Tag Archives: Jonathan Portes

Water privatisation was a Tory rip-off from the start. What does that say about the other share offers?

This Site used to discuss the economy with Jonathan Portes back in the early days, so I tend to trust his observations – especially where he had a direct hand in matters.

So his observations on the water privatisation “rip-off” of 1989, in The Guardian, are very interesting.

He says the Thatcher government was not interested in providing value for money to taxpayers or water consumers; all the effort was put into making a “successful” sale – in which the demand for shares was high.

This was an ideological objective: water privatisation was extremely unpopular, with every poll showing that a substantial majority of people were opposed to the policy – so shares were sold well below their value in order to provide an average gain of 40 per cent to investors on their first day of trading. That’s how taxpayers lost out.

Consumers lost out because the political requirement that shareholders must profit hugely meant there was no support for tighter regulations to restrain future bills and/or require investment in infrastructure improvements.

As a result, over the following two decades the privatised water companies paid more than £57bn in dividends, at the same time as running up large amounts of debt, the interest on which is effectively paid by customers.

So water consumers are subsidising the water companies’ profits by paying off their debts for them, while also pay through the nose for the poor service they receive – because Thatcher wanted to pretend that privatising water was a good idea. How perverse!

Professor Portes goes on to say that the head of the Centre for Policy Studies, Robert Colville, provided the most illuminating political reason for privatisation when he said the “single greatest justification for privatisation is competition for capital”.

He meant that, as a public service, water would always be in competition with other priorities, from HS2 to hospitals, and the result would be underinvestment.

But we have seen that the current operating model, in which companies face public sector levels of competition and risk, and get private sector levels of profits and return, is simply not acceptable.

Prof Portes says keeping water in the hands of private companies may not be a bad idea because “governments, especially but not only Conservative ones, pursue stupid, self-defeating policies for short-term political reasons, so it’s worth consumers massively overpaying the private sector to secure the level of investment that is required, even if the public sector could, in theory, do it more cheaply”.

He suggests that the government should renegotiate its relationship with these firms, pointing out that they are contractors delivering a public service and should be treated as such: forced to bid competitively for the right to operate.

From This Writer’s point of view, it looks like a lose-lose situation.

If we accept the claim about government decisions – and I think that is reasonable in the light of the Tories’ huge failures in recent years – then the water firms can’t go back under public control.

But treating them as government outsourcing firms would create a situation where they ended up claiming they could carry out the work required – infrastructure improvements, value-for-money for customers – with less money than they need to avoid bankruptcy, meaning they would eventually go to the wall. Does nobody remember what happened to Carillion?

Is there another alternative?

Perhaps there is. What’s wrong with saying that the profit motive has failed and demanding that water be run by autonomous, non-profit-making organisations, for the benefit of the consumer?


If this is the case with water, isn’t it also the case with the privatised energy firms? With the railways? With all the other Tory privatisations? Why shouldn’t they go non-profit too?

Source: I worked on the privatisation of England’s water in 1989. It was an organised rip-off

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Vox Political vindicated on unemployment figures


How pleasant to see Vox Political‘s concerns about the massaging of UK unemployment figures being taken up by the kind of people the mass media actually respect.

A report on the BBC News website states that Conservative Party claims that unemployment has dropped by around 60 per cent in some areas is based on “wrong data” – in other words, the Tories are lying.

This blog has been saying that for a very long time!

The story says Tories have been using Jobseekers Allowance figures – the so-called Claimant Count – to justify their claims, but the independent Office for National Statistics showed only a 20 per cent drop in those seats. The ONS said online: “the number of unemployed people in the UK is substantially higher than the claimant count”.

Jonathan Portes, director of the National Institute of Economic and Social Research (and well-known to readers of this blog), said: “Many people who are unemployed don’t claim JSA… JSA figures at the local level are accurate, but it is not correct to confuse JSA rates and unemployment.”

In the BBC story, a Tory spokesman said the concern over the data was “nonsense”. He said: “This unemployment measure is provided by the independent House of Commons Library – and for constituencies they are the most up to date and most reliable numbers to use.”

Yes, the House of Commons Library does provide figures – with a caveat that they do not include the number of unemployed people claiming Universal Credit, and there is no date set for when those figures will be included in the Claimant Count (as reported by David Hencke in November last year). The current way of calculating these figures is misleading from the start.

In an article from the same month, This Writer made some other pertinent points:

“If employment has increased – and there’s no reason to say it hasn’t – we can also conclude that the reason employers are more willing to take people on is that they can pay peanuts for them and rely on the government to top them up with in-work benefits. It seems likely that the work was always there but employers weren’t going to take anybody on if it meant increasing the wages bill and reducing the amount of profit available to them. Now that zero-hours contracts are available, along with part-time schemes that deny people pensions and holiday pay, it’s a different matter.

