And if you don't do wider reading...

 You miss snippets that help grow your understanding, and which will stop you making daft claims for policies and their efficacy. Have a look at these points:

Fattening up America’s farmers

Editorial
The Washington Post

Recent data shows there’s enough food in the US to “meet everyone’s minimum calorific needs almost twice over” while net farm income is projected to be 26% above the 20-year average this year, says The Washington Post. Yet Congress is “gearing up” to reauthorise America’s agricultural safety net, the Farm Bill, conceived to help farmers cope with the Great Depression. For reasons “both of fairness and spending control”, the system, which results in a “disproportionate share of the benefits” flowing to high-income farmers, requires an overhaul. Take the “lavishly subsidised insurance” (the government pays about three-fifths of premiums), which reduces incentives to mitigate risks and improve the resilience of the land. A scheme to protect farmers against “truly catastrophic disasters” might be more appropriate, and tightening criteria by which payouts are awarded would save $24.4bn over ten years. Instead, House Republicans are proposing to tighten eligibility for food benefits for the poor, saving $11bn over ten years. “No decent fiscal strategy would demand this sacrifice from the poor while asking nothing of the myriad special interests that feed off the Farm Bill’s wasteful largesse.”

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SNP statism strangled Scotland

Oliver Shah
The Sunday Times

The “damage done to business confidence by the Scottish National Party and the Greens” reveal the “dangers of excessive statism”, says Oliver Shah. Frustration amongst business leaders has reached a “new level”. Towards the end of Nicola Sturgeon’s “reign” the government announced measures that “went down like a lead balloon”, including capping residential rent increases at 3% for the duration of a tenancy, “prompting some landlords to turf out occupants early and putting an estimated £2.5bn of build-to-rent investment at risk”. Such measures come against a “backdrop that is generally anti-wealth”. New “progressive” tax rises have taken the top rate, paid by just 33,000, to 47%. The next highest rate is 42%. The Ferguson Marine ferries shambles “shocks anyone who understands big projects”. The oft-criticised Scottish National Investment Bank, funded with up to £2bn of public money, had no CEO for 14 months. Excessive statism isn’t the “whole picture”; there is also a sense that the public sector, with its “sclerotic” working-from-home culture, is failing to provide the services you would expect from such a high tax base. “Tories, with their windfall taxes… and Labour, with their plans for Great British Energy”, take note.

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A political prize for the Tories

Liam Halligan
The Telegraph

Rishi Sunak has been defending last year’s decision to drop compulsory housebuilding targets for local authorities, but the unavoidable fact is the UK has a shortage of homes, says Liam Halligan. Owner-occupancy among the young has “plunged” and our housing benefit bill has tripled to nearly £30bn in two decades. Our “once vibrant” building sector has been eviscerated by big developers that stage a “deliberate go-slow” to keep demand and prices high. When residential planning permissions are granted, the “vast planning uplift” goes almost entirely to landowners and developers and, by stoking demand in the face of inadequate supply, the “absurd” Help to Buy scheme is also ramping up prices. There is an urgent need for “radical supply-side reform” but it’s doubtful it will happen. Another idea would be to use state-owned land, amounting to 6% of all freehold acreage, rising to 15% in urban areas and enough for a minimum of two million homes. Sales should be restricted to small, local builders and include strict conditions so that affordable housing is built quickly. Boosting housing supply quickly while rebooting our small and medium-sized builders are “political prizes”. The Tories would be “wise to grab them”.

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It’s time to embrace the youth

Isabel Berwick
Financial Times

“Intergenerational tensions” are coming to the boil in the workplace, says Isabel Berwick. “Seething resentments” against the young may be “hidden behind a wall of basic courtesy, terrible HR ‘inclusion and belonging’ jargon and lofty words”, but reports from two of the Big Four consultancy firms, PwC and Deloitte, show that newly hired graduates do have weaker teamwork and communication skills than previous cohorts. PwC is to appoint older staff as coaches; Deloitte will ask new joiners to attend sessions on “mental resilience, overcoming adversity and the importance of mindset” to counter their tendency to “overshare” about health matters. But Gen Z-ers, born from 1997 onwards, have grown up in the online era of instant connection and global reach, so it’s little wonder they can seem “overfamiliar”. It’s unfair to expect the newcomers to do all the adapting. Workplace norms shift when the young move in, and by 2025 Gen Z will make up 27% of the workforce in OECD countries. To keep them on board, the rest of us will have to be more understanding of the habits of people practically born online. Leaders who blunder by complaining about snowflakes face punishment by online mobs. “Bosses, take note.”

