Month: July 2008

Yesterday the Chairman of the BBC Trust and the Director General came to the Commons to talk about their service. I went along to ask them why BBC political journalism confines itself to the agenda of the spin doctors, and to repeating the half truths and misleading comments encapsulated in the soundbites.

The BBC took this as a request for a few more academic type programmes to go wider than the news. It was instead a complaint that the BBC is too influenced by spin, to the exclusion of the audience understanding what is really going on.

Let’s take three examples. Readers of this site will know I have been a long standing critic of the government soundbite “We made the Bank of England independent and that guarantees economic stability”. The first half of this was never true, as any well informed Whitehall watcher should know. They did not make the Bank independent – they took away crucial responsibilities from it and interfered at crucial moments with the MPC. The second part is now unravelling – can you claim it is stable to have a run on a bank, a halving of mortgage activity, a halving of house sales and a collapse in property and housebuilding?

The second is the current soundbite “We must not talk ourselves into recession”. The sharp slowdown we are experiencing is not the result of idle talk, but the result of a shortage of money. It is the direct consequence of a boom-bust credit and money policy pursued by the authorities, who created easy credit in the period 2004-6 and tight credit 2007-8 through their handling of banking regulation, money markets and interest rates. Ministers will not be able to talk their way out of this one. They need to take action in markets to sort it out.

The third is the soundbite “The UK is well placed to ride out this international storm”. The BBC dutifully puts into bulletins that the Credit Crunch was made in the USA, and this is an international problem. They should instead ask some of the following questions:

1. Wasn’t Northern Rock a British collapse, based on the UK mortgage market?
2. Didn’t nationalisation of the Rock remove the most aggressive large mortgage lender from the market, intensifying the mortgage squeeze?
3. Isn’t the boom-bust in UK property prices and housebuilding a UK phenomenon brought about by British monetary policy?
4. Isn’t the UK government in a bad position, having borrowed and spent too much in the good years and now unable to reflate the economy with tax cuts?
5. Didn’t the UK government use off balance sheet vehicles and creative credit devices itself on a large scale, fuelling the credit boom of recent years?
6. Hasn’t UK competitiveness declined significantly in recent years, making UK adjustment more painful?
7. Why did the UK fail to add more to non fossil fuel electricity capacity during the good times, to ease shortages now?
8. Why does the UK impose some of the highest taxes on oil products, and increase them during a period of sharp upward movements in oil prices, exacerbating the squeeze?
9. Why did the government increase North Sea oil taxes, putting companies off from more exploration and enhanced recovery?

If they asked some of these, they might see that repeating uncritically the notion that this is entirely a US or international problem is just not the case. The UK dimension to this crisis reveals serious flaws in the conduct of policy in recent years.

The price of oil fell sharply yesterday. The mood has changed in energy markets in recent days – at least for the short term. It is a reminder to all those who think the price of oil and related commodities can only go one way that there could be a price retreat in a market where everyone who needs oil has probably bought lots forward just to be on the safe side. Readers of this blog will know I have felt for some time that there is speculative as well as business money behind the oil rise, and this could unwind at any time.

I do not deny the long term case for higher oil and other commodity prices. Of course the arrival of 2,500 million Indians and Chinese at the western party will make a long term difference to the prices of commodities relative to other things – they will get dearer as these large countries get richer. Such changes rarely occur in a steady straight line, and we should expect interruptions to the upwards march when there is too much speculation in the market, or when there are pauses to demand growth owing to the trade cycle. We are likely to experience some reduction in demand from the west over the next year, as the economic slowdown has an impact. This would be reinforced by mild weather, and offset to some extent if there is a really cold winter.

The volatility of the oil price should act as a warning to the incompetent UK authorities that they should concentrate on fighting downturn more than on fighting inflation. No-one looking at the UK economy today can plausibly think its main problem is accelerating inflation. Its main problem is clearly collapsing demand and a weak banking sector which will keep growth well below trend for the foreseeable future. In such circumstances upwards movements in commodity prices are unlikely to lead to second round inflation in the UK – the higher prices do show up in the price indices, but just mean people have to buy less of something else, as consumers have no way of passing the price increases on. They are not going to get an inflationary wage increase.