“The number of people who were self-employed increased by a staggering 186,000, to reach 3.25 million, while people working as self-employed part-time increased by 93,000 to reach 1.27 million. That’s 4.52 million – almost one-sixth of the total number of people in work. If you think that’s great, you haven’t been paying attention. Remember this article, warning that the increase was due to older people staying in work? And what about the catastrophic collapse in self-employed earnings we discovered at the same time?

“How many of these are people who have been persuaded to claim tax credits as self-employed people, rather than jump through the increasingly-difficult hoops set out for them if they claimed Jobseekers’ Allowance – and do they know they’ll have to pay all the money back when their deception is discovered?

“The number of people in part-time employment has also increased, by 28,000 to reach 6.82 million. Are we to take it that this means under-employment has increased again?

“Public sector employment has fallen again. If you want to know why the government keeps messing you around, there’s your answer. There aren’t enough people to do the job. This month’s statistics show 11,000 fewer public sector employees than in March, and 282,000 fewer than this time last year.

“Unemployment is said to have dropped – but remember, this is not counting people who have been sanctioned. A recent study by Professor David Stuckler of Oxford University suggests as many as half a million people could have been sanctioned off-benefit in order to massage the figures, meaning that the total listed – 931,700 – is probably wrong. Remember also that Universal Credit claimants aren’t counted, nor are those on government work schemes – another 123,000 people.

“This means the actual unemployment rate is likely to be double the number provided by the official statistics.

“And what about people on ESA/DLA/PIP?”

In January this year, This Writer added: “New research by Oxford University and the London School of Hygiene & Tropical Medicine has shown that only around one-fifth (20 per cent) of people who have been sanctioned off of Jobseekers’ Allowance have actually found work, leaving 1.6 million in limbo; they’re off the benefits system but researchers can only surmise that they are relying on food banks.”

And in February, Vox Political had this point to make: “We also know that many thousands have died – through suicide or complications of their physical conditions (if claiming incapacity benefits) after receiving decisions that were not only wrong, but may have been fraudulent.”

Whichever way you slice it, the Tories aren’t being straight with you.

You can trust Vox Political to give you the facts, though.

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Setting the record straight on Sturgeon’s fiscal policy

The Resolution Foundation's predictions for government spending, based on the different parties' declared plans.

The Resolution Foundation’s predictions for government spending, based on the different parties’ declared plans.

Vox Political’s article on Nicola Sturgeon’s London speech provoked a disgruntled response from Jonathan Portes. The NIESR boss sent a message stating that the article’s fiscal arguments were out of whack.

He didn’t ask for this blog to straighten them out, but the information he sent, coupled with some other pieces he suggested – by Professor Simon Wren-Lewis and the Resolution Foundation – make it inevitable that another stab is required. If you support the SNP, you’re still not going to like it.

The first comment from Mr Portes is as follows: “1. SNP plan is slower deficit reduction than Lab/LDs, which in turn slower than Cons. All consistent with falling debt/GDP ratio. So all are sustainable.  Haven’t looked at detail, but Simon WL & I both think Lab too cautious – so SNP not obviously crazy.”

Simon Wren-Lewis’s article states:  “In reality what Sturgeon was proposing was still deficit and debt reduction, but just not at the pace currently proposed by Labour.”

And the Resolution Foundation adds: “The SNP would commit to delivering existing 2015-16 plans, as each of the Westminster parties have, before changing course.”

There’s a major point to make here, which all three of the sources above have missed. It’s that the SNP and its adherents have been cursing Labour from High Heaven to Low Hell for committing to Tory austerity policies because Ed Balls promised a Labour government would stick to Coalition spending – note that word, spending – limits for the first year after the general election.

Why have SNP adherents been slating Labour when the SNP has committed itself to the exact same Conservative spending limits, for the exact same period of time? Doesn’t this also make the SNP a party of austerity?

This leads us neatly to a point made by the Resolution Foundation. Ms Sturgeon wants to put a lot of space between SNP plans and those of Labour by claiming that Labour is committed to eliminating the UK’s structural deficit by 2017-18. They say Labour signed up to that when it voted to support the Charter for Budget Responsibility. You may recall there was another big fuss about Labour supporting Tory austerity, being just the same as the Tories, and there being only 17 MPs who oppose austerity (the number who voted against the CBR). Bunkum, according to the Resolution Foundation.

“The ‘Charter for Budget Responsibility’ is highly elastic: it’s not based on a firm commitment to reach balance in 2017-18,” states the Resolution Foundation article. “Instead it represents a rolling ‘aim’ of planning to reach current balance three years down the road.” The article adds: “Most economists are sceptical about how much difference it (the charter) will make.

“So what if Labour targets a current balance in 2019-20 instead? Based on current OBR assumptions this could be achieved with as little as £7 billion of fiscal consolidation in the four years to 2019-20 (including the cost of extra debt interest).”

Labour has made it clear that it plans to make only £7 billion of cuts. As this coincides exactly with the Resolution Foundation’s figures for a 2019-20 budget balance, logic suggests that this is most likely to be what Ed Balls is planning.

