Today the Guardian runs a most important interview with George Osborne. In it it he makes some crucial points.

1. The government has borrowed far too much off balance sheet through Private Finance Initiatives, Public/private Partnerships and similar deals. These need to be evaluated, and their true liabilities and costs put into the public accounts.

2. Green taxes have been given a bad name by Labour, and are now seen as Stealth taxes by the public. The public does not want more of them.

3. The current large deficit will cast a long shadow over a future government. It will place such a government in a straitjacket.

These important statements imply that a future Conservative government cannot promise to match any spending plans for the next decade that Labour likes to dream up. Whilst no Conservative government would want to sack teachers, nurses or doctors, it will have to rein in the wasteful and undesirable spending which now abounds.
It also implies that tax cuts will not be funded from unpopular tax rises, but from the proceeds of growth as the economy starts to recover. Recovery will be strengthened and speeded if government gets a proper grip on spending.

The US Treasury has moved to support Freddie Mac and Fannie Mae, the two large mortgage companies that dominate the US housing market. In what amounts to nationalisation, the Treasury has pumped in new equity capital and offered guarantees.

Fortunately this action does not come straight out of the Northern Rock book of mismanagement. In these cases there was no run on the institutions forcing the hand of the authorities. They were thinking ahead. Nor will nationalisation mean halving the mortgages offered and financed by the companies, as it does at Northern! The aim is not to sack staff and reduce the number of mortgages, as in the UK, but to make cash available and to try to stabilise a tumbling mortgage and property market. To this extent it is good news, and accounts for the immediately favourable response of the markets.

I am glad I am not an American taxpayer. This is a huge budget commitment. The Treasury says that with careful management the taxpayer will have to put up very little. Let’s hope they are right. The fact remains that this is the biggest ever rescue, and the US taxpayer now effectively stands behind half of all American mortgages, offering to pay losses on them if customers default. That’s good news for all the other banks in the system but bad news for taxpayers.

It shows how serious the present crisis is that the US authorities think they need to take such drastic action. Who would have thought a Republican President would end up nationalising the world’s two largest mortgage lenders? I do not recall that in the manifestoes four years ago. What kind of message does that send out to bankers and mortgage companies about how they should behave?

It is true that existing shareholders in the two FMs may lose, but everyone else implicated in making too many bad loans will have the protecting arm of the Treasury around them. Is it perhaps time for Mr Darling to make another one of his speeches about moral hazard? Will be hearing anything on this subject from the Governor of the Bank of England, who used to be strongly against such an approach?

To all my readers who think I have been too ready to seek action from the authorities on both sides of the Atlantic that can help stabilise house prices, I plead guilty. Collapsing house prices brings down much else with the fall. Many families pay the price with lost jobs, shattered dreams, repossessed properties. No sensible person wants that. I also think there has to be some balance in action taken, to avoid a worse problem in managing public debt and the government deficit. The art of getting through a crisis like this is to say and do just enough to allow private sector solutions to emerge. Shunting all or most of the problem onto government balance sheets does not solve it. It just moves the problem on, to emerge in a different form on a different day.

If these institutions have lost a lot more than is so far reflected in their write offs, then the taxpayer now will have to pay for the losses. If these institutions were just suffering from too little overall liquidity in markets so that investors were being unduly pessimistic, there were cheaper and easier ways for the authorities to sort that out.

One way or another the governments are taking over the bad loans and the portfolios of debt where confidence has been damaged. The European Central Bank has been busily taking in such paper to keep its banking system liquid. The Bank of England has done more of the same. The UK taxpayer has taken on responsibility for all the Northern Rock book, and now the US taxpayer is the reluctant owner of a couple of huge mortgage houses. The taxpayer interest has not been as well looked after as it should be. Of course Central Banks should take in poorer paper and make money available when it is needed, but they should do so with large enough discounts and requirements for write offs that fully protect the taxpayers who pay their wages.

The government is now spending on average £10,000 a year on every man,woman and child in the UK. Or, put another way, we have to pay £10,000 a head on average to the government in tax to keep them going. As children do not pay tax, that means the average taxpayer has to pay well over £10,000 a year if you add up all the taxes you contribute to.

So what do you get for your money? Is it a good deal? I just get my dustbin emptied once a week, and am allowed to use some inadequate roads.
I don’t mind being asked to help pay for the neighbours children to go to school and I don’t begrudge my elderly neighbour a free knee op.
I am not so sure about contributing to all the government’s wars, and become livid when I have to pay for regional government, an army of spin doctors, the rising number of civil servants, and the glossy brochure industry that is a substitute for government action. I dislike having to bail out the odd mortgage bank and railway company, and resent the ever expanding quango state regulating every feature of our lives, at our expense

I would like to hear from more of you about which bits of public spending you think are worthwhile, and whether you feel you are getting your £10,000 worth today?

And why am I doing two blogs today, like yesterday ? Because the weather is so bad I have lost both cricket matches this week-end I was hoping to play in. That just about sums up this summer and this year’s rain sodden cricket season.

I guess I am relieved we were spared a posing Minister for drought three years ago, and an overexposed Minister for floods over the last couple of years. I would, however, like the Ministers responsible for water supply and water control to do something instead of just saying things.

Three summers ago it was hot and dry. We ran out of water, so it was rationed. I called for a new reservoir in the dry south-east, and backed the plan for a desalination plant for London to act as reserve supply for dry times. Neither project has got past the drawing board three years on. On the law of averages we will get a dry summer sometime, and clearly we will have one before this government has got round to building the extra capacity we need for all the extra people they have invited in and all the extra homes they are building in the south east.

Now we have had two of the coldest and wettest summers I have ever had the misfortune to live through in a row. Fourteen months ago all too many people were flooded in their homes. We have had fourteen months of memos, lawyers letters, arguments over which public body is responsible in each case, Ministerial statements, a major Enquiry and Report, but very few men in diggers actually improving the ditches and digging a few more where there is too much water flowing.

What people want is some solutions. Public sepnding is now racing to £10,000 a year for every man, woman and child in the country. Why can’t they, within these huge budgets, afford just something to improve our land drainage, and to collect enough of the water so in drier times we don’t run out? Why is this just impossible for them to do? Why does everything take so long, cost so much and work so badly? Why does the Environment Agency define its job as warning peopole they might be flooded rather than helping ensure they will not be flooded? And why yesterday did Ministers give up on talking to the media and leave it to an official to do so? Are they at last embarassed by their lack of action?

The BBC in its report on UKIP said with some glee that the Conservatives will face a challenge from the right at the European elections because UKIP will demand a referendum on Lisbon.
Why is it right wing to want to ask the people about such a crucial matter? Were Labour and the Lib Dems being unacceptably right wing when they promsied one in the last General Election? Did they become left wing when they ratted on their promise (Yes, probably! That’s a delightful unforeseen consequence of the BBC nonsense).

