Month: June 2009

MPs pensions

June 26, 2009 20 Comments

Yesterday the Commons agreed that there should not be a further additional payment from taxpayers to the MPs contributory pension scheme, which like many such schemes is in deficit.

This means that other ways will have to be examined to bring the fund into balance with the liabilities.

The obvious thing to do is to start by closing the scheme to new members, as most private sector schemes have done. This should be announced as soon as possible, so those thinking of standing for Parliament for the first time in the next General Election know the terms and conditions in advance.

We need to begin migrating MPs from the final salary scheme to a defined contribution scheme, where like others their pension depends on how much they have saved rather than a promise from the employer.

Leaving the European Peoples Party

June 26, 2009 23 Comments

Today I wish to praise Mark Francois. The Shadow Europe Minister has worked hard to create an anti federalist grouping in the European Parliament. He has helped David Cameron implement his vision of Conservative MEPs providing an opposition to “ever closer union” and the remorseless march of power to Brussels.

He reminded me yesterday that before the last European elections Nigel Farage asserted that David Cameron would not take his MEPs out of the EPP grouping, and placed a bet on it. It’s time for Mr Farage to admit he was wrong and settle the account.

Poeple need to understand that the Conservative party is a Eurosceptic party that wants trade and friendship but not centralised government from the continent. It is of couse predictable that now the party has set out very clearly its opposition to federalism in the European parliament, to match its long standing opposition to it at Westminster (votes against Nice, Amsterdam and Lisbon), our federalist opponents here at home attack the politicians and parties we are allied with in the European Parliament.

The federalists always tell us we should lead in Europe. That is what we wish to do – to lead Europe forwards to a world of self governing nations unencumbered by too much centralised Euro bureaucracy. They are always telling us we should be more engaged with continental politics, and have more friends on the continent. Now we do, they tell us they are the wrong friends! They are all elected MEPs, so by implication the federalists are now criticising the peoples and nations who elected them.

Meanwhile the UK government continues to accept all the bureaucracy and France and Germany serve up, unable to resist bad laws or to defend the Uk interest.

Reading Evening Post

June 25, 2009 4 Comments

Witch hunting was always an unpleasant and overrated pastime. It is popular today. Many people have been out to hunt down the criminals, the fools and the incompetents who they think caused the Credit Crunch.

Who was to blame? Apart from the bankers and other financial experts who lent too much, the regulators failed to stop them. The whole Tripartite system of regulation was tried and found wanting by events of the last decade. Not one single senior person in any of the 3 supervisory institutions of Treasury, Bank and FSA thought the banks were lending too much. Not one tried to blow the whistle on the most extraordinary credit binge any of us have seen. They did not lack powers to stop it if they wished. They did not lack information. You could see it by reading the balance sheets of the top four banks in the country, something you would expect the senior people in all 3 institutions to do as a matter of course. You not only had to read them, but to show some judgement. You needed to understand that the new rules allowing such excess were foolish.

The important issue is not which individual or which individual institution was more to blame. It’s water under the bridge now. The big issue is why are we still operating with the same system? What have regulators learnt from this dreadful experience? How can we be sure someone next time round will have a clear understanding of what needs to be done? We need them to answer the following questions:

What are the regulators’ views on the degree of bank support? When will they force the state’s clients banks to cut costs, improve their business, and sell off assets to repay the money they have received? Isn’t it time the taxpayer got some money back from those banks? Isn’t it time they cut the top pay and the excesses , to try to make a profit for taxpayers?

Do the regulators agree the banks in the UK are too big to bail and too big to fail? When will they start splitting them up to create a more competitive and more manageable sector? Surely they could separate out the profitable foreign banks from RBS and sell them? Couldn’t they close down or sort out the large investment bank within RBS and pass that on, so taxpayers do not have to take all those risks?

Do they agree that appointing more and more regulators, and ticking more and more boxes failed to create orderly markets and successful regulation? Do they understand that having one or two senior people with judgement would have transformed the situation, as it needed someone to see the overall problem?

Why do they think they now need more people and better paid people? Why can’t some of the people we have already make the big judgements you need to make to regulate successfully?

Why is the Monetary Policy Committee of the Bank of England happy with the current level of government deficit? Does it not foresee funding problems ahead? Why doesn’t it raise interest rates a little, to offer some return to savers, and to bring its rate more into line with reality?