If commodity prices do decline and stay lower the rises in the RPI will subside quite quickly. The downturn will not suddenly come to an end. Maybe if and when this happens even the ponderous and foolish UK authorities will see they have set interest rates too high for current conditions, just as surely as they set them too low for conditions a couple of years ago thanks in part to the UK government’s meddling with the targets, and in part thanks to the government’s passion shared with some in the banking sector for off balance sheet finance. Maybe the Treasury will speed up its review into the functioning of the money markets, and conclude what is obvious to most sensible commentators that the money markets are still short of cash and helping to throttle the economy. What do we pay all those salaries of Ministers, senior Treasury officials and Bank of England officials for, if they cannot see these blindingly obvious truths and need outside experts to come in a write reports as if next year would do for fixing this problem?

All the PM is able to do is to tell us the UK is well placed to ride out the international storm. Both parts of this idiot soundbite are wrong. This is not just an international problem. A large part of the UK housing and mortgage collapse was made in the UK. Northern Rock was not big in US sub prime, but big in UK mortgages. It was the Bank of England and Treasury that mishandled money markets last summer and led to the run on the Rock. The UK is not well placed. Thanks to its profligate government and hapless monetary authorities it is one of the worst placed economies to handle the downturn. If you want to cure a problem you first need some honest analysis of what is wrong. Until the UK government admits its past mistakes I do not hold out a lot of hope of it getting the next moves right.

The British Chambers of Commerce latest survey makes bleak reading. Small businesses, which were very chirpy about the outlook only a month ago, are suddenly full of fear, reporting falling orders. The BCC itself has become the latest to signal recession.

There were Wall Street analysts telling us the US was in recession at the beginning of the year. Instead, so far we have just had a sharp slowdown. There have been doomsters calling recession for the UK this year, but so far we have had two quarters of painfully slow growth. I am holding to my forecast that we might get by without a full recession in the US, where they have taken action with low interest rates and tax rebates to try to turn the economy round. The UK is now wallowing from a monetary authority that is getting it wrong both ways – too loose on the way up, and now too tight on the way down, so it is a closer call here.

Within the overall pattern of no growth or slow growth, certain sectors will experience a very painful recession. In both economies property, building and construction are in freefall, and banking is going through a nasty squeeze. With a low dollar and falling pound both economies should see better export performance, as their manufacturers are priced back into world markets during an inflationary period.

The situation in the UK is both ameliorated short term by excessive public spending, and made worse in the medium term (two years) by the over borrowing of the public sector to pay the ballooning bills. Yesterday in the Commons it was Supplementary estimates day, when the government seeks Parliament’s approval for some of the overruns so far this year. We were only allowed to debate concessionary fares and the science budget. The more interesting estimate before us was the stonking £5,300 million extra cash estimate for Northern Rock resulting from the transfer of a Bank of England loan that previously had not appeared in the figures. No Treasury Minister was on hand to give us an update on how big the trading losses and redundancy costs are likely to be, and how long it will take to get the loans back that the Treasury and Bank have extended. You don’t get much explanation for £5.3 billion from this government! It is typical of a regime that spends other people’s money as if there were no tomorrow, and now thinks borrowing any amount it likes is fair game. They may discover the day of reckoning for their excess comes before the General Election.

In today’s Independent there are rumours of £7.5 billion of overrun on the public accounts. The way this government is spending, I think the final total above budget this financial year will be higher than that. The short term impact on activity will be far less than the medium term adverse impact from the higher interest rates and lost confidence as the government’s financial plans unravel. If only the PM would bring back Prudence, we would have some better options.

In the meantime there is action the government should take to fight recession. It should press ahead with the permits, licences and competitions necessary to organise large scale programmes to increase transport, energy and water capacity. It is an ideal time to do it, when the construction industry is facing large cuts in workload and workforce. That is something we could all agree about, and something which would help UK competitiveness in the next upswing.

This government’s answer to every problem is to make it dearer and blame someone else. Only the rich can afford to live under Labour.

Today we have the ultimate irony, that they now think the way to deal with food price inflation is to make it dearer, by appealing to the supermarkets to remove the two for three and the one for two offers! You could not write parody better than they write it themselves. It’s the Bogof answer to the struggles of the family budget.