What the BBC should have said in its report was this. The Conservatives promised a referendum on Lisbon in the last Election. We kept our promise, moving an amendment to get one, and voting for it, when Lib Dems and Labour let us down by failing to keep their word. I seem to remember there were no elected UKIP MPs available to help us secure that referendum, and fewer Consrevatives than we needed because UKIP and others had stopped some Conservatives getting elected on the promise of a referendum.

Conservatives have made clear we will give a referedum if Lisbon has not been ratified everywhere when we come to office. It seems unlikely it will have been ratified, so there will be a referendum. If by any chance it has been ratified we will be taking other actions to sort out the EU mess, as we cannot live with Lisbon, or with other parts of the accumulated Treaties and powers of the EU.

The Stock market fell badly
House prices are falling quickly
Bentley announced a three day week
New car sales are well down
Second hand car prices are low and falling
Property specialists are getting gloomier even after a 20% fall in commercial property values
The pound fell further
There are fewer jobs on offer

Some of my readers seem pleased that house prices are falling. Some still think we should be fighting inflation because the pound has fallen and imports are dearer. All the evidence is that the big problem now is the downturn. Inflation will fall rapidly next year. Fewer and fewer companies will have any pricing power. The Stock Market is waking up to the profits squeeze that will now follow the squeeze on family incomes.The government still refuses to cut back itself, intensifying the squeeze on the rest of us.

Some of my readers ask why keeping house prices up matters to politicians. It matters to them because it matters to most of their electors. Most people’s main asset is their home. They do not want it to fall in value. When it does it not only makes them feel worse off, but it limits what they can borrow to sustain their lifestyle. Of course rising house prices on the scale we have experienced in recent years is bad news - it creates a bubble which will burst. It would have been better to have controlled the economy so house prices rose gently. There is one thing worse than house prices rising too rapidly, and that is them tumbling. Many people will pay the price of that. It will mean lost jobs, shattered dreams, repossessions. Do not curse us to even bigger falls in house prices. It just means more economic misery ahead. It means people thrown out on the streets, and it means many others tightening their belts even more whilst big government spends on as if nothing had happened.

The last couple of weeks have seen confirmation of the downturn on both sides of the Atlantic. House prices continue to fall in the USA, and the UK. Latest figures show UK house prices market now down by 12.7% over the last year, with a big fall of 1.8% in August. UK Car sales fell by 18.6% in August, always a poor month for them anyway. Fears are growing of bad profits performance ahead in the US and the UK. Surveys of confidence and purchasing intentions are in negative territory.

None of this should have been news. My forecasts of falling house prices, slowing activity, poor confidence levels and squeezed profits were not out of line with many other commentators. It’s just the British government which refuses to give us sensible forecasts to help guide markets. Those Ministers who lecture the private sector on the need for transparency are unable to give us any themelves on these important economic matters.

There are two necessary conditions for a recovery. The first is a fall in oil and other commodity prices, to relieve the inflationary pressure. That should in due course enable Central banks outside the US to cut interest rates, and reduce the need for rises by the Fed. As predicted, this is now happening, with oil down substantially on its high.

The second is the creation of more liquidity in Western banking markets, as the banks recapitalise. Recent market events imply this has not yet happened sufficiently. Substantial sums have been put into banks by existing and new shareholders, but banks are now being very cautious and regulators are reinforcing the caution long after the inflationary credit bubble has burst.

Both the ECB and the Bank of England kept their interest rates up this week. They are still fighting inflation more than recession, which does not help bring forward recovery.

Over in Euroland the economy is sinking, shrinking in the second quarter GDP figures. Each main central Bank has now taken lower quality assets from banks as security for cash. Market participants are asking how much more of this can they do, and will they roll these facilities over? It reminds us there are now issues to work through in returning markets to normality, arising from the short term measures the authorities took when the crises were at their height and individual institutions were under threat.

It is still important to watch interest rates and banking liquidity. I am still more worried by prospects for the UK economy than for the US, in view of the large government deficit in the UK and the importance of house prices to the economy as a whole. When the government’s mini package was announced on housing many rightly said it was far more important to know how much liquidity would be supplied to mortgage banks, and how would the Bank of England handle its existing scheme?

The one bit of good news is even this government in the short term seems to realise the money is running out. There may be no additional special scheme to help people with their energy bills this winter, and no windfall tax on the energy companies at a time when we need them to invest more in future capacity. This will disappoint many of the government’s own supporters, but is a whiff of realism after many special increases in public spending. Even the housing scheme contained elements of juggling within existing budgets. Gaining control of public spending is crucial to recovery. Getting priorities right within it to cushion the impact on the most vulnerable should also be part of the government’s response to the economic downturn.

The contrast of McCain and Palin worked well for the Republicans. The Obama camp is driven back onto attacks and disparaging comments whilst McCain tells the world he wants to work with Democrats for the change America needs and Washington will have to accept.

I heard McCain speak at the Conservative Conference when he joined us there. His speech made me appreciate how good David Cameron is as a public speaker! Last night he performed so much more effectively. His quiet lack of oratory was persuasive, followed by a crescendo in his credo which stirred the audience to enthusiaism.

The problem with all moderrn politics is Who will deliver? So much money is raised and spent on judging and polling the public mood, that you would expect both sides to know what the public wants. Of course electors want change, because the economies of the world are weakening and people are getting hurt. Of course many electors want politicans who will stand up to big government, and tame it to work for us. Of course sensible people are against war, and want the West to win more friends to its causes without having to exchange bullets. Mc Cain captured all that, thanks to the great words he and Palin delivered. They can afford the best in speech writers - as can Obama. The issue for both camps is can they deliver the policies that will make them come true?

Obama’s early brilliant rhetoric of change is looking stale, as the reality of more spending, more laws and bigger government emerges from beneath the noble aspiraiton to improve the lot of the people. Palin’s language that she will help tame the Washington bureaucracy looks fresher, because she has just arrived on the scene. McCain promised last night to unleash Palin on Washington. He promised smaller government and lower taxes. Can they deliver?

The race is still close. Both sides show what you can achieve in politics if you research the mood well and use words well. People can become interested and enthused. Whoever wins then has a far more difficult task. How can they make modern bureaucracy bend to their will, to get more out of it for less cost? If the winner cannot do that, the public will feel let down all over again. Can either side make a difference to the Credit Crunch and the economic troubles? Neither has so far come up with a plan which makes any sense. At least McCain’s wish to curb spending and the public deficit would help.

Sarah Palin gave a great performance to the Republican faithful. I am not myself swayed to favour a candidate because they go hunting, have five children, are married to a Trade Union member or defend the citizen’s right to carry arms. But then I’m not an American and I do not have a vote in the Presidential election. I don’t think the behaviour of children is a more relevant considersation for a female candiate than for a male one. What matters is how the candidate would behave in office.

I do like brave interesting politicians who aim to curb the excesses of big government. Mrs Palin came over as a feisty and fresh face on the international stage who has been doing just that in Alaska. I liked the way she began the spending controls by selling the Governor’s plane and doing without the personal chef. I enjoyed her telling the audience that you just have to use the veto as Governor to stop less desirable spending. Her intention to go to Washington to serve the people rather than the “liberal” media commentators was a novel idea in this age of spin. Let’s hope it catches on.