Impact of a windfall tax (as I said all along...)

 

JULIET SAMUEL

Treasury idiocy is killing North Sea energy

Ministers privately admit that hastily extending the windfall tax was a mistake and its true cost is now becoming clear

Juliet Samuel

Wednesday May 24 2023, 9.00pm, The Times

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David Duguid well remembers the Burns Night he spent in Baku, Azerbaijan. On the hunt for haggis, he had to criss-cross the city from shop to shop. The marvel, perhaps, is that he was able to find any at all, let alone 13 tins. But, as he says: “You go anywhere in the world in oil and gas and you’ll hear Scottish accents.”

For how much longer will this be true? Duguid is now a Tory MP representing Banff and Buchan, a rural region heavily reliant on North Sea oil and gas. Despite historically high prices, the industry he joined decades ago is under siege and the future of its next generation of workers is in doubt. The downturn is being driven by a rash of taxes and political attacks. Banks have stopped lending. Britain’s oil and gas industry, one of our prime economic assets and an employer of 150,000 people on good salaries, is being systematically strangled.

Climate activists have had the industry in their sights for years and their campaigns have taken a toll. But it is the recent rounds of poorly designed windfall taxes, and warnings by Labour that it will stop all “new investment” in fossil fuels, that have really sent the industry into a tailspin. Nine in ten capital projects in the North Sea are now on hold. The largest of them is the Rosebank field, where work was due to start extracting 300 million barrels of oil. Activity in new fields is at a 40-year low. Investment has cratered to the point where future production will be below even what is required by the Climate Change Committee’s preferred “pathway” to net zero.

• Aberdeen could lose standing in energy sector due to ‘hostile political environment’

The North Sea is critical to British energy security. Oil and gas supply more than two thirds of our overall energy. Wind and solar, despite all the hoo-ha, supply less than 10 per cent and cannot be relied upon in the wrong weather. About half our oil and a third of our gas is produced in the North Sea. So running it down simply means the UK will have to import more, which is both riskier and more carbon-intensive.

Despite this, the industry has been recklessly treated as a cash cow for years. A tipping point has now been reached with the latest so-called windfall tax, introduced last autumn in Jeremy Hunt’s frantic post-Truss fix-it job. The government’s first windfall tax had been set to expire in 2025. But in November, apparently without much thought, the tax was raised and extended to 2028. The new timeline means it will now capture almost every new project due to start in the coming years, even if oil and gas prices fall. It is no longer taxing windfalls, but is imposing a punishingly high cost on doing business.

The impact is striking. The UK’s biggest producer, Harbour Energy, wound up paying an effective tax rate of 100 per cent last year. Without the extra tax, its profits would have risen eight-fold. As it was, during a bumper year for all its rivals outside the UK, it barely broke even. It soon put all its British projects on ice and started talking about job cuts — precisely what campaigners for the tax told us wouldn’t happen.

Even this isn’t enough for them. Labour has vowed to close down “loopholes”, otherwise known as incentives to invest, if it gets into power. This would be the seventh major change to this tax regime in 20 years, in an industry that thinks in decades. Norway, whose successful windfall tax has been cited so often, has changed its regime just once in that time (to make it more generous during Covid). And Oslo suspends the tax when prices fall below a certain level. As a result, Norway has saved Europe from freezing and is finding ever more supplies. The UK, by contrast, has become an investment pariah. One after another, corporate presentations to shareholders are emphasising a shift away from Britain towards other, more stable political environments, like West Africa.

