Month: July 2008

There was one really encouraging thing in the Chancellor’s remarks to the Times. He thinks oil prices will remain high. As he’s been wrong on practically everything else, that is very encouraging! It is possible the big falls in the oil price this week will trigger further declines and some unwinding of the substantial “investment” positions that many funds have taken in oil. That would help relieve the immediate inflationary pressures, and might persuade eventually even the slow moving Monetary Policy Committee that it should fight recession rather than inflation. The long term trend in oil and other commodity prices is up, but that does not mean it will happen in straight line with no periods of weakness and decline. World demand growth is reducing, and even China and India are having to cool their economies to combat inflation.

It is also good news that at last the Chancellor recognises that he has been too optimistic about the state of the economy, about the likely pace of economic growth and the state of the public finances. Unfortunately he still seems to think in Labour soundbites and seems incapable of proper analysis of the situation.

He tells his colleagues through the pages of the Times that there will be no more money for “schools, hospitals, defence”. What does that mean, and why put it like that? The budget figures for 2009-10 and 2010-11 show more money for all three, especially the first two. Defence is in great need of additional money for equipment. There is plenty of extra money washing around in the budget estimates for the next two years in programmes without the same priority, which should be switched to the important and sensitive areas. There are huge amounts of over administration, over regulation, over computerisation, and over provision of consultancies which should be flushed out. That would free money for priorities, and allow cuts in overall spending. Non front line staff costs should be brought down through a strict policy of no recruitment.

The Chancellor needs to wake up to the bleak reality of a large budget deficit and borrowing overshoot which will prove difficult to finance and will be damaging to the rest of the economy. If he persists in continuing with so much wasteful spending in the public sector it will squeeze the private sector even more. That will produce more political misery for him amongst the voters he is squeezing, and will induce more job losses in private sector companies who will have to cut costs the painful way because the public sector is unable or unwilling to cut its costs in less painful ways.

The huge surge in borrowing in the last quarter took most commentators by surprise. My forecast of a £10 billion overshoot this year now looks quite low. The public finances are deteriorating more rapidly than I have ever seen, and still the government carries on spending as if there were no problem. The Chancellor talks tough – and foolishly – in the Times interview. Who believes him? The best thing is to watch what he does, not what he says. In the last few weeks he has spent an additional £2.7 billion on the 10 p tax rise compensation, (and promised more to come), £1.5 billion on North West transport, an unspecified amount on Northern Ireland for the 42 day vote, £4 billion over several years for two new aircraft carriers (work for Scotland) and hinted that he will raise less in revenue for fuel duty and car tax than planned. That is hardly evidence of a man with an iron grip on spending, or with a clear sense of direction on taxation. This budget deficit problem is going to get a lot worse and will need additional measures to control it. Borrowing is just deferred tax with interest! The public doesn’t want a bigger collective mortgage.

Meanwhile the commentators write about the breaking of the fiscal rules as if it were sudden and new. Any sensible commentator can tell you the rules were broken years ago by fiddling the figures.

Yesterday the BBC did move from ignoring the idea of cutting public spending, to mentioning it in pejorative terms. At the same time they started pushing out the government propoganda that the UK exceeding the 40% limit on government borrowing should be viewed alongside Italy where government borrowing is 100% of GDP and France where it is 50%. It’s typical of the lazy or biased reporting we get used to from the BBC on the economy and this government.

Of course the BBC should report the government’s spin line, but it should not be presented as fact. They could, for example, have said the following:

“The government today sought to reassure that raising the ceiling for public borrowing above 40% was reasonable at a time of slow down, especially as France has already reached 50% of National Income and Italy 100%. The Conservative’s Economic Policy Review pointed out that in their view the government has exceeded the stated target for public borrowing if you include all the off balance sheet loans and the unfunded pension liabilities, and put the total already at around the Italian level of 100%. City expert Mr X said he would not himself chose to compare the UK with Italy, a slow growth economy in considerable trouble, and said that the faster growing economies tend to be ones with lower levels of public spending and borrowing as a proportion of National Income than the UK”

That would be a better balanced piece, and leaves the listener free to decide the government is right or the Oppositon is right or business is right, or some combination of them.
It is a disgrace that they just assert the government’s spin line as true and sufficient.