Just look at the list of things that they want to sort out by making them dearer and by interfering with the supermarkets, dedicated to making things cheaper:

1. Some people binge drinking – government answer: cancel cheap drink for everyone at the supermarket, remove promotional offers, and abandon happy hours in the pubs and clubs. Only the rich can then afford lots of drink.
2. Too few roads for too many cars – government answer: congestion charges, so only the rich can drive in central London during the week. This answer will be rolled out elsewhere given half a chance.
3. Too much CO2 from vehicles – government answer: ever higher fuel duties, Vehicle Excise Duty and VAT – so only the rich can drive a car regularly
4. Rising food prices – government answer: get rid of the supermarket cheap offers to reduce consumption! Only the rich can eat well.
5. Too much packaging – government answer: get the supermarkets to charge for bags

Whilst I agree with the general point that governments cannot alone solve all the problems, and what each one of us does is in aggregate important, I do get fed up with a government which never wants to tackle its own contribution to problems, and which sees dearer prices and higher taxes as the way ahead in every case. Part of the reason we are adopting a more inflationary psychology in this country today is because the government is generating so much inflation of its own.

What I would like Gordon Brown to say and do at the Summit goes something like this:

“Today we face the twin problems of energy and food shortage, driving the world prices of both higher. This is damaging the prospects of recovery for the rich western economies trying to overcome the Credit Crunch. It is far worse for the poorer countries, where more will be forced into undernourishment and greater poverty by the surge in prices of these basics. We had planned at this summit to concentrate on the response to global warming and African poverty. We need today to concentrate on African poverty, and to see that any attempt to ease this requires us to grapple more successfully with the world shortages of energy and food than we have managed over the last few years. We cannot solve the African problem unless we can resume faster growth in the West and supply them with better market opportunities for their goods. We cannot resume faster growth in the West unless we can get on top of scarcity and inflation in the prices of the basics. We cannot help Africa by expanding ourselves if we drive the relative prices of the basics so high they cut Africa’s effective income further whilst raising our own overall.

The cases of food and energy are different. The West needs to change its approach to food production and trading dramatically to be fair to the rest of the world. I will be pressing to dismantle the Common Agricultural Policy, which prevents poorer countries selling us as much as they would like at the same time as restricting our domestic output by encouraging set aside and non productive use of land. At current world market prices – and at lower ones than now – we should abandon managed prices and assume world prices within the EU, allow the free movement of overseas produce into our market (subject to health and safety checks) and remove incentives to keep land idle. The USA too needs to tackle its agricultural protection. I will also encourage entrepreneurs and financiers in the UK to look at possible commercial and investment ventures in lower income countries in the agricultural sector.

The West has chosen to levy very high taxes on certain forms of energy, especially penalising its use for road transport whilst favouring it for other kinds of transport and some forms of space heating. When I pressed the Arabs to produce more oil they not unreasonably said I should also look at the UK government’s contribution to high fuel prices. I now do so, and accept that levying more than 60% of the retail price of petrol as tax is too high in current circumstances. I will cut the duty and VAT so I am only collecting this year the budgeted amount. I trust Middle Eastern producers and governments will as a result look favourably on further short term increases in production.

In the medium term many governments of oil producing areas need to encourage more production. I appreciate I have taxed the UK North Sea too highly at the margin, putting off the new exploration and investment we need. I am announcing today cuts in North Sea taxation geared to encourage money into exploration and into increasing production from enhanced recovery in existing fields. I urge governments in other oil provinces from the USA to Russia via the Middle East to do something similar.

Finally, I am conscious that we need to do more to find alternatives to oil based energy for the longer term. I will be going ahead with a much larger programme of permits for renewable and nuclear power in the UK, and will be exploring with industry how we could speed up carbon capture, oil from coal and clean coal technology. The UK has large coal deposits, and we need to find a way of bringing them back into use, meeting modern expectations of cleanliness and working conditions.”

David Hodgson writes that social breakdown and inequality are the result of “neo liberal social and economic policies”. They are the result of re-creating our” social and economics institutions in the image of America, having turned our backs on Europe.”