How does the MPC think it can get the UK off quantitative easing? What is its current view of our inflation prospects, given last year’s devaluation and this year’s commodity price rises?

Is any regulator concerned about a bond bubble?

It is my view – and has been throughout the last fifteen years – that the Bank of England is the best body to undertake the related tasks of supervising the banks, managing the money markets and setting interest rates. The Bank did not distinguish itself in the last decade, so I am not proposing powers for them based on any witch hunt against the FSA. It just makes sense to look at money markets, credit creation and the price of money together. You still need to find good people to do it, but it makes their task simpler if they control all the relevant levers and have full responsibility under the Chancellor for the results. If you did that well you would need a big army of box tickers, looking the other way on the things that matter. If the Bank coulld smooth and control the money markets properly, we would not have such violent swings. We could start to dampen boom and bust.

John Redwood launches new book, “After the Credit Crisis: No More Boom and Bust”

June 25, 2009 2 Comments

John Redwood has today launched his new book, “After the Credit Crunch: No More Boom and Bust”. Published by Middlesex University Press, “After the Credit Crunch” is an authoritative and up-to-date analysis of the credit crunch and the events that led up to it. John Redwood’s analysis focuses on how and why the UK economy fell into the crisis, what it needs to do to escape, and how it can avoid similar problems in the future. It rebuts claims by the Labour Government that the UK’s problems are solely the result of an economic crisis that started in the United States. He argues that a series of policy and regulatory errors combined to deepen the effect of the global recession, and shows how the current crisis is an extreme example of the old fashioned boom-and-bust cycle that Gordon Brown claimed to have abolished.

“After the Credit Crunch” examines the global context of the economic crisis and illustrates the changing balance of power between commodity producers, manufacturers and consumers. He reviews all the policy areas that contribute to national competitiveness, including taxation, regulation, energy, transport, regional development and education. He expands on his previous publications, “Superpower Struggles” and “Stars and Strife”, and offers a strong defence of market based policies and low taxation in addressing the economic challenges of the 21st century.

Speaking at the launch of “After the Credit Crisis” today, John Redwood said: “We have lived through three phases of wrong policy and bad regulation. Between 2003 and 2007 interest rates were too low and banks allowed to expand too much. In 2007 and 2008 rates were too high and the money markets were starved of cash. In 2009 the UK government is failing to sort out the broken banks it owns whilst running too large a deficit. The UK has to save and export more, and has to raise quality and efficiency throughout the public sector”.

About John

John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

John was an Oxfordshire County Councillor in the 1970s. In the mid-1980s he was Chief Policy Advisor to Margaret Thatcher. He urged her to begin a great privatisation programme, and then took privatisation around the world as one if its first advocates before being elected to parliament. He was soon made a minister, joining the front bench in 1989 as Parliamentary Under-Secretary in the Department of Trade and Industry. He supervised the liberalisation of the telecoms industry in the early 1990s and became Minister for Local Government and Inner Cities after the 1992 General Election.

Shortly afterwards, John joined the Cabinet and served as Secretary of State for Wales from 1993 to 1995. In opposition he has acted as Shadow Secretary of State for Trade and Industry (1997-1999), Shadow Secretary of State for the Environment, Transport and the Regions (1999-2000) and Shadow Secretary of State for Deregulation (2004-2005). He stood for the leadership of the Conservative Party in 1995 and again in 1997. He is currently Chairman of the Conservative Party’s Economic Competitiveness Policy Review.

John has been a fellow of All Souls since 2003. He is currently a Visiting Professor for Middlesex University Business School and has published a number of books including “I Want to Make a Difference, But I Don’t Like Politics”, “Singing the Blues”, “Third Way, Which Way?”, “Stars and Strife”, “Superpower Struggles”, “The Death of Britain”, “Just Say No” and “Our Country, Our Currency”.

Buying the book

To buy the book please visit the Middlesex University Press website at www.mupress.co.uk, or click here to buy the book from Amazon.

Wokingham Times

June 25, 2009 1 Comment

It is sad to learn this week that several good employees of the Wokingham Times have lost their jobs in this painful recession, and sad to report that the Wokingham Times office in the town has closed. Many of us would like to thank the staff concerned for their contribution to Wokingham life and debate.