It was even more fun hearing the hissy fits from Democrat women, still smarting from the rejection of Hilary. They came over as unpleasant, tearing into a member of their “sisterhood” because she dared to have popular views on putting government back into its place as servant of the people rather than as a life support machine for the elite, cutting back its size and arrogance. It seems some Democrat ladies only want the glass ceiling broken as long as the whole of the rest of the big rambling building of government remains intact and is voted more money by the winning women.

It is sad to read that in some places in the UK as well as in politics in the USA the glass ceiling still impedes talented women. I want them to break through by their efforts, as some have so successfully. I speak as someone whose best boss was a woman. Margaret Thatcher was a good boss because she listened, weighed your advice based on how well thought through it was and how well you defended your case. She was prepared to do difficult things that did not poll well if they were right for the country and right for the longer term. Her successors in office have not had that combination of longer term vision and impatience to get things done which she had. Even those who disagreed with some of the things she was doing admired her dedication and tenacity in doing them. Her worst critics in Labour have come to defend important parts of her new settlement of the Union and privatisation issues, as they have come to see how some of these reforms were crucial to advance people’s living standards.

In the USA the Republicans have done more to advance the cause of talented women in government in recent years. Miss Rice is, arguably, the second most powerful person in the world after the President. Now they have placed a female Governor on the ticket for the White House. As Mrs Palin hit out at Mr Obama, it was amusing to hear her remind the audience that she had much more executive experience just by being a small town Mayor than the Senator, let alone her experience as Governor. My advice to Mr Obama is “Don’t make experience an issue in this election”

The Bank of England meets this week to decide interest rates with its policy in tatters.

Its sole aim is to keep inflation down to 2% per annum. The reason behind that instruction is to uphold the purchasing power of our currency. Neglect has led to a big devaluation of the pound, meaning our purchasing power if we wish to buy goods and services from abroad has been slashed.
As overseas trade represents a susbtantial slice of our economy, this is a serious assault on our living standards. Indeed, many of the luxuries and extras are imported, leading people to feel much worse off when their prices rise on the back of a devaluation.

The Bank’s problem is there is no easy way for it to restore the value of the pound at home and abroad. Raising interest rates would be the traditional response to a sinking currency, but in these conditions that might be seen by the markets as short term, leading to a bigger decline in economic output and worse problems next year. Markets could take fright rather than buying pounds, as they would not see it as a sustainable policy.

Cutting rates in the way we need to stimulate activity could also deter people from buying sterling, for the obvious reason that it lowers the return you make from holding the currency.

Leaving things as they are, the likely decision of this week’s meeting, just delays sorting out the mess, and may not help either. It looks like dither.

So what should the Bank do? If it were serious about rebuilding confidence in our currency, and defending its value, it would send a public letter to the government demanding they take the action needed to restore confidence. If the government produce new sensible forecasts, takes action to rein in its wilder and less desirable expenditures, sorts out Northern Rock and did one or two other things to show it wanted to get on top of the financial crisis, then the Bank could cut rates.

When the US took concerted action to improve the US economy, Fed and Administration combined, the Fed was able to cut rates and the dollar rose. It is the weakness of the UK economy that is adding to the fall of the pound.

Yesterday saw a government fight back on the economy savaged by events.

The pound dropped to a new all time low against the Euro - a Euro is now worth more than 81p, 14% more than at launch.

The pound dropped again against the dollar. It has fallen from $2 to $1.77 in les than a month, making all items priced in dollars more than 10% dearer.

The latest report on the jobs market said there had been a sharp contraction in jobs on offer.

Many people said that the government’s encouragement to first time buyers to buy properties when house prices are still falling at around 1% a month was bad idea

The OECD came out with a surprising forecast that only the UK of the major economies would plunge into recession in the second half of 2008.

The fall in the pound and the changes in the job market matter more than the forecasts and statements. The devaluation has made us all a lot worse off. It’s time to think of cancelling the holiday in the USA if you were planning one. It means dearer oil and food. It means a bigger squeeze on our spending power generally.Now we are imprting inflation, it will put the Bank off action to cut interest rates quickly enough.

The fall in jobs is not all bad news. Wages are under reasonable control, as I have been forecasting. There is not going to be a wage inflation against such a gloomy jobs background. The fall in jobs also implies companies are taking action to avoid financial disaster. It means more companies will survive the downturn.

Even the government’s housing package was mercifully small, and included some spending that was already in budgets. Is that the first sign that the government realises there are limits to how much it can borrow?

Unfortunately the government has already committed itself to unrealistically high spending plans, and will not come clean on how much worse the deficit now is, thanks to sharp slowdown. It remains vulnerable to the mauling given it by the OECD forecasts, because its own forecasts are so obviously wrong. No-one believes the government’s figures. If they wish to reassert any kind of authority they should re forecast now.

And whilst they are about it why not recall Parliament to discuss the various rescue packages? I am sitting in my office this morning, but as always in September the place is a building site. Whilst most MPs are away from the place, they just carry on spending!

Yesterday evening I heard Gary Hoffman give a lecture on “Leadership and Reputation” at the Henley Management School. After 26 years at Barclays, Mr Hoffman leaves to become Chief Executive of Northern Rock at the end of this month.

He gave us an impressive talk about the importance of reputation and brand in banking. During the course of the lecture and questions it emerged there would likely be a need for more write offs and provisions at Northern Rock, as readers of this blog will be expecting. The £600 million of losses so far reported since becoming nationalised and the £3,000 million of new equity capital will not be the end of the taxpayers’ misery.

The more I see and hear of Northern Rock, the more I find it impossible to understand why Vince Cable is lauded for pressing for nationalisation, or why the government was foolish enough to do it.

As a result we have

The former biggest new lender in the market unable to make new loans at a time of mortgage famine
The need for other banks to refinance some of Northern’s mortgages, further reducing the flow of new mortgages
Redundancies to scale back the business
Large losses to be paid for by the taxpayer
The taxpayer effectively paying £15 million a year on top as a contribution to the local community
Taxpayers underwriting sponsorship of Newcastle football club

If instead the government had acted as intelligent bank manager to the Rock, it could have continued to write new loans and offer more attractive rates. It would not have lost as much or sacked as many.

The sooner what remains is sold to the private sector the better. It could either be sold as a going concern, or the assets sold to new managers and companies. Either would be a cheaper answer for the taxpayer, and would probably save more jobs in the long run.

The interesting question is what value does the Northern Rock brand now have? Mr Hoffman thinks there is strong brand loyalty to the Rock in the North East. I was pleased to hear his belief in the brand and the support he thinks it still enjoys. I would be interested in comments on how many North eastern savers would put their money with it if it did not have a government guarantee.

It was good to hear Mrs Blears wriggling when asked if she would recommend a young friend to buy a flat or house today, now there is to be no Stamp Duty on a property between £125,000 and £175,000 for a year.

