Monday, July 26, 2010
Sunday, July 18, 2010
Perhaps the most significant area to deal with in the UK economy is the almost continuous current account deficit. The UK along with the US runs at a nearly continuous current account deficit. While this is good for the world economy (The US and the UK are two of the only countries who actually produce any demand) it is bad for our standing in the world. The main way the US has curtailed Britain and its foreign policy since the second world war is through finance. During the Suez crisis the US forced Britain to pull out largely by allowing a run on sterling. The UK relied on US support for an IMF bail out in the 1970's which came with all sorts of strings. In return for lend lease the UK was forced to sign the Atlantic treaty giving up any rights to have colonies post WWII. Please note I am not trying to criticise the US here but it does show that a creditor nation can have a major soft power influence over an others counties foreign policy. Today the US finds its self in an increasingly similar position. With countries like Saudi Arabia and China the major creditors of the world the US is increasingly isolated and unable to use soft power techniques against its allies. Instead it is forced to spend ever larger amounts on its hard power military strategies.
With the UK's comparably small impact on world consumption the effect of the UK switching from deficit to credit would not be to hard to deal with. However the effect on the UK and its ability to conduct soft power as a means of persuasion would be very large indeed.
How Could we achieve this?
In order to convert our current account deficit into a surplus we firstly need to cut government spending. The UK government is the biggest culprit when it comes to the deficit. Government deficits are funded through issuing government bonds. Much of these bonds are bought by surplus countries such as Japan, China and Abu Dhabi. There main rational for doing this is to give us enough money to continually buy the goods they have to sell be it Oil, LCD tv's or Sony Play stations.
If the UK government did not issue such bonds i.e ran at a fiscal surplus then much of the flow of money from our country would be halted. In order to do this the UK government needs to cut back on spending. Especially unproductive spending. The fat est budget to trim is the budget which produces nothing. I am of course talking about the welfare system.
Taking into account money spent on welfare by local and central government excluding pension the UK will spend £109 billion in 2010 on benefits. That's three times more than the defence budget and almost as much as the NHS. That's around 7% of GDP. Where does this money go? A large proportion of it and by that I mean most of it is wasted. The welfare state was suppose to prevent poverty however 65 years since it was created it actually creates more poverty than it prevents. entire family's for 2 or 3 generations have continually lived on benefits never earning or contributing a penny to the country.
Almost every government since 1945 has come in to power with the promise or reforming welfare, cutting out benefit cheats and getting people back to work. None have succeeded. Indeed the only way I can see to reform the welfare state its to actually get rid of it completely. (As someone who considers himself a socialist this is a difficult statement for me to make) When you think about it, why not scrap it? Almost every individual I know in the UK has never claimed any benefit. On the rare occasion they try it is so difficult and the benefits are so small that most ordinary people don't get anything.
Indeed the long term unemployed with no desire to work seems to benefit the most. As the system can't deal with them they inevitably get moved on to disability payments and forgotten about. Disability benefits are probably the biggest area we can look to make savings. All the truly disable people I know (i.e blind paralysed etc) actually work for a living. Indeed over the last 20 years allot of money has been spent to allow disabled people access to transport, workplace, education etc. The only people I know on disability benefit have Alapicha, Gout or are Alcoholics at which point they receive extra money to buy drink.
The only way to reform a system like this is to scrap it all together. Many people will initially see this as a cruel and impractical solution. However I have thought long and hard about it and to me it seems the most workable solution. Countries in Asia and even the USA have either no or a very limited benefit system. With no benefit system we will survive and indeed thrive. Now being a socialist I don't want to see people starve. I will outline three separate systems to replace the current benefit systment which will not only save the country money but I believe help the ordinary man and women much more and get the long term unemployed back into a working ethos and ultimately help alleviate poverty.
New National Insurance Scheme
As we will be saving over £100 billion per year we can afford to cut taxes. Particularly National Insurance. I would replace National Insurance with a new system. An employees provident fund (EPF). All employees would make a 10% contribution to their Account while their employers would also make a 10% contribution. These funds would be managed in a central sovereign wealth fund. When someone becomes unemployed they will be allowed to claim at 50% of there previous salary upto the total value of their fund. People will also be allowed to access part of the fund to cover education costs in later life as well as investing in their own business (encouraging enterprise and innovation). Any funds left at the end of their working life can be used for a pension. This way over time we will reduce the entitlement to the current basic state pension in favour of a new funded system. This sovereign wealth fund will rapidly grow to become the largest sovereign wealth fund in the world ( Approximately £90 billion per year accumulation). This fund will also give the UK a massive boost in its diplomatic weight and a nearly unlimited demand for UK government bonds in times of crisis.