So SNP (and Green) adherents who crowed about Labour austerity being as bad as that of the Tories need to apologise – sharpish.

Now that these points are cleared up, let’s look at the substantive issue. Here’s the Resolution Foundation again: “The first minister’s headline was that she favours £180 billion of extra spending in the next parliament relative to current coalition plans… an increase in ‘departmental spending’ of 0.5 per cent a year in real terms over four years [we’ve established that the first year’s spending would adhere to Coalition-planned spending levels]. Our estimates suggest that raising departmental spending by 0.5 per cent in each of the four years after 2015-16 would indeed yield a cumulative increase in spending of around £180 billion (in 2019-20 prices, £160bn in today’s) compared to existing coalition plans. So that seems to fit.

“Another, more conventional, way of putting this is that in the final year of the next parliament, departmental spending would be around £60 billion higher in the SNP scenario than it would be under the coalition’s outline plans. This means that departmental spending would end up in roughly the same place in 2019-20 (in real terms) as it is now. We’d see £8 billion or so of departmental cuts in 2015-16 broadly cancelled out by a rise of around £7 billion across the following four years. It also means that, all else equal, there would still be a (small) UK-wide current deficit come the 2020 election.”

As you can see from the graph, the scenario that suggests a Labour balance in 2017-18 would imply a big difference with the SNP, particularly in the first half of the next Parliament – but, come 2019-20, “there would still be a £48 billion gap between Labour and the coalition plans; not that far short of the £60 billion gap that would exist between the SNP and the coalition”.

The scenario in which Labour balances its budget by 2019-20 “would in theory be consistent with spending roughly £140 billion more than coalition plans.

“The SNP proposal implies increases in total departmental spending of £1-2 billion per year over four years whereas Labour’s 2019-20 scenario implies cuts of £1-2 billion per year over the same period. This is against total departmental spending of around £350 billion. By 2019-20 this difference adds up to roughly a £14 billion gap between the two parties. Now, that’s a real difference but given the scale of the numbers involved, (and the fact that some of Labour’s consolidation may come from tax increases rather than spending cuts), it’s also a relatively modest one.”

It’s more or less the same amount the Coalition Government borrows every month, in fact.

Now let’s throw a spanner in the SNP’s works. The Resolution Foundation points out: “Fiscal discussions of this type tend to suffer from a severe case of false precision. None of the party leaders knows any better than you or I what will happen to productivity next year, never mind in 2020… Any difference between, say, the Labour and SNP spending plans would be dwarfed by the fiscal implications of even modest boosts (or dips) in productivity. Indeed, even the very large difference between the SNP (or Labour) and the coalition’s plans could be overshadowed by a significant shift in productivity trends. And, to Sturgeon’s credit, her remarks this week emphasised productivity.”

Yes – productivity. Does anybody remember that, prior to the referendum, the SNP wanted Scottish voters to believe that any borrowing that might be necessary in an independent Scotland would be offset by increased productivity? What did Simon Wren-Lewis have to say about that? Oh yes: “Governments that try to borrow today in the hope of a more optimistic future are not behaving very responsibly.”

But that is exactly what Ms Sturgeon was proposing for the whole of the UK; borrowing on the assumption of increased productivity.

Here’s a chance to put another SNP myth to bed, from the same writer. In his article about Ms Sturgeon’s speech, Professor Wren-Lewis states: “Of course this is the same person who, with Alex Salmond, was only six months ago proposing a policy that would have put the people of Scotland in a far worse fiscal position than they currently are, an argument that has been reinforced so dramatically by the falling oil price. You could say that it is a little hypocritical to argue against UK austerity on the one hand, and be prepared to impose much greater austerity on your own people with the other.”

The argument he mentions ran as follows: “Scotland’s fiscal position would be worse as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline. This tells us that under current policies Scotland would be getting an increasingly good deal out of being part of the UK [and therefore independence would be detrimental].”

He added that the Institute for Fiscal Studies, which had independently analysed the SNP figures, had made a mistake on interest rates. The IFS analysis, he wrote, “assumes that Scotland would have to pay the same rate of interest on its debt as the rUK. This has to be wrong. Even under the most favourable assumption of a new Scottish currency, Scotland could easily have to pay around one per cent more to borrow than rUK. In their original analysis the IFS look at the implications of that (p35), and the numbers are large.”

The Resolution Foundation notes that “the flipside of higher spending, all else equal, would be higher debt and higher debt interest payments”.

So the SNP plan, as this blog pointed out, could create an interest-payment problem for the next government that bites into the extra money said to be for services.

Mr Portes made two other minor points, as follows: “2. Your stuff about Lab could spend more if economy does better wrong way round. If economy worse, we need higher deficit. Over time, as income goes up, so does/should spending. But short-term macro should be countercyclical.”

When I wrote the material about Labour spending more in a better-performing economy, I was thinking of the Labour government immediately after World War II. The current Labour Party has mentioned this period in recent speeches and releases, and it seems clear that Messrs Miliband, Balls et al consider their task, if elected in May, to be similar to that faced by Mr Attlee and his party – the reconstruction of the UK after a long period of destruction.