It is the crucial question. If you can now recomment first time buyers should buy, the measure might help the market a little. If advisers and analysts still think there could another 5-10% fall in residential property prices, it would be better advice to the young person to wait a few months, as saving 1% to lose several times that is not good business.

I wonder where the government gets the £600 million of lost revenue figure from. Presumably it is left over from the out of date and inaccurate forecasts given at the time of the last Budget.That may be what is pencilled in at the moment for Stamp Duty on such properties, but it is highly unlikely they will collect that much anyway, given the very low level of mortage availability and the freezing of the residential property market generally.

One cheer for the government’s housing package - tax cuts are welcome. It was a pity they refused to tell us how the package will be paid for, or to change the government’s economic forecasts. As the OECD is now forecasting a recession in the UK - two down quarters this year - we need a counter forecast from the Treasury.

Readers of this blog will not be surprised by the fall of the pound. I wrote about our freefall currency on 16th August last. Today the front pages of the newspapers tell us what a big story it has become.

If we were still living in an era of fixed exchange rates, or managed ones, we would be deep in a huge crisis by now. The UK government would be borrowing abroad to buy pounds to try to stop the currency falling. The foreign money lenders would be demanding cuts in public borrowing and spending as part of a package of better economic management. Floating rates takes the immediate sting of such a crisis away from a Chancellor wishing to prolong his holidays away from London.

A little bit of devaluation, when you are running a big balance of payments deficit, is no bad thing. It helps your exporters become more competitive, so they can sell more. It puts people off buying a few luxury imports, so you spend less. The balance of payments start to correct. Just as Japan found a little bit of inflation was preferable to deflation, so a little bit of devaluation for the UK is fine in current circumstances.

The problem is, we are now getting a big bit of devaluation. There is a sense of carelessness, even of incompetence in the air, underwritten by the Chancellor’s foolishly pessimistic remarks from his Scottish holiday home. Overseas holders of sterling have got the message that the government does not seem to care about the value of the currency, and is taking none of the steps to run its own affairs prudently that you expect from a strong country wishing to have a strong currency.

This does now matter. Oil has fallen from around $145 a barrel to around $115, a fall of around a fifth. This started to bring welcome respite from inflation that was getting out of hand. Unfortunately in the last few weeks the UK has lost half of that advantage – oil has gone up by 10% in sterling terms thanks to the fall in the pound against the dollar. $145 a barrel oil at $2 to the £1 was costing us £72.50 a barrel. $115 a barrel oil at $1.80 to £1 is still costing us £64 a barrel, a much smaller fall than the fall in the dollar price. You will see the latest fall in the pound in the pump prices. The same is true of the thousands of commodities and products we import that are priced in dollars, or in Euros. The pound hit a new low against the Euro yesterday.

There is likely to be an immediate price to be paid for this imported inflation. The Bank of England will feel it has to keep interest rates higher for longer than it would otherwise. The Bank, if it were truly independent, would tell the government we need lower interest rates badly, but can only afford them if the government takes other action to reassure foreign holders of sterling, sufficient to stop the collapse of the pound.

What should the government do to stop the slide? It needs to reassert itself in a way which breeds confidence in its actions and in the UK economy as a whole. That includes:

1. Changing the language. The government cannot carry on using the bland and out of touch complacent language it has been using prior to the Darling outburst, nor should it go over to Mr Darling’s own excessive gloom. It needs to find words which show it has understood the severity of the financial situation, but do not exaggerate the bad news. It needs to say there are limits to how much it can spend and borrow to “help” us in the squeeze.
2. Changing the forecasts. It will not do to carry on with the Budget forecasts, as no one in markets now believes them. Nor can we wait until the official Autumn forecast to see the revisions. The markets need answers to two simple questions immediately. What growth rate does the government think the UK economy will manage in 2008-9 and 2009-10? In the light of that, how much is the government planning to borrow in each of those years?
3. Getting in control of how much it is spending. Spending growth has been far too fast since the Budget, and borrowing will be boosted by the slower growth than forecast which cuts revenues and raises spending further. The government needs to cut out more waste and less desirable spending, and accept some discipline on how much it can afford to borrow and will be allowed to borrow by sceptical markets.
4. Stopping its own contribution to inflation, by freezing public sector prices, charges and taxes where it has a monopoly, and making their delivery more efficient instead.

Floating exchange rates are usually a good thing. They allow adjustments to be made in easier ways than fixed rates allow. If a government thinks they give it carte blanche to spend and borrow as much as it likes it can get away with it for quite a long time, but there comes a reckoning. The first thing to go is the currency. That is now happening to the UK. Later it might become difficult or too costly for the government to carry on borrowing at the level required. They need to get a grip now. That’s why we need the Chancellor full time in London, and we need Parliament back to put some pressure on them to take the necessary stabilising action.

The odd billion pounds for the residential property market is not going to turn it round - the sum is too small. Another billion on the deficit is a further increase in an already alarmingly large figure, and does not help restore confidence in the conduct of public finance.

Yesterday in seven badly chosen words Mr Darling announced the death of New Labour. To many of us it has been a slow and lingering death for some time, but Mr Darling put a stake through its heart.

New Labour was a spin story devised by Mr Blair and Mr Brown in the 1990s to make Labour electable. It said that New Labour would offer economic efficiency allied to social justice. At face value it was a good offer, attractive to many Conservatives. Who doesn’t want economic growth and prosperity, and who doesn’t want that to be used to help the less well off? it sought to banish memories of Labour’s previous economic mismanagements. Every previous Labour period of government had been short, including too much public spending and public borrowing, a balance of payments and a sterling crisis, a devaluation and cuts or slow growth in living standards.

The Conservative Opposition under David Cameron has been doing a good job showing that the social justice side of the offer has not been delivered. New Labour, like Old Labour, thought social justice could be created by taking more money off the richer half of the country to give to people living on benefit. It didn’t work in the 60s or 70s, so there was no reason why it should work in the noughties. Mr Brown thought that the problem in the past had been a shortage of money to do it on a big enough scale, so he simply threw even more money at it. The result was even more people living permanently on benefit. He thought that if he paid benefit to people in work as well as out of work it might tempt more into work, but underestimated how much had to be done to educate, train and motivate the 5 million plus still living on benefit as a way of life. Many people now know that the government has not delivered social justice. The left will urge Mr Brown to do more of the same – spend more money on those on benefits. He will do some of that and it will have the same result as before. He now does it when the puboic accounts are in a dreadful mess. He runs the risk of a government financing crisis to go with the sterling devaluation he has already triggered.The Blairites and modernisers will tell him to look at the detailed work of Iain Duncan Smith and others on how to mend a broken society. He will lift some of their soundbites and back a few pioneer projects, but not on a scale likely to have any impact.

