Green Easing – Save the planet while saving the economy

So we are now 4 years in to the worst recession since the 1980s, 1970s, 1930s, records began? and it seems like we are going to be stuck this way for a long time. Governments, individuals and companies around the world have racked up massive debts during the boom years, but they are now struggling to pay them back. For years central banks have targeted price stability (low inflation), but there is a growing realisation that stable prices can also mean stubborn debts, and so the previously unthinkable is now becoming a reality – that central banks pursue a higher rate of inflation in order to reduce the real value of old debts. Although the BoE have continued to state publicly that their inflation target is 2%, the reality in the UK is that we have had nearly 5% inflation (RPI) since early 2010.

The Bank of England have already created £275bn of new money through their quantitative easing programme, which they used to buy Government bonds from private banks (asset purchases). The theory is that the banks will then have more cash to lend to small businesses. The reality appears to be that banks don’t really want to lend to the sort of companies that want to borrow. If a higher rate of inflation is now palatable, could there be a more effective route to injecting cash into the economy and encourage nominal GDP growth?

If we are going to print money, I feel it should be used to purchase assets that will bring long term positive benefits to the country. I think residential solar power plants are particularly well suited to this idea, and a green quantitative easing programme could replace the existing Feed In Tariff scheme (which has nearly run out of money).

Green Quantitative Easing

£200Bn Green Easing Target: Install 10GW of residential solar plants per year, for the 8 years to 2020. 

  • Use printed money to fund the installation of solar panels on the roof / open space of any household or community who wishes to participate.
  • Money goes directly to businesses who install the panels, avoids the relying on the banks.
  • Tangible assets with tangible benefits – homeowners would feel positive they are receiving something good (free electricity) as a result of the policy (can the same be said of normal QE?).
  • Easily administered through the MCS scheme – upon successful registration of an installation, the supplier could be paid by bank transfer by the BoE.
  • No additional debt for government, companies or individuals. Ownership of the panels could be retained by the BoE (with a long term lease on the roofs), giving them a real asset for their balance sheet. Free electricity would go to the household, export revenue could be collected by the BoE. Effectively the Bank would own a distributed network of green power plants, which generate an income through selling power to the grid. These could later be bundled off and sold to the private sector if that was deemed necessary.
  • Helps alleviate Fuel poverty. The poorest households would get free electricity during the day to run their appliances.
  • In rough terms, £200 billion would be enough to put solar panels on every house in the country (or in open spaces for shared community projects), and would give us a total installed capacity of 80GW (@ £2500 per KW). This would produce more electricity than total UK demand in the middle of the day during peak months of summer – so we would need to also invest in suitable storage techniques (batteries or running hydro power stations in reverse). The panels could be installed at a rate of 10 GW per year, which is achievable and would cost only £25 billion each year.
  • We would easily meet our 2020 targets of generating 15% of power from renewable sources.
  • Overall energy costs would be reduced as the huge supply of solar electricity comes online.
  • The scheme would easily support around 55,000 jobs (Capacity per employee: assuming 230 working man days per year / 1.25 man days per KW installed  = 184,000 W installed per person per year. Number of jobs = 10,000,000,000 W/ 184,000 W = 54,348)
The idea is still pretty rough around the edges, but I think in principle it could work really well to generate growth whilst hitting our climate goals. The solar sector has shown they already have the ability to hit this level of installations, by installing nearly 126MW in the week before the Feed In Tarrifs were cut. This is an annualised rate of 6.5GW, and not far from the 10GW which would be needed. What are your views on this? Disclosure: I have put my money where my mouth is, as I have recently invested in a Solar Panel business through my company, Fubra Limited.

Further Reading

Summary of Emergency Budget 2010 measures

I’ve seen a lot of different measures from today’s budget quoted in the media, so I thought I’d try to summarise some of the key points in one place for quick reference!

Headline Figures

By 2015/2016….

  • Spending cuts will have reached £99 billion per year.
  • Taxes to rise by £29 billion per year.
  • Total consolidation of £128 billion per year.
  • Government spending to fall to 40% of GDP from 48% in 2010.
  • Tax receipts to rise to 39% of GDP from 37% in 2010.
  • Public sector net debt to be 67.4% of GDP, after peaking at 70.3% in 2013-2014.