Are we to believe the economy is likely to worsen, in which case more borrowing will be needed? It’s certainly possible that major shocks are on the horizon. This writer is in no position to speculate.

“3. Finally, stuff about credit rating agencies/bond markets/Greece is absurd propaganda. I’ve written on this many times.” He’s right; it wouldn’t have been included it if Yr Obdt Srvt had stopped to think about it, but the article was up against a deadline and this writer was throwing in all the cautionary words he could find.

So let us forget about them. Here are a few more. Simon Wren-Lewis, at the end of his article, notes: “I read a blog post recently that suggested this was an election Labour would be better off losing… A Labour government dependent on SNP support would be abandoned by the SNP at the moment of greatest political advantage to the SNP and disadvantage to Labour. However if we assume that the oil price stays low there is no way a rational SNP would want to go for independence again within the next five years. It might be much more to its long term advantage to appear to be representing Scotland in a responsible way as part of a pact with Labour.”

Is the SNP rational? All the evidence available so far suggests it isn’t.

It put forward arguments that were deceptive about an independent Scotland’s economic future.

Its representatives and followers spread lies about Labour economic policy.

All indications suggest the SNP will try to create the conditions required for Scottish independence at the earliest opportunity, and then leave the rest of the UK hanging.

The original article on Ms Sturgeon’s speech ended by saying the SNP would be hard to trust.

After the findings of this one, it is nigh-on impossible to do so.

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Duncan Smith has ruined the DWP – and has nothing to show for it


Universal Credit has been an unmitigated calamity and so-called ‘reforms’ intended to end billions of pounds of spending on Incapacity Benefits every year have instead increased the cost – that is the end-of-Parliament report on Iain Duncan Smith’s Department of Work and Pensions from Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR).

In addition, the department has suffered serious – and possibly lasting – damage to its reputation since 2010, a reputation that was at a high when Mr Portes left it in 2008, due to the success of its integration of benefit offices and job centres into Job Centre Plus.

“Six years on, that reputation is in tatters,” he writes in The Guardian. “This decade’s flagship programme – the integration of the six major working-age benefits into universal credit – is far behind schedule, with tens of millions of pounds of IT investment already written off and much more to come. The [National Audit Office]’s verdict has been damning, describing weak management, ineffective control, and poor governance, with both ministers and civil servants coming in for severe criticism. External experts – most of whom supported the principles behind universal credit – are unsure of whether the system can ever be made to work, even several years late.

“But this is far from the worst of the failures. The collapse of the department’s contract with Atos to reassess incapacity benefit claimants means perhaps half a million remain in limbo. The suffering of individual claimants misclassified by Atos and DWP – in some cases left literally starving – has been well-publicised. Less so has been the cost to taxpayers. But the Office for Budget Responsibility’s Welfare Trends report, published last week, shows an upward revision of £3bn a year in spending on incapacity benefits – entirely attributable to delays and mismanagement.”

And it is all the fault of the Tories, it seems.

Mr Portes states: “But the evidence points to a combination of hubris on the part of Iain Duncan Smith, a reluctance by civil servants to push back against unrealistically ambitious timetables, and arbitrary, Treasury-driven spending cuts.” The man we call RTU (Return To Unit) or SNLR (Services No Longer Required) is too proud to admit his ambition outweighed his ability; his staff were too timid (afraid of him?) to make him face the realities of the situation and the Treasury, run by Duncan Smith’s rival George Osborne, forced cut upon cut onto the department, perhaps in an effort to make the Secretary-in-a-State look worse than he already did.

So “Even after it was obvious that the [Universal Credit] programme was well off-track, Duncan Smith continued to claim it was ‘on time and on budget’.”

Sir Bob Kerslake, outgoing head of the civil service, described a “culture of good news” where no one could say that things were going wrong.

And “Duncan Smith’s well-publicised attempts to shift the blame for the mess to civil servants has poisoned relations within the department”.

Meanwhile, in a bid to claw back some of the money lost on UC, ministers were desperately clamping down on incapacity benefit claimants: “Ministers firmly believed that hundreds of thousands of people on incapacity benefits could in fact work, and that the new work capability assessment would show just that, giving the Treasury some of the savings it needed. So when their own independent reviewer, Malcolm Harrington, told them that the work capability assessment needed major changes, and meanwhile the reassessment process should be delayed, they ignored him; not pressing ahead would have left a significant black hole in the sums.

“The predictable result – tens of thousands of appeals, many successful; considerable hardship; administrative chaos; and eventually the collapse of the DWP’s contract with Atos. And the long-term downward trend in the number of people on the benefit has now actually reversed. Ministers have yet to explain why, if it is really the case that hundreds of thousands of people were receiving the benefit when they shouldn’t have been, the “reforms” are now actually seeing the numbers going up again.

