Liberal Vision

Cutting the throat of the black gold goose

Hammer of the oil companies George Osborne is a greater environmentalist than economist. Or is he?

The impact of the his 12% hike in the North Sea supplementary charge; on top of two 10% rises by Gordon Brown last decade, has seen a roll call of firms suspending or scrapping major investment deals in British waters.

City AM has been following the stories over the last week, the most significant of which was a £10bn investment in Mariner and Bressay by Statoil.

The short term impacts on the UK tax take are unclear. Existing fields facing marginal tax rates of 62-81% will continue to produce. In the short run the world price of oil is more important than investment.

In the long run the Chancellor will be testing to destruction… again… the problem that high taxes don’t work. Investors don’t tend to volunteer to make their money work more for the Government than them.

A view strongly expressed previously by the Scottish Liberal Democrats, who campaigned vigorously against Gordon Brown’s looting. They may be wondering why a Scottish Liberal Democrat Chief Secretary to the Treasury didn’t stop this, knowing has he does, that when the rate, last doubled investment in the North Sea fell 25%.

But isn’t this good for low carbon energy?

The answer is no.

First oil and gas companies are international. Investment moves around the world looking for the best returns. That movement is limited by cost and national monopolies, but as some opportunities become more expensive, others such as oil sands and deep water drilling become more attractive. No carbon is saved, it just gets drilled elsewhere. Some of those alternatives produce more CO2, in production, than drilling the North Sea.

New opportunities in the North Sea are already expensive due to natural considerations; the hostile climate West of Shetland for example. And in decline. Creating fiscal barriers on top of that, whilst Barack Obama for example is offering tax breaks, is uncompetitive.

No low carbon technologies are yet in a cost effective position to displace oil and gas as primary fuel sources for transport and electricity generation. They will get there, one day, but to do so require investment. That investment in turn, whether public or private, depends on economic growth.

High taxes kill growth. Efficient investment requires exploiting the skills and advantages you already have. Offshore wind for example benefits directly from offshore oil and gas engineering. For green energy to be the future we need energy companies to be successful today.

In the medium term the likely impact of the Osborne tax will be less tax revenue. That could be masked if global oil prices continue to rise, but there will still be a dead-weight loss. If prices fall, it could be dramatic. Gas prices for example are already much lower than oil.

It would be better if oil and gas were treated on a level playing field with other businesses, with special taxes reserved for concrete market failures like mitigating carbon, not revenue raising.

Where hypothecation is useful perhaps it should be towards investment in future energy sources, not reducing taxes at the pump or other pet projects. The Treasury and public sector should be taking the hit on keeping down the cost of living, not the providers of jobs and growth.

The current North Sea Fiscal regime is over complex. The erratic behaviour of successive Chancellors can give industry no confidence in future stability. That loss of confidence, in some respects, is even more worrying than the rise. This is one piece of populism that has backfired badly. The Government should think again.

Shameless Balls

The line adopted by the Ed Balls, that the Government’s current deficit difficulties are purely due to international banking / credit crisis in 2008 is one much repeated.

This is surely easy to test?

At one level is clearly false. It is simply an admission that the last Labour government made spending decisions on the basis of a bubble.

Anticipating such risks and hedging against them is the job of the Treasury. Under Labour the Government was spending more than they made in every year since 2001/02. As was said at the time, they didn’t ‘fix the roof when the sun was shining’.

They excuse this with all sorts of pseudo-Keynesian waffle about ‘investment’, but much of the rise in public spending was not infrastructure for the future, but current spending on wages for public sector workers and voter-pleasing bribes such as the child trust fund. A classic Labour approach to economics; spend, spend, spend, and hope something turns up.

Further the impact of the credit crisis on Government income is measurable.

Tax revenues fell from around £550bn in 2007/8 to £520bn in 2009/10 (£533bn in 2008/09). It’s a difference of around £30bn.

That’s less than the current interest on the national debt (@£50bn), let alone the annual deficit (@£150bn)

This means, crudely, public spending commitments are accounting for about 80% of the deficit, the recession around 20%.

And that only if you generously assume the Government couldn’t have possibly seen there was a bubble (whilst Vince Cable kept predicting it), and taken precautionary action. And further that the debt itself, and that large interest bill, was nothing to worry about and should not have been reduced.

How all that equates in the mind of Balls to the financial crisis being solely responsible for the deficit and debt is a mystery to me.

Perhaps a Labour economist could explain?

Budget Reaction: Is ending NI a good idea?

A few cheers and jeers in today’s budget. The airwaves are full of detail so we will focus briefly on a selection of issues. This is not a comprehensive analysis.

