Month: February 2009

I asked the Treasury to tell me if they were going to start underfundign the deficit, to aid a policy of printing more money. Yvette Cooper assures me not. She says:

“The Government intends to continue to finance the Central Government net cash requirement using the framework that was established in the 1995 debt Management Review. The Government aims to finance its net cash requirement plus maturing debt and any financing required for additional net foreign currency reserves through the issuance of debt.” Elsewhere she says they are not planning more use of short term debt.

The Office of National Statistics tells us today that we can add £1 to £1.5 trillion to the £700 billion national debt to allow for the banks coming into the public sector. That makes our national debt up to a collosal 150% of National Income on the official figures. We could add some more for pensions liabilities and other off balance sheet items.

So after all those months of being told the UK has low public borrowing around 40% of National Income, at last the government’s own statistics office tries to make an honest institution of the government with these much larger figures. I am not going to argue today over over the odd trillion of understatement, now they are coming up with some more realistic figures. I just want to know why it has taken so long,and why we had to put up with all those denials when I tried to set out the true figures in the Commons and elsewhere.

Bloggers have asked me what do I think of printing money (quantitative easing).

It can be necessary when an economy is in slump and there is no danger of a collapse of the currency or inflationary tendencies from doing it. It is dangerous if there are inflationary tendencies, and if the currency is vulnerable.

The recent views of the Monetary Policy Committee continue to alarm me. They should remember their job is to keep price increases down to 2% on the CPI. They have singularly failed to do that, with the CPI still showing 3% despite the general slump in activity. We are now in Slumpflation thanks to the government and them.

Monetary easing could be part of the answer to our current decline in activity. It needs to be accompanied by spending and borrowing less in the public sector. This is easy to do – all they need to do is spend a lot less on subsidies to wayward banks for starters. The future course of sterling matters a lot. Any further decline in the pound would be inflationary. Sterling now responds to news on RBS and the other nationalised or semi nationalised banks, because overseas holders can see the dangers of the UK state taking on too many debts and obligations from the banks.

The MPC should be writing to the Chancellor to point out not merely that monetary growth was too slow at the end of last year for comfort on activity, but also to point out that the sharp decline in sterling is a matter for concern and does prevent them lowering interest rates. Indeed they should not have lowered them as far as they already have. They could add that the government’s policy towards banking support is now one of the forces driving the pound down. In recent days similar fears about continental banks have adversely affected the Euro.

We need government action to control public spending, and to start to sort out the banks problems instead of just paying for the mistakes. We need higher indicative interest rates to encourage savers and debt repayment. Then we would have a safer background for monetary easing to get activity advancing again.

The likely exchange of letetrs with the MPC requesting permission to switch on the presses and the Chancellor likely to say “Yes” is a silly ritual designed to make you think the MPC is independent. If the MPC were truly independent they would tell the Chancellor a few home truths about the runaway borrowing and wasteful spending.

The MPC minutes mainly talk about activity, not inflation, despite their remit. They do acknowledge that the pound has lost one quarter of its value and this could affect inflation, but much of their discussion sounds like Gordon Brown telling us all it is a global rather than a UK problem. They conclude that the pound has fallen to rebalance the economy, and that it “could have been increased risk premia” – so that’s all right then!

They sign off by saying it was crucial “for the Chancellor to ensure that the government debt management policy would be consistent with the monetary policy actions of the Bank of England”. In this unintended side swipe at Brown’s “reforms” of the Bank they are pointing out that it is no use the MPC trying monetary easing if the government decides to sell huge quantities of its own debt! Well I never – why didn’t they think of that when they split up the Bank in 1997 and gave the power of issuing debt back to the Treasury?

In summary, I disagree with the present policy mix and think quantitative easing in these conditions would represent another worrying risk.

The BBC highlighting very high rail fares in the UK today is inclined to suggest the cause is the government’s policy of requiring more of the costs to be paid by passengers and less by taxpayers. It is one of Labour’s policies that I support. The true cause of high rail fares in the UK is the high cost way our railway is run. Fares are a rip off in many cases. They do need to be brought down. Pumping more taxpayer cash in is not the way to do it.

Britain’s railways are neither green nor good value for money. Indeed to some extent the bad policies that damage the environment are the same ones as make the railways too dear. Put simply, the UK runs too many unpopular trains that are more than half empty, too many heavy trains which require too much energy to speed them up and slow them down, and runs too many old and inefficient engines to haul them.

The railway also uses people wastefully, as it does fuel. It runs on too many consultants, managers and non operational staff, living in its own overregulated high cost world. Compare the approach of the railways with that of the low cost no frills airlines, and you will see what I mean.

It would be a good idea to have a blitz on all those costs and requirements which make our railways high cost. We need more trains on popular routes at popular times – especially commuter routes during the morning and evening peak. Unfortunately with heavy trains, poor brakes and old signals it means we cannot run nearly enough trains on the generous amounts of track we have. Let’s buy cheaper lighter trains that can speed up and slow down much more rapidly, allowing many more trains an hour.