I read that my prospective political opponents for the next election wish to make political points about the issue of MP expenses. I look forward to reading the Lib Dem explanation of why Lib Dem MPs have had to repay money claimed for a £1000 rocking chair, a trouser press, and a designer make over of a London flat among the more eye catching items. It would be especially interesting to hear Lib Dem comment on those MPs of their party who banked substantial sums to surrender moderately priced rental agreements and leases on flats in Dolphin Square when the rents had been paid by the taxpayer, only to claim higher sums after surrendering the favourable lease.

The truth is that Parliament ran too generous a system of expenses for too long, and it was laxly administered. MPs of all parties claimed under this system, and some of the money should now be repaid as the claims may have been legal but they were not well judged. For my part, I intend to cut my expenses further, as I did last year before this row blew up. I will maintain my bedsit in Pimlico, as it saves me hours of travelling each day, allowing me to do more of the MP job myself and save taxpayers having to pay for another member of staff to which I am entitled under the scheme. As we need to cut the overhead of public spending substantially without damaging services, I am not now claiming any taxpayer assistance for my flat.

Labour are about to run a campaign complaining if MPs have a second job. Candidates pledging never to take any additional task on other than being a backbench MP do not understand how the job works, or how Parliament and government works. The whole edifice is based upon the idea that an MP can do another job. MPs may become Ministers, taking on a very time consuming and demanding second job with a good official salary. Others act as Shadow Spokesmen, chairmen of committees, a Speaker of Deputy Speakers and the like.

It is possible to do these other jobs because whilst the MP’s job is demanding and requires plenty of time and effort, it is not a 9 to 5 office job. On long Parliamentary days to get most out of it you need to be working as an MP from 7 am until 11 pm, to capture the meetings, events, activity in the Chamber and outside. On the many days when Parliament is not sitting there is much greater flexibility about what to do and when to do it. An MP does have to be on call all the time, and does need to do week-end work, but there is time in a well planned MP’s schedule to be a Minister as well, or to have a non executive role outside Parliament.

Parliament is in my view better for having many MPs on all sides of the House who have current experience of life outside politics. Their contributions to debates can provide the mixture of commonsense and experience that is needed to be amend or challenge the official view. I doubt I would be an Economic Adviser to the Conservative leadership if I did not write a twice weekly commentary on economies and financial markets outside Parliament.

More about getting out of the economic mess

June 25, 2009 39 Comments

Yesterday on both sides of the Atlantic there were hints that the current programmes of quantitative easing – printing money – will be the end of it. Both the Fed’s statement and the Governor implied that the existing sums pledged will be enough in their view.

In the UK the Governor also attacked the government’s public spending and tax plans.

“We are confronted with a situation where the scale of the deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path which wasn’t sustainable and a correction was needed”, he said.

The Governor is proving to be a shrewder politician than he has been a central banker. He may have misread the cycle badly, allowing too much money in 2003-6 and too little in 2007-8, but he is reading the political cycle well. He understands the forces that now are pushing us to lower public spending after the next Election, and realises that the special measures taken to ensure the sale of enough gilts this year may not be possible again thereafter. He is siding with the Chancellor and the Leader of the Opposition against the Prime Minister, and is even daring to criticise the PM for the size of the defict he built up as Chancellor in the “good times” before the crash.

On Tuesday I asked the PM what plans and timetable he had to reduce the deficit and end quantitative easing. I needed have bothered. I was treated to the usual highly politicised answer about the government doing what ever it takes, and the usual false contrast between the government who wants a recovery and an Opposition which wants cuts. The PM is now a parody of himself.

My question was a perfectly reasonable one. It is the question most economic commentators and market participants are asking. It was neither loaded nor party political. There ought to be an official answer to it, but the PM cannot bring himself to provide one. Instead he falls over his crude party politics, and seeks to underestimate everyone else’s intelligence. I suspect the true answer is that QE will end shortly when they have spent the £125 billion, and the deficit will be cut by a crisis Cabinet meeting immediately after the Election.

Meanwhile, the government moves on without the PM. You can feel power falling away from him. The UK establishment knows the deficit and current public sepnding levels are unsustainable. They realise that any incoming government after an Election will have to control public spending much mroe successfully than this one. The pity is we have another possible eleven months of spend and borrow on a huge scale, making the inevitable correction that much more difficult, and pushing us even further into debt than we need go. We feel the price of his soundbites on our shoulders.