Tax changes

  • VAT is rising to 20% from 4th January 2011.
  • Personal income tax allowance for under 65s is rising by £1000 to £7475. Should bring 880,000 low income tax payers out of tax. However, basic rate and higher rate earning limits will be reduced to ensure that higher rate payers do not benefit from the increased personal allowance. The exact figures will be published in September.
  • Employers NI Thresholds will rise by £21 a week (but the NI rate is also rising as per the March budget).
  • Capital gains tax kept at 18% for basic rate tax payers, but rising to 28% for higher rate payers (capital gains added to income to determine if someone is a higher rate payer). The annual exemption will continue to rise inline with inflation, and will remain at £10,100 in 2010/2011.
  • 10% Entrepreneur relief rate allowances raised from £2 million to £5 million of lifetime gains.
  • The main rate of Corporation Tax is to be cut from 28% to 24% by 1% a year over 4 years. The small companies rate will be reduced from 21% to 20%. Starting in April 2011.
  • R&D: The government plans to consult with business to review the taxation of intellectual property, the support R&D tax credits provide for innovation and the proposals of the Dyson Review.
  • No rise in duty on cigarettes, alcohol or fuel (although VAT rise will apply to them). Government is looking into a fuel price stabiliser, and fuel subsidies for rural residents.
  • New businesses setting up outside the South East and London will be exempt from the first £5000 of N.I. payments for the first 10 workers.
  • New levy on banks’ balance sheets (0.03% of total size minus insured retail deposits and capital)


  • Child benefit frozen for three years.
  • Tax credits reduced for families earning £40,000+ per year, but increased for low earners – amount per child to raise by £150 per year per child above inflation.
  • Housing benefits capped at £400 per week for 4 bedroom or larger properties, with lower caps for smaller properties (3 beds – £340, 2 beds – £290, 1 bed flat – £250).
  • State pensions to be given triple guarantee – they will rise annually by the greater of earnings, prices or 2.5%.
  • State pension age to rise to 66.

Public Sector

  • 25% cut in spending across all government departments except health and foreign aid. Includes education, defence, local government etc..
  • Public sector workers earning more than £21,000 per year to have pay frozen for 2 years. Workers earning below this will receive a flat rate increase of £250 per year.
  • Public sector pensions to rise only by CPI (which is generally lower than RPI).


  • Aiming for cyclically adjusted current budget balance (excludes debt interest, cyclical payments such extra unemployment benefits because we’re in recession, and also capital spending / investment) by 2015/2016.
  • Aiming for public sector net debt as a percentage of GDP to be falling from 2015-16 onwards.

As an investor who seeks to make long term investments in small businesses, this budget is encouraging.

Typos / Errors

  • Page 15: Table 1.1 2014/2015 total numbers for spending and tax don’t add up (83 + 29 != 113).
  • Page 18: incresase should be increase.

My UK Election Wish List

There will be an election in the UK within the next 6 months, so I thought I would take some time to compile a list of the major issues that will influence my vote.

So here’s my wish list for our next government:

