and clothe themselves these days, shelter – another of those vital building blocks at the bottom of Maslow’s hierarchy of needs – is often much more difficult to obtain at the right quantity, quality and price.

A scarcity of housing has a range of unpleasant social and economic side effects:  Overcrowding is unpleasant and too many families can’t afford the space they need; others are forced to put off having children entirely or not have the number of children they want because they can’t afford to house them; and the oscillation of house prices between unaffordable and crashing has driven economic and financial crises.

George Monbiot thinks he has a solution, an easy one that doesn’t even require us to build more homes. Just live in the many empty rooms in the cavernous mansions of the rich.  Apparently they are everywhere, and 37 per cent of the housing stock is under-occupied.  Have we really missed such an orgy of mansion building, or is something else going on?

We don’t know a lot about the make-up of the under-occupied homes.  It might be possible to get a lot more out of the “EHS-LFS combined dataset” that is the basis for what statistics we do have (all the empirical claims in this post are from that source, unless otherwise stated), but for now it is pretty limited.  I would guess that they are made up mostly of these categories of people, though:

People living in areas where housing is relatively affordable, so a bit more space – which most people agree is nice – isn’t that expensive. Monbiot doesn’t quote his source when it says that: “London had the highest rate of overcrowding, 7.2%, with around a third of all overcrowded households in England living in London. London also had the lowest rate of under-occupation, at 23.3%, whilst the South West and the East Midlands had the highest rates, 40.4% and 40.3% respectively.”  That tells you two things:

1. Under-occupied homes aren’t located where the most rich people are, and particularly where the number of super-rich people has grown the most.  The growth in the numbers of really rich people in Britain over the period Monbiot is looking at has been concentrated in London, particularly in the financial services industry.
2. Under-occupied homes aren’t where you need them to address the housing crisis.  Lots more homes in the South West and East Midlands aren’t what we need.

Parents whose children have moved out. I would guess this is the biggest category.  Families with two or three teenage children often need a three or four bedroom house to ensure that they aren’t overcrowded.  When the children leave, that house is immediately under-occupied.  Many parents will downsize over time, bigger houses are expensive after all, but there are a few reasons they might not, at least immediately:

• They like their current house.  When you’ve lived somewhere for a decade or more you can often develop a sentimental attachment to it.  No doubt an ardent campaigner like George Monbiot can attack that as unsustainable, but in the real world where our homes are more than human storage bays it is meaningful.
• Moving is expensive and unpleasant.  People often won’t move immediately, even if it would be sensible, because it is a process that costs a lot of money and involves a lot of disruption.  They’ll wait a bit, and a snapshot like the one Monbiot is using will register them as living in an under-occupied home.
• They want to be able to have the children back for Christmas.  Children move away but they often come back.  Particularly with such a high youth unemployment rate, lots of young people who strike out for independence with huge confidence find that they need to beat a temporary retreat to the family home a few months or years later.  Any parent whose children have left home, but who wants to be able to accommodate them without overcrowding when they come back, will count in the under-occupied number.

The only solution Monbiot seems to have for those who don’t want to move out of their under-occupied homes is to take lodgers.  But it doesn’t seem so unreasonable that people resist sharing their home with strangers.  They want their own home, and their privacy.  While some might welcome a lodger for companionship, as he suggests, others aren’t lonely, and many won’t be single.  And you can’t kick out lodgers over Christmas, it would be unfriendly.

Beyond that, the source for Monbiot’s statistics also reports that overcrowding “is a problem which particularly affects households with children.”  You therefore can’t solve the problem of overcrowding with more spaces for lodgers.  A simple example shows why that is the case even if you don’t accept that most families want their own home not a share:  If you take an under-occupied three bedroom house with a single elderly person in it, and add a family who need a room for the parents and two rooms for children, you’re back to overcrowding!

The striking increase Monbiot has spotted over a few years is almost certainly a result of a series of compounding trends.  More old people, the children of the baby boomers moving out and things like that.  It certainly can’t be explained by the super rich, who are too few in number to account for big changes in how homes are occupied.  That one statistic, and a taste for misplaced class warfare, has led him to ignore the real circumstances that are the best explanations of why so many households are under and over-occupied.