The death of the final salary pension fund – for the private sector

June 24, 2009 55 Comments

Ten years ago Ministers still claimed that the UK had the best system of occupational pensions in Europe. They could point to the fact that British people had more money saved in pension schemes than all the rest of Europe put together. The creation of the occupational pensions movement, and the establishment of a final salary scheme by most medium sized and larger employers meant many could look forward to a decent income in old age, and retirement at 65.

Today, the picture is very different. Large numbers of schemes are closed to new members. Many are also closed to existing members, who are no longer allowed to save more to add to their final salary scheme. We are currently hearing of very large and well financed companies deciding they too can no longer afford to go on with generous pension schemes, and are about to close theirs. Some schemes have collapsed, along with their sponsor companies.

How did we get into this mess?

Many schemes are in substantial deficit because

1. The tax on their investment income, introduced in 1997, reduced the investment return and damaged prices of shares the funds owned over the ensuing 12 years.
2. The last ten years (to March 2009) have seen no positive returns on UK and US shares. The Credit crunch and recession have wiped out all the gains of the decade, leaving pension funds considerably worse off than if they had remained in cash.
3. Those valuing funds make assumptions about how much future inflation there will be. The higher inflation is, the more money the pension fund needs to pay out the higher pension payments. Most valuers these days insist on an inflation rate higher than the 2% target rate the Bank says it will keep to – at a time when RPI inflation is negative. Government reliance on low inflation figures is not reflected in pension fund valuation.
4. The good news that people are living longer is bad news for pension funds. They are having to provide more money to pay pensions for longer.
5. Pension funds now have to pay a tax or levy to the Pension Fund Protection scheme. In other words,successful funds are now taxed to pay the losses on less prudent funds. This additional cost makes employers even keener to keep down the contributions on their own fund.
6. Regulation has greatly increased, requiring employers to spend more and more money on legal, actuarial and other advice and compliance. Trustees find it very difficult to make sensible decisions, as they are so hedged around by the rules. The main conclusion of most of the advice is that funds should now own more and more government debt, despite this only producing an income of around 3 to 4%. People fear this will not enable them to pay all the pensions in the future at an acceptable level of contributions.

The result of all these pressures is that many companies say they cannot afford the large contributions now required, and cannot afford the risk of the open ended commitment to employees. Some companies are in the position where the pension fund is worth much more than the company, and where the future pension risks and costs are higher than the main risks and costs of running the business. Western companies facing these costs have to compete with Asian companies that often carry no such requirement.Pension costs can help bring an entire company down in a competitive global market.

It is a sad example of where the combination of higher taxes and more regulation leads to the end of a good idea, instead of being its salvation. Never have pension funds been so regulated. Never have so many been closing down or cutting back. Government has contributed it make it both too dear and too dangerous for many to run a final salary pension scheme. Paradoxically, having achieved that for the private sector, the government continues with such schemes – many completely unfunded – in the public sector. This is becoming a matter of controversy, generating a big sense of unfairness. I will look at what could be done to rebuild pension savings and to establish more fairness in a later blog.

Prices and money

June 23, 2009 38 Comments

Early in 2008 when interest rates were too high for comfort and likely to help bring more banks down, I called for much lower rates. At the time I said inflation would tumble anyway, as the inevitable recession bit.

As expected the recession came, and inflation has fallen sharply on the RPI measure, less so on the CPI measure. It is time to reassess the inflationary outlook, as interest rates have now be held well below normal recession levels for some months , and quantitative easing is well underway.

UK inflation has proved to be more obstinate on the CPI measure than the deep recession would suggest, for three main reasons. The first is the collapse of the pound in 2008. As I warned at the time, a money policy which lurched to being too easy would drive the pound down, which would leave us very exposed to imported inflation. We are now living with the consequences. Forward currency cover is running out for importers. Stocks of cheaper imports are running out. New product is costing more.

The second reason is the commodity price revival, brought on by Chinese restocking and probably by speculative activity on the back of quantitative easing, Oil has more than doubled from its bottom levels earlier this year. Although sterling in recent weeks has been getting stronger, abating the import price issues, commodity prices have been going up more quickly than the currency, leaving more price pressures in the system.

