Dealing with the deficits

The UK has been running a substantial balance of payments deficit for many years. The main origin of this is the large balance of payments deficit on trade account with the EU, which has persisted throughout our time in the single market and is partly related to its asymmetric construction in ways favourable to continental agriculture and industry and against UK services.  In the twenty years before we joined the EEC our balance of payments on current account was roughly in balance. During our time in the EEC up to the completion of the single market in 1992 our current account was typically in modest deficit. After 1992 in the single market our current account deficit ballooned to £40bn  to £90 bn a year. Under Labour in their later years the UK also ran a budget deficit which became enormous with the banking crash.  Since 2010 the budget deficit has been brought down from 10% of GDP to under 3%. The balance of payments deficit has stayed at around  5%.

I am more worried about the balance of payments deficit than about the budget deficit. There are only two ways we can finance the overseas deficit. Either we have to borrow money in foreign currencies, or we have to sell more and more of our assets to foreign interests. So far this has proved relatively easy, as foreign investors have found UK assets attractive. They like our property, technology companies and the rest. Our markets are particularly open allowing them to buy up businesses and real estate.

Where we borrow to sustain our excess consumption of European imports we run currency risk of having to repay in a  foreign currency that has got dearer against sterling. Where we  sell more assets we forgo future profits and dividends, and may see the foreign buyer transfer some of the economic activity elsewhere if they wish to help their home production at the expense of a former UK competitor.

This is why stopping EU payments is doubly important. If we stop all the EU payments but spend all the money saved at home we still make a big reduction in the external deficit as this is money which no longer has to be sent across the exchanges to overseas . Every pound we save on net contributions is a pound saved from the balance of payments deficit. I would like the Treasury to be more concerned about the government’s role in boosting the external deficit, and keener to bring it down.

The Treasury does want to cut the budget deficit. That too is easier to do if we cut the amount we are sending abroad. If more of the overseas aid money was spent on the wages of UK public sector  who go to help abroad ,and more on UK supplies and equipment which we give to the aid recipient, the aid budget would be less of a strain on the balance of payments. If more of the actual costs incurred by our military and NHS in helping abroad was properly accounted as aid spending that would help the general budget. If more people who come to the UK for asylum were given housing and other financial support as part of the overseas aid budget that too would assist in cutting the overall deficit.

The Treasury needs to tighten up on the money spent abroad, as it imposes a double strain on our accounts.



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The German election and the collapse in support for Mrs Merkel

Mrs Merkel lost a lot of ground in the German election, plunging from 41.5 % to 33% .  She lost around 65 seats. In her place the anti Euro AFD soared to 13% to give it  94 seats, where it had none before. This is a contrast to the UK Conservatives rising from 36% to 42 % for their share of the vote in the last election.

Mrs Merkel may be able to soldier on at the head of a difficult coalition, but she has lost substantial authority for her EU policies as a result of this voting collapse. If she and the potential alternative left of centre coalition both refuse to include the AFD one of them would have to govern as a minority. Only a further CDU/SDP coalition can get her to a majority. This Grand coalition between the two main rivals is not easy, especially now both parties see how damaging it is for them electorally.So far indeed the SPD have said no deal. Germany has voted itself into weak and unstable government. The BBC calls this a Merkel win!

The UK government has to see this is a further strengthening of its negotiating position. It looks as if the EU has rejected Mrs May’s generous offer and suggestions in her Florence speech, as appears to be the case from Mr Macrons words and from the reactions of the EU Commission. The UK government should in the event that the EU does confirm it refuses to widen talks and seek a positive future agreement soon make clear the offer is withdrawn given the lack of any positive response.The position anyway should be being reconsidered in the light of the   German election.

The Prime Minister made a very generous offer but made clear all had to be agreed before any offer is confirmed. Circumstances are now different so the UK needs to firm up its position and intensify its preparations for no deal to show it is serious. Then the EU may start to talk about the things that matter to both sides. If they continue in saying they will not even talk about trade and the future relationship there is no point in being generous. We should neither pay to get talks started nor pay for a trade deal.

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Water management

On a recent visit to environmental and  river works in my constituency, I was asked if I knew about total water catchment management.  It was presented as some new breakthrough, based on understandings of the patterns of water movement. Apparently it includes the perceptions that you need to manage water on a water basin basis, and that you need to consider what happens to the water if you speed its passage upstream to avoid flooding when that water arrives more quickly downstream.

