Month: January 2010

There are many economic myths around. There is the idea that the government abolished boom and bust. There is Labour latest fashion that borrowing and spending more in the public sector produces a stronger recovery. So far the biggest borrowing nation of all the major economies, the UK, is the only one not to have pulled out of recession. My favourite today is that we have record low rates of interest which will see us through the crisis.

It is true that the Bank of England’s MPC has set 0.5% as the interest rate. The problem is the markets don’t think that is a realistic rate for normal commercial transactions, so it does not operate in the private sector.

If you want a mortgage and are lucky enough to be able to get one, you will be paying 4-5%. That’s eight to ten times the Bank’s low base rate – not just the odd 1% over to allow the Building Society a profit.

If you are a small business wanting to borrow, you will be paying 7-15% for an overdraft if you can secure one. That’s fourteen to thirty times base rate.

If you are a large business wanting to borrow from the corporate bond market you will be paying between 6% and say 10% depending on your balance sheet and trading strength. That’s twelve to twenty times base rate.

And if you are the government wanting to borrrow for ten or more years you will be paying 4% to 4.5%, or eight to nine times Base rate.

So what’s the point of Base rate? It gives the MPC something to do to set it and to justify their large salaries. It does have two impacts on the economy. It does allow the government to borrow for the short term at a lower rate. So far markets have gone along with lending for a few months or even a year or two to the government at low rates related to the base rate. Recent weeks have seen increases in the rates they charge the government for anything other than the short term.

It also helps the broken banks make a small fortune. All the time they can borrow short in the money markets and with government help at rates related to Base rate, and lend longer at rates totally unconnected to base rate, they can make more money. Given the way the banks are regulated, with the regulators shutting the stable door after the horse of excess credit has bolted, that does not help the rest of the economy as much as we would like.

UK official rates are too low for the state of the public finances.They are also largely irrelevant to the state of the non bank economy, as no-one can borrow at anything like them.

Praise where praise is due. Apparently the clueless coup had its moments. Lord M and Mr D seem to have wrestled the driving wheel away from Mr Balls. According to briefing “Tory cuts versus Labour investment” is no longer the dish of the day. We are all cutters now.

This morning Mr Darling begins the long task of trying to win back the confidence of the money lenders. When you need to borrow one quarter of all you are spending, day in, day out, you do need to heed their views. The Bank this week confirmed that it would not be printing any more money. They only have around £7 billion of firepower left out of the £200 billion they agreed to print to see the government through the worst of the downturn. In recent weeks the Bank has been buying under half the amount of debt the government needs to borrow. We can see that from the increase in the interest rate the government now has to offer to raise its money.As readers of this site will know, we should expect further increases in interest rates to follow as the government shifts from printing some to borrowing the lot.

If the government is serious about helping recovery it needs to put through spending cuts now. Lord M has been showing the way with the Universities – not popular but I guess realistic. I would myself prefer it if they would stop recruiting from outside to all these non jobs and got on with the task of reforming and simplifying public services.

Lord M has also allowed people to write that he wishes to reassure entrepreneurs and rich foreign investors that they are still welcome here. Labour, he says, is not about to squeeze them until the pips squeak. There is still enough New Labour to recognise the need to keep and encourage entrerprise. If that is true then they should cancel the 50p tax rate, as the quickest way to send a message to the world community that they do still want a UK open for business.

We are told today there will be a Labour budget before the election. That will make interesting reading. Of course it will contain the biggest spending cuts for 20 years. To create a sustainable recovery it needs to contain the biggest spending cuts for more than 70 years, such is the extent of the crisis in public finances. If they do not cut soon, interest rates will carry on upwards, damaging what passes for a private sector recovery so far.