Arguing that Breakdown Britain, or the poverty and drug-taking in some US cities, is the result of economic liberalism is as likely as arguing these phenomena are the result of living in a Christian culture in the UK and the US, a proposition I know David would reject. It is true that there is some poverty and unemployment in the USA, but less of the latter than in the EU. Relative US poverty is in relation to a much higher standard of living in the USA than in Europe. Both the US and the UK are Christian countries, so how can we be sure that the features of society we do not like result from the alleged economic policies rather than from a Christian framework marked by tolerance of other ways of life? I do not see causal connection in either case, but could make a better argument for the latter than for the former. You could argue that the lack of an agreed moral framework, and the lack of moral authority by the Christian Churches over many people in the society are, in part, the reason for different social mores and the presence of more anti-social behaviour than in say, Islamic societies where the moral grip of religion is greater. We value freedom more, and the Churches give a hesitant message if any on how we should live.

The UK, far from turning its back on Europe in the last couple of hundred years, has remained engaged so much that it has fought great wars to try to keep Europe free, and in recent decades has accepted practically every law code and power shift recommended by the EU. Over the last decade the government has taken public spending and borrowing up to EU levels, and has equated NHS spending to health spending levels on the continent. At the same time, France, deeply embedded in European politics and values has seen her suburbs disfigured by high unemployment, racial tensions, poverty and drug taking on a worrying scale. How on earth can you believe that if we were more “European” we would have fewer social problems?

There is a great misunderstanding by many on the left of the nature of free enterprise capitalism. It is not wholly individualistic, and it does not rely on competition to the exclusion of co-operation and community. I believe in free enterprise as part of my wider belief in a free society. I am against big government, but that does not make me a critic or opponent of collective actions, community values, or team work. I prefer team games to individual effort sports, where the individual has to co-operate with others and work for the benefit of all team members. I like enterprise capitalism, because like minded and like motivated people discover they are stronger working together than apart, and are able to serve their fellow human beings better by co-operating through companies.

I dislike big government, because it is so often clumsy and insensitive, damaging civil liberties in the name of security, and damaging free enterprise in the name of equality. It makes us collectively poorer. Taken to the extremes of communism it makes the society so much poorer that the poor are poorer as well as the rich are poorer than people in freer societies. Big governments under communism always favoured more spending on weapons than on improving the lifestyles of their publics.

Free enterprise societies have higher average incomes than other states organised along different lines. They enjoy more personal freedom than socialist states where government may command where you work, determine your income, decide your housing and control your thoughts. The freer the state the better the economy – the European model of limited free enterprise has been consistently outperformed by the freer USA, which has kept its unemployment lower and its growth rate higher than the EU.

A free enterprise society gets the best out of the individual and the family by allowing them to co-operate and work with others as they choose, by allowing thousands of flowers to bloom in the meadow of our plenty. It honours charities, welcomes Churches, encourages diversity in tackling social problems as well as in producing more and better goods. The main developments that have made life so much easier – the phone and mobile phone, the TV, the washing machine and the car have all been developed in free enterprise societies. Free enterprise works because it creates that natural balance between competition and collaboration, between team effort and individual initiative. Other societies are not so good at that, so they either have to copy the free enterprise ones and allow in their companies to do it for them, or accept lower living standards and greater poverty.

I learn today that my colleague Philip Hammond has obtained some figures from the government showing just what huge sums have been paid out in performance pay, including to the accident prone Inland Revenue and others who have lost data.

I had tabled separately a series of questions to find out if these performance awards are easily come by, and if there is any attempt to manage performance well. Looking at the results – the lost data, the falling or slow moving productivity, the error rates, the accounts that have to be qualified and the general delay throughout the public sector in answering letters and queries, management under this government is very lax.

I have asked how many people have lost their jobs for incompetence and worse; how many staff have been disciplined, and how many staff have been awarded no bonus or low bonuses under bonus schemes. If I get an answer – and full answers are rare to Parliamentary questions under this regime, I am expecting it to reveal that bonuses are not used as part of a tight management system, and are too easily granted and payments awarded at the end of the year.

The rows over MPs pay demonstrate the understandable anger of people in private sector jobs where bonuses vanish when performance declines, even if that happens through no fault of the employees and the company thanks to market circumstances, when they see the public sector casualness in its approach to reward and remuneration.