“The promised savings, of course, have long since vanished. In fact, the OBR estimated last week that the delays to the government’s plans for these two benefits are now costing taxpayers close to £5bn per year – dwarfing savings made elsewhere, and leaving a large potential black hole in the next government’s budget.”

Perhaps this is why Rachel Reeves keeps talking about money, rather than the human cost of the DWP’s bungling.

Only this morning, she was on Twitter telling us she would be appearing on LBC to talk about how Labour will “make work pay” – annoyingly trying to steal a Tory soundbite.

Perhaps, also, this is why the DWP is infamously reluctant to answer Freedom of Information requests. The infamous call for an update on the number of ESA claimants who have died since November 2011, first made by Yr Obdt Srvt in 2013 (following other unsuccessful attempts) is now  – on a second attempt – with the Information Commissioner’s Office on appeal after ministers found another reason to refuse it.

And the Huffington Post has told us that a perfectly legitimate request by Newsnight’s Chris Cook has also been snubbed by the department.

“Iain Duncan Smith’s DWP has made a name for itself as one of the most vindictive arms of government since the coalition came into power, far more concerned with saving money than serving its jobless customers, and as useful as a wet paper bag in getting people into work,” wrote Nick Stephenson.

“It has been found to be using targets to drive sanction numbers ever upwards, its actions are one of the main reasons why people need to use foodbanks, and its latest wheeze is for staff to go into schools to scare children away from claiming benefits.

Here on Vox Political, as stated above, we call Iain Duncan Smith ‘Return To Unit’. On the evidence above, let’s hope the voting public decide it’s time he actually went.

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The Coalition is creating serious problems and distracting you with phantoms


According to the beauty industry, women must now start deodorising under their breasts.

I kid you not – it was in The Guardian.

Columnist Jill Filipovic hit the nail on the head when she wrote: “I can already hear your objections: ‘But the area under my boobs doesn’t stink!’ or ‘What kind of marketing genius not only came up with the term “swoob,” but actually thought half the world’s population might be dumb enough to buy into it?’ or simply, ‘This is a dumb product aimed at inventing an insecurity and then claiming to cure it.’

“You would be correct on all three points.

“In fact, inventing problems with women’s bodies and then offering a cure – if you pay up – is the primary purpose of the multi-billion dollar beauty industry.”

The simple fact is that you don’t really need to worry about smells down there – a good old soapy flannel will cure any such problems.

That’s not the point, though. The aim is to get you thinking about it and devoting your energy to it, rather than to other matters.

Now let’s translate that to politics.

We already know that all the scaremongering about Romanian and Bulgarian immigrants storming the country from January 1 was a crock. That bastion of good statistics, The Now Show, told us last week that the total number of Bulgarian immigrants in the last couple of weeks was “around two dozen so far”, according to their ambassador. In the first three months after our borders were opened to Croatians, 174 turned up.

Yet the government wanted you to believe they would flood our immigration service in their millions, “taking benefits and yet simultaneously also taking all the jobs”.

My use of language such as “storming” and “flood” is not accidental. By far the more serious threat to the UK in the early days of 2014 was the weather – and, guess what, not only was the government unprepared for the ferocity of the storms that swept our islands, the Coalition was in fact in the process of cutting funding for flood defence.

This would have gone unnoticed if the weather had behaved itself, because we would all have been distracted by the single Romanian immigrant who was ensnared by Keith Vaz in a ring of TV cameras at Heathrow Airport.

Now the Tories are telling us that our take-home pay is finally on the rise for all but the top 10 per cent of earners, with the rest of us seeing our wages rise by at least 2.5 per cent.

The government made its claims (up) by taking into account only cuts to income tax and national insurance, using data leading up to April last year, according to the BBC News website.

This kind of nonsense is easily overcome – New Statesman published the above chart, showing the real effect of changes to weekly income for people in various income groups, and also provided the reason for the government’s mistake (if that’s what it was).

“The data used … takes no account of the large benefit cuts introduced by the coalition, such as the real-terms cut in child benefit, the uprating of benefits in line with CPI inflation rather than RPI, and the cuts to tax credits,” writes the Statesman‘s George Eaton.”

He also pointed out that other major cuts such as the bedroom tax, the benefit cap, and the 10 per cent cut in council tax support were introduced after April 2013 and were not included in the Coalition figures.

Once all tax and benefit changes are taken into account, the Institute for Fiscal Studies has shown that almost all families are worse off – and the Coalition also appears to have forgotten the five million low-paid workers who don’t earn enough to benefit from the increase in the personal allowance.

Skills and enterprise minister Matthew Hancock compounded the mistake in an exchange on Twitter with Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR). Asked why his analysis “ignores more than four million people in work (the self-employed)”, Mr Hancock tweeted: “Analysis based on ONS ASHE survey of household earnings data”.

Wrong – as Mr Portes was quick to show: “Don’t you know the difference between household and individual earnings?”

Apparently not. ASHE (Annual Survey of Hours and Earnings) is a survey of employed individuals using their National Insurance numbers – not of households or the self-employed.