This blast of Arctic weather will not help our economy haul itself out of recession. This week our large companies that need gas to manufacture have been told to stop burning gas so the rest of us can stay warm. The government has failed to organise sufficient gas storage, as part of its general energy policy failure. Some shops have not opened, others have closed early to allow their staff to get home in slightly better conditions. Many offices have been operating on skeleton staffs. Those who have tried to carry on as normal have found it almost impossible to get parcels, letters and cheques delivered, and to get the stocks and supplies they need. Big retailers may still be counting the good news from a few better trading days around the change of the year, but things are not so good this week.

It is true some have experienced boom conditions. Sales of domestic energy will be strongly up. Specialist clothing, shovels, boots and other snow equipment are in strong demand. This will not make up for the general loss of output that has come from the collapse of the transport system. All too many employees have not reached their companies to do their jobs. Many schools have been closed for the duration of the bad weather. Those shops that do open often have empty shelves owing to a shortage of particular goods or the inability of the delivery system to get them to the stores.

Why has this happened? It has happened owing to the failure of the Highways Authority to have enough grit at its disposal, and enough vehicles to distribute it and to plough the heavy snow away from the roads. Our mad legal system has put many off clearing their own section of pavement and side road. There is no sense of urgency to get the job done, to get the system functioning. We seem unwilling to spend a bit more on salt and hiring lorries to clear the highways, whilst being willing to spend a small fortune on more fractures as people slip on the ice and snow.

We do look to government to organise the roads and railway lines. They own them and are responsible for them. If they are not open for business, nor is the rest of the economy. We can ill afford lost output. We need to work more and earn more, to start to tackle our massive debts. Instead we are having an enforced endless Christmas holiday as people linger at home, afraid to venture out. The government will be one of the big losers, as it means more revenue loss for the state on all those sales and profits forgone.

“Keep this card and see that we keep our promises” says my copy of Labour’s pledge card from the start of the government.I did :

“Get 250,000 under 25 year olds off benefit and into work

Set tough rules for government spending and borrowing;ensure low inflation;strengthen the economy”

We all look forward to those. Any chance any time soon?

The global warming theorists were out in force on this site to condemn for me for asking a simple question of Mr Ed Miliband. They accused me of being silly, of failing to grasp the “settled science” and of wasting Parliament’s time and money. The question was “Why is the Northern hemisphere winter so cold, and which climate model predicted this?”. If the question was so wayward, why couldn’t Mr Miliband answer it?

They made a number of false claims about me. They said I did not understand the distinction they draw between climate and weather. Of course I understand that. The point at issue is when does enough weather become climate? When does a succession of cold winters and/or summers affect the averages sufficiently to change the trend? Some used to think that if it got colder – or warmer – for a decade that was “climate”. Now it appears the global warmists think it has to be a trend for 30 years. I hope they remember that if we do have some very hot days for a change next summer. On their own logic that will not be evidence for global warming. They said I do not understand the settled science. Of course I understand their claims, as my blog on the theory makes clear.

So I found it fascinating yesterday that on both the BBC and Channel 4 they decided to run pieces from their global warming experts reaffirming the “settled science” and saying that of course a hard winter is compatible with the theory. At least those commentators graced their audience with saying they could understand why people were asking the question. They thought the question warranted prime time to reaffirm global warming. They attempted to answer it sensibly, making this new precautionary claim that climate takes 30 years to reveal itself.

When I set out a different view of the UK economy – with very different forecasts – from the government’s I do not tell everyone the economics is settled and anyone with a different view is being silly. It so happens my predictions on the course of the Uk economy in the last few years have been more accurate than the government’s. They missed the banking crash and the recession before it was on them, and have been late to accept the inflation they are now creating. They might have been right. You get on and debate the clash of views. Everyone knows that economics proceeds by means of theories that have to be tested by reality. You are as good as your last prediction. Why can’t the global warmists participate in an intelligent debate about when weather becomes climate, instead of making offensive remarks and seeking to close down the topic? The world may be warming – so let’s hear the evidence and find out what difference a cold winter makes to the averages.