The scheme I have outlined above will take care of most of the ordinary working men and women of the UK in a cheaper, more efficient and more beneficial way. No need to means test of asses entitlement. Just show your P45 and claim until you find a new job or exhaust your fund. Fore retirement. People can retire when they can afford it.
There are several parts of the existing benefit system I would hold on to. The current basic state pension would be maintained. As people begin to acquire more contributions in the EPF system the existing basic state pension can be reduced. I would also maintain disability payments for severely disabled people. People would have to submit to an annual physical signed off by three doctors. Other than that everything else would go.
For the 100,000's of benefit dodgers and people just to lazy to get out of bed I would develop a new system. Call it a 21st century work house. Over the space of several years before we cancel the benefit system we would build large emergency care centers outside every major town and city. These centres will provide people with food water and basic accommodation.
Family's will have rooms of 2 or 3 maximum single people will have there own dorm style room. People in the centre will work in one of three ways. There accommodation and three meals a day will be provided. They will also receive a small salary for working
Firstly A Basic manufacturing centre that produces low end manufactured goods. The people in the centre will be exempt from minimum wage legislation so we can pay them on the region of 50p per hour. The goods produced will be low end textiles the type of goods that require very little training to produce. In times of recession we can stock pile these goods to sell in the future. The main thing is to get people use to the idea of working.
Anyone who does not perform in the textile manufacturing plant or is fired for miss conduct laziness etc will be demoted to the recycling centre. This will be dirty smelly work picking through rubbish piles for recyclable materials. Its not pretty but its the type of work that needs to be done at any time. Hopefully it will give people enough incentive to work better in the manufacturing plant.
Anyone who does well in the manufacturing plant but is not able to get a job in the outside may be promoted to duties such as cleaning, kitchens, security staff etc basically running the centers.
Anyone who is really unwilling to work will be able to stay in the centre but will have no TV in there room, no entertainment of any sort and will only receive 2 meals per day.
Adults will be able to attend free of charge education classes in the evenings to help them with reading writing and any other areas they are deficient in.
The schools in these centres will be the best that money can buy. Small class sizes with after school tutoring etc aimed at giving the children of the disadvantaged the best possible start in life. Hopefully the earning's from the manufacturing centres will be enough to cover most of the cost of these centres although they will always rely on some sort of government subsidy. It sounds Draconian but I honestly feel we need Draconian measures to deal with the wasted people in our society. We are treating them like children and taking away there civil liberties but then they are acting like children. People will be free to come and go from these places as they please. The goal will be to turn people back to the main stream work force as quickly as possible while maintaining a cost effective basic safety net.
To help people on low incomes who currently rely on income support we should increase the threshold for income tax to £10,000 for single people and £15,000 for parents. We should also build a substantial amount of council housing and not make the mistake of selling it off again. We can also give food vouchers for basic Staples such as milk bread etc.
I know to most people reading this I will come off as a right wing Daily Mail reading neo con but I am not. I feel that the only kind of welfare state we can afford is one that produces results, that provides the basic human decencies while better preparing failed members of society and their children for the modern work environment. Handing these people fist fulls of cash helps no one. Inevitable there are some people out there who may deserve the cash and will be greatly disadvantaged by this system (they so called most venerable members of society) put simply I am sorry but we as a country can no longer afford you. You will have to come to terms with what ever place you can in the new system. You can't make an omelet with out breaking a few eggs. No system is perfect but at least in this one you will not starve you will never be homeless and you will have a chance to better your self and contribute to the society that supports you.
Thursday, July 15, 2010
The United Kingdom an over view
As an economist I see the downfall of the UK as an over played broken record. Yes the UK has hit difficult times. We are running a substantial budget deficit unemployment is high and growth is week BUT so what. Everyone else in the world is running a similar budget deficit and has higher unemployment. While strong action is needed to control public spending and balance the budget we should not feel this is the end of the UK. Indeed we have a number of real economic driving forces which will get us out of this mess.
- We went into this crisis with the lowest debt of any of the G7 nations. We can afford to have a bigger deficit for longer than any other G& nation except the USA and Japan.
- Up to 2008 we had the highest per ca pita income of any G7 nation except the USA and Canada.
- The only reason we have fallen from the worlds 4th largest economy to the 6th is that China have a billion people and the GDP is measured in Dollars. With the fall of sterling France appears to have a larger GDP than the UK but this is not the case when taking into account purchasing power parity.
- Unlike France we have a population who is prepared to practice Fiscal discipline and work a little longer instead of swamping our kids in debt.
