Tories turn to the “Magic Money Tree” (again). Remember Liz Truss? – Owl

The Conservative manifesto will include tax cuts, Rishi Sunak has said.

The prime minister told the BBC’s Nick Robinson: “We’re going to keep cutting people’s taxes. You’ll see that in our manifesto tomorrow.”

Becky Morton www.bbc.co.uk

Challenged over how he would fund his policies, Mr Sunak said they would all be “fully funded and costed”.

He insisted day-to-day government spending on public services would continue to increase ahead of inflation under a future Tory government.

But when pressed over whether certain departments would see cuts, he acknowledged “all governments prioritise within that”.

In the spring Budget, the government announced a 2p tax cut to National Insurance for 27 million workers – matching another reduction set out in last year’s Autumn Statement.

The Conservatives have also said they want to abolish National Insurance completely in the long term, when it is deemed affordable to do so.

The party’s manifesto, which is being launched on Tuesday and will outline what it plans to do if it wins the election, is expected to include a pledge to scrap stamp duty for first-time buyers of properties costing up to £425,000.

However, it is not thought to include anything on inheritance tax.

Asked if the Tory manifesto would promise more tax cuts, Mr Sunak said he wanted to build on the tax cuts “we have already started to deliver”.

Both the Tories and Labour have ruled out any increase to the rate of income tax, National Insurance or VAT.

However, both parties have also said income tax thresholds will remain frozen until 2028.

This means millions of people will be pulled into a higher tax band if their wages increase.

Mr Sunak said his party’s policies would be paid for by clamping down on tax avoidance, which he said would raise £6bn, as well as reforming the welfare system and getting more people into work.

However, the independent Institute for Fiscal Studies has said delivering the £12bn savings promised by the Tories by 2030 through reforming welfare “looks difficult to the extreme”.

The think tank has also warned whoever wins the next election will have to cut the scope of what the state provides or increase taxes to maintain levels of departmental spending.

Asked if he would be honest with people that his plans would also mean significant spending cuts for many government departments, the prime minister said: “No, that’s not what our plans show.”

He said day-to-day spending on public services under a future Tory government would continue to increase ahead of inflation.

But he added: “Of course, all governments prioritise within that.”

Mr Sunak said he also wanted to focus on productivity in the public sector, which he said had fallen “considerably since Covid”.

He added that increasing productivity to pre-pandemic levels would save £20bn and would make it possible to cut taxes.

Mr Sunak was also challenged over his party’s record on housing.

Asking if having your own home had got harder under a Tory government, the prime minister said: “It has got harder – and I want to make sure that it’s easier.

“And what we will do is not just build homes in the right places and do that in a way that is sensitive to local communities, but make sure that we support young people into great jobs so they can save for that deposit.”

He added that “saddling young people with higher taxes” would make it harder for them to save for a deposit to buy a house and he wanted people to “keep more of their money”.

One recent report by the Building Societies Association found first-time buyers were facing the toughest conditions in which to buy a house in 70 years.

It suggested home ownership among younger people has been in decline over the last 20 years.

Mortgage rates are relatively high compared with the last decade, and the cost of renting has also soared, making it harder for people to save.

This means first-time buyers face the double challenge of raising enough for a deposit as well as being able to afford a mortgage.

Labour’s shadow housing secretary Angela Rayner said Mr Sunak’s answer was “a damning indictment of 14 years of housing failure”.

She added: “Never once in 14 years have the Tories met their 300,000-a-year housing target, and their recent decision to appease the Tory MPs on their backbenches and abolish mandatory housing targets has seen housebuilding take a nosedive.”

Asked if record net migration figures showing 745,000 entered the UK in 2022 meant he had “lost control of the borders”, Mr Sunak said the numbers were “too high”.

But he argued that as PM he had brought in “the biggest, strictest reforms to bring down immigration that we’ve seen”.

In the interview, the Mr Sunak repeated his apology for leaving last week’s D-Day commemorations early, saying: “I hope people can find it within their hearts to forgive me.”

He asked people to “judge me by my actions”, pointing to increased investment in the armed forces and support for veterans.

Mr Sunak played down suggestions his election campaign had got off to a bad start, insisting he believed he was the right person “to build on the progress that we’ve made”.

“We’ve been through a tough few years and I do believe at this point we have turned a corner,” he said.

Her “balanced scorecard” of objectives contains so many objectives, despite all the pollution problems, she scored 46.5% of maximum, which the remuneration committee cut to 38.5% after applying its “discretion framework in respect of South West Water’s environment and pollution performance”.