• North Sea Transition Authority gives green light for 20 carbon storage sites in UK waters

All of this at a time when Europe’s energy crisis is still very much unsolved. Prices may have fallen for now and yes, we made it through last winter because the weather was average and Chinese demand was still in lockdown. But what about the coming winter, and the one after that? The plan, insofar as there is one, is to rely on more imports from the United States or Middle East, which means being at the mercy of global gas markets — while Britain wrecks its own production prospects and fails to open more storage capacity so we can stockpile.

Nor will the levies bring in much revenue. Investors fear they’ll wipe ten years off the life of the industry and bring forward decommissioning costs, which the government is obliged to help fund. Overall, this will cost the Treasury money.

If all of this were actually good for the planet, one could perhaps make some argument in its favour. But it is likely to cause a significant rise in global carbon emissions. If UK production falls, Britain will be forced to buy more European gas and Europe will in turn burn more coal and import more carbon-intensive gas by ship. If the North Sea infrastructure is dismantled, a key part of Britain’s net-zero plans will become much harder. Carbon capture, the burial of CO2 emissions, will require the North Sea’s gas chambers, its pipelines, rigs, terminals and workforce. Instead of nurturing this supply chain, the people in it and their specialist skills, the government is presiding over a mass exodus of talent.

Does any of this sound perverse and shocking? Well, it’s no shock to the government. In private, ministers and their advisers readily admit they acted in haste and messed up the whole thing. They know they could alleviate the damage with relative ease, by applying a price floor to the tax and increasing investment allowances.

This wouldn’t eliminate the threat from Labour policy, but it would at least change the status quo and force the opposition to deal seriously with the trade-offs when it gains power. Yet despite quiet reassurances to the industry, March’s budget came and went without news. Ask government insiders why and they squirm. “The politics are difficult,” they whisper. “It doesn’t play well.” In other words, our government is knowingly engaged in an act of economic vandalism purely for the sake of short-term political gain. It is sacrificing both Britain’s energy security and the climate because “standing up to Big Oil” sounds good in focus groups.

A few weeks ago, the country was appalled to learn that Russia had been sending spy vessels around the North Sea in a possible precursor to sabotage. The truth is that Moscow needn’t bother. If the government has its way, North Sea industry will soon be in irreversible decline. Who needs the FSB when you have the Treasury?

Now about that fusion power thing:

 Not a mention in here:

What do we do when the wind does not blow, and the sun does not shine?

AMBROSE EVANS-PRITCHARD16 May 2023 • 3:30pm

If Britons had been told a decade ago that wind power would generate more electricity than gas over the first quarter of 2023, very few would have believed it. 

Media disbelief, technological fogeyism, and institutional resistance from large parts of the British establishment obscured the view.

UK’s wind farms reached 32.4pc of total electricity supply over the first three months. Gas slipped to 31.7pc. Solar reached its own seasonal record in April. National Grid said 46pc of the UK’s total power came from renewables last month. This displaces liquefied natural gas (LNG) imported from the US and Qatar.

So far, so good. The UK has been able to add wind and solar to an existing infrastructure and grid designed for fossil fuels without crashing the system. The harder test is to come as the country moves at breakneck speed towards an entirely different structure, with renewables becoming the big beast of electricity supply. 

The UK currently has 43 gigawatts (GW) of installed renewable capacity. This is heading to 130 GW in short order, assuming that Britain's ambitions are not thwarted by the permitting bureaucracy and the global supply crunch in turbines and solar panels.

The Climate Change Committee wants 65 GW of offshore wind alone by 2035, and the giant new turbines being rolled out in the wind corridors of the North Sea have almost double the capacity factor (energy yield) of earlier baby blades. 

The arithmetic is obvious. Renewables will displace gas altogether on increasingly frequent occasions and at times overwhelm the grid with excess power, as already occurs in Scotland. 

At other times, renewables will leave a huge and sudden gap. What do we do about Dunkelflaute wind droughts that last for days or even weeks, typically in mid-winter when power demand is greatest, and when there is no solar either? 

Delft University says these high-pressure weather systems typically range from 50-100 hours. But they can be much longer during freak years. You need strategic back-up for the worst extreme.