Now Mr Darling has demolished the more important half of the New Labour offer, the promise of economic stability and efficiency. Labour won 3 elections on a few soundbites. Readers of this site will know what I have thought throughout of the spin that Labour made the Bank of England independent and that guaranteed economic stability. Any lingering doubts people had about my analysis must have been cast aside by the convulsions in markets since last August. The bigger soundbite from the point of view of popular impact was the often repeated mantra “There will be no more boom and bust”.

“No more boom and bust” was the most effective of all the New Labour songs. It was audacious and all encompassing. It was audacious because it reminded people of the mistakes of the Tory years in 1992-3 when the Exchange Rate Mechanism fell apart, the only Tory economic policy Labour had ever supported and had urged on the then government! Any sensible critic would accept that had Labour been in office then they would have inflicted exactly the same misery on the British public. As one of the few MP critics of the ERM throughout, it was a lonely business when the main Opposition party would not help us expose and fight against it. It was effective, because people wanted assurances that interest rates and house prices would be stable, or not go down.

The soundbite worked brilliantly in 1997, as part of the reason for change. What change did people most want? “No more boom and bust”. It worked well again in 2001. After all, leaving aside the disgraceful tax raid on the pension funds and the sale of the gold holdings, most of the period 1997-2001 was characterised by prudent management of public finances and produced a reasonable economic performance. That added some credibility to the slogan. Labour still allowed boom and bust in manufacturing, but that was disguised by the strength of services in general and London’s service sector in particular which helped the national figures considerably.

By 2005 it should have been apparent to more commentators that we were back in boom and bust, but because we were enjoying the boom part of the policy too many people were still prepared to ignore the obvious signs. I highlighted the excess and waste in public spending, the build up of far too much public borrowing, and the change in inflation targets to keep interest rates lower than desirable. I also highlighted wrong headed mortgage regulation and the Basel I banking regulations, which became an important part of the disaster.

Mr Darling has told us it cannot work again. Even if his new forecast is too pessimistic, as many private sector commentators imply by their forecasts, we all now know that we have lurched from too much borrowing, too much price inflation, too much house price inflation, to too little growth and to a Credit Crunch. In Mr Darling’s words we have lurched from pretty good economic conditions to the “worst in 60 years”.

Perhaps he did this with the full knowledge of the Prime Minister, with both men thinking that lowering expectations drastically was the best way to create a new start and to get an audience for whatever actions they will take next. Polls must tell them people did not believe the old spin line about how well placed the UK economy was to weather the US sub prime crisis, as if people would not see the other crisis made here in the UK.If he did, the PM is now offside, and others are at work to undermine the Chancellor in favour of Mr Balls. Perhaps he did it to cut loose from a Prime Minister on the slide, telling us that he the Chancellor recognises that his inheritance from his boss was not all it was cracked up to be at the time.

Either way, it transforms British politics. It now allows us a more honest debate about what went wrong and what needs to be done to put it right, if only the media will start to listen to those voices that have dissented throughout from the nonsensical spin that has prevented proper economic analysis. It will anyway confirm the public view that New Labour is dead – it has delivered neither economic efficiency nor social justice- whatever the media now do.

We do need both social justice and economic efficiency. To achieve them we first need a government which can get a grip on public spending and borrowing, and reform our monetary and banking arrangements, so they will deliver prudence and low inflationary growth in the future. That was what we tried to set out in the Economic Policy Review last autumn, published just before the Rock crisis, written in the expectation that the monetary mismanagement we were witnessing would end in tears.

The idea that the treasury should guarantee and underwrite £40 billion of housing values is absurd. Have they learnt nothing from nationalising Northern Rock? The more they spend on such ventures, the more they waste, and the more confidence drains away. IT IS TIME TO STOP DREAMING UP NEW SPENDING PLANS, TIME TO GET A GRIP ON THE STATE BUDGET.There are limits to how much the state can borrow. They are well into the danger zone already.

The Chancellor’s devastating interview shows we need a Parliamentary statement on Monday to give us a completely new set of forecasts for the UK economy. Parliament should be in session to cross examine him over one of the biggest downward revisions to forecasts ever made by an incumbent Chancellor.

In March 2008 the Chancellor in his budget told the Commons the economy would grow by 1.75% to 2.25% in 2008, by 2.25% to 2.75% in 2009 and 2.5% to 3% in 2010. He said “My forecast shows the UK economy will continue to grow throughout this period of economic weakness”.

Today we learn that he now thinks the prospects are the worst for 60 years. That must mean, for example, a bigger fall in GDP than in 1979-81, when it fell by 1.76%. He also says now “It is going to be more profound and long lasting than people thought” which must mean he expects downturn next year as well as this. If just one year shows a drop of 2% (Chancellor’s implied new forecast) that means 4% less National Income, a loss of £60 billion compared to budget forecast. That also implies a loss of £24billion of tax revenue at the average 40% tax rate on the economy as a whole.

We have already had one quarter’s figures showing no growth compared with the reasonable growth the Chancellor was forecasting. He now tells us to expect a bad downturn, worse than any of the private sector forecasters are expecting.

This means more job losses, more increases in public spending to help people who lose their job, less tax revenue as the economy falls. The figures involved will be huge. There will be a vast black hole in the government’s accounts.

It is high time the government recalled Parliament, made an honest statement to the Commons, and produced some new figures. The rest of the country is now very worried by the situation. It is not good enough for MPs to be away for a further five weeks, and for the government to delay new figures until the Autumn Statement. Mr Darling’s careless language may be just that – but as it has been his only attempt to revise his optimistic March forecasts we have to take it seriously until he corrects the record again. The man who told us not to talk ourselves into recession has now conjured a far worse picture for us than any mainstream commentator!

The portrait of the Chancellor in the Guardian today by Decca Aitkenhead is devastating. Intended to lift the veil on the private man and to help him project his image and his message, the interview reveals a man completely out of his depth without a clue about the financial crisis swirling around him.

The first incomprehensible error is to give such an interview and to use it to make serious statements about the state of the economy. If Mr darling must show his human side and invite people to his holiday home has should stick to talking about the scenery and the marmalade. It is is not the right time or vehicle to adjust the nation’s view of how serious an economic crisis we are in. A few casual remarks about how conditions will be the “worst they’ve been in 60 years” will travel the world and lead to fundamental reappraisals of forecasts everywhere. There is no revision to the Treasury forecasts accompanying this statement. So we now know the Chancellor thinks the optimistic forecasts from HMT about growth prospects this year and next are a bunch of lies, but his forecast of a recession remains unquantified. If we take him seriously he is saying the Treasury have now to revise their forecast down to show big drop in GDP 2008-2009, bigger than the recession in 1974. Why couldn’t he make a proper statement from the Treasury accompanied by proper revised forecasts? I have felt for sometime waiting for the Autumn Statement before we get a revision to forecast is to wait too long. In this situation markets expect up to date information. They get it from companies, who have to tell us of worsened trading expectations, so why can’t we get it from the Treasury?