It is all part of the systematic misrepresentaiton of economic matters. This includes:

1. Telling people that the only option for Northern Rock was nationalisation, without setting out other options that were available prior to that dreadful decision. Nor did they expalin that nationalisation was the option that made the mortgage position worse and would lead to more redundancies at the Rock.
2. Telling people the Bank of England is independent, when it was badly damaged and its powers reduced by the Brown reforms.
3. Equating cutting public spending with cutting schools and hospitals or teachers and nurses – ignoring all the wasteful and less desirable spending the government carries out.
4. Concentrating on so called “new money” in arguments about public spending, which implies that the only money that matters is additional spending over and above the additonal spending that has already been announced!
5. Believing that spending less means doing things less well – no understanding of productivity and the favourable impact of new technology on costs and quality.

I woudl be happy to set all this out on the BBC anytime this week-end but am not expecting to be asked. They usually ask me to go on to talk about topics I know less about and never write about!

Halve interest rates. Cut out waste and undesirable public spending. Sell some public sector assets to raise cash.

The government should do all three if it is serious about preventing recession or recovering from the downturn.

Money is too tight and interest rates too high, just as money was far too loose and interest rates too low for too long in the period 2001-6. The current inflation comes from past mistakes, and will subside as soon as world commodity and energy prices subside, which they may well do.

Even today, if the government imposed a staff freeze (excluding essential front line service employees like teachers, nurses, police, doctors and service personnel) the costs would run off quite quickly given the huge size of administrative payrolls. It should also place a ban on most new consultancy contracts, cut down numbers of political and press advisers, and slow down or cancel expensive computer schemes, especially the ID one. It would not be difficult to save billions over the next year or so.

Asset sales would also help the public accounts at a time when they are strapped for cash. Let’s see the sale of the Student Loan book accelerated. Bring on the sale of Northern Rock. Insist on more private capital for the railways.

There are many things the government could do to get a grip on its finances. Being a government of spinners, all it will do is change the basis for setting out the borrowing figures and the fiscal rules, and carry on borrowing as if there were not repayment day. That will prevent the Bank cutting interest rates as much as possible, and will intensify the squeeze on the rest of us. The UK is the worst placed of the major economies to ride out the Credit Crunch, because its own economic policy is so appallingly badly run.

Of only we could have some action to fight recession, instead of wonky words and fiddled figures.

After the fiddled figures comes the changed rules. For years we have been served up a diet of changed statistics, altered bases for setting out public spending, a riot of off balance sheet disguises for extra borrowing, and changes in the dates of the famous cycle that is meant to anchor the government’s spending controls. Despite all that we learn today that even the government think their so called fiscal rules lack credibility, so we are to have new ones that allow the government to carry on borrowing as if there were no day of repayment.

“Fiscal rules lacking credibility” is a smart way of saying no-one believes them any more. No wonder. I have set out how I think the true balance sheet indebtedness of the UK government including unfunded pension liabilities is around £1500 billion, or more than 100% of our National Income. To be told we are still just below 40% of National Income on the government’s measure, staying within this control, is absurd. If the government wants to have a control over total debt it should include the borrowings of Northern Rock, Network rail, all the PFIs and PPPs, even if still refuses to include the pensions deficits that any private sector company now has to put on its balance sheet. That alone would mean they would need a debt ceiling above 50% of National Income unless they are going to start cutting their debt burden..

Then there is the sustainable investment rule, which says they should not borrow more than they need to pay for capital items across the cycle. This allows them to borrow for current spending – to live on overdraft – for years on end, as the cycle may last 12 years and is their flexible friend. They only tell you when the cycle ends when they feel like it and after it has happened! A better rule would be to limit borrowing to capital and a specified percentage for current spending if economic growth falls below a stated level, and to require proportionately less borrowing than capital spend when economic growth exceeds the same level, which should be set at the trend or average rate of growth.

What matters today is not efforts to change the rules, but efforts to control spending and borrowing more effectively. This week I was sent a note telling me that work is advancing on having more honest, understandable and consistent figures for public spending after all these years of fiddled figures. I emailed back with the ironic enquiry that I assumed this work would not be ready until the 2010-11 financial year, just in time for a new government if one is elected. Quick as a flash I was emailed back to tell me that was exactly the expected date of introduction! I just trust the sender shared my sense of irony. Clearly some are preparing for a new government, and think it should not have access to the flexible presentation of the current regime.