As someone unversed in climate change might say ,” Let’s look on the bright side. If this is global warming, we should be very glad we are not facing global cooling. “

As predicted the snow coup was over almost before it started. Mr Hoon and Mrs Hewitt did not entice a single new name onto the media to support the idea of a challenge to the PM. That must be a new record for a lack of support.

It has taught us three things. Senior Labour figures are divided over the wisdom of running with the PM as their Leader. Labour is preoccupied by its own internal troubles, which are more to do with personalities than with policy. The government ignores the financial crisis rumbling around its head.

Instead of a champion emerging with policies to tackle the deficit more immediately and manfully, to reform public services and to put the economy on a path of sustainable recovery, we witnessed several important figures in the government delaying their support for the PM and then writing lukewarm words that fell far short of endorsing him. The Chancellor clearly is not impressed by his neighbour, and did the minimum. The Foreign Secretary could not even manage the minimum, delaying the longest and then producing a very watered down statement.

These were not the brave deeds of people having genuine disagreements about how to rescue the country. Nor are they the words of loyalists who understand they all will be hanged together if it does not work.

I was invited onto Five Live to comment on the aborted coup. The BBC had done an excellent job explaining the coup through the words of John Pienaar just before my interview. I felt that in order not repeat that I should talk about the national financial crisis the Cabinet was ignoring owing to its personality preoccupations. The coup is symptomatic of a wider collapse in government, an inability to concentrate on solutions to our problems. The BBC had no wish to go there, so it was difficult to see what they wanted from me as they had already done it themselves through their Political Correspondent. They didn’t seem to know either, so they kept it short. They seemed most interested when I replied to their question about the Conservative party interest. From that point of view it could not be better. It leaves the government led by Mr Brown, the Conservatives preferred opponent at the next election, whilst doing him more damage from friendly fire.

Yesterday whilst Labour MPs were plotting and most of us were wrestling with ungritted pavements and side roads, interest rates rose again in the government bond market.They rose because markets do not believe the government is getting a grip on its borrowing and finances. They rose despite the Bank of England continuing with low short term interest rates, with bond buying and money printing. The government should be alarmed.

I wanred on this site some months ago that interest rates were likely to go up. I said I did not think people and institutions would go on lending to the government at 2-3%. They won’t. At yesterday’s prices the government has to pay 4% to borrow money for 10 years, and 4.5% to borrow money for 20 years. The old bonds issued that have no repayment date now offer more than 5%. That’s big moves – large falls in government bond prices, big increases in the interest rates.

Why does this matter? it matters because it means we taxpayers will now have to pay a lot more interest. We will pay more interest on the near £200 billion of new borrowing this government is doing each year. We will pay more interest on the old borrowing that falls for renewal. Each 1% increase in interest rates costs us an extra £2 billion a year interest, a sum which escalates as more borrowing falls due for renewal and as more borrowing is taken out. That’s money we either have to pay in extra taxes, or money that has to come from additional spending cuts. Mr Brown used to be hot on the need to cut the interest bill of government, when he was in opposition. It is a pity he has forgotten that wise proposition now he is in office.

Mr Hoon and Mrs Hewitt are not being helpful to the PM. No sooner had we heard a more spirited Brown performance in Prime Minister’s Questions than the rumours and the media confirmation came that two senior Labour backbenchers want a secret ballot vote on whether Brown should stay or go on Monday! It was all the more surprising because after several weeks before Christmas when support for the PM in Questions was more muted and there were empty benches, today the party seemed stronger in its support.

Their political judgement is as weak as their understanding of the Labour party constitution. The Leader has to be elected by the whole party, which includes the activists and the Trade Unionists. Meanwhile, if there had been any doubt about the voices against Brown within the Labour party, they have now been confirmed by these two senior figures.

Before anyone makes an unfair jibe, I only challenged for the Leadership of the Conservative party when the incumbent PM resigned and said he wanted a contest. That was an entirely different situation. There was also two years to run before we needed an election. Mr Brown has made it cystal clear he does not wish to stand down and sees no need for a contest.