The second error is to reveal just how out of touch with the financial world this man is. He tells us the first he knew of the financial problems in money markets last summer was when he saw an FT article about the ECB pumping money into their money markets! He tells us he rang the office from Majorca, but of course did nothing. The rest of us were writing and worrying about the lack of liquidity all that August, telling the government to act. Clearly they were too busy holidaying. The next he knows is when back in Edinburgh and he spots a run on Northern Rock, which forces him to London! The rest of us were watching the grisly events around Northern Rock unfold before the run began. In such circumstances I would expect the Head of the tripartite regulatory structure to be getting daily reports on the situation, and to be using his grace and favour house in London to manage the crisis from there. The Guardian journalist did not seem to recognise just how serious this admission is.

The third error is still thinking Labour’s main problem is presentational. “We patently have not been able to tell people what we are for”. Labour’s problem is not presentational. We all know what Labour is for. It is for an ever bigger public sector, it is for more and more spin doctors and presentational gimmicks, it is for more government advertising, it is for keeping them in power, it is for higher taxes and higher benefits, it is for an ever bigger money go round with Peter paying Peter via the intermediary of the government, it is for incompetence at managing the financial affairs of the money markets and the public accounts, it is for massive borrowing. The issue is not the public’s lack of understanding of Labour, but Labour’s inability to deliver the fairer society and the stronger economy they promised.

Knowing our Chancellor had “no idea” of the severity of the crisis facing them until recently is not going to help build confidence. Knowing that he knows the public is “pissed off” with Labour undermines his position further, as the choice of language is not what we expect of a senior figure. There is still a deafening silence on what Labour is actually going to do about the falling house market and the mortgage famine, still a silence over when and if they are going to exert some discipline on the public accounts, still confusion over how they are going to sort out the muddle in the money markets and the problems with banking. The botched nationalisation of the Rock has made their position so difficult. It is eating cash the government and taxpayer cannot afford, whilst having to throttle back its lending and sack many of its staff because it is in the public sector. Returning it to the private sector at almost any price would help to tackle the mortgage crisis, and save the public money.

Readers of this site will know I have long been advocating that the Bank of England cuts interest rates and concentrates on fighting recession. Inflation will fall next year anyway. This has proved contentious with some of my readers. I ask them, how much more evidence do you need of slowdown, how much bigger a fall in property prices, how much more of a squeeze on incomes and lending before you accept that conditions are disinflationary, even recessionary?

Yesterday I was delighted and amazed to read the words of David Blanchflower, Monetary Policy Committee member. He delivered an extraordinary broadside against his own Committee. He accused the Bank of relying on “wishful thinking” in its forecasts, and condemned the whole monetary policy as “misguided”. He agrees that next year inflation will fall, and states “18 months down the road and inflation is going to plummet like a rock”. In a now famous remark he said “ To sit and worry about inflation expectations and what is going to happen to those, rather than worry about the fact that the economy is going to go into recession seems to be misguided”.

Of course, under the requirements set down by the government to the MPC, they are required just to worry about inflation expectations. Their remit prevents them from considering the impact of their actions on the real economy, unless that has an impact on inflation. For years we have been fed the soundbite that the UK has an independent Central Bank and that is a guarantee of economic stability. The truth is we do not have an independent Bank, and the actions of the MPC have helped destabilise the economy. They kept money too loose allowing a credit binge, and they are now keeping money too tight, assisting a Credit Crunch. They have been aided in this by pro cyclical regulation of the banks – too loose on the way up, too tight on the way down – and by a government which does not seem to understand money markets.

We will now see many of those who have spent the last few years praising the mythical independent Bank demanding a change in its government remit. The truth is that in a democracy if any institution or group of actors gets things wrong and inflicts economic misery on the public, their roles, jobs and remit will be debated and changed. No quango or Bank stays “independent” for long if its actions do not please. The politicians have to respond to the popular anger about failure or mistakes. The government will have to look at adding a requirement to the MPC to consider its impact on the real economy, just as the Fed has to in the USA. In the last quarter the USA produced annualised growth of 3.3% (where are all those pundits who told us the US is in recession now?) whilst the UK slowed to a standstill and Euroland fell. The USA has a Central Bank that has to work with the government to influence the level of economic activity as well as prices. Euroland and the UK have central banks which just concentrate on inflation, and manage to get that wrong.

Perhaps the most important thing David Blanchflower said was “We need to actually get ahead of the game and it appears that we are now behind”. Exactly. It is as if all those clever economists have forgotten one of the basic things they teach their students – there are leads and lags in economic policy. Changing interest rates has a delayed effect, as it takes time for all rates to adjust and for banks and borrowers to adjust their behaviours to the new levels. Many people have protection from higher mortgage rates for a period. Larger companies can use interest rate futures to protect themselves for months ahead. Many people and companies have a bit of money for a rainy day, but not enough for a rainy year.

The present high inflation reflects mistakes of the MPC and others a year or two ago. There is nothing the MPC can do in the short term about that. The issue is what are conditions going to be like a year or two ahead? Most commentators agree they will reflect the current squeeze. It is difficult to see inflation staying high against such a background, and strange to see a government and a Bank so keen to intensify the squeeze by most of their actions. The rest of the MPC need to join David Blanchflower, by trying to project themselves into the future. Most of them seem to be at best living in the present, if not stuck in the past. Applying a second load of bolts to the stable door after the horse has bolted won’t bring it back. The issue is how we get a new horse into the stable in times of slowdown or worse.

I remain strongly of the view that the US has got its policy response right to the Credit Crunch, and the UK is still getting it wrong. It will not be easy for the US authorities to chart a successful course, given the magnitude of the mistakes made on the way up. They still have to contend with a very weak banking sector, with more bad news still to come, and with a very weak property market, which adds to the banking weakness. So much lending is secured against property, so falling property prices undermines old loans and puts people off making new ones. The Fed’s slashing of interest rates helped, but it cannot get all the market rates down in line with its rates, because the banks are short of cash and reluctant to lend. There will be some excitement about a change of President, and the two main candidates seem to be lining up to continue fiscal stimulus to assist low interest rates, with the emphasis on tax cuts to alleviate the squeeze on personal incomes. All that means the US is better placed than Europe.

Meanwhile Euroland remains mesmerised by inflation despite the obvious evidence that the slowdown has now hit Germany as well as Italy and Iberia. Destocking is adding to the woes of companies, as they fight to become more liquid against a backdrop of declining turnover. The UK is going for a huge fiscal stimulus based on increased public spending with revenues falling from the downturn. The fact that the government sector is as overborrowed as the private sector before entering the downturn leaves it in a weak position, at the mercy of the markets. The pound is now falling against the dollar, having devalued against the Euro, increasing the cut in living standards.

(Previous blogs on this topic on www.johnredwood.com include
“Halve interest rates and cut wasteful spending” 18.7.8
“The lies about the EU economy” 14.8.8
“The Bank of England is fighting the wrong dragon ” 9.8.8
“An inflationary or inflammatory letter?” 17.6.8
“Why have the government and the Bank of England failed us on inflation?” 17.5.8)

The Taxpayers Alliance today have published another good piece of work pointing out just how much extra tax the government collects in the name of greenery, over and above the calculations of the cost of CO2 and pollution.