So the Coalition – and particularly the Tories – were trying to make us all feel good about the amount we earn.

That’s the distraction. What are we supposed to be ignoring?

Would it be David Cameron’s attempt to bribe councils into allowing shale gas companies to frack their land? Councils that back fracking will get to keep all the business rates collected from the schemes – rather than the usual 50 per cent.

He has also claimed that fracking can boost the economy and encourage businesses into the country, in a further bid to talk down dissent.

Or is it the growing threat of a rise in interest rates, which may be triggered when official unemployment figures – which have been fiddled by increased sanctions on jobseekers, rigged reassessments of benefit claimants, a new scheme to increase the number of people and time spent on Workfare, and the fake economic upturn created by George Osborne’s housing bubble – drop to seven per cent?

It seems possible that the government – especially the Tory part of it – would want to keep people from considering the implications of an interest rate rise that is based on false figures.

As Vox Political commenter Jonathan Wilson wrote yesterday: “If the BOE bases its decisions on incorrect manipulated data that presents a false ‘good news’ analysis then potentially it could do something based on it that would have catastrophic consequences.

“For example if its unemployment rate test is reached, and wages were going up by X per cent against a Y per cent inflation rate which predicted that an interest rate rise of Z per cent would have no general effect and not impact on house prices nor significantly increase repossessions (when X per cent is over-inflated by the top 1 per cent of earners, Y per cent is unrealistically low due to, say, the 50 quid green reduction and/or shops massively discounting to inflate purchases/turnover and not profit) and when it does, instead of tapping on the breaks lightly it slams the gears into reverse while still traveling forward… repossessions go up hugely, house prices suffer a major downward re-evaluation (due to tens of thousands of repossessions hitting the auction rooms) debt rates hit the roof, people stop buying white goods and make do with last year’s iPad/phone/tv/sofa, major retail goes tits up, Amazon goes to the wall, the delivery market and post collapses… etc etc.

“And all because the government fiddled the figures.”

Perhaps Mr Cameron doesn’t want us thinking about that when we could be deodorising our breasts instead.

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Back to the maths class for DWP decision makers

When I was six, I told friends and family I did not want to go out with a girl because "she can't do her maths". What a pity the adults in the Coalition government don't know now what I knew as a child.

When I was six, I told friends and family I did not want to go out with a girl because “she can’t do her maths”. What a pity the adults in the Coalition government don’t know now what I knew as a child.

Iain Duncan Smith was right to weep when he visited Easterhouse, all those years ago – although he would not have known the reason.

It turns out there are probably drug dealers on that estate with a better grasp of mathematics than anybody in his Department for Work and Pensions – or, let’s be honest, the entire Coalition government.

This week it emerged that the National Audit Office has refused to sign off the DWP’s accounts – for the 25th year running. While this indicates that the problem is not limited to the Coalition, it should be noted that David Cameron’s crew has done nothing to rectify it.

The NAO has instead delivered a “qualified” audit opinion, in respect of fraud and error which is considered to be unacceptably high. It seems the department overpaid £3.5 billion or 2.1 per cent of total benefit expenditure due to fraud and error – and also underpaid £1.4 billion to claimants.

Of this, fraud remained static at £1.2 billion (the same as in 2011-12), while underpayments due to official error increased from £400 million to £500 million.

Official error has increased while fraud has not.

An interesting sidebar to this is the fact that fraud has not decreased either, despite all Mr Duncan Smith’s apparent efforts to hammer it. Next year’s accounts – due after April 2014, although your guess on the actual date is as good as anyone’s – should make interesting reading, as they should show the effect of the major regressions (not reforms) he introduced this year.

Further evidence of government incompetence with the figures came in a chart from Conservative Central HQ’s press office, flagged up by Jonathan Portes and the immeasurably cleverer people at NIESR (National Institute of Economic and Social Research).

The chart’s claim was that 28,500 households had been receiving more than £500 per week in benefits, despite containing people who could work but weren’t – until the £26,000 per year Benefit Cap was brought in and reduced it to nothing.

Mr Portes told us the chart was based on DWP statistics published last week that show that 28,500 households have had their benefit capped at £500 per week, “however, the interpretation – and the chart – is utterly wrong in every respect.

“It just is not the case that every one of those 28,500 households contains someone who “can work”.  As the DWP publication clearly states, the cap applies to households in receipt of key out of work benefits – including both those in the Employment and Support Allowance (ESA) Work-Related Activity Group (WRAG) and those on Income Support (IS).  For people in the WRAG, the position is quite clear. As the DWP itself puts it… they are ‘currently too ill or disabled to work’.

“DWP makes clear that there is no assumption that Income Support claimants ‘can work’, but quite the opposite. As a general rule, most people who ‘can work’ should be on Jobseekers Allowance (JSA), not IS. In practice, most of those on IS are single mothers with young children, who are not expected to work.