I expressed surprise at this.  Water has always been managed on a water catchment area basis since I have been involved in public policy. Our water companies were designed around water basins. There have been few attempts to transfer water from one catchment to another. The most famous was the decision to supply Birmingham from new reservoirs in Mid Wales, which caused controversy. Debates about creating a national water grid have not resulted in the creation of one.

I would also have thought it had been well understood by past generations of managers that if you solved the problem of flooding by improving capacity to move the water on upstream you could do more damage downstream unless you also made provision there for fast transit or storage of excess.

It is  true that much of the rain falls in the more lightly populated parts of the north and west of our country, whilst more people live in the drier south and east. There is some movement of water to those places by the Thames and other rivers,  but the south has had to build reservoirs for storage on a considerable scale and has put in desalination capacity as well to have sufficient water. It is important to recognise the need for more water capacity in the south and decide which is the best  value and best environmental means of providing that capacity. The UK overall is  not short of water and overall gets plenty of rain. There remain important issues about supplying enough drinking quality water during dry periods in the drier heavily populated parts. More water storage is one answer. More water transfer would be another.


Meanwhile water management is crucial to controlling flood risk. Given the extent of building on flood plain, it is becoming ever more necessary to engineer solutions to safe water transport and storage during times of heavy rainfall.

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The government needs to press on with the No Deal option

The result  of offering too many compromises with the EU is it will  make the Deal option less attractive than the No Deal Option. Paying large sums for a Free Trade deal makes no sense, when tariffs would  be a cheaper way where we can give the tariff money back to the UK consumers who paid it. Accepting EU control of our laws, trade policy, migration policy  and other matters after March 2019 means we don’t take back control.

The PM’s speech says considerably less than the versions of commentary that have been built on the back of it. She argues that we want as short a transition as possible, and says we need to  be able to run our own affairs from the moment we leave the EU. That is not the same as spending two more years in the EU and calling it transition.  She said “I dont  believe either the EU or the British people want the UK to stay longer in the existing structure than is necessary”, so lets get on with sorting everything out now. It need not be that difficult.

On money she says they might agree to stay in certain programmes where we would agree cash for benefits. I have  no problem with that, though there are no programmes which are a must as far as I am concerned, We can replicate the worthwhile ones for ourselves. She also reaffirmed we will “honour commitments we have made during the period of our membership” which some interpret to mean making  full contributions up to the end of the present 7 year budget cycle. There is no legal requirement to do that.

It is not possible to have a meaningful conversation about Transition or Interim arrangements without having a Deal agreed, or at least knowing the outlines of what the EU will offer and accept. I wish the PM well in her effort to get meaningful talks going. I am not persuaded that we owe them any money or that we want to stay in for moment longer than our legal requirement up to March 2019.

What the civil service have to grasp is there is no cliff edge. It is quite possible for the UK to have functioning borders and trade arrangements on March 2019 even with no deal. 160 other countries trade daily with the EU and most have no special Trade Agreement. The priority must be to get everything in order for 2019 exit. That will also strengthen our bargaining position for a better deal, showing we are ready and willing to just leave. The EU’s response to the speech shows that they will just go on  pushing for more and more money to make sure it is bad deal.



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We will leave the EU in March 2019

The Prime Minister made some good things clear. We will leave the EU in March 2019. We will not stay in the single market or customs union. We do not want to be in the EEA. We do need to be free to pass our own laws and to negotiate our own trade deals.

She also made a very generous offer to the rest of the EU. The UK will stay engaged and helpful to EU on security and defence matters come what may. The UK will happily allow continued tariff free access to the UK market on similar terms to today if the EU reciprocates. The UK may stay in various spending programmes and make a continued financial contribution to them if that makes sense to  both sides and if the UK will continue to benefit. Programmes like Erasmus and the work of the EIB may be what she has in mind.

More nuanced language was used for the passage on an implementation period. She rightly said this should be as short as possible and must have a final date. It remains difficult to know if we need such a thing, as that will depend on whether there is an Agreement to implement.  The issue of money remains sensitive on  both sides. The PM made no express offer of  cash, and stressed that budgets have to be talked about alongside trade and the future relationship.

I remain of the view that we owe them  nothing and we do not have to pay for a free trade deal. That is so much in their interests that there is still the chance they will come round to wanting it. We have always accepted we owe them contributions  up to the date of leaving, which will deliver them an additional  £30 billion ( rough estimate) between June 24 2016 and March 29 2019.