The default solution is to continue piping in North Sea gas, or importing LNG, for use in peaker plants exactly as we do today but in diminishing volumes and with rising reliance on carbon capture.

America’s NET Power is already developing the UK’s first zero-emission gas plant for the Teesside Carbon Cluster, based on the Allam Cycle pioneered by British inventor Rodney Allam. 

Rather than bolting an amine capture-system onto an existing gas plant, which depletes power and doubles the cost, it builds the plant from scratch and harnesses CO2 as a fuel for an “oxy-combustion” process in a closed-loop. It captures 97pc of the carbon.

Founder Bill Brown told me that he could produce the world's cheapest clean (blue) hydrogen. That may prove difficult in Europe where the price of gas is much higher than in America. How will the world penalise methane leakage from extracting and transporting that gas?

Whether or not NET Power wins the prize, it is a racing certainty that the likes of Exxon, Shell, and Saudi Aramco will succeed in slashing the cost of carbon capture as they embrace the technology with the zeal of the converted.

So yes, we can still rely on gas when the wind does not blow and the sun does not shine. This entails the parasitical cost of keeping peaker plants on standby for ever-reduced hours. That might require a state subsidy, akin to paying for a strategic petroleum reserve. But it can be done. 

The second default option is to use free electricity from excess renewable power that would otherwise have to be curtailed – at night, at weekends, etc – to produce green hydrogen via electrolysis. 

The hydrogen can be stored for long periods in Yorkshire salt caverns, one of the UK’s geological trump cards. This reserve can supply modified peaker plants equipped with hydrogen turbines for winter back-up. 

Electrolysis is expensive but the technology is tracking the same “learning curve” and economies of scale as solar, wind, and lithium batteries over the last decade. It will become dramatically cheaper. The US Energy Department is targeting green hydrogen at $1 a kilo by 2030 (a stretch). 

But relying on surplus wind and solar to make hydrogen requires keeping electrolysers idle for much of the time. There may be better uses for this power in many areas as we move to smart metres, EVs, and electric home heating. 

A third option is to create our winter back-up with nuclear power. Kirsty Gogan, head of TerraPraxis, says the best commercial sense for nuclear reactors in Britain may be to run them day and night for 80pc of the time to make “pink” hydrogen, switching to baseload power for the grid for the other 20pc when needed. 

For nuclear aficionados, I recommend her recent appearance in Michael Liebreich’s weekly podcast, Cleaning Up. The series is the best deep-dive into the economics of energy and clean-tech in the English language today. He takes no prisoners.  

Personally, I have a soft spot for small modular reactors. Rolls Royce is developing a 470 MW mini-version of today’s light water reactors, aiming to slash costs by manufacturing the components and shipping them by road and rail. It relies on nuclear supply chains that already exist. The reactors could be in service by the early 2030s.

Generation IV mini-reactors using molten salt and other advanced designs operating at atmospheric pressure may ultimately prove cheaper and more nimble, and perhaps able to dial up and down fast enough to match renewables. For now we take what we can get. 

One thing is certain, the hydrogen will not be squandered on absurdities such as piping it into homes for combustion in hydrogen boilers. It is too explosive and the tiny molecule leaks easily. Switching to such boilers would be as disruptive as installing heat pumps but an order of magnitude less efficient. Nor will it be used for cars. Too much of the energy is lost turning power into hydrogen. 

Small Modular Reactors will each be capable of producing enough power for 1 million homes at a cost of just £1.8bn apiece CREDIT: Rolls Royce

The rule of thumb is to electrify wherever possible. Clean hydrogen is precious. It will be needed for a long list of tasks with no alternative: replacing dirty hydrogen in industry, making fertilisers and green steel, for shipping and clean jet fuel, as well as for the Dunkelflaute reserve. 

In the end, the solution will be a jumble of competing technologies. The UK’s Highview Power is the world leader in cryogenic compressed air that can store energy for days in steel towers. It plans two to three plants a year over the 2020s, targeting 6 GW of dispatchable back-up electricity for up to 60 hours at a levelised cost of $100 a MWh. If it succeeds, that will plug a large hole.