The Conservative party should thank the two senior figures for highlighting the leadership issue. I think we can also sleep easily in our beds tonight, because Mr Brown will survive this half hearted coup. That is the best possible outcome for the Opposition. The rebels neither have a candidate to replace Mr Brown, nor are they willing even to say they think he should go. Rum that. Without big numbers to back it, this is another coup that will vanish with a whimper.

Yesterday as half the country struggled with snow drifts, blocked roads and icy pavements, and as the other half awaited plunging temperatures and a snow storm, Parliament devoted prime time to global warming. I looked in vain at the Order Paper to see how I could raise the state of the highways, the lack of grit for the pavements and side roads, the rush of too many people to casualty departments following slips on treacherous sidewalks. I thought we should be debating the UK’s lack of preparedness for another Antarctic blast. The government was still in world saving mode, wishing to spin its way to success from Copenhagen’s ragged conclusions. I wanted to save the NHS money by gritting more pavements. That could be a deficit cutting item of spending given the costs of fractures.

I asked Mr Ed Miliband a simple question. Why was the Northern hemisphere experiencing such a cold winter, and which of the climate models had predicted this? It was meant to be a rational and interesting question. It should be the kind of question climate change’s chief UK salesman can answer in his sleep. Mr M has always posed as a kind of para scientist. He pretends to read all the climate change science in the back of his Ministerial limo and on those long flights he makes to save the world. I was expecting some answer that told me you can have severe winters within a pattern of global warming, with reference to some climate change model analysis which allowed for adverse variations within the assumed pattern of warming. How wrong I was. Instead Mr M threw his toys out of the pram, declined to offer a civil answer to a civil question, and told me the science of global warming was settled! His problem is that there are a lot of climate sceptics out of Parliament who do not see it like that, who want some answers to some difficult questions about the government’s beliefs and strategy in this area. Some other MP from a sedentary position offered the profound advice that I needed to understand climate was different from weather. At least that was cleverer linguistic gymnastics than Mr M could muster.

The day did not improve when we got onto the main business of the Deficit. I got the opportunity to make a speech along the lines of yesterday’s blog. We did drag out of reluctant Ministers the fact that they think they need at least £57 billion of public spending cuts, along with around £28 billion of more taxes, to hit their target of halving the deficit as a proportion of GDP by 2014. The Chamber was virtually empty on the Labour side. Only two backbench Labour MPs were prepared to speak in the debate. Both of them opposed the government’s measure – one because it did not take the deficit seriously enough, and the other because she could not countenance spending cuts.

It turned out when I had the chance to read their draft Bill that it contains a major flaw even within its own silly terms. It requires future Chancellors to cut public spending as a proportion of GDP every year from 2010 to 2016. This means that if there were by any chance another sharp contraction in the economy the government would not under the terms of this Bill be able to use the natural stabilisers which the government has always told us are so important. In a recession tax revenue falls and benefit spending rises, making the deficit worse. This “cyclical” part of the deficit is always thought to be fair enough, as it will self correct when recovery gets underway. Under this Bill it would not be permitted. Under pressure the government then told us that in such circumstances they would bring a new Deficit Bill to the Commons relaxing this one!

So Parliament wasted the best part of a day debating a Bill written by the Tresury to make the Treasury behave in a certain way for the next six years, only to be told that of course if things went wrong they would tear it all up. The Bill makes clear no Minister can be blamed or punished if they fail to hit the deficit targets!

I have a better idea. Tear the Bill up now, and save the money and effort of putting through this absurd law. It imposes no sanctions on Ministers if they fail to deliver, and we now know it can be changed anytime government wishes. We woudl be better off debating the cold weather, and trying to bring some relief to people seeking to get to work and school. I did ring my local Council who promised faithfully they would grit and salt the roads thoroughly. I would still like more snow ploughs available and more grit for the pavements and side roads.