In the meantime the most important thing the PM said was Whitehall is charged with the task of getting everything ready to leave without a deal. There can  be no successful negotiation without the EU understanding  no deal is a feasible option. What matters now is the response of the EU. The UK needs to stop negotiating with itself and concentrate on selling a good deal to the other side, as the PM sought to do today.

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Catalan independence

The Spanish state refuses to allow the Catalans a vote on whether they wish to be independent of Spain. The elected Catalan government is preparing for a referendum at the beginning of October to decide whether to stay or go. The Madrid government argues this is against the Spanish constitution and refuse to sanction such a vote. Polls suggest the independence side is a little  behind.

The Spanish state is now arresting and bringing charges against Catalan politicans who are preparing this vote. They are seizing ballot papers, and  withdrawing powers and money from the Catalan government   to stop the vote taking place.

The EU in its earlier days encouraged regional governments and often appealed over the heads of national governments to them. It created a Committee of the Regions and prefers to run various programmes by sending cash direct  to regional administrations. Now it is more nervous of the centrifugal pull of regions, and keener to help member states that face disruptive regions.

The heavy handed approach of the Spanish state may be making more Catalans favour independence. It is strange to see a western democrcy going to such lengths to stop a vote which an elected regional gvernment wants. When Scotland wanted something similar the UK state granted it. Its not something to do too often, but when there is a strong head of steam behind such an issue and no vote has taken place for a long time it is a pity opinion can be thwarted. The EU once again backs the anti democratic forces.

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What we want from Brexit

I am tired of listening to endless negotiations amongst ourselves. There are too many interests and individuals who want to undermine the UK position by constantly urging us to make concessions. It is even more bizarre that they do so before the talks have even begun about our future relationship.

It is time to remind ourselves of why a majority voted to leave. We expect a better future as a result, with or without a deal with the EU.

Out of the EU we can spend the £1bn a month of net contribution on our priorities, as I proposed in my suggested post Brexit budget

Out of the EU we can set our own taxes. We can for example remove VAT from green products, domestic fuel and female sanitary items.

Out of the EU we can decide how to spend the money we do get back from the EU. We may have better ways of subsidising our farming, for example.

Out of the EU we can regain control of our fishing grounds and have a fishing policy that is kinder to both our fish and our fishermen.

Out of the EU we can sign free trade agreements with countries like the USA, Australia and New Zealand that the EU has  not bothered to settle.

Out of the EU we can shape our own laws, and Parliament can respond to UK public opinion where people want change.

Out of the EU we can have our own migration policy, inviting in those we wish, and controlling the numbers coming to take low paid unskilled jobs.


It will also be better for the rest of the EU, as they can press ahead with their currency, economic and political union without the UK trying to slow them down, block them, or opting out.

We can have a more positive relationship when we and they are free to do as we wish.


The EU is not offering anything we need pay €20 bn for!

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Governor Carney does more twisting and turning over interest rates.

The Governor of the Bank of England has a consistent track record over interest rates. Three times he stated  conditions for a possible  increase, only to fail to put them up each time we reached those conditions. He then followed this tour de force by actually lowering them instead.

He has now again suggested rates might need to go up soon. Why should we believe him this time? He has after all made a mess of forecasting the economy for the period after the Brexit vote, expecting a sharp slow down and technical recession when for the first half year after the vote the economy accelerated. He has also shown a marked inability to predict his own actions in the past.

His latest reasoning is based on the thesis that overseas rates are trending upwards. The markets instead think US rates are going to stay down as they edge instead towards cancelling some of the QE and bonds they have bought up. Rates in large countries  like India and Brazil are coming down, whilst rates in the Euroland and China do not look as if they are  about to rise.

He also alleges that Brexit could harm the UK’s productive capacity and thus worsen the trade off between inflation and growth. This reveals two substantial misunderstandings about our modern economy. The first is that if by any chance we do leave with no trade deal there will be considerable demand for imports to substitute for items like food where EU imports suddenly become dearer thanks to tariffs on top of the dearer Euro. As we have a large deficit it could actually boost productive capacity. The second is the Bank’s old fashioned idea that as you approach capacity working so inflation shoots up ignores the simple fact that we are running an open economy. If we run out of domestically produced tomatoes we import a lot from somewhere else rather than putting up the price of UK ones. if UK wages costs start to rise the EU sends us plenty  of extra workers to keep the wages down.

I note now that the pound is only 4% below its average in the months running up to the referendum against the dollar, and only 2% below against the yen. We don’t hear about the pound anymore from all the Remain facing media! The Euro meanwhile goes from strength to strength against all major currencies.