  • All government spending and contracts should be published openly, and available for anyone to download as raw data. The only exception should be staff salaries, which I would consider personal information. Each department should publish their total wage bill, and the number of staff they employ so that the average wage can be seen. Currently, nobody, not even the opposition, may scrutinise government spending on certain large contracts – so no-one knows the true extent of our nations commitments. Commercial confidentiality is often cited as an excuse not release such information – in my opinion, if you are a business who deals with government – you should  accept that your contracts will be public knowledge.
  • All Ordnance Survey and Postcode data should be open and free. There should be a central, authoritative address database that anyone can use. I strongly believe that freeing up all this data will encourage a huge amount of innovation and bring economic benefits of several orders of magnitude bigger than the cost to the public purse.
  • Prevent any bank or business from becoming too big too fail. If a business is too big too fail, it’s too big. It’s not fair to privatise the profits, and socialise the losses, therefore these businesses should be broken up.
  • Pay back the national debt. It’s not a good strategy for individuals or governments to consistently spend more than they earn. Nor is it fair that every child in the UK is born with £30,000+ of public debt. Let’s try to boost the economy through sustainable activities rather then borrowing from the next generation, otherwise interest payments on our debt will soon cost us more than the whole education budget.
  • Simplify the tax system. The current system is hideously complex and inefficient. Surely we could save some money by simplifying things. Do tax inspectors really add much value to society? Couldn’t we redeploy most of them as Doctors, or scientists instead? (Or indeed any other job!) Do we need so many loop holes and tax reliefs – a simple lower tax rate would be more efficient. How about a single flat tax for income, capital gains and profits, say 25%. Really rich people don’t pay much tax in the UK currently as they just move to Monaco or other low tax jurisdictions. So, if we got the balance right we could probably collect more tax with a lower tax rate than we do currently.
  • Encourage entrepreneurship. Cut back on the amount of paperwork (red tape) that businesses must complete.
  • Streamline public procurement and encourage small business to bid for contracts. Let’s make it easier for small business to compete to provide products and services to the government.
  • Protect front line services (Doctors, Nurses, Policemen, Firemen), but reduce the size of the state through efficiency savings, removing bureaucracy and getting rid of most quangos.
  • Re-structure the benefits system to encourage work. Most people I know who are on benefits want to work, but they find it hard because they will be worse off if they take a minimum wage job. We need to ensure that it pays to work.
  • Consider a citizen’s income (also known as basic income) instead of benefit payments, and thus increase the incentive to work. I’ve not fully costed this one, and I’m not even sure it would work – but I definitely think it’s an interesting concept that’s worth considering. Here’s how it would work: All citizens would receive a flat monthly payment regardless of whether they are employed or not. Adults would receive more than children. Parents would receive their children’s payments on their behalf. It would be paid without requiring the citizen to work, or requiring them to accept a job if offered one. Do we really need full employment? If some people don’t want to work then that is their choice. However, if they do get a job, they get to keep all their citizen’s income, so there is no disincentive to work for those who want to. Basic social housing would then be rented back to families for a portion of their income. The incentive to work would be for anyone who wants to live in better accommodation than the basic social housing they rent, or if they want to go on holidays or have luxury goods, etc…  You would probably need to scrap the basic tax free allowances in order to fund it, however the marginal benefit of working would increase – people wouldn’t risk loosing their basic income if they accepted any work. We would not need as many staff at HMRC.
  • Simplify the planning system, and consider building more towns on agricultural land. I think ultimately we will need to build more new towns. People rightly complain when more housing is packed into smaller and smaller spaces in existing towns, leading to over stretched public services and infrastructure. Planning standards should ensure a low environmental impact of new developments, but not mean that we all have to live in shoe box flats. They should provide open and transparent rules that are positively biased (i.e. you can build here as long as… ) rather than the planning lottery that we currently have. If the rules were simple to apply it would encourage much more investment in housing. Most of us aspire to live in a detached house and surely the gardens that come with these are better for bio-diversity than the tarmac car parks of a block of flats, or even the single crop agricultural land that they could be built on. Even if we doubled the amount of urban areas in the UK we’d still only be approaching the level of urbanisation of the Netherlands. There is definitely not a shortage of land in the UK! As a nation we are perfectly capable of building larger, more affordable, higher quality, more sustainable, lower emission houses. We just need to sort out the planning system!

What are you wishes for the next government? Add a comment to this post!

Working with Government APIs

It may have been a long time coming, but I have to say the UK Government has now made pretty good progress when it comes to making their services available online – and we have taken advantage of this with our online accounting system, Clear Books.

Clear Books integrates with a number of Government APIs, including:

  • Companies House WebCheck – Lets you purchase official documents (annual accounts, annual returns, director appointments, share allotments) that have been filed for most companies registered in England & Wales.
  • Online VAT Filing – Allows you to generate and file VAT returns online. Also allows you to pay by direct debit, so no need to send a cheque in the post.
  • Online CIS Filing (coming soon) – A feature specifically for the Construction Industry – this lets you file monthly CIS300 returns and verify sub-contractors from within Clear Books.

In the future we plan to add a number of other services, such as:

  • Online Filing with Companies House – File your annual return, annual accounts, and other forms electronically.
  • PAYE forms filing with HMRC  – File P14 , P35 , P45, P46 etc online.

We have also made a lot of our code available as open source under the php-govtalk project, so if you are interested in collaborating with us – we’d love to hear from you.

