Credit cards, credit easing and a fiscally credible growth plan – by Ian Mulheirn

David Cameron had a near miss on telling us all to pay off our credit cards today, especially since the Chancellor’s newly announced growth policy would rely on SMEs maxing-out theirs.

The Government is right to be wary of taking on more debt in a sovereign debt crisis. Temporary tax cuts or slowing the cuts to current spending could be disastrous given the state of sovereign debt markets. But that doesn’t mean that the only way out of the hole we’re in is austerity irrespective of growth. Far from it. The ongoing Greek tragedy – so often cited by Plan A fundamentalists as evidence of the alternative to austerity – is as much a crisis caused by the inability of Greece to grow in the face of such draconian cuts (and uncompetitiveness) as it is by the size of its national debt. Unlike households, economies have to grow their way out of their debts just as much as they have to get a grip on spending.

That fact calls, not for austerity, but for judicious use of the limited borrowing headroom the Government has. And here’s where things got interesting this week in Manchester.

It was encouraging to hear that the Chancellor will set out plans to get credit flowing to SMEs through credit easing. We’ve yet to find out exactly how it’ll be done, but let’s be clear: to do this will involve HM Government – yes, the same one that keeps going on about the evils of borrowing – issuing more government bonds and getting deeper into debt. It can get away with this politically because financial transactions like this don’t appear on the headline debt-to-GDP ratio. But it is nevertheless an important symbolic departure from the Government’s previous position that ‘further borrowing is not the way out of a debt crisis’.

Of course, a major unkown in this is whether there’s actually much demand for credit out there among SMEs. Afterall, why should they start borrowing to invest if the rest of us are too busy paying off our credit cards to buy their products? If it’s going to work then, the new credit plan will have to spray cash around a bit.

And there’s the problem. If the scheme is to have any real impact on the economy, the Treasury will have to take on a fair amount of credit risk from banks issuing SME loans. So despite being a monetary intervention, this is not the most fiscally credible stimulus plan the Treasury could embark upon. Any significant amount of risk taken on by HM Treasury is just as likely – arguably more likely – to scare the bond market as a slug of honest borrowing to capitalise an infrastructure bank that could be directed to invest in badly needed chargeable infrastructure like roads, energy and information infrastructure. The latter approach is – and would be seen by investors as being – a more fiscally credible growth plan than any effective credit easing strategy. Arcane accounting rules can protect you from political opponents, but they don’t fool the bond market.

Greg Hands: let’s make financial products simple – by John Springford

The SMF held an intriguing fringe event earlier on ‘nudge’ and consumer financial services. In fact this was the second in a pair of debates, the first of which, at the Labour conference, was written up in the Financial Times last weekend. In today’s debate Greg Hands MP, PPS to George Osborne, argued that we need simple products in financial services. Kite-marked products were the cornerstone of the SMF’s recent report ‘A confidence crisis: restoring trust in financial services’, which featured heavily in the debate. Here’s a quick rundown.

As several contributors to the debate implied, financial services markets easily break down because providers know more about the products they’re selling than customers. Because of this, and because the services are provided for an indefinite period, providers have big incentives to take advantage of consumer confusion and inertia. So they create products with headline prices which are initially attractive, tending to make money later through additional charges, interest rates that quietly shrink over time, a blizzard of small print and confusing information that highlight benefits of the product and underplays the risks.

Understandably, consumers get upset about this, and feel cheated. They end up in a state of chronic mistrust, and partly as a result they don’t take up products that could actually help them and tackle the UK’s long-standing savings shortfall.

To cut through this, the SMF suggested the development of a kite-mark for products that have clear, comparable and standardised charges, terms and conditions. A kite-marked ISA, for example, would track the Bank of England’s base rate, rather than having a high ‘teaser’ interest rate that disappears after a year. Greg Hands was supportive of this kind of approach to ensure that competition in the financial services sector works to lower prices and improve products for consumers, rather than encourage producers to put their creative energies into bamboozling hapless customers.