Heads she wins; tails we lose. – Owl

South West Water owner’s boss should lose all bonuses after Devon parasite outbreak 

Nils Pratley www.theguardian.com 

Here’s a rarity: a chief executive turning down an annual bonus two years in a row out of solidarity with the suffering customers. But when the company is Pennon Group, owner of South West Water, the operation currently knee-deep in a diarrhoea and vomiting outbreak in Devon caused by polluted water, Susan Davy had little real choice. She cannot expect applause for leading “from the front” and “living our values”, as she described her decision to turn down £237,000 in cash.

In fact, the question is why she still thought it appropriate to collect £298,000 under her separate long-term share-based scheme. That award sent her overall pay up from £543,000 to £860,000, a figure that may cause stomach pain across the south-west, not just in the coastal town of Brixham, where the parasite cryptosporidium was found in the system.

A year ago, she saw the short- and long-term schemes as a job lot and waived both. If anything, the case for surrendering both elements of variable pay should have been more compelling this time because an outbreak of illness is bad even by the standards of the modern water industry. There was no explanation of the different logic in the annual report.

A deeper question is why the bonus issue even arose in the first place. Why wasn’t it automatically reduced to zero in current circumstances? The answer lies with the usual suspect – the fact the standard “balanced scorecard” of objectives for an executive includes so many elements that it is hard to miss them all. In Davy’s case, the formula spat out a ratio of 46.5% of maximum, which the remuneration committee cut to 38.5% after applying its “discretion framework in respect of South West Water’s environment and pollution performance”.

Come on though, outsiders will still be baffled as to why the committee’s discretion could be so minor (and so precise). Even ignoring the parasite outbreak, South West Water is still falling substantially short on the Environment Agency’s most important annual measure: the company got two stars, when four is the aim, under the latest industry-wide environmental performance assessment.

Nor is it the case that Pennon’s shareholders are having a better time. Yes, they got a £127m dividend even as the Devon outbreak was in full swing, but the share price has roughly halved during Davy’s four years as chief executive. Not for the first time, one must ask what is the point of these “balanced scorecards” if they produce unbalanced outcomes that miss the wider picture.

In a month’s time, Ofwat, the sector’s economic regulator, will unveil its first view of the English and Welsh water suppliers’ business plans for the next five years, including the company-by-company increases in bills to fund greater investment. Bill rises are inevitable and South West Water is looking for 30%-ish, which may be at the lower end of the industry’s range but will still come as a shock to many customers. Davy should have read the room: if it was right to turn down short- and long-term awards last year, it was right to do so again. Half measures don’t cut it.

This isn’t another column about how the next government won’t have any money. If you haven’t gathered that by now, there’s probably little value in repeating it. Whichever of the main parties forms the next government, it will need to cut spending or raise taxes or it will miss its own fiscal targets. Instead of focusing on that fact, I want to explore why. 

Paul Johnson www.thetimes.com 

Why is it that, with taxes at pretty much the highest level in the UK in 70 years, it can be true both that many public services are in a terrible state and that there isn’t enough money to do much about them without raising taxes even further?

That public services are struggling was set out in stark terms in a report last week from the Institute for Government. To take a few choice quotes, it says that “hospital performance is arguably the worst in the NHS’s history”, “prisons are at crisis point” and “in the last six years there have been six times the number of bankruptcy notices filed by local authorities than in the previous three decades”. You get the picture. And that’s despite the fact that public spending as a fraction of national income has shot up over this parliament and, even on present implausibly tight plans, looks set to settle at well above its long-term average.

That taxes are at their highest level as a fraction of national income in seven decades is simply a fact. They have risen by more over this parliament than over any other in that period. The only bright spot is that many of us won’t have felt that directly. The direct tax burden on average earners is, surprisingly, at its lowest level in half a century. By contrast, companies and those on high incomes have been hit hard.

What on earth is going on? A new report from my colleagues at the Institute for Fiscal Studies tries to get under the skin of this apparent puzzle.

A little bit of history is important. The story of the past half-century or so has been one of successive governments trying desperately hard to prevent the state from growing. While spending on the welfare state has risen, defence spending has fallen and fallen and fallen. We have stopped building houses and supporting nationalised industries. Through the 2010s, our government responded to the fiscal problems created by the financial crisis by cutting spending. In most other countries in western Europe tax took more of the strain than it did here. Yet by 2019, after nearly a decade of austerity, the state was still at the same size that it had reached in 2007, after a decade of a Labour government that had poured large sums into public spending.

How did all that austerity apparently achieve so little? In part because the starting point in 2010 was so difficult. Spending had spiralled as a fraction of national income as the economy had shrunk. The economy then refused to grow at anything like its previous rate. And cuts in working-age welfare and education spending as proportions of national income were offset by spending on the ever-voracious NHS. It is a striking statement of both priorities and demographic determinism that between 2007 and 2019 spending on health rose by 1 per cent of national income, while spending on education fell by the same amount.