Effective 2009-2010 Tax Rates

If you factor Employee’s and Employer’s National Insurance Contributions into the total deductions made by the tax man, then most people pay closer to 30% tax than the headline basic rate of 20%.

The following graph shows the total % tax paid by an employer + employee for a given nominal gross salary. This includes income tax and employee / employer national insurance.

Replacing benefits with a Basic Income

For a while now I have been thinking that there must be a better way to re-distribute income in our society. The current welfare system is hugely inefficient and complicated with all the means testing and civil servants needed to administer it.

Our system is also full of perverse incentives, whereby it encourages people NOT to work. If you are unemployed and receiving benefits, then you risk losing them by going back to work, and unless your new job pays well above minimum wage, you might not be any better off!

Wouldn’t it be better to provide everyone with a minimum amount of income (funded through taxation) that was not in any way mean’s tested? This would remove a huge amount bureaucracy and encourage unemployed people to get a job without the fear that they would lose their existing income.

Basic Income

The idea is known as a Basic Income – also referred to as a Citizen’s Income. It is similar to a Negative Income Tax and it works like this:

  • It is paid to individuals rather than households;
  • It is paid irrespective of any income from other sources;
  • It is paid without requiring the performance of any work or the willingness to accept a job if offered.

I think that this basic income could then be combined with universal public services, free to the end user. So every citizen would receive a fixed basic income plus certain guaranteed minimum entitlements, such as health care, education, shelter and security.

The public and private sector would compete to provide schools, hospitals, and accommodation to satisfy the universal guarantees. The social housing should be modest to keep costs down and to encourage people to work if they want better.

In the 2008 Budget, we spent £169 billion on social protection – that’s almost £3000 for every citizen of the UK – £57 a week per person. The basic income could be stepped, so that children receive the lowest amount, working age adults would earn more, and pensioners would receive the most.

Advantages of the Basic Income System

  • Increased incentives and rewards for those who want to work.
  • Simpler, more efficient and easier to implement than the complicated means tested system we have now. Thus represents better value for citizens.
  • Minimum guaranteed income for all citizens

We should simplify the tax system at the same time, and scrap the complicated capital, corporation and income tax schemes with a single flat tax.

Monetising the debt – BoE to buy UK Government Bonds

So it has happened: these extraordinary times have caused our Government to look to Zimbabwe for economic policy inspiration and so, as of last week, the Bank of England will begin a £150 billion programme of printing money.

Technically referred to as Quantitative Easing, it’s actually a lot easier than printing money, and more environmentally friendly too: the Bank just types a number into a computer to increase the balance of a customer’s account and, unless the customer wants to actually withdraw the money, no trees will be harmed.

The majority of this money will be used to purchase Government bonds, but some will also be used to buy high quality company bonds. You might think that using Central Bank money to buy government debt is illegal under EU law, but, as long as they go through an intermediary (even if that is a bank like Lloyds or RBS, who they majority own), it’s allowed:

Article 101 of the Treaty establishing the European Community states:

Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

The Government and the Bank of England are side stepping this law by purchasing Gilts (UK Government bonds) from Commercial Banks indirectly in the secondary market. However, in the long run, the effect will be exactly the same: The Central Bank is printing money to lend it to the government.

Lorenzo Bini Smaghi from the European Central Bank highlighted the potential consequences as follows:

Central bank independence: from theory to practice

It is beyond doubt that conducting an independent monetary policy, aimed at the achievement of low and stable inflation, is made significantly more difficult by the existence of large budget deficits. This is true for two related reasons.

First, when deficits and public debt become unsustainable, the incentive for the government to force the central bank to monetise its deficit, thus eliminating public debt via inflation, increases substantially.

Second, the larger the budget deficit and the accumulated debt, the more market participants become aware of the risk of monetisation.

In addition, they may believe that the central bank will be forced to “bail out” the government by assuming its liabilities, even if Article 103 of the Treaty explicitly prohibits this.

This may jeopardise the anchoring of inflation expectations and make the control of inflation more costly. In this case, fiscal policy may become dominant over monetary policy, thus undermining, de facto if not de jure, the functional independence of the central bank.