Cheers

Raising tax allowances is essential to increase the incentives between work and benefits. It is not a redistributive anti-poverty measure, it is one that makes exiting poverty far easier for those who are prepared to work.

Reviewing the 50% tax rate is probably the only way, politically, it can be ditched, and likely then only when the economy is better recovered.

Cutting fuel duty and suspending the escalator is sensible. The Exchequer loses little from this, whilst the political message is powerful

Jeers

Although the Budget predicts reduced deficits by 2015, any deficit at all means more debt. Public spending is clearly not being cut fast or hard enough to protect future generations from our waste today.

The flip-side of the fuel duty announcements was the introduction of a Fair Fuel Stabiliser paid for by a levy on production. There is already a 20% special tax on UK oil and gas exploration. That has reduced the attractiveness of the North Sea for investment, in turn reducing returns. The costs of another 12% levy will also be passed on to pension funds and in reduced investment which could undermine any relief for consumers. The Chancellor should just cut duty when global oil prices are high.

Smokers get another beating with 2% rise above inflation. It is already the case that 21% of the tobacco consumed in the UK comes from illicit trade, i.e. organised crime. This is driven principally by relative national tax rates. It is highly profitable to smuggle and counterfeit, enforcement and punishment are weak. Counterfeit products tend to be more unhealthy, criminal profits fund more crime. A technical reform to mitigate against differential impacts on low and high cost brands misses this point. In the long-run British duty rates need to be sensitive to the pace of change in other countries. That reform is overdue. Providing another case-study in why prohibition doesn’t work is unwise.

The Big Change

Merging National Insurance and Income Tax does sound sensible. NI is effectively a stealth income tax and is masks just how extreme and high British taxes are by international standards. Such a change will make the sort of tinkering enjoyed by Gordon Brown much more difficult.

The problem, other than the possibility of a stealth rise on upper-rate payers in the process of change, is that national insurance is in itself a better idea than general taxation as a way of funding welfare.

When introduced by a Liberal government it was a proper insurance scheme for worklessness and old age. As recently as the 1990s the Liberal Democrats believed it should be used to fund the NHS.

Proper insurance is hypothecated, i.e. spent on a specific thing, not on anything the government fancies. The more hypothecation there is, the less the state can do as it pleases. For that reason tax hypothecation is vigorously opposed by the Treasury.

But that constraint protects taxpayers. It acts as a break on the kind of welfare ramping that has led to the current trillion pound debt, and even larger unfunded state pension liabilities.

Hypothecation is also more personal, people can see how much welfare costs them. Transparency engenders responsibility.

Another benefit of insurance is there is no need for the state to be the monopoly supplier. Similar to David Laws point in the Orange Book about health insurance. Offering people choice in providers of welfare insurance would be another check and balance on state waste.

The proposal is now subject to a long review, so we cannot say whether these issues will be taken into consideration, but it would be a historic quirk if this liberal coalition ended one of the main achievements of the last Liberal government, 100 years on.

Cutting up the cake

For better or ill, the political settlement that Western liberal democracies have means that the government of the day decides how to cut the cake. That cake is cut according to the size of government borrowing, what its spending priorities are and the demands of the public as voiced by pressure groups.

If the cake is reduced there is less to cut and hand around. If you wish to give out more but have a small cake you need to find ways of making it bigger. This is a continuous challenge and leads to fierce arguments about post code lotteries and fairness.

During the last 30 years we have seen some steps to alter this. While the government may make the cut someone else hands out the goodies or administers the transfer. There have been attempts at getting the recipients to make more decisions about the services they get. This trend is continuing and is likely to grow as successive governments face tough fiscal decisions.

There is another way of distributing products and services. One of the best devices at crowdsourcing public demand emerged centuries ago. But making the price signalling of the open market function within public services is not easy.

The coalition is clearly using that policy tool to reshape the relationship between the citizen and the State. It will take some time before we know if they have achieved  that aim.

To buy local is loco

Over at Cafe Hayek, George Mason professor of economics Russ Roberts turns his guns on the ”buy local” fallacy.

Roberts is a far better economist than I am, and I have no doubt that he has a better understanding of the value of trade, but I am left feeling that somehow his article fails to get to the root of the issue.

I have therefore set out my own reasons why the Buy Local movement is actually harmful to human development and will reduce welfare. This boils down to the fact that it is anti-trade, preventing people from benefiting from the most effecient providers across the country or the world; that it undermines the principle of specialisation on which human development is based; and ignores Comparative Advantage, which makes it worthwhile for even the most and the least efficient producers to work together.

Please head over to the IEA website and take a look at the full article. I have closed the comments section below to encourage readers of this site to comment in the same place as readers of the IEA site.