He pointed to the benefits of making products comparable, so consumers could more easily choose between products that essentially do the same kind of thing. Better quality products would thus help to promote price competition. The Treasury is consulting on simple financial products at present. Here’s hoping Hands and Mark Hoban make them happen.

This Tory love affair with marriage must stop – Ryan Shorthouse

Ah, yes, a regular feature at Conservative Party Conference: a prominent Conservative politician reassures the grassroots that the Party will eventually, sometime in the future, restore a tax break for married couples. This year it’s Iain Duncan Smith, yet again. We hear that our broken society will be repaired by recognising marriage in the tax system. Nonsense.

First things first, the marriage rate has declined but most indicators of social progress – education, health, poverty – have improved in recent decades. Yes, there are still some real problems in a handful of communities, but to suggest we have a broken society as a result of the decline of two-parent households is palpably not true.

Turning to the effect of marriage, it is the case that children with married parents tend to have better educational and social outcomes. But the best available evidence suggests that marriage itself doesn’t cause these better results.

Rather, it’s the other way around. Those with higher incomes and educational attainment are more likely to marry. These characteristics could be the real reason for their children, on average, doing better. A recent paper by the Institute of Fiscal Studies supports this. If you compare a married and cohabiting couple with the same education levels, socio-economic status and own childhood family structure, there is no significant difference between how their children develop.

Think about it: what social conservatives are actually saying is that the act of marriage is somehow special. This is absurd. God doesn’t come and sprinkle special dust over people which suddenly makes them better parents overnight. What really makes married couples effective parents is that they have a more stable relationship – that’s probably why they’re getting married in the first place – are better educated, and tend to have higher incomes.

Even if marriage did improve outcomes, the marriage tax break on any affordable scale would make very little difference the number of marriages. After all, we had a marriage tax break in the 1980s and 1990s: but numbers plummeted. Besides, do we really want to spend public money encouraging the kind of marriages that happen for financial reasons?

But, wait, David Cameron says it’s all about signalling: “This is more about the message than the money”. So it’s about reminding people how great marriage is. The problem is that most people already know this. Surveys suggest that the overwhelming majority of under-35s want to get married one day. The most common form of adult partnership is still marriage.

In the 2010 Conservative Manifesto, Cameron outlined the specifics: he pledged to restore a transferable tax allowance for married couples. A sole basic-rate earner in a couple with dependent children could benefit from part of their non-working partner’s tax allowance – giving them an extra £150 a year.

But only a minority of married couples would benefit from this. Over in the twenty-first century, most married couples are both working. In fact, it would direct more public funding towards pensioners where only one of the couple has a pension or other income. Crucial public funding would yet again be directed towards the old when the young need it more.

What’s more, it won’t help the families who really need the support either. The very poorest families, whose children are more likely to have poorer life chances, are those where both parents are not working or earn very little. If no one is working, or earns below the personal tax allowance, you don’t pay tax, so you can’t get a tax break.

Marriage is a fantastic institution. We should celebrate people achieving their aspiration to find someone they love and declare publicly their commitment to each other. But fiscal policy should stay out of it, not least because marriage doesn’t produce better parents to stop troublesome kids.

Better parenting really comes from higher education and income levels, not from forcing people down the aisle, or bribing mothers to stay at home. So we need improved work incentives for parents and enhanced educational opportunities for more disadvantaged young people. Luckily, we have a public service that can help achieve both: affordable, high-quality childcare. But childcare costs are rising and public support falling.

Forget marriage tax breaks: Government should deploy its limited resources in supporting more children access such vital pre-school education. Then it really will stand a chance of thwarting the dysfunction that stubbornly persists in pockets of our society.

Credit easing: it’s a plan B Jim, but not as we know it – Ian Mulheirn

The Chancellor has paved the way for so-called “credit easing” to help UK firms get access to loans. This is a radical monetary – if not fiscal – departure for the Government from its tough talk on ‘Plan A’ and is potentially a very significant tool to spur growth – depending on how it’s done.