Since 2019, public spending has rocketed. Obviously, it grew by astonishing amounts during the pandemic, but that’s not what I mean. Public spending today, after all the Covid and energy crisis-related spending has ended, is about 4.5 per cent of national income, or £124 billion, higher than it was in 2019-20. That is a colossal change. Part of that growth was planned. The Boris Johnson-led Conservative government wanted to be rather less austere than its predecessors. But most of it, about four fifths, was not anticipated.

Alongside paltry economic growth, the two biggest contributors to that unplanned growth were a jump in debt interest spending and a big increase in spending on working-age welfare, particularly as a result of rising numbers receiving health-related benefits. These increases do not look like being transient. Even on official forecasts, which imply cuts in many areas of public service spending, overall public spending looks set to remain at nearly 3 per cent of national income, or £80 billion, higher at the end of this decade than it was pre-pandemic.

On top of these pressures from debt interest and welfare spending, health spending will continue on its ever upward path. Defence spending, after 70 years of cuts, looks set to turn a corner. It will no longer be the cash cow for the burgeoning welfare state that it has been since the war. Rather than reduce the scope of the state, our politicians still want to increase it, by expanding free childcare provision, for example. And, on top of the problems created by spending cuts, various aspects of public provision have had to face up to new pressures: remarkable increases in numbers with special needs in schools, in demands on social care for children and adults and for mental health services, among others.

Put all that together with low growth and the biggest pile of public debt since around 1960 and the reasons for our fiscal travails begin to become clear. We will need a multi-faceted response. Focus on productivity in public provision and do what we can to get economic growth, for sure, but they won’t be enough in themselves. We also need to face hard questions about how to manage demands, how to decide on the scope of state action and what size of state and level of tax we are comfortable with. However much our politicians might want to avoid these questions before the election, the winners will have little choice but to confront them in its aftermath.

Paul Johnson is director of the Institute of Fiscal Studies. Follow him on @PJTheEconomist

The next government must give Windermere greater protection from sewage pollution, campaigners including the naturalist Chris Packham and the comedian Paul Whitehouse have urged in an open letter to all party leaders.

Sandra Laville www.theguardian.com 

The campaign group Save Windermere, which organised the letter, says the lake has huge ecological significance, is home to rare and protected species and brings in about £750m to the economy. But the signatories, who include the Wildlife Trust, the countryside charity the CPRE and WildFish, say it is being degraded by sewage pollution from United Utilities treatment plants.

As party leaders prepare to publish their manifestos this week, Matt Staniek, the founder of Save Windermere, said greater protection for the lake was urgently needed to make sure it was looked after for future generations forever. “This is not ideological, it’s non-contentious, and it is absolutely necessary to save Windermere whilst also setting an example for the treatment of our freshwater and our natural world on a national level,” he said in the letter.

The protections for the lake are contained in the EU-derived water framework directive, but Staniek said the system failed to address the ecological, cultural and economic stability of the lake and the surrounding area despite its national significance.

The letter says: “We urge you to commit with haste to granting greater environmental protection for England’s largest lake. The mechanism used to achieve this must have legal underpinning, whilst current legislation must also be enforced. Success will be defined as the long-term recovery of the lake, with it returning to, or as close as possible to, its natural oligotrophic state.”

Last month it emerged that millions of litres of raw sewage had been illegally pumped into Windermere in February, and that United Utilities had failed to stop the pollution of it for 10 hours. It did not report the incident to the Environment Agency until 13 hours after it started.

Suspected illegal sewage dumping into the lake also took place more than 70 times in 2022, according to analysis by the academic Prof Peter Hammond, and in June that year a serious pollution incident in a beck feeding the lake left hundreds of fish dead.

The letter says Windermere has been victim to decades of pollution and exploitation resulting from inadequate investment and substandard regulation, leaving the lake unadaptable to our changing climate.

“Over the last year alone, we have seen unprecedented rainfall which has increased sewage discharging into the lake,” it says. “This, combined with the threat of drought in the summer months, leaves our lake in a precarious position and at risk of extensive algal blooms which, at worse, can cause mass fish kills and leave its waters potentially toxic to the general public.”

A United Utilities spokesperson said that phosphorus levels in the lake had been steadily declining since the early 1990s, while the lake’s four bathing waters all consistently achieved the highest “Excellent” status. “Since 2020 United Utilities has halved the amount of phosphorus that is now entering the lake from our own processes. However, the factors affecting water quality in Windermere are complex and, without targeted action by multiple sectors, we will not see the changes we all want.”

The company said it did not recognise the Hammond figures. Regarding the February pollution, it said: “This incident was caused by an unexpected fault on the third party telecoms cable network in the area, which United Utilities was not notified about and which affected both the primary system and United Utilities’ backup. As soon as we discovered this fault was affecting the Glebe Road pumping station, our engineers took urgent steps to resolve the situation and we informed the Environment Agency within an hour of the pollution being confirmed.”