This morning I awoke to the BBC telling us there are just two choices for the government – relax the rules on borrowing (i.e. borrow more) or put up taxes.
What is with these so called independent journalists?
Why is cutting public sector waste and undesirable spending never an option for them?
How much more waste and needless spending do we have to have before it might just be?

Yesterday was an Opposition day in the Commons, when the Conservative party was able to chose the topics of debate. We used the second half of the day to highlight the robbery at the petrol pumps, and to demand a reduction in fuel duty. The government responded by announcing it would not be going ahead with the 2p a litre increase scheduled for the autumn, though this was more likely to be response to the Glasgow by election than to our Parliamentary pressure.

During the course of the debate the Chief Secretary to the Treasury, Mrs Yvette Balls (nee Cooper) showed a marked reluctance to share any figures with us. The Government’s number cruncher in chief was apparently unable – or unwilling – to answer the following questions:

1. How much revenue will be lost by cancelling the forecast 2p tax rise this autumn?
2. What has been the increase in total revenue from oil and oil products since the budget over and above budget forecasts, resulting from higher oil prices?
3. By how much has the pump price of fuel risen since the Budget as a result of tax?

Mrs Balls is an intelligent woman. She would have expected us to ask these basic questions in a debate which majored on the issue of tax revenue from fuel duty, VAT on fuel and North Sea taxes. As the government’s chief number cruncher these should be a pretty elementary part of her brief. We must assume that when she announced the cancellation of the 2p tax rise she not only knew how much this would “cost” the Treasury, but would also know how much extra revenue they are gaining anyway. It is pathetic that she was unwilling to tell us these basic figures despite frequent probing, showing just how “political” these Ministers are. Don’t they realise that it merely makes them look shifty that they refuse to answer such basic questions or supply the rudimentary information Parliament needs for a proper debate on these topics? Far from protecting them from unhelpful comment or criticism, it intensifies the criticisms and the anger of the public. They have come to end of the Spin show, yet pretend it is still going down well with the taxpayers.

Our guesses of the answers did not get challenged in the debate. We ventured that the government had enjoyed a windfall of more than £500 million in the first six weeks of the new financial year from oil taxes, and suggested the revenue loss this year from taking away the extra 2p would be around £550 million. The government is clearly better off on oil tax account with the price rises and their impact on VAT and North Sea taxes, even after the 2p cancellation.

The Opposition was right to ask for a cut in Fuel Duty now. It would cut the inflation rate, show the government was getting the message of how people are suffering, and would help the lower paid especially. This government seems to take the Marie Antoinette approach to travellers. To all those who are finding it is now too dear to run a car thanks to higher VED and higher fuel duty, they say “Let them go by taxi”. It is their own erstwhile supporters they are hitting most by high petrol prices and ever higher VED. It is going to take another revolt or two by Labour backbenchers to get the message through to Mrs Balls.

It has taken years for this government to receive a blistering Report from the Ombudsman making it quite clear there was regulatory failure as well as business error at Equitable Life.

When I was the regulatory Minister for Insurance and much of the City in the days when that post was held in the DTI, I received reports on the failure of Barlow Clowes. As soon as I read them I saw how people had suffered, and did not hesitate to compensate once regulatory failure had been established.

I want this government to do the same in this case. Many MPs have been pressing this cause with the government on behalf of constituents. Now the Ombudsman is so strong and clear, what further excuse could there be for delay?

It also leads one to ask more about the nature and purpose of financial regulation. This government seems to see regulation as a good way of bashing private business. The government is very reluctant to conclude regulation has let people down when things like Equitable Life or Northern Rock happen, yet what is the point of it unless it can prevent such events? And if things do go wrong with regulators, as sometimes they will, why is there so much hesitation or denial, when people want an apology and compensation for the mistakes?

I went to a lunch meeting with the Engineering profession on the Lords terrace this week. They wanted to tell us about how to tackle climate change by cutting carbon output. It seemed a pity that on a very sunny day when the sunlight was streaming through the entire long wall of glass along the side of the Terrace marquee, all 96 light bulbs were burning away. I suggested they turned them off but to no avail.