Others have worked out just how much more than the cost of road provision motorists have to pay. Whilst bus and train operators are allowed tax concessions on track use and fuel purchased, motorists and lorry owners have to pay tax after tax to use the public highway and burn fuel.

The public worked this out for themselves a long time ago. All the polls show that a majority of people have thought for a long time that the green argument is used by many politicians as another excuse to raise more money in tax so they have more of other people’s money to play with. Nor is this the only misleading spin and ill thought through policy we experience daily from this government.

Let us look at some of the other green contradictions we get from this administration.

They tell us that travel by car or plane is bad for the environment because these vehicles emit carbon dioxide. They tell us trains and buses are good for the environment, perhaps because these vehicles also emit carbon dioxide! They never truthfully tell us that all vehicles with diesel, mains electric or petrol engines emit carbon dioxide when the power is burned or generated. You need to do a proper audit of each journey someone undertakes to find out which is the greener way of travelling. Sometimes it is greener by car than by train or bus, depending on where you are going and how many other people are going there too. You need to consider the energy burned to get you to and from the train station as well as the per person energy used by the train. If you want to go from the village of Little Known to the village of Lesser Used in the Marsh at 11 pm it would not be economic or green to lay on a bus just for you.

We are told that travel by car could be made greener and safer if we limit the speed of cars on good roads. So we have to drive cars that would be quite capable of travelling at 80 or 90 miles an hour on a motorway at a maximum of 70. Meanwhile we are told that trains are better if they travel at 125 miles an hour, whilst the government subsidies the industry to spend a fortune on trying to achieve speeds of 150-175 miles an hour, in the knowledge that anything that gets in the way of trains travelling at that speed does not have a chance of survival. Trains cannot be steered round an obstacle on the track, whereas a high speed car has a chance of steering round an unforeseen obstacle on a motorway. The government strengthens its arguments for slower running cars by saying they then burn less fuel per mile travelled. Why doesn’t the same rule apply to a train?

Ministers and officials in air conditioned and poorly insulated offices tell the rest of us we need to improve the insulation of our homes, and lecture us to turn out unused lights and turn off appliances at rest. How often do you see a Minister or senior official turn out a light when leaving a room where the taxpayer is paying the electricity bill? Who turns their computers and screens off when they go for a break at work in the public sector? I find people at home are much more motivated than the public sector to use energy wisely, because we are paying our own bills. That’s why I have been drawing attention through Parliamentary Questions to the need for better performance from the government itself at saving us money by raising its game on energy efficiency.

I heard this morning that UK house prices are now down by more than 10% so far this year. I listened in vain for a government Minister to come on to claim success from their policy. For years Ministers have told us we needed to make houses more affordable. They have become mighty shy now their policy of starving the Money markets of cash last summer and nationalising the UK’s most aggressive lending bank, Northern Rock, is delivering lower house prices with a vengeance.

Could it be that they have at last worked out that lower house prices do not automaticallly make houses more affordable, if there are too few mrotgages to buy them with? Could it be that at last they understand there is one thing worse than house prices soaring, and that is house prices falling? Aren’t we owed some explanation of their latest thinking, and some comments on where they want to take the mortgage market next? After all, they now own and manage one of the largest mortgage banks, and intervene regularly in the money markets, so much of this is down to their efforts.

We should be told by the government how much further they intend to let house prices fall before taking the necessary money and mortgage action to stabilise them. We should be told whether they think that the shortage of housing they identified in previous years has now corrected, given the lack of buyers for new homes. Does that make them want to alter their targets for new house construction, as they think new home starts determine house prices?

Commercial property has already fallen by more than 20%, twice the fall so far in houses. There is more and more empty space available as developers finish building projects in progress. As migrants from overseas return home in search of jobs elsewhere, and as people staying here give up on trying to find a mortgage for a better home, we should expect further falls in residential property prices. There will be more repossessions as people struggle to pay the mortgages they already have, forcing more properties onto the market.

No more boom and bust? That does not seem such a clever soundbite now ownership of Northern Rock and clumsy mismanagement of financial regulation and the money markets has made the UK government into an architect of bust in the property market, presiding over the collapse of the mrotgage book of one of our bigger mortgage lenders at a time of general mortgage shortage. And how does Vince Cable now think about the outcome of nationalising Northern Rock, having acted as the government’s spinner to win over fashionable opinion to such an ill judged course? Is he happy with the collapse of house prices, the shortage of mortgages and the redundancies at the Rock?

The West has aroused the Russian bear through its contradictory actions over Kosovo and Georgia. Russia now sees the West as asserting its power too far, recognises the West is now overstretched in the east, and thinks the West is becoming too intrusive close to Russia’s borders.

I wish to stress that I like most Westerners condemn the invasion of Georgia and the military actions taken by Russia in the Georgian war. I also disagreed with some of the actions taken by the EU and the USA during the Yugoslav wars, which are an important part of the background to Russia’s attitudes today. The West is in danger of reaping what it has sown.

Now the bear has awoken we need to analyse carefully what are the legitimate and illegitimate aims of Russia, and how might it use its growing military and economic power? We need to think before we speak, and plan and act before we commit ourselves too deeply, beyond the range and strength of our power.

The irony of the present situation will not be lost on the Russians. The West is paying Russia to re-arm, thanks to the failure of the UK, the US and other western governments to take the necessary action to cut dependence on imported oil and gas from parts of the world that are unstable or unfriendly. The more oil and gas we buy from Russia at these new higher prices, the more missiles they can finance and the more tanks they can manufacture. The first thing the West should do, if it wishes to strengthen its hand vis a vis Russia, is take urgent action to cut its dependence on imported fuel. I have set out before some of the steps the UK should be taking now to do this.

The second thing the West should do is think through its position more clearly on whether it should help defend all existing borders of states or not. It has been normal in the post 1945 world to attempt to defend existing states borders, buttressed by the UN. It required UN agreement and action to ratify changes in states borders. That changed with the recognition of Kosovo, opposed by Russia, a UN Security Council member with a veto.

This doctrine is also in conflict with another Western doctrine, the self determination of peoples. Under this doctrine, if a dominant majority in a substantial region of a larger country wish to secede and form their own state, they should be allowed to do so following referendum and legal process. This is, for example, the view of the Scottish Nationalists over how they should take control of their country, and the growing view of many English nationalists who want a vote on the independence of England from the UK and the EU. It is a view that the US set out as a war aim in the 1940s, seeking to liberate European countries from German control, and favoured by the US when supporting the removal of colonial powers from Africa. Czechoslovakia was allowed to split in two when the popular wishes were so clear.

In the modern complex world we live in there should be no reliance on one of these doctrines to the exclusion of the other. Sometimes they will be in conflict, and decisions need to be made. In practise each case has to be settled on its merits. The judgement will be better if it is supported by more countries, including all the important global and regional powers who can help maintain the peace around whichever decision is made. I incline more to favouring self determination, but accept there may be occasions when that cannot work. There have to be some limits to it to avoid a constant state of flux and an endless movement to ever smaller states.