Fly over southern England at the morning peak and you see crowded main roads with traffic bumper to bumper, and largely empty railway lines with large gaps between trains for safety reasons owing to the type of train, and the traction and braking system. We need either to fill more of the seats at off peak times by price discounting, or to reduce the number of unpopular trains trundling around the country largely empty. The railways have some of the bets routes in to our city centres, but they simply are not used enough owing to the technology.

Since Labour nationalised Railtrack the costs of providing and maintaining the track have shot up. It has been a consultants field day. The business is most unresponsive to commercial opportunity. Take them a property project to improve a station and make some money from associated commercial development, and they will sit on it or fail to progress it for years. In Wokingham they stayed out of the property boom as they did elsewhere, failing to improve their own property from profits on commercial development on their extensive land holdings.

The nationalised railway in the long post war period failed to put in a simple spur line to Heathrow, the world’s busiest international airport, until the idea of private capital finally brought about such an obvious business move. The rail network was great for Victorian industry, and even managed to update itself for the early twentieth century business estates. The long years of nationalisation saw the railways fail to move with the times. Now much of industry is on newer business parks located by motorways, without spur lines and sidings, because the railway failed to market itself to business to carry goods.

We need a more commercial approach. The railways could have a relative advantage at taking more commuters and more goods traffic. If they did so successfully they could lower the fares, because they would have more revenue and less cost for each journey. They need lighter trains, cheaper trains, fewer consultants and better traction.

Yesterday was a defining day for the Obama Presidency. He fulfilled the two obvious predictions made on this site – just like George Bush he would spend and borrow more in response to the crisis, and just like George Bush he would send more troops to the Middle East to intensify America’s war there. Obama’s bank package is just another variant of Bush’s largesse to Wall Street.
Yesterday marks the day when he ceases to be in opposition to an unpopular Bush Presidency, and now has to take responsibility. His honeymoon has been short owing to circumstances.From now on people will look at the economy and ask if his policies are working, as he has made so much of his twin packages, one for further bank subsidy and the other to pass more money through state hands. From today the strategy in the war in Afghanistan will be his strategy, even though there is still vagueness about the long term aims of the conflict.
I am pleased he wants to sort out Guantanamo sometime, pleased with his wish to uphold more civil liberties somehow and pleased that sometime he intends to try diplomacy more. What we need is a clearer grip on public spending and borrowing, and a more certain touch at running the US money system to get us over the downturn. It would be a sad legacy for this President of promise, if the main change he sees through is to undermine the excellent work Presidents Clinton and Bush did in reducing welfare dependency.

State bail outs are usually bad news.

They are clearly bad news for taxpayers. We get lumbered with having to pay for businesses which have lost money and become too expensive for their shareholders and bankers to keep going.

The British experience demonstrates that they are often bad news for the very people a bail out is designed to help. In the 1970s UK government put huge sums into leading industries, only to make them some of the worst employers, endlessly sacking staff despite the hand outs. The nationalised coal, steel, and rail industries fired large numbers of people, whoever was in government and however much taxpayers money was tipped in.

The bailed out industries were not good news for their customers either. Far from enjoying cheap subsidised prices, they often faced big real increases in prices. Where bail out was allied to monopoly customers were clobbered.

In “Going for broke” I made the case against state subsidy of industry in the early 1980s, based on UK experiences in the 1970s. We won those arguments. A new generation of politicians, Labour as well as Conservative, started to repeat the new mantras – “Government is no good at backing winners” and “ Subsidy just delays sorting the bad business out, it doesn’t save the jobs”.

It is worrying that these crucial lessons seem to have been lost on both sides of the Atlantic. The US and the UK authorities seem to think these rules do not apply to banks, for some unspecified reason. Now the US is considering a second bail out of GM and Chrysler, just a few weeks after the first bail out. When will they learn?

It is not difficult to see why bails out rarely work. If senior management think cash comes from taxpayers, they devote their energy and time to wooing the state instead of wooing their customers and sorting out their businesses. If employees think the state will rescue their job it takes some of the pressure off to help the company find the new customers it needs to pay the wages. Above all it stops the energy and thought of how to change the business to make it successful.

What would happen, some ask, if the state does not step in and buy shares in banks and car companies? The answer is the radical restructuring needed takes place more quickly, perhaps reducing the total loss and pain brought on by subsidised delays to the process. Of course no main bank should be allowed to go under, as the Central bank is their lender of last resort. If they need last resort lending, it should be made available on promise of radical restructuring and slimming down, to get the bank back into commercial shape. If a car company needs money it can get it from its own bankers. If they are not obliging, then it needs to sell assets and find new equity backers. They will be there, even in these conditions, for a business plan which makes sense. Only the state finances dud business plans as a matter of course.

Ignore the RPI – it is just reflecting the huge cuts in interest rates. Although it is the rate that matters from the point of view of many contracts, for once we should examine Mr Brown’s chosen rate of the CPI.