The government is taking on so much debt, that it will take many generations to repay. It’s therefore looking more likely that at some point it will need to be eroded through a period of high inflation, which is affectively another stealth tax – the inflation tax.

The Bank of England says this Asset Purchase Programme is temporary and they will look to sell any assets purchased under the scheme back to the market when the economy recovers. Let’s hope they resist the temptation to dramatically expand it, and are serious on their commitments to low inflation.

Stability versus Flexibility aka Euro versus Pound

For the past 10 years I’ve been undecided as to whether Britain should join the European single currency, the Euro.

At first I was leaning towards the Euro, thinking that a level playing field of prices across Europe would encourage competition, making prices more transparent across a larger market, and therefore bring down prices in general.

Then, for a period, I felt that being constrained by a single interest rate for such a large and diverse economy would be harmful and having the flexibility of our own national currencies would assist us in adapting to any challenges we face.

However, since the start of the credit crisis and as the pound falls against a basket of currencies, I’m now leaning back towards the Euro. I’ve realised that governments (particularly our current one!) are too often tempted to print money to inflate their way out of a debt crisis, thus punishing the thrifty and rewarding the reckless.

I think that stability should be the most desirable attribute of a currency. It allows good businesses to concentrate on what they do best, rather than having to worry about the constantly fluctuating value of their imports / exports / savings. It allows people to plan knowing that they can buy a fixed number of goods with their income, and that they can set aside enough for retirement.

So the decision between the Euro and the pound, it would seem, boils down to a simple choice: Stability versus Flexibility.

As Britain and our European neighbours deal with the recession, it’ll be interesting to see which performs best. Countries such as Ireland, Spain and Greece may prefer lower interest rates than the Euro affords them, but if they perform relatively better than Britain does in the medium term, it would suggest stability is more important than flexibility.

How to borrow from the Bank of England

As regular readers of my and / or Brendan’s blog and twitter feeds may know, we have been looking into how to set up a bank. The primary reason being that if the Bank of England embarks on a policy of quantitative easing (otherwise known as printing money / helicopter money), then we want to get a piece of the action. We certainly have plenty of ideas for cash yielding investments to spend it on!

Anyway if we get past the formalities and set up our bank, how do we go about borrowing money from the Bank of England?

Unfortunately, I couldn’t quite find a simple answer to this on the Bank of England’s website, but I think the process comes down to the following 3 steps:

If you read through the eligible securities section on their site, you will see that it basically just includes things like government bonds. This is not really much good to us, as we would need to use our cash to buy the bonds in the first place, in order to borrow the same amount back. However, there may be a solution, the Discount Window Facility (DWF).

The purpose of the DWF is to provide liquidity insurance to the banking system. The Discount Window Facility is not intended for firms facing fundamental problems of solvency or viability. Eligible banks and building societies may borrow gilts, for up to 30 days, against a wide range of collateral in return for a fee, which will vary with the collateral used and the total size of borrowings.

Institutions eligible to participate will be banks and building societies that are required to pay cash ratio deposits (CRDs) and which otherwise meet the requirements for eligibility, as determined by the Bank, for the Bank’s Sterling Monetary Framework facilities.

The key point here is that they say they will accept a wide range of collateral in exchange for government bonds (gilts). Presumably, the gilts could then be used to borrow hard cash using their standard lending facilities.

If they are willing to accept poison assets such as dodgy loan books from mortgage lenders, then I don’t see why they wouldn’t accept shares in companies, or loans to businesses.

Issues to solve:

  • What is required to become a bank (or more correctly, a monetary financial institutions)?
  • Will the bank accept shares in private companies as collateral, or a loan book that is made up of advances to start ups and other small businesses?
  • If the loans are for 30 days, can they be rolled over each month?
  • Are there any other schemes to borrow money from the BoE on a longer term basis?

Here’s the application form.

Bank of England Statistics Database

I just found a cool tool on the Bank of England site for anyone interested in financial / monetary stats. Basically the Interactive Stats Tool lets you search through a huge amount of statistical releases and then download them in either CSV, Excel, XML or HTML formats.

Here’s some examples of what you can get:

You can even merge multiple datasets together in the same results page:

Here’s some figures on the Money Supply:

If you find any more interesting ones, be sure to post them as a comment!