“Overall, although we don’t have precise numbers from the DWP statistics, it seems quite likely that in fact less than half of the households affected by the cap contain ‘people who can work but aren’t’.”

Mr Portes went on to analyse the second assumption in the chart – that there are now no households receiving more than £500 per week in benefits that include “people who can work but aren’t” – and found it “just as wrong,” – because DWP guidance exempts households with anyone on DLA, PIP, Attendance Allowance, the support component of ESA or Industrial Injuries Benefits, and those receiving War Disablement Pension and equivalent payments from the Armed Forces Compensation Payments Scheme.

“Of course it’s perfectly possible for such households to contain ‘people who can work but aren’t’ – most obviously households with a child receiving DLA, but there are lots of other possible cases. Moreover, even this excludes couple households where one person is working but the other could work, but is not, who are also exempt. Given enough children and/or high enough housing costs, such households can receive more than £500 per week in benefits,” wrote Mr Portes.

“Again, we don’t know the exact numbers, but we are certainly talking about thousands of households, not zero.”

Only on Monday, Mr Duncan Smith assured the Commons Work and Pensions Select Committee that he had warned CCHQ and Tory chairman Grant Shapps against such jiggery-pokery with his departmental stats: “I have had conversations with him and others about being careful to check with the department.”

So did the chart go out with his department’s full endorsement, in which case this is even more proof that the DWP can’t get its facts right – or did CCHQ ignore Mr Duncan Smith’s words and make its own mistake?

For this government, and Mr “In Deep Sh…ambles”, the result is the same.

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From the DWP to the economy – the Coalition’s growing credibility chasm

All the wrong things for all the wrong reasons: The evidence shows no good reason for George Osborne's economic austerity policies - other than, possibly, an intention to rob this nation of everything possible before 2015.

All the wrong choices for all the wrong reasons: The evidence fails to support George Osborne’s economic austerity policies – the only likely explanation seems to be an intention to rob this nation of everything possible before 2015.

The more we learn of the Tory-led Coalition’s policies, the wider the gap grows between what it is doing and what it should be doing.

Look at the sham psychometric tests, exposed by fellow blogger Steve Walker in a series of articles on his Skwawkbox site. It is now firmly established that the DWP – aided by the Cabinet office ‘nudge unit’ – set out to pressgang put-upon benefit claimants into taking part in a crude piece of neuro-linguistic programming – no matter what answers you provided, the test always pushed out a ridiculously upbeat appraisal of your character and then tried to get you to act according to this verdict in your jobsearching activities. The theory is that this will make a jobseeker more confident and finding a job easier. The problem is that it’s quite utterly ludicrous.

If you haven’t already, you can read the Skwawkbox exposure of this particular caper on that site – there are plenty of links to it from this one. The reason it is mentioned here is that it provides a useful set of questions with which to analyse any government activity: First, is the theory behind this activity sound? Second, if that theory is being used to support a particular course of action, is that action justifiable?

So let’s turn once again to George Osborne’s reasons for pursuing economic austerity, as described in the letter Vox Political received from the UK Treasury last month.

Firstly, the letter warns against the perils of losing market confidence. By this, we can see that it means we should fear any downward revision of our credit rating by the credit agencies, as “a one percentage point increase in government bond yields would add around £8.1 billion to annual debt interest payments by 2017-18”.

What’s being said is that a drop in our credit rating would mean the people and organisations that have invested in UK government debt (by buying our bonds) might move their funds to others, meaning the government could be faced with an interest rate rise, leading to increased difficulty in borrowing.

But we know that this isn’t true. The UK’s credit rating was downgraded only a few months ago. Did interest rates rise? Was our ability to borrow hindered at all? No. There’s a reason for that.

As Professor Malcolm Sawyer notes in Fiscal Austerity: The ‘cure’ which makes the patient worse (Centre for Labour and Social Studies, May 2012), “It is well-known that a government can always service debt provided that it is denominated in its own currency. At the limit the UK government can ‘print the money’ in order to service the debt: this would not take form of literally ‘printing money’ but rather the Central Bank being a willing purchaser of government debt in exchange for money.” This is what is happening at the moment. Our debt is in UK pounds, and we can always service it. Our creditors know that, so they remain happy to continue financing it.

This means that the Treasury’s next point, that “any loss of investor confidence in the UK’s fiscal position would not only affect the UK, but also the global economy” is also meaningless. There won’t be a loss of investor confidence, so there won’t be an effect on the global economy.

We move on – to the Chancellor’s claim that fiscal austerity is required to prevent the slowing of economic growth that happens when the national debt hits 90 per cent of gross domestic product (or thereabouts).

You’ll recall that my letter to the Chancellor was prompted by the revelation that the academic paper on which he relied most often, by Reinhart and Rogoff, had been proved to be mistaken. The Treasury’s response pulled out a series of references to other academic works suggesting a fiscal cliff similar to the Reinhart-Rogoff model, off which we would drop if the national debt passed an arbitrary level around 85-90 per cent of GDP. These were published by the International Monetary Fund, which we know isn’t quite as keen on austerity as it used to be; the Organisation for Economic Co-operation and Development, which this blog marked out as “schizoid” only a few days ago; and others.