There is so much creative ferment in global clean-tech that it is impossible to know what will sweep the board by the 2040s. Vast sums are being spent by the US, China, Japan, and the EU, by the world’s top universities, and by venture capital funds trying to crack the technology of energy storage. It is being cracked.

The lesson of the last 20 years is that technology moves faster than the public can keep up, and that seemingly insurmountable problems fade into irrelevance. We have the means to master the intermittency of wind and solar. If governments set the right tone, markets will find the cheapest way to do it.

Fiscal drag writ large:

 

Sunak pulls off biggest tax raid in 44 years as one in five pay higher rate

Six-year freeze on income tax thresholds is Treasury’s single biggest revenue raiser

BySzu Ping Chan16 May 2023 • 6:00am

Sunak introduced a freeze on tax allowances in 2022 CREDIT: JESSICA TAYLOR/AFP

One in five taxpayers will be paying higher-rate income tax by 2027 as Rishi Sunak's stealth raid forces millions to hand more of their earnings to the Government.

The Institute for Fiscal Studies (IFS) said the Prime Minister and Chancellor's six-year freeze on income tax thresholds is the Treasury's single biggest revenue raiser since Geoffrey Howe increased VAT from 8pc to 15pc in 1979.

It will push the number of people paying a tax rate of 40pc or more on their earnings to 7.8 million by 2027-28, according to official estimates. That represents a quadrupling in the share of adults paying the higher rate since the early 1990s.

The change is because of so-called “fiscal drag”, which pushes more people into higher income tax brackets as pay levels rise but tax brackets do not.

Tax allowances traditionally go up in line with inflation but were initially frozen by Mr Sunak from 2022 to 2026. Mr Hunt extended the freeze for two more years when he became Chancellor.

The IFS warned that the freeze will “disincentive work” and drag hundreds of thousands of teachers, nurses and electricians into the higher rate tax band for the first time, adding to the cost of living challenge facing many workers.

Households face a record fall in incomes this year and the IFS said a third of the slump was because of the stealth raid.

The IFS said “essentially no nurses” and only about 5pc of teachers and electricians paid more than the basic rate of income tax in the 1990s. However, one in eight nurses and a quarter of all teachers will be subject to higher rate income tax by 2027.

The situation has been exacerbated by decades of thresholds rising slower than earnings, the IFS said, as well as former chancellor George Osborne's decision to cut higher rate thresholds in cash terms before partially reversing them in the mid-2010s.

“More adults than ever are paying higher-rate tax,“ the think-tank said, adding that the levies once “reserved only for the very highest paid” were now pushing traditionally working and middle class jobs into higher tax traps under Mr Sunak.

The threshold for the highest-rate tax is currently frozen at £50,270. The think-tank calculated that for the 40p rate to hit the same fraction of people as it did in 1991, the higher-rate threshold will need to be “nearly £100,000” by 2027.

Research by the IFS also showed 1.7 million workers were on course to start paying a marginal rate of either 60pc or 45pc by 2027. This is just below the share of adults who paid the 40pc higher rate at the start of the 1990s.

Isaac Delestre, research economist at the IFS, highlighted the “unwelcome proliferation” of “spikes” in Britain's tax system that means people who earn between £100,000 and £125,140 face a marginal tax rate of 60pc on every £1 of extra income earned.

This is because the tax free personal allowance begins to be tapered away at this level, which has been frozen since its introduction in 2010.

Mr Delestre said the so-called “60pc tax trap” was having a “much bigger effect on people's incentives to work” as workers stash more into their pensions or work fewer hours to avoid paying the higher rate.

The IFS said stealth raids were “not a sensible way to make tax policy”. Mr Delestre added: “For income tax, the story of the last 30 years has been one of higher-rate tax going from being something reserved for only the very richest, to something that a much larger proportion of adults can expect to encounter.”

The six-year stealth raid is set to be larger as a share of national income than Mr Hunt's decision to raise corporation tax from 19pc to 25pc. It is also a bigger tax grab than Gordon Brown's decision to abolish the 10p income tax rate in 2007.