We need to revisit the whole question of public sector reward and its poor linkage to productivity and performance. Bonuses are used effectively in many parts of the private sector to drive ever better personal and company performance. There is no evidence they are well used or properly disciplined in the public sector.

If I get no answers to my questions it will be typical of the malfunctioning government. If I get honest answers I expect it will show one sided bonus schemes which do not deliver as much as they should by way of better performance.

Social breakdown and economic breakdown- what to do about Breakdown Britain

I was invited to a meeting to discuss anti social behaviour in my constituency yesterday, sharing a platform with a local GP, an Inspector of Police and a charity worker specialising in tackling the problems of disaffected youth. I said something along the following lines:

“ Most of you in this hall today are used to getting up at a reasonable hour in the morning, washing and dressing, shaving or putting on the make up, and going out to make your contribution to our community life. Some go to work, as teachers or police, some to sell us goods in the shops or to make us things in the factories. Some retired people go out to lead local community clubs and activities, to run our charities and voluntary organisations. You have a sense of purpose and wish to live within the law.

“I was asked by David Cameron to produce an analysis of how we could make things better for all who wish to make their own way in the world, and want to contribute to our economy or voluntary activities. That work is now being adapted to manage the crisis in our economy that the Credit Crunch and its aftermath represents.

“My colleague, Iain Duncan Smith was asked to produce a report into Breakdown Britain. His task was the more difficult one of recommending how we tackle the problems of that other Britain. It is peopled by those who have no reason to get up in the morning and smarten themselves up, by people who are depressed, angry, lonely or out of sorts with the world around them. That other Britain throngs with drug peddlers and drug users, with the unemployed and the mentally ill, with those who failed at school and fear they will fail at most other things. It is full of people who cannot accept the rules of how the rest of us live, who see them as at best an irrelevance and at worst a tyranny they must break. Our prisons are full of the sad and the mad as well as the bad.

“Iain not only harnessed the talents and ideas of the many to write his analysis and proscription. He also plunged himself into the world of social entrepreneurship to gain first hand experience of ways of stretching out a helping hand to those down on their luck and to those who think the best thing in life is to look for trouble in gangs or idle time away on street corners. If there is one overriding conclusion from Iain’s patient work, it is that there is no top down answer government can impose or buy. He concluded that in the broken communities of Britain many of the dispossessed young need adults who will take time to cross the street to help, inspire or comfort before it is too late and they need the penitentiary. He recommended relying more on a renaissance of social entrepreneurship, letting a thousand flowers bloom in the unpromising concrete fields of our inner cities.

“Here in Wokingham we are blessed with fewer of these problems than you would encounter thirty five miles down the road in parts of inner London. But no community is free from drug abuse, drop-outs, mental illness, violent crime and casual damage to property. Here we have seen violent and casual knife crime, and syringes in children’s play areas. My message today is that all of us adults have a part to play – some small, some larger – in putting more of this right. Families can inspire and discipline, motivate and reprove. Where they can they should be encouraged to do so. Where parents are too busy to offer the love and time it takes, or where the families have been ruptured and the adults are themselves prisoners of emotional poverty, other adults from the local community need to be around to help. It is not financial poverty that does most damage. Some poor families make up in love and concern what they lack in cash, and some rich families may shower goods on their children for lack of time to do what matters more, to take an interest.Some will help by running voluntary organisations, organising sports, and by setting up social enterprise companies and not for profit bodies. Others will make their contribution through their excellence as school teachers, vicars, policemen and women and care workers. There has been tension and difficulty in talking between the generations from time immemorial. That should not stop us seeking to improve the dialogue of the generations. We, the generation in power, need to tell those who follow us what we are trying to do and how we are seeking to do it. The generation that follows will judge us, write our epitaphs and decide what to keep and what to ditch. The coming generation needs to tell us what they want from their future and how they see what we are striving to do whilst there is still time to modify or complete it.

“If there were a few silver bullets that government could fire to solve the problem this government or its predecessor would have done so. There is no party dispute over the need to mend our fractured society, and what disputes there are over means amount to very little. The truth is political parties have come to recognise it is not primarily a problem for new legislation or better benefit rules. It is a problem for all of us, to offer some leadership and to offer some inspiration to young people before it is too late and they have settled into a life of crime and futility.”