The third reason is the behaviour of some industrial companies. Usually in recession as volumes fall away companies offer price cuts to try to induce more spending on their goods, or at least to encourage gains of market share. This time round the volume reductions have been so enormous – a halving of demand is typical in the automotive areas for example – that some companies are taking a different view on price. They are saying to their customers our overheads per unit of output have risen sharply, thanks to the big drop in your orders. As a result we cannot afford to offer you any price cuts. In some cases they may even propose price increases, to try to reduce the losses on the limited output they can sell.

In both the US and the UK industrial work forces are on the whole co-operating with management to combat the huge falls in demand. In many cases employees have volunteered for more short time working, extended factory holidays and the like to cut both output and their pay in the hope that will enable them to keep their jobs for the upturn. In other cases Unions and employees have reluctantly accepted the need for substantial redundancies and factory closures, as companies desperately try to cut their costs and output as demand plunges.

Employees seem to understand that the banks are not prepared to pay for ballooning stock and work in progress that cannot be sold, and not prepared to pay for large losses in industrial customer companies. They have their own losses to finance instead. Companies have to run down their stocks of raw materials and finished goods, and have to cut employee costs. Most companies embarking on such reductions are also cutting out management jobs as well. Where the cuts are made by short time working, managers may also have to go onto shorter weeks for less pay.

UK inflation will be higher than it should be owing to monetary and fiscal looseness, the commodity surge and the weakness of the pound last year. The authorities must not ignore inflation. It is down for the moment, but not necessarily out.

John Bercow

June 23, 2009 44 Comments

Some contributors to this site and other Conservatives I spoke to over the week-end have spoken out strongly against John Bercow. BBC journalists are using vivid language to describe Conservative attitudes to John in their commentaries on the Speakership from their sources.

I respect John’s skills as a Parliamentarian. He has the best memory of any MP, which he can use to recall the exact words of quotes, dates and other facts that can be important to the debate. He has been on an unusual political journey, from Monday Club to acting as an adviser to the Labour government. I have sympathy for his views on children with speech difficulties and think he has done good work on that matter. His own personal family story should evoke sympathy, not dislike.

The new Speaker should heed the wise words of advice from David Cameron. The House needs to see not merely that he has put behind him the views and loyalties he held some years ago, but now he is Speaker he has to also discard his more recent views and friendships to demonstrate impartiality.

He needs to show that his message of change is change for a purpose. The purpose should be to rebuild Parliament as the leader of national debate, the means to hold government to account, and the way to ensure proper representation of minority opinion. His decisions need to show he wants a stronger Parliament, able to hold truth to power, and capable of requiring accountable Ministers to take the place seriously and to tell us first.

It should have been no surprise that he got the job. It is , as I keep reminding my readers, a House with a large Labour majority. Labour decided to remove the old Speaker, and Labour were always in a position to choose the new one. Yesterday Labour decided to behave tribally and to elect the candidate many Conservatives did not want.

Conservatives now have to accept the result, and show respect to our new Speaker. We all need this to work. The Opposition should not prejudge this Speaker. He should be judged on how well he does at allowing Parliament to have more teeth and to hold a more central role in public debate.

Smaller banks, the Chancellor and the Governor

June 22, 2009 23 Comments

Last week there was an apparent disagreement betweent he Governor and the Chancellor over the dangers of mega banks. The Governor rightly warned that some banks are too big to fail, implying something should be done to stop this. The Chancellor seemed to be more accepting of very large banks, and was more in favour of demanding more capital and more liquidity – a happy request for him at a time when he needs banks to buy more government debt!

I am with the Governor to this extent. I do think some UK banks are too big for comfort, and there is too little competition on the High Street to lift service standards and foster innovation. The answer to this lies not with a new Glass Steagall or some other regulations, but with competition law, and with the government as owner of two of the large banks.

In future the Competition Authorities should be allowed to block mega mergers of banks, and encouraged to do so by a clear banking competition policy. I was against both the LLoyds/HBOs merer and the RBS/ABN Amro merger. These mergers damaged the markets and the shareholders. They should have been stopped by the authorities.

The UK government can fashion a more competitive banking sector by splitting up RBS and LLoyds before returning them to full private sector ownership. This will the topic of a future blog.