Mr Delestre said: “Alongside the fact that 1.7m people will be paying marginal rates of 60pc and 45pc in the next few years, this represents a fundamental and profound change to the nature and structure of our income tax system.”

Fiscal rules - time for a rethink?

 The case for rethinking fiscal rules is overwhelming 

Rather than exerting useful discipline, they are constraining government investment

ANDY HALDANE.  The writer, an FT contributing editor, is chief executive of the Royal Society of Arts 

 Last month, I discussed the negative feedback loop between stalling economic growth and expanding safety nets. How do countries break free from this “doom loop”? One important element is to rethink the fiscal rules shaping government investment decisions. 

 The idea of fiscal rules, which place limits on governments’ borrowing, is a sound one. Governments should abide by a “good ancestor” principle, endowing future generations with assets and income, not encumbering them with debt and taxes. In this way, fiscal rules can help ensure intergenerational equity — they are the everyday equivalent of aiming to leave your children the house rather than the mortgage. 

 After a sequence of pandemic-related splurges in government spending, fiscal rules are now at serious risk of being breached. The US is facing a cliff-edge next month due to the debt limits imposed by Congress. In the EU, calibration of the Stability and Growth Pact’s limits on countries’ debt is proving acrimonious. And in the UK, fiscal rules requiring a falling debt ratio within five years are restricting the government’s ability to put in place long-term growth-enhancing policies. 

 Are these rules exerting useful fiscal discipline or constraining investment and growth? I believe the latter. They are typically based on the stock of government debt relative to income. We would expect this ratio to vary over time. The greater the challenges facing a nation state, the stronger the case for debt-financed investment in the public goods needed to rise to them. 

 Take the UK. Since the industrial revolution, ratios of debt to gross domestic product in the UK have, on average, doubled every century. This was an explicit societal choice to invest in the new sets of public goods necessary to support economic and social progress — from schools to housing to health. 

Other countries’ debt ratios have also tended to trend higher over time. We should not necessarily expect this pattern to repeat itself in the 21st century. But nor should we expect debt ratios to flatline or fall. 

Many advanced economies are facing challenges no less severe than those our ancestors faced. And the case for a new set of public goods to meet them is just as compelling. This highlights a second defect with existing fiscal rules: they are typically based on net financial debt. They do not recognise the non-financial assets created by public investment, whether tangible (roads, hospitals, schools) or intangible (intellectual property, data, code). 

Nor do they recognise investment in natural assets, such as clean water, air and a thriving biosphere. Recognising those assets would give us a measure of the true net worth of the government. Just as a company or household would look at their net worth when making investment choices, so too should government. 

Countries with high net assets have been found to have lower borrowing costs. Bond market vigilantes target poor ancestors, not borrowers. That’s why real government borrowing costs have trended downwards over the centuries, despite government debt ratios trending upwards. 

Financial markets know it is the value of the house, not the mortgage, that matters. Countries with higher net worth also tend to exhibit greater macroeconomic resilience. This then reduces the burden on the state when adverse shocks strike. 

Our current debt-based fiscal rules, by constraining public investment, have contributed to a reduction in macroeconomic resilience and a bulging of the safety net following shocks. That has been the story of the past few decades when public investment by G7 countries has been flat or falling, despite global real rates of interest being close to zero. 

Here was an opportunity to invest in economic and environmental regeneration and boost growth and macroeconomic resilience. Misguided fiscal rules meant it was wasted and the doom loop perpetuated. 

 Global real yields have since risen across the world. But with real rates still under 1 per cent globally, the cost/benefit calculus would overwhelmingly favour public investment today to support growth and resilience tomorrow. Recent skirmishes over debt limits in advanced economies mean this opportunity is at risk, once again, of being squandered. Adhering to existing fiscal rules risks underinvesting today in tomorrow’s economic and environmental health. 

As the evidence of the past few decades demonstrates, debt-based fiscal rules dent growth, weaken macroeconomic resilience and amplify the doom loop. Future generations will rightly consider us bad ancestors if we stick with them.