Credit easing would involve the Treasury buying up corporate bonds of larger companies, but also SMEs. This would increase the level of cash in the economy and reduce the cost of borrowing to these all-important firms. Through these mechanisms it could have a very significant impact on growth.

But if this plan is to work, it has to be done at the right scale and in the right way. Bank of England MPC member Adam Posen, estimates that the existing £200bn quantitative easing intervention by the Bank has boosted GDP by 1.5%. Something on a similar scale looks necessary in this Treasury-led quasi-QE2.

What’s more, since SMEs don’t issue bonds that can readily be bought, how credit easing is designed to help these smaller firms will matter hugely to its effectiveness. There seem to be three options here.

• First, the Treasury could buy up bundles of SME assets currently held by UK banks. A danger here is that the banks will off-load the riskier assets onto the taxpayer and use the cash to help rebuild their balance sheets, rather than to create more SME lending. That would impair the effectiveness of the plan and limit the amount of cash getting into the real economy.
• A second option would be for HMT to capitalise a new public bank to kick-start lending to SMEs more directly, as Posen has suggested. But wait a minute; doesn’t the taxpayer already own a few banks?
• The third option, therefore, would be to use the existing state-owned banks to get lending going, as Sam Brittan proposed in the FT recently.

Either of the last two options would seem sensible ways of injecting credit where it’s due. We’ll have to wait until November to find out which route Mr Osborne plans to take.

Perhaps a more intriguing aspect of today’s announcement is whether or not it constitutes a deviation from Plan A. Inevitable, that depends how you define Plan A. Credit easing isn’t formally a fiscal policy: since the Treasury would be engaging in financial transactions, the investment wouldn’t hit the deficit. But the taxpayer would instead be bearing a large amount of risk – risk that private investors don’t currently have the appetite to bear. Viewed in that way, this looks like a plan B of sorts. At the very least it’s an admission that austerity alone won’t work. Thank goodness for that.

Council tax freeze: playing games with spending will damage growth – Ian Mulheirn

In his speech today, George Osborne made himself popular with delegates by announcing that he’s found £800m to freeze council tax bills in 2012-13. In fact this was something he announced back in 2008, but was later quietly dropped.

The council tax giveaway isn’t the only magic money the Government has found recently. Two weeks ago in Birmingham, Danny Alexander dug out £500m from the back of the Treasury sofa for new infrastructure spending too. But in austerity Britain, one is bound to ask where are the Treasury duo getting all this money from: haven’t we all been told that the cupboard is bare?

In reality all this cash is coming from this year’s under-spending by Whitehall departments. The Treasury gets tough with departments that blow their budgets, but when they under-spend – as they inevitably do – it snaffles the spare cash from this year for shiny new policy announcements like tax freezes and new investment for next year.

It’s disappointing that Whitehall spending rules seem designed to help boost ministers’ popularity by routinely allowing them to announce spending twice. But this is nothing new and successive governments have played the same games.

What’s concerning is that these games are being played at precisely the wrong time given the weak state of the economy. By shifting money that should have been spent this year into 2012-13, the Government is effectively cutting public spending further than planned in 2011. With growth tanking, now is precisely the wrong time to be doing that.

Listen to our audio interviews from the Labour Party Conference

The SMF team caught up with some of the main speakers at our fringe events at Labour to get their views on welfare to work,trust in financial services, higher education and more.

• At ‘Early intervention: can markets end child poverty?‘ we asked Graham Allen MP about whether he thought it was likely that private companies would invest in early years projects. Listen to his answer here.

• At our fringe event ‘The Work Programme Underway‘, we asked Stephen Timms, Shadow Employment Minister what one thing he would do to improve the Work Programme. Listen to his answer here.

• At our event on university access, ‘Widening participation in Higher Education’ we asked Shadow Universities Minister Gareth Thomas whether or not he thought higher fees would harm access. Listen to his answer here

• At our event on consumer finance ‘Creating better financial outcomes: how do we empower consumers?’ we asked Andy Love MP about his views on trust in financial services. Listen to his answer here.