It was the same yesterday at another government/industry meeting in Parliament where all the lights were on on a sunny day.

The private sector is cutting its fuel use because it has to cut its costs. When will Westminster and Whitehall learn?

Stock markets around the world remain in free fall. It’s not surprising to readers of this blog – there’s plenty to be pessimistic about.

There are two big changes underway. The long term change is the shift in economic power from west to east, from an Atlantic centred world to the economies of the Pacific Basin; from the EU and east coast USA to west coast USA, India and China. In the process 2,500 million poor people gradually come to the consumer party, creating huge extra demand for energy, food and raw materials of all kinds. This argues for long term investment in commodities and commodity producing economies, and in the fast growth economies of the East themselves, but only when the price is right.

The short term change is the collapse of some of the debt structures built up in the US and Europe in the heady days of easy money and rapid expansion between 2001 and 2006, as erratic Central banks shift uneasily from being too loose to be being too tight. Simultaneously the fast growth economies of Asia are catching the inflation bug. So they too are entering a phase of credit tightening and interest rate rises, which will slow them at the same time as the credit crunch slows or stops the western world. This should produce both lower growth and some respite to the vertical climb of commodity prices. It has already produced sharp falls in many Stock markets despite the good growth of many underlying economies.

There is only one major Central Bank clearly fighting recession rather than inflation – the Fed. The rudderless Bank of England lurches from mistake to mistake under the unsure Darling. It first created the inflation with interest rates that were too low, then it created the credit crunch in the UK by starving the money markets of liquidity, next it started to put interest rates down, then it panicked about inflation and decided it had to keep interest rates up. Its performance has been a bit like a drunk trying to walk in straight line along the money motorway, whilst trying to avoid the fast moving vehicles of inflation and recession. The European central bank allowed inflation to get out of hand by adopting too easy a policy. Ever since it found out its mistake it has stubbornly refused to change rates at all. Maybe it understands that Ireland and Iberia need very different rates from Germany, but there is nothing they can do about that.

We are in for more bad news over the summer, as the Asians tighten the screws to curb inflation, and as the West learns more of the damage from its own erratic monetary policies and the resulting credit crunch. It seems likely that the US will be the first major economy to experience any upturn in fortune, given the consistent policies to avoid slump. The tax cuts, liquidity injections, easier money policy and low interest rates all point in the same direction, and at some point will bring the economy round. The balance of payments is improving rapidly, consumers are saving and rebuilding their balance sheets, and the dollar is beginning to strengthen.

The UK remains in the weakest position of the major economies, along with Italy. The UK still has both an overborrowed government sector and overborrowed consumers, a weak currency and a fiscal position deteriorating all too rapidly. Several years of falling competitiveness, rising taxes and little investment in infrastructure has left it in a bad place, made worse by the erratic money and banking policies pursued by the regulators and the Central Bank. The RPI and the CPI soared again this month, and there is worse to come before the inflation subsides. There is plenty of deflation in the clothing and shoe shops, in the estate agents window and in the commercial property market, but plenty of inflation left at the petrol pump and in the food market. Redundancies in building, construction and finance are now coming all too rapidly, and will be followed by other sectors as the consumer squeeze runs its full course.

The falls in the Chinese and Indian Stock markets have already been large, but we are still in the early stages of the tightening in these countries and cannot be sure how far the authorities take it before they, like the US, turn their attention to reflation again.

(Regulatory notice- This blog is not offering investment advice)

Welcome to the real world! The government at last admits it cannot switch enough from road to rail because the railways are full, and accepts that congestion is both expensive and environmentally damaging.

As an emergency measure they are suggesting allowing people to use the hard shoulder of the motorways at busy times of day. It seems to help around the M42, so why not? It’s all you can do quickly after ten years of neglect of transport infrastructure expansion for both rail and road.

On Monday after my surgery it took me three hours to drive into London – even longer than walking and using the train – because the M4 east bound was closed at junction 5, the A 40 eastbound was closed at the Polish War Memorial, and the Cromwell Road was closed! I remember sitting on a Bill Committee to legislate so the highway authorities sought to keep the roads open and traffic flowing – clearly we were wasting our time.