What is really worrying about Monbiot’s article isn’t that it is wrong, we can rebut it.   It is that it could so easily become a dangerous but implacable myth.  Like Richard Murphy’s estimates of the “tax gap” that free lunch will be very tempting to lots of campaigners and allow them to avoid thinking about difficult questions on planning regulations, in particular.  It could also easily inspire a group like UK Uncut to start invading homes and demonising the rich, further putting them off bringing investment, jobs and prosperity to the UK.   These sorts of myths are piling up – other examples include the findings of the Spirit Level and low social mobility -and they are responsible for lots of the worst policy mistakes the political class are making today.

Mark Wallace, our former Campaign Director, has pointed out that Monbiot may also be a bit of a hypocrite.  Does he have two spare rooms?  Is he taking lodgers?

Value Added Tax (VAT) goes up today, increasing the price we pay for most goods by 20 per cent instead of 17.5. If retailers pass this on to consumers, prices in the shops will rise by 2.1 per cent. But it could be worse than that for consumers. Prices tend to be set at psychologically significant points: either at or a penny off round numbers. Retailers’ costs have been rising recently but until now they have felt unable to pass on the costs to customers and have suffered deteriorating margins in order not to lose sales to competitors. But analysts predict the Chancellor’s VAT hike will prove too much for retailers and they will pass on their other rising costs at the same time.

Retail expert Jason Gordon at consultancy Booz & Co said:

“From the retailers I’ve been speaking to, I expect prices to increase by between 5 per cent and 8 per cent. The majority of retailers will ’round up’ rather than ’round down’. There have been so many years of price deflation, retailers need to move up prices to stay profitable. The pressure to increase prices has been building for some time, and that time has come now.”

The VAT rise will hurt consumers, hitting the poorest hardest, and could cost jobs. The Government needs to address the massive deficit, but it should be tackling waste more aggressively and rethinking what it spends our money on rather than wringing our wallets for even more cash in these already difficult economic times. Cancelling the 30 per cent increase in overseas aid spending and binning the High Speed Rail project are two big savings that spring to mind, and there’s plenty more out there.

This morning, Chris Huhne has told the Today programme that the idea climate change policy will drive up electricity prices by £500 is “absolutely bonkers”.  That estimate comes from the price comparison website uSwitch, which argues the £200 billion in investment needed will put £500 on top of current bills of around £1,157.  DECC can dispute the figure but to get arrogant about it is a very bad idea.  uSwitch’s estimates are actually quite similar to the numbers produced by market experts like Citigroup Capital Markets.

Climate change policies are already a big part of consumers’ bills.  Here are Citigroup’s latest estimates of the new costs  we are set to face, from their September 2010 report The €1trn Euro Decade – Revisited:

“Taking the higher savings [from reduced fuel costs] figure would give a net additional revenue requirement of £16.4bn. Given that total revenue to the UK electricity sector in 2009 was £31bn, of which £15bn (48%) was raised from retail customers and £16bn (52%) from industrial and commercial. In total therefore we estimate that the UK electricity sector would need total revenue in 2020 of £47bn. If the split between retail and I&C customers were the same as 2009 then retail customers would be paying around £330 per household additional costs (2010 prices). This would represent a 52% real terms increase in domestic electricity bills over their June 2010 level of £500 as calculated by Ofgem. This would take the duel fuel bill from today’s £1,120 to £1,604 per annum.”

Efficiency savings won’t fix the problem:

“The UK government is expected to launch its ‘Green Deal’ program in the next few months. This program aims direct £10’s bn into home energy efficiency over the next decade. The hope is to reduce home energy use, specifically space heating. This would help reduce the impact on the rise in electricity bills for duel fuel customers. If gas demand can be reduced by 15% that should save around £93 pa for the average duel fuel customer. The duel fuel bill would then be £1,511 – which still represents a 35% real increase. And it is worth noting that customers will be expected to fund the cost of the insulation work under the Green Deal, which could off-set the cost savings.”