• At our event on Investment, Growth and PFI we asked Margaret Hodge whether or not she felt that there was an alternative to PFI and what she thought about a national infrastructure bank. Listen to her answer here.

Miliband’s tuition fees proposal: clever headline or credible policy proposal? Nigel Keohane

Ed Miliband won headlines and attention on Sunday for his surprise announcement on tuition fees. If Labour was in government now, he said, they would reduce the cap on tuition fees from £9,000 to £6,000, paid for by corporation taxes on the banks and higher interest rates for top earning graduates.

Many applauded Miliband’s boldness in advocating such a scheme, while critics rushed to condemn the proposal, calling it a “u-turn” on Labour’s previous commitment to a graduate tax. Miliband himself wouldn’t be drawn on whether or not the proposal would be in their 2015 manifesto, and many in the party made clear their continued commitment to a graduate tax. But at an SMF fringe event held yesterday shadow universities minister Gareth Thomas said that it was ‘a strong contender for the 2015 manifesto’.

Politics aside, few can argue with the principles behind the proposal – to increase access to university for those from the poorest backgrounds. But whether or not the policy will work to achieve this rests on a number of assumptions.

Assumption #1 – £9k fees will deter poorer students – and £6k fees will not

It’s fairly safe Labour ground to claim that the Government’s fee regime will harm access, and in many ways the real surprise is that Miliband accepts a doubling of fees in the first place. But actually nobody really knows yet if £9k fees will deter poorer students and impact upon demand.

The new fee regime won’t come into play until 2012, and it’s not until we see the results of UCAS applications early next year that we’ll start to get a picture of the impact of £9k fees on demand. If potential students are basing their decisions on the misconception that they will actually have to pay £9k from their own pockets each year, then they may well have a negative impact upon access. If they’re recognising them as the pseudo-tax they actually are, then the picture may be very different. If the situation is the latter, then reducing the fees to £6k won’t have any impact upon demand.

Assumption #2 – the main beneficiaries of the proposal will be the ‘squeezed middle’

Miliband’s pledge is a clear tactic to appeal to the new battleground of politics, the ‘squeezed middle’. With detail on the terms of this pledge unclear, it’s hard to say whether or not this will really benefit this group. But what is crystal clear is that any reduction in fees will directly benefit those at the top of the income scale. As many graduates earning lower incomes in work will never actually pay off their loans for the £9k fees, this move will essentially give a tax break to those who will – people who do well in the labour market. The Miliband proposal attempts to deal with this by increasing interest payments for those earning above £65,000 – but this itself relies these graduates actually coughing up (see next point).

Assumption #3 – increasing interest rates on loans for those earning over £65,000 will make the proposal progressive and will generate cash

Increasing interest payments for graduates earning above £65,000 would seem like a sensible way to ensure progressivity whilst generating cash to reduce fees overall. The problem is that interest rates would probably end up having to be so high that higher earning graduates wouldn’t pay them. They might look at alternatives, like commercial loans, when they reach the £65,000 threshold. The Government could counter this by introducing penalties for early repayment, but this would not stop high earners from opting out of the loan system altogether.

As Miliband himself has acknowledged, this policy may not even see the light of day. And if it does the landscape for students may have altered considerably. If demand – and access for poorer students – really does drop in response to higher fees, then this policy could be a shrewd move by Labour. If not, then it may well remain no more than an attention-grabbing headline.

Plans A, A+, B and C – by Ian Mulheirn

The Government is ‘STICKING TO ITS BUDGET PLANS’ says the Treasury, at every possible opportunity. So that’s it, right? No Plan A+ no Plan B and certainly no Plan C, (whatever this alphabet soup of growth strategies might mean). No boost to the economy, and no new growth plan? Well not quite. The Government’s fiscal mandate actually has a huge amount of scope for a state-led infrastructure investment drive, and ‘sticking to the plan’ needn’t be quite what it seems.