So how should the West respond to Russia? Today the West needs to understand why Russia is so alarmed by NATO’s current stance, and to understand how there is no acceptable military option for the West to dominate in Georgia and to determine borders so close to Russia. In other words, we need to talk to Russia, and to discuss the issue of splinter regions from Georgia. We need to discuss the whole architecture of states around Russia’s western and southern border, to avoid committing NATO to maintain borders we cannot in practise enforce at an acceptable military cost, and to allay Russian fears to make Russian military action less likely. We need to see how big the disagreements are and to assess if any other state apart from Georgia is in danger of a Russian invasion. So far the West has not won over enough independent world opinion to strengthen its hand in negotiation with Russia.

At the same time we need to strengthen NATO and the Western economies, so we are less dependent on Russian fuel and more capable of acting if Russia pushes too far and uses her military in even more unacceptable ways.

The USA has been the world’s only superpower for a couple of decades. It has got lazy about using its power and enforcing its will. Only asymmetrical warfare and terrorist attacks have challenged it for years. Now US power is coming up against other important powers in China, Russia and the Middle East that it would be unwise to attack head on. Worse still, the US is in danger of creating too many different enemies and threats, fighting a live war in the Middle East, a cold war with Russia, and engaged in a superpower struggle of various kinds with China, primarily in the economic sphere in the first instance. There are flash points in all of these relationships – in each border state near Russia that the US guarantees, in Taiwan, in Iran and Iraq. Even the world’s superpower has to be careful not to overstretch. It is dangerous to create so many opponents who might one day help each other against their common enemy. The US needs to ask itself what are its long term interests? How many of them can it pursue backed with effective military force? The EU needs to stop posturing as a major player when its words can be inflammatory and when it lacks the military capacity to enforce. I am not recommending it has military capacity – I am recommending it should remember its limitations. The UK needs to look to its economy first - it is now so weak it cannot afford its current defence commitments properly, and is vulnerable thanks to the lack of a cogent energy policy. We need some strategy rather than more foreign policy spin.

David Milliband is playing a dangerous game. His visit to Ukraine and his support for places close to the Russian border is a further incitement of Russia, without the force to back up the position he is setting out. He comes across as a boy cold warrior without weapons, playing with fire in a part of the world he understands but dimly. Maybe he is still planning his first cabinet, and too distracted by the slow collapse of the government he represents to do the homework he needs to do to understand the world of the Caucasus.

He has chosen the weakest and worst of all the possible responses to the ill judged Georgian adventure and the unacceptable Russian invasion. He has decided to talk tough and act weakly. What we need is a proper analysis of the problem, and longer term measures to rebuild the UK’s strength – and the strength of our Western allies – before presuming to dictate to Russia things we cannot control. How does he think the UK can guarantee the independence of all the states clustered near the Russian frontier? Does he understand why the West’s actions in encouraging and recognising an independent Kosovo have been seen by Russia as a green light to supporting independent states out of Georgia’s regions?

How can he belong to a government which set up a Scottish Parliament which now wants a vote on Scottish independence, and yet argue that people should not be allowed to change their states if they wish? He is muddled on self determination and how you redraw Europe’s borders. Apparently what is allowed in Kosovo is not allowed elsewhere. Time to do some reading and thinking, Mr Milliband, before putting your foot in it again.

Today the government’s favourite think tank is being given air time to tell us how important migrants are to our economy. It is true that in the boom time migrants often came here to do jobs others were unwilling to do. The government made the labour market much less flexible for people born here, through its new labour laws, and its tax and benefit regime. The evidence of that is there to see in the 5 million people of working age who do not have a job. It offset this inflexibility to some extent by inviting in large numbers of migrant and temporary workers. That was better than leaving the economy ossified , but not as good as making the UK labour market strong enough and flexibile enough to get many more people back to work or into work for the first time.

Now we are entering a very unpleasant downturn, brought on by government waste and overborrowing, as well as by the loose monetary policy of past years and the overborrowing in the private sector, the market will partly adjust by some migrants going elsewhere where there are better job opportunities.Nonetheless, there will be all too many job losses, and some rise in overall unemployment, as the economic winter sets in. The inward migrantion kept wages down at a time of boom, and will offset some of the job losses in times of downturn, but not all of them.

What will the government do to show it is tackling the problems of joblessness and income squeeze? It will spend and spend, as it still does not realise governemnt over spending is much of the reason why the UK is in such a poor position to correct the excesses of past years of easy money.It will offer one off help this winter with fuel bills and maybe with food bills. It will seek to augment people’s income in the short term by borrowing more money which the same people will have to help repay with interest in later years! At a time when people struggle to get a mortgage or afford a mortgage to buy themselves a home we will all be forced to help pay for a collective mortgage to offer sops to people faced with a struggle to pay the family bills.What we need is a governemnt which can deliver much more for less, and eave us more of our own money to pay the bills.

The government should be more cautious. Offering benefits rather than tax cuts is an expensive and complicated way of easing the squeeze, involving too sets of extra officials to collect the money in and then dish it out. Doing it all on borrowing risks the ultimate wrath of the markets. This autumn the government will have to come out with revised figures, showing just how much above its own budget its current spending now is, and revealing just how much worse both spending and revenue looks in the months ahead thanks to much slower growth than forecast. If the government is honest in its figures it will help, but the figures will be bad. If it understates them it will undermine market confidence even more, as markets are getting ready for a lot of red ink in the government’s budget. The more red ink there is, the worse the downturn and the longer will recovery be delayed.

I am busy this week-end but will do the responses tomorrow. Apologies for the slight delay in service.

It’s typical that at a time when the issue is Why is the government spending so much more and borrowing so much more than it forecast some should want the issue to be Tory spending plans.

The issue today must be How can this government get a grip on the public finances? It wrongly thinks spending borrowing and wasting more is the right approach, when it will make the squeeze and the Credit Crunch worse.

My comment to the Sunday Telegrpah said that the Tories should not yet produce spending and taxing plans, because the rate of deterioration in public finances is so huge and we cannot be sure yet just how bad an possible inheritance will be come 2010. Instead we must highlight the large black hole in the governent’s own numbers, and urge them to take corrective aciton - not by cutting nurses and doctors, teachers and police, but by stopping so much waste and needless bureaucracy. Above all they need to stop the losses at Northern Rock and return it to the private sector so it can make mortgage advances again.

There will be a crisis in public finances if the government carries on at its present rate of overspend and overborrowing. It is crowding out an already emaciated private sector, and intensifying the squeeze on incomes. It will leave the government as both unpopular and incompetent.The first thing they should do is place a recruitment freeze on more burearcrats, as we are groaning under the weight of their salaries and pensions.This country is one of the worst placed to tackle the global imbalances, because it has such a top heavy government with so little being achieved for all the money spent.