It is the Department of Energy and Climate Change that is out on a limb here, in not taking the likely costs of a massive expansion of offshore wind and other expensive sources of energy seriously.  With even more support for expensive sources of energy like offshore wind announced (see the BBC report) today’s announcements will exacerbate the problems for consumers.  Last year, we set out how a more realistic climate change policy could save consumers and industrial employers a fortune.  Just stop insisting that we use the most expensive sources of power and pay extravagant subsidies.  The Government are going in the other direction.

The new plans today, with guaranteed high prices in the energy sector, shift huge amounts of risk off energy companies and onto ordinary consumers.  They will guarantee higher prices in the years to come and still aren’t going to create the conditions needed for lower cost sources of energy like nuclear to go ahead.  Investment in nuclear needs greater protection against construction risk, the chances that the projects will go over time and over budget.  The only low carbon energy we have got so far has come from specific subsidies, like the prohibitively expensive Renewables Obligation, and not the carbon price.  That isn’t going to change.  We will just accelerate a new dash to gas that is happening anyway.

Today’s announcements put the final nail in the coffin of the idea that the EU Emissions Trading System (ETS) is anything but an unmitigated failure. When we first released our report on the ETS I pointed out that calls to fix the price were an admission of failure.  I was told that calls to fix the carbon price were just nuclear industry lobbying and wouldn’t be taken seriously.  The whole point of a cap and trade scheme like the ETS is that you don’t have to set the price, you limit the volume of emissions and let the market set the price.  If you don’t trust the resulting market price, and the Government have fixed it today, then the whole thing is a massive waste of money and effort:  all the multi-billion windfall profits for energy companies; millions of pounds spent administering the scheme; profits for traders; and expensive trading losses at institutions like hospitals.

This is a shocking failure of policy and betrayal of the interests of poor consumers and manufacturing workers.  Politicians of all parties who have uncritically assented to these policies need to start doing their job and holding the Government to account.  Poor families and elderly people shivering in their beds this winter have Chris Huhne, and Ed Miliband before him, to thank.

Today the details have been announced of the British Government’s loan to Ireland, the Press Association have reported them.  It will be £3.25 billion over eight payments and used to shore up their banks and sovereign debt.  The spin is that it isn’t such a bad deal because they will repay the loan and interest at a rate of 5.9 per cent.  It might work out that way, and to a certain extent it has on the banking bailout, but that isn’t the point.  Investing is about balancing risk and reward and if this was really such a good deal private investors would be lining up to lend the Irish Government money.  They aren’t because the risks are too high.

Osborne’s other key justification for the loan is that our economy is closely connected to that of Ireland so we can’t let them go under.  That assumes that this loan is really what they need.  But economists from across the ideological spectrum have lashed out at the European plan for Ireland, of which this loan is a part, arguing it will do nothing more than delay a necessary reckoning with the eurozone’s problems.  The Irish are hardly welcoming the assistance with open arms.  Here are just a few comments from leading economists:

“The Irish “rescue package” finalised over the weekend is a disaster. You can say one thing for the European Commission, the ECB, and the German government – they never miss an opportunity to make things worse.

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic.

[...]

The Irish “programme” solves exactly nothing – it simply kicks the can down the road.“

- Barry Eichengreen

“In the short term the EU will kick the can down the road via a temporary Irish bail-out, just as it did with Greece. It is likely to do the same with Portugal. But it has finally dawned on the EU that a rolling process that places private bank losses on to public balance sheets could leave its governments insolvent too.”

- Nouriel Roubini

“The eurozone cannot work with such disparate economies. Putting aside the current financial crisis, it is hard to see how Ireland, for example, can recover economically. As one of our major trading partners this is bad news for us. At some point, the EU will have to come to terms with the exit of some of their members – the sooner the better. Of course there are implications for the banks – but better to deal with their problems directly rather than struggle with propping up the unsustainable.”

- Ruth Lea

It is understandable that Continental political elites are in denial.  It is impossible to overstate how committed they are to the euro project.  But we shouldn’t be putting billions of pounds of British taxpayers’ money at stake just so they can temporarily avoid confronting the fundamental problems of the eurozone.   That isn’t going to help Ireland and is a misuse of our money.

It is incredible how little scrutiny there has been of these plans.  We need to tell politicians that we don’t want to fund this bailout.  Please sign the TPA petition.