- Unlike Germany, France and Japan (our only comparable competitors) we have a growing population. The Uk is predicted to become the EU's largest economy by 2050
- We still have the world's main financial centre and despite what the press want us to believe Finance is here to stay and will continue to be a major economic driver well into the future.
- We don't make stuff. Allot of people have criticised the UK for its relatively small manufacturing base. While this might have bean handy over the last 2 years in the recovery the main thing we should remember is we stopped making stuff for a reason. Germany and Japan are both the only major net exporters in the G7 and both have been in recession since the late 1980 and will likely stay in recession until the start making things there own people want.
- The bank of England seems to be the only bank in the world that has a clue what to do in the economic crisis. they obviously paid attention in the first day of economics class. devalue the currency, print money and generate some inflation.
- We have inflation. Our debt is getting smaller by between 3% and 5% (depending on who you believe) per annum
- We have lower unemployment levels than either the US or the EU.
I am not trying to say that things are rosy in the UK. They are not but we can only compare ourselves with the rest of the world. Yes the UK hit the 2008 crisis harder than anyone else. We had the biggest finance sector per ca-pita obviously we were going to suffer the most. The point I am trying to make here is that given some time and a bit of discipline we will be okay and in a stronger position than most of our competitors.
We certainly should not be considering throwing away our diplomatic and military edge in a defence review because we feel that we are too small and too poor to maintain it. This simply is not the case.
The title of Superpower has only ever been granted to 2 counties and today only one retains it. That will likely be the case until the middle part of the century when inevitably China and perhaps India will super seed the United states and perhaps become the first Mega Powers.
Indeed even at the height of the British Empire in the 1850's to 70s we were never a super power. We had overwhelming Naval power but a very small army. We were perhaps the greatest of the Great Powers. Surprisingly despite the rumors of our demise this is a position we have maintained since our hay day. Today we have the worlds second largest defence budget (Although china has over taken us last year principally due to the drop in sterling). We maintain the second largest navy in gross tonnage in the world. We hold a number of strategic assets especially our SSN's and SSBN's which are nearly unmatched. We have a multi role fighter which is easily the second best in the world (Typhoon) and cost significantly less and will be built in much greater numbers than its only competitor the Raptor 120 vs 600+. The RAF is the 5th largest air force in the world an easily more capable than its larger but undeveloped competitors India, Russia and China. Our Army is small but nearly unmatched for its professionalism and capability. Indeed no other military (excluding the US) can deploy and maintain three full combat brigades anywhere on the planet with the abilities we have 16th air assault, 3 commando 7th Armoured.
Fundamentally I am a realist. I realise that Britannia will never again rule the waves as she once did. Nor should she. In the 21st Century there is no place for empire's. Inevitable massive countries such as India and China will eventually come to dominate the world. Even the USA will have to come to accept there dominance as we had to accept the US A's and the Dutch had to accept ours. However taking these three countries out of the equation there is no reason why we cannot maintain the 4th spot military and 5th economically well into the 22 nd century. Looking at the other countries that might seek to compete with us we have a number of distinct advantages. With a bit of hard work sacrifice and good old British ingenuity we can maintain or even enhance our position in the world over the next 50 to 100 years. In this blog I will attempt to outline, economic, military, domestic and foreign policy measures which will help to achieve this goal.
To what aim? That is the big question. Why should Britain in the modern age try to maintain its great power status. The best and simplest answer I have is because it is what we do. We are a people who do not know the word defeat. We are defiant, obstinate and down right violent some times. These attributes have often been to the constination of our enemies (and some times our friends) from the Nazi's to Argentina who could not understand why we would fight. Our fore fathers passed on a great and terrible legacy to us. The nation who first industrialised, who abolished slavery, created the modern world of trade and finance. Who stood alone against the Nazi's and all of occupied Europe despite all the odds.
Dont get me wrong. I know our history is as checkered as anyone else's with all sorts or wrong doings and genocides but we have a number of things to be emencly proud. Our problem has been that this legacy has also been a terrible curse. Terrible because we have felt unable to match up to it in the modern age. Terrible because since the end of the Empire we have struggled with defining what role we should play in the modern world. Where do we fit in. During the cold war this role was defined for us. We were landing strip one. The main pin linking Europe and the USA in NATO. Hell bent on not repeating the mistakes of 1939 and making sure the Russians stayed out of western Europe.
However since 1991 we have been unclear where we should fit in in the world scheme. We have been happy to hide behind the special relationship and be the USA's only real ally. While I have always and will always be an admirer of the USA this is now no longer the place to be. As time goes buy the special relationship will be a more and more one sided and not to the UK's benefit.
Its time to carve out a new direction for the UK. One that will put us back into the premier league. Think we can't? I say yes we Can and I intend to show how.