Oil prices rose and house prices fell again yesterday. It is the government’s nightmare scenario. They have left the UK short of energy by failure to make early enough decisions on replacement power stations using non imported fuel, and through their wish to tax the North Sea oil province too heavily, discouraging more production. They well know how important house prices are to consumer confidence and jobs in the UK economy, let alone to voter attitudes.

Both subjects were on my agenda in Parliament yesterday. At lunch time HBOS came in to tell any MPs interested what they thought was likely to happen in the UK housing market. Last time they had dropped by I had found them wildly optimistic, anticipating little change in house prices. This time they were gloomier, forecasting a 9% fall in the average price of a home in 2008. I still think that is looking on the bright side. HBOS argued that the supply of houses would remain tight, thanks to a collapse in housebuilding, against a continuing lively pace of immigration and divorce generating more demand for households. I reminded them that fewer migrants will come if the economy gets grimmer, whilst divorce and migration only translates into demand to buy homes if the mortgages are available so people can afford them.

Anecdotage tells me that some sellers of houses are now beginning to cut their prices by rather more in a desperate attempt to find a buyer. For several months the market has held its values better than might have been expected, because there have been precious few transactions. Sellers have held out for the original price, and buyers have simply stayed away. Gradually some sellers will decide they have to take whatever price is available, and a few more buyers will be tempted by significant price cuts. One friend of mine has cut the price by more than 20% and still has no takers. Another cut by almost 15% and found a buyer. Meanwhile mortgage offers have more than halved. Banks are understandably cautious, lending a smaller proportion of the price, expecting a more cautious valuation and seeking a higher margin through a higher interest rate. That’s what a Credit Crunch is all about, and that’s what the government and Bank of England said they wanted when they warned banks to be more careful last summer. Sometimes governments should be careful about what they ask for, in case their wish comes true. This blog said at the time the authorities would reap a bitter harvest from their approach to money markets last autumn. It is not going to make the banks more popular, but it will strengthen their solvency and repair some of the damage to their profitability.

Back in the Commons Chamber in the afternoon we had the opportunity to debate the government’s wish to charge people more for owning a car. The absence of most Labour members, and the fears of some of the few who came spoke volumes about their underlying concern. They must know that the plan to increase Vehicle Excise Duty substantially on older cars that emit too much CO2 is seen as unfair, and on their own figures is not a green policy as it achieves practically no reduction in CO2. Most people are stuck with their older vehicles, especially now the price of them is falling to reflect the higher running costs form the higher tax in prospect. The Conservative Opposition offered them a way out, seeking to stop the government from going ahead, but the Labour MPs declined the life line.

For most MPs it’s not easy being a rebel. You are pulled between remembering that your party allegiance accounted for a large part of your vote at the election, and the strong view that your party is making a big mistake which is letting down the voters. On 42 day detention more Labour MPs felt that the principle of the issue mattered and they should vote with their consciences. They had not signed up to eclipsing important civil liberties. On higher taxes they are uneasy because they can see how unpopular they are, yet individually they are drawn to support their party out of their instinct that higher taxes are good. On Tuesday the rebels over the abolition of the 10p band accepted a weak formula to look again at compensation for losers from the Minister and backed off their tabled amendment. On Wednesday the possible rebels on VED did not even table an amendment and returned to tribal loyalties as they queued up to distance themselves from the amendment the Conservatives had tabled.

In each case the rebels felt better for rejoining their party in the Commons – it makes for easier relationships with colleagues. A long summer back in the constituency may serve to remind them just how toxic these higher tax policies have become, bearing down especially heavily on those on lower incomes. Then they may remember why they felt they should rebel – the government is destroying their chances of re-election if they have marginal seats, and hastening the day they will be out of government if they have safe seats. It is now the economy, stupid, which will determine the government’s chances of re-election. If they do not do something soon to lower inflation and ease the squeeze on incomes, they are doomed.
So far the government seems set on intensifying the squeeze on all of us by increasing taxes, whilst spending yet more and more money they do not have in the public sector. Today sees at last the signatures on the contracts for two large aircraft carriers. It is doubtless a coincidence that this brings work for Glasgow ship yards at a time when we are fighting a Glasgow by-election.