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University fees

Labour, Conservatives and Liberal Democrats have all in opposition opposed university tuition fees for some of the time. All in government have signed up for them and increased them.

There is growing unrest about these fees, as people feel £9000 is too much for some courses at some Universities. The answer then, is not to apply there. Governments had hoped there would be a market for university courses, with lower fees for the less well rated places and subjects.  Instead universities decided to all price at £9000. Why signal your place or course is not as good as the best by offering a lower tariff?

In practice employers and the wider community do distinguish between courses and universities, prizing some more highly than others. The Universities might not like it, but they cannot prevent the publication of elaborate league tables showing Oxbridge and the Russell Group as more prestigious  places to go than the names at the bottom of these  publications.  So why then do they  not use price to attract students?

There are two main reasons. Setting a lower price for your course confirms what is otherwise a guess or opinion that that course is of lesser value. The more lowly rated universities can still fill enough places at £9000, so why not keep the prices up?

The truth is some courses cost a lot more than others. Offering a good science course in the centre of London with all the labs,property and equipment must be a lot dearer than offering a humanities  course out of property 200 miles or more from the capital. Some of the cheapest courses to run are ones at the bottom of the unofficial lists of quality, giving to them the highest margin. I read that some in government now object to universities charging too much and making a surplus.

The danger of a blanket cut in the fees is that it damages the great institutions that are world class, who are spending  large sums on facilities and teaching and often cross subsidising UK undergraduates. One of the UK’s  big advantages as we go through Brexit is we have a good concentration of high class universities capable of great research which can have spin off for economic development. This would be an odd time to anger them and to disrupt their development.

There is no easy answer to the imperfect functioning of the university market for UK undergraduates. What we need is more demanding applicants, prepared to ask for better value fees where the costs of provision are low and the ranking of the course below average.

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How complicated is Brexit?

I have often said that “Brexit could be easy”, and have gone on to explain how the army of consultants, Remain liking government officials on both sides of the Channel, and the EU Commission will doubtless slow it down and make it more complex.  My critics change “could” to ” will be” when commenting and claim I do not understand how complex people will make it.

Let’s have another go at explaining the dispute. At the high level Brexit is easy. The country leaving sends an Article 50 letter. Two years later it leaves, with or without a deal concerning the future relationship. It could of course leave sooner than two years were both sides to want to make it easy.  All the EU has to do is to confirm it wants tariff freee access to our market with no new barriers and we can get on with registering that as an FTA at the WTO. Otherwise the UK and the EU trade with each other as all non EU members trade with the EU today.

The EU however wants to get rid of the UK as a force to slow down monetary and political union, but is very keen not to lose the UK’s substantial financial contributions. Its negotiating  strategy is to delay at every available opportunity, as each month of delay is another £1bn. Each month’s delay is also another opportunity to watch the UK indulging in an  absurd negotiation with itself, leading some in the EU to conclude the UK is likely to prove weak. Some in the EU think if they play it long the pro EU forces that remain in the UK may succeed in demanding further large payments to the EU . Some hope for a  new subservient relationship for the UK which will remain in some close association of a legal kind that stops it gaining full control of its laws,  borders and budgets without offering the UK any influence over the EU approach to these matters.

The government’s official position clearly rejects any such approach. The government has rejected continued membership of the single market and Customs Union, on the basis that both the Leave and Remain campaigns said these would not be available without budget contributions, freedom of movement and the rest which we rejected in the referendum.  The government has discussed possible interim periods or implementation periods if things are agreed for our future relationship that take a bit longer to fix. They are not currently asking for any such thing in the talks, as you would need an Agreement first before deciding how you implemented it!

It is one of the stupid myths that asking for a comprehensive Transitional period would solve anything. One or two more years of full membership duties to spend more time arguing over the future relationship should suit neither party, and would increase the period of uncertainty for business.  You only need to ask for interim periods or delays if there is a good Agreement accepted by both sides with difficult technical issues that cannot be fixed quickly.

The scares of no planes flying, lorries sitting in jams at Dover and trade disrupted are irresponsible. It is in  neither sides interest on the day we leave to run their affairs so badly that they disrupt EU and UK citizens going about their business. Governments, EU and domestic, are our servants. The UK is getting on with putting in a customs and borders system that will work from 30 March 2019. Doubtless the EU will do the same, as they have to answer to the farmers, factories and businesses of the continent who will expect continuity and smooth running. Both sides have to conform with WTO rules, abide by international law and allow independent courts to uphold private contracts that will continue to operate.

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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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