Obviously I haven’t had time to look up eight academic works to support any opposing theory I may wish to create – and I think I would be foolish to try. I don’t have any grounding in economics beyond what I’ve been able to pick up by following the national and international debates.

But, then, according to Dean Baker of the Center (yes, it’s American) for Economic and Policy Research: “As a general rule economists are not very good at economics.”

He writes: “Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about. This is the only reason that the Reinhart-Rogoff 90 per cent debt-to-GDP threshold was ever taken seriously to begin with.”

That prodded my curiosity to check some of the papers listed by the Treasury in support of its stance, and the three that I checked (The Real Effects of Debt, Public Debt and Growth, and How Costly Are Debt Crises?) all listed the Reinhart-Rogoff paper in their supporting references. So Mr Baker is right.

“Debt is an arbitrary number,” he continues. “The value of long-term debt fluctuates with the interest rate… The value of our debt will plummet if interest rates rise… This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

“Bonds carry a face value, meaning the amount that will be paid off when they reach maturity. This is what gets entered in our debt figure. However bonds also carry a market price, which fluctuates inversely with interest rates. The longer the term of the bond, the more its price will vary with interest rates.

“If interest rates rise, as just about everyone expects over the next three-to-five years, then the market price of the bonds we have issued in the current low interest rate environment will fall sharply. Since we count our debt at the face value of the bonds, not their market price, we could take advantage of the drop in bond prices to buy up… bonds at sharp discounts to their face value.

“The question is why would we do this, we would still pay the same interest? The answer is that the policy would make no sense for exactly this reason.

“However, if we accept the Reinhart-Rogoff 90 per cent curse, then reducing our debt in this way could make a great deal of sense. Suppose we can buy back debt with a face value of 60 per cent of GDP at two-thirds its face value, or 40 per cent of GDP. In our debt accounting we would have reduced our debt-to-GDP ratio by 20 percentage points. If this gets us below the 90 per cent threshold then suddenly we can have normal growth again.

“Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 per cent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It’s logic folks, it’s not a debatable point — think it through until you understand it.”

I found Mr Baker’s piece after asking Jonathan Portes of the National Institute for Economic and Social Research (NIESR) for his opinion on the Treasury letter. He described it as “Predictable and largely irrelevant”.

So despite my lack of economic education, we have a working theory that suggests the Treasury has built its economic castle on the sand; that its justification for austerity is unsound. What about the austerity measures themselves? Are they justifiable on any level at all?

Evidence suggests not.

Let’s go back to our other friend in this matter, Prof Malcolm Sawyer. “Fiscal austerity and cuts in public expenditure do not work – there is a limited, if any, effect on reducing the budget deficit, and any return to prosperity is severely undermined.” We can see that this is true, using the government’s own figures. It managed to cut the deficit from £150 billion to £120 billion in 2011-12, mostly by axing large projects that invested in the UK economy. How much did it cut from the deficit in 2012-13? Less than £1 billion. The benefit cuts that created much of the fuel for this blog have not helped to cut the deficit at all.

“The reduction of the budget deficit can only come from a revival of private demand which is harmed by an austerity programme,” Prof Sawyer continues. Again, we can see that this is true. Austerity measures such as benefit cuts and the axing of infrastructure investment projects means there is less money available to the people who are most likely to spend it – the working- and middle-classes, and those who are unemployed. People with less money have to spend just about everything they receive in order to cover their costs. That money passes into circulation and the economy grows, through the fiscal multiplier effect. An attempt to explain this effect appeared on this blog within the last few days. The point is that demand increases when the people who earn the least have more to spend.

Therefore we see that Prof Sawyer’s next statement, “Deficit reduction requires investment programmes and reduction of inequality to stimulate demand”, is already proved.

So the answer is to reduce the unemployment rate by creating more jobs and closing the jobs deficit, as highlighted in this blog only a few days ago; to raise incomes by significantly increasing the minimum wage and adopting the proposed ‘living wage’, as promoted in this blog frequently; and investment in infrastructure projects.

What has Osborne done, along with his economically-illiterate chums?

He has created high unemployment.

He has depressed wages.

He has cut infrastructure projects.

He has, therefore, sucked all the demand out of the economy. What effect has this had?

Economic growth has, in the single word of Shadow Chancellor Ed Balls, “flatlined”, borrowing has remained high and the national debt is continuing to rise.

In other words, this part-time Chancellor’s strategy – a plan on which we have all been asked to judge the entire Coalition government, let’s not forget – has failed. Hopelessly.

I return you to Prof Sawyer, one last time [bolding mine]: “The austerity programme is economically irrational, socially irresponsible, and lacks credibility that it can reduce the budget deficit and secure any return to prosperity. The time has come to rebuild through investment and through a major assault on inequality.”