It is obstinately still at 3%. The authorities should not be surprised. That is the price of falling sterling, which we will see reflected to some extent in rising prices, despite the general gloom and the discounting. For once CPI is giving a more meaningful impression of inflation than the RPI.

Council taxes are too high, and in many places are rising too quickly. I welcome today’s news that a Conservative government would give local electors the right to demand a referendum where they thought the Council Tax was too high and should be brought down. We need such a countervailing power. We need some way of standing up for the taxpayer. I also welcome the news that they want to scrap some bits of regional government at the same time: the more the better.

Why can’t more Councillors and Councils do this? Most of them if asked agree that many voters want a lower tax. I have been consulted this year by some Councillors on the detailed budget making of a local authority (not Wokingham). It has been a useful reminder of just how difficult a task it is for Councillors.

The first problem they need to tackle when budget making is the information they get sent. All the Councils I have know over many years receive budget papers in the same useless form. Officers start on the basis that everything being spent in the outgoing year is a given. They then compile a list of “unavoidable” commitments to add to last year’s total. On goes the revenue consequences of last year’s new projects, the need to make crucial repairs to capital assets which they otherwise have not provided for, pay rises agreed, automatic bonuses, the consequences of government circulars seeking more actions by Councils (whether they are statutory or advisory), and any other item they can kitchen sink. They usually claim Council inflation is much higher than CPI inflation, and put a large figure in for that as well.

This produces typically the “need” for a 6-10% increase in Council Tax for a so-called “standstill” budget. If Councillors accept this work of fiction, they are on the hook for a bruising and ultimately unsuccessful budget process. If Councillors counter by saying they want to do something new in one or two areas, that is extra making the Council Tax increase even higher. If they request a reduction in the proposed tax increase – and they usually do – officers then come forward with “cuts”. These are usually carefully chosen to cause maximum political pain. They typically propose surrogate tax increases – higher car parking charges, planning fees, congestion charges and the like, and insensitive reductions in service, often aimed at the most vulnerable.

In the bargaining that follows the worst of the “cuts” are avoided, the fat in the budget is left untouched and neither side are happy with the result. Opposition Councillors have a field day if the process is public or news leaks out, as they can condemn the incumbents for daring to look at the uninviting list of cuts and charges the officers have dreamt up to try to keep the budget high.

So what should Councillors do? They should do what they do with their own family and business budgets. In tight years all items of spending are under review. The aim is to cut out the least desirable items, not the most sensitive, and to deliver the same or more for less by spending more wisely. To do this the first round of budget papers should n ot present existing spending as a given, but should question why the Council is doing its more marginal things., and question how it can do everything needed more effectively. Councillors should ask amongst other things

1. How much is the budget for Consultants? Why can’t this work b e done in house by existing officers? Why are we often paying twice for the same thing?
2. How much is the Council spending on energy? Would spending on insulation, heating controls and better management of buildings use slash this budget in year? Can the energy contracts be renegotiated on more favourable terms?
3. How much is the Council spending on transport? Can the contracts be better managed? Can more transport be grouped to minimise journeys and maximise use?
4. What is the budget for “fact finding travel” and conferences? Is all this necessary?
5. What is the budget for PR? Why can’t Councillors do more of their own communication, without relying on officers who have to be careful not to be political in their messages with Council money?
6. How many surplus assets does the Council have? Can some of these be sold to cut debt?
7. How good is the Council’s cash management? Can they earn a better return on balances without putting it in an Icelandic bank?
8. How many layers of management does the Council have? Why can’t this be slimmed down through natural wastage?
9. Wouldn’t a staff freeze generally be a good idea to make manning more efficient? Couldn’t the Council cut the number of committees which need servicing, and concentrate on the big issues that matter.
10. Why is the Chief Executive’s office so large and expensive. Doesn’t economy begin at the top?

Councillors are part time, and face clever officers often determined to expand their empires. Leaders need to tell officers many of the present budget papers are not fit for purpose. They need to introduce commonsense budgets, as many of them run elsewhere.

Dame Stella is right today to complain that the government is using fear of terrorism as an excuse to take away liberties and create a police state. The only thing I take issue with in her statement is that the government is not using the fear of terrorism of the people so much as its own fear of terrorism.

We need a government which polices our borders better, but respects our traditions of innocence until proven guilty, trial by jury, no detention without charge or trial, and the right of most to go about their daily lives without government spying and intrusion.

Above all we want a government which targets its enforcement activities against violence on those who can be reasonably suspected of possible violence, not by placing everyone under surveillance. Guards and gates are expensive, clumsy and often do not work if there are dedicated groups who want to carry out acts of violence.

Place suspects under surveillance, and uphold the freedoms of the rest of us. Learn to target. Most people are not potential terrorists, so don’t waste time checking them, and don’t waste money watching them as if they might be. If you watch the borders better, you can interview people who arrive who have a history of association and statements that causes concern, and can interview UK citizens who have been to places where terrorist training occurs. Those are two small groups most worthy of investigation.