As I argued at the SMF’s Liberal Democrat conference keynote event last week, investment is the only way out of our growth problem. Relying on an export-led recovery is a policy dead on arrival given the state of the Eurozone and the US. And Mr Balls’s VAT cut money would mostly leak abroad, while adding to the deficit. Besides, the UK economy is facing a much graver problem than a lack of consumer demand: it’s becoming clear that the economy’s productive capacity is significantly smaller than everyone had hoped. Unless we tackle both the lack of demand and the economy’s weak potential, the future looks bleak. Massive investment in chargeable infrastructure – toll roads, energy infrastructure and the like – is the fiscally credible solution. Not only would it pay its own way – which would keep the bond markets happy – it would also encourage private investment to pile in behind (as the BCC argued today).

There are a range of way that this could be done, but such a short-lived investment splurge is consistent with the Treasury’s fiscal mandate. The principal Treasury aim is to restore ‘cyclically adjusted current balance’ by five years’ time. Since we’re talking about capital spending, this first target would be unaffected. The second part of the mandate is that the Government should have the national debt-to-GDP ratio falling by 2015-16. But this puts no ceiling on what that ratio might reach before that date, only that it should fall thereafter.

So the Government’s tough rules are, sensibly, a lot more flexible than many think. It’s time to use some of that flexibility. Let’s call it Plan A.

DWP flagship schemes under financial pressure – Ian Mulheirn

This morning’s Telegraph carried news that DWP’s Universal Credit – a flagship policy to overhaul and simplify the benefits and tax credits system – is at the top of George Osborne’s warning list. As ever with such grands projets, it looks like it will take longer to bring to fruition than planned, and the delay could involve a large price tag. Ministers should take the hit and give it time if they want to avoid the tax credits debacle of 2003, when Gordon Brown’s policy hit the buffers because rushed technology malfunctioned.

But Universal Credit isn’t the only light flashing red on the DWP dashboard. The Work Programme – the Government’s huge back-to-work scheme – is starting to look pretty pricey too. As SMF warned last month in new research, it seems increasingly likely that programme providers won’t get anywhere near the performance expected of them by DWP. And as the economy worsens, many providers will be under pressure from their investors to cut expenditure. That’s very bad news. As the economy struggles, now is precisely the wrong time for a reduction in service expenditure on the long-term unemployed.

While the job outlook is bad news for Work Programme providers paid by results, other signs are bad for the Treasury. At this afternoon’s SMF and AELP fringe debate on the Work Programme, it was pointed out that many providers are saying that they’re seeing many more jobseekers referred to them than DWP told them to expect. Part of that is due to rising unemployment, but most of it is down to the fact that providers always thought the projected referral numbers looked low.

Why would DWP underestimate the number of jobseekers who would go onto the new scheme? There are two possible explanations. It could be that past experience of over-estimating such things has led DWP to be excessively cautious. Alternatively, since each referral costs the Government money, DWP’s ‘cautious’ view is in fact an optimistic take on the cost of the scheme. In a tough spending review, it helps if great policies look cheap. As it stands, anecdotal evidence suggests that the Work Programme is turning out to be rather more expensive than planned. All this, together with the Public Accounts Committee’s damning report on attempted departmental savings elsewhere, makes it look like DWP is haemorrhaging money. The Government needs to get all this under control if it’s not to undermine its hard-won fiscal credibility.

Listen to our audio interviews from the Lib Dem Conference…

… and watch this space for interviews from Labour!

On our Audioboo page you can listen to:

• Lord Teverson on fuel poverty, following our fringe event with Which? on energy prices
• Philip Collins on University tuition fees, following our fringe event with Universities UK on social mobility and higher education
• Stephen Lloyd MP on the challenge of youth unemployment, following our fringe event with AELP on NEETs
• Sir Alan Beith on prison reform and reoffending, following our fringe event with NACRO on crime