Month: May 2010

In the first week of the Coalition government, whilst their minds were elsewhere, Labour’s policy of devaluation and higher prices continued. Sterling fell against the dollar and other important currencies like the yen. The Coalition government reached agreements which included some increases in public spending which were specific, but has yet to spell out how much further and faster it plans to go in deficit reduction.

There are three main options to change course on inflation and devaluation. Most helpful would be an early statement of the new trajectory for deficit reduction whilst they work out the detailed spending plans. The bigger the cut in the deficit this year the better it will be for seeing off a falling pound and higher prices.

Secondly, they could announce they will not be resuming the Labour policy of money printing to provide cheap finance for a public sector spending led recovery. This policy clearly is not working and is unaffordable.

Thirdly, they could raise official interest rates to bring them more into line with private sector reality and borrowing costs.

I would recommend doing numbers one and two immediately.

The favourable reaction to the $1 trillion package of loans and guarantees for Euroland states in difficulty did not last long. Yesterday markets fell sharply again on renewed worries that Euroland will not grow quickly enough or in places at all. A failure to grow will keep tax revenues depressed and social spending high, leaving deficits too large. Markets fear a European vicious circle.

So what should the EU do? It should change policy. Instead of seeing higher taxes and more regulations as the answer to everything it should see them as part of the problem. Instead of seeing government action as the outward manifestation of social solidarity, it should see the need for more private action to employ and serve the neighbours as proof of true social solidarity.

The EU should meet to achieve two big changes of direction. Its first task, as stern budget superviser urging member states to rein in deficits, should be to make dramatic reductions in the EU budget. From each member states point of view the money spent on EU matters and projects is of more marginal importance than say the money spent on domestic education and health care. The EU should take the lead to in cutting spending to relieve the budgetary pressures. Spending cuts should start abroad. The EU’s sensible requirement for controlled budget deficits should make them lead by example.

Its second task should be to draw up a big Repeal Directive, removing from the law codes many of those fiddling and costly interventions in business life which have led to the export of so many jobs from the EU to less regulated places like China and India.

Euroland needs more private sector jobs. It needs to export more and import less. EU rules and taxes get in the way of that.

The UK coalition government also needs to follow policies which promote a faster private sector recovery.

This morning we learn the new Foreign Secretary has been booked to go to Washington, and we are assured he will shortly thereafter be visiting Paris and Berlin.

If they wanted to show they understood how the world is changing, Foreign Office officials would buy him a ticket from Washington to Delhi,and then on to Beijing.

The UK needs to build a deeper and stronger friendship with India, the world’s largest democracy. It must be good news for the UK that India has a fast growing market of 1200 million people, in a country where English is the second language of many.

The Uk needs a good relationship with China, its bank manager and supplier of so many goods. As the Coalition government understandably plans to take time to cut the deficit it needs to know the views of the world’s main creditor who will be needed to buy some of the debt.

Economic power is shifting and will shift dramatically. There are 300 million consumers in Europe, in a very slow growing area of the world with substantial debt and currency problems. There are 2500 million consumers in India and China, with a combined growth rate of almost 10% per annum. China has $2 trillion in the bank. The UK’s commercial future lies more in Asia. If we are to earn our present living standards and grow them faster we need to go east.

Whilst the new Coalition government in the UK considers its options for budget reductions next month, many EU countries are revisiting their large public sectors and taking action to bring down costs.

Cutting Ministerial salaries is popular. The 5% UK cut is similar to the cuts in Portugal. Spain has cut Cabinet salaries by 15% and Romania and Greece have also put through pay cuts. Several countries have widened the pay cuts to include senior officials. France has announced a 10% cut in state operating costs, and has frozen total spending save pensions and interest payments. Portugal has stopped certain high profile capital projects. Greece is running a pay freeze for the public sector until 2014 and has cut public sector allowances and bonuses. Spanish civil servants are experiencing a 5% pay cut.

Action is also being taken on pensions. In the Netherlands the retirement age is being raised to 67. Greece is putting the female retirement age up to 65 from 60. Spain is freezing pensions. Romania is putting through benefit cuts.

The profiles for deficit reduction include:

Borrowing as a percentage of National Income

Spain 11.2% 2009 9.3% 2010 6% 2011 3% 2013

Greece 13.6% 2009 8.1% 2010 7.6% 2011

Portugal 9.4% 2009 7.3% 2010 4.6% 2011

The problem for many of these countries is that stuck in the Euro zone without the ability to print money and to devalue, their private sector growth rates may remain poor. Some of them have added to the difficulty by putting through large tax increases. Portugal has imposed an extra 2.5% tax on profits, more than 1% extra on Income Tax and raised the top rate of VAT to 21%. Greece has put VAT up to 23% from 19% and increased Excise duties by 10%. Even Germany, with a lower deficit, has announced no planned tax cuts after all.

More states should be looking for things the government need not be doing, and should be doing more to cut the costs of the government overhead. The EU could make a contribution to getting member states’ budget deficits down by cutting its own financial demands on its members.

Higher taxes on consumption where a country is in balance of payments deficit is less harmful than extra taxes on work and investment. It is all part of the process of cutting living standards where a country has been living beyond its means for too long, relying on borrowed money. In the Euro direct cuts in living standards by cutting pay is more common. In the US and UK cutting living standards by allowing the currency to fall is more common. Sterling fell to $1.46 yesterday, reminding us the markets are not going to wait too long before wanting proof that there is a new strong grip on the nation’s finances.

Some of you have written in wanting me to cut loose from the Coalition and speak out for doctrinal purity. Others have written in urging me to support the Coalition.

I wish the Coalition every success. I have been arguing for months that this country needed to get rid of Mr Brown’s government, and needed a government which would start to control the deficit before the deficit swamps us. That has now occurred.

Contrary to those who fear “sell out” or “treachery” the events of the last few days have not suddenly changed my views on Europe, taxation, the enterprise economy or freedom. Just because the Conservatives are in coalition with the Lib dems I do not become an overnight convert to Lib Demmery, anymore than left of centre Lib Dems will suddenly become a convert to my views.

What both sides have to accept is that the Conservatives, the largest party, do not have the votes to implement their full manifesto, but they are the best placed to lead the task of financial and economic reconstruction which this country needs. The Lib dems can veto some of the things they most dislike. The Lib Dems did not have a good overall result, and they can only hope to get through those things which meet with the approval of many Conservatives. Thus, I have no problem voting for Income Tax cuts by raising thresholds rather than some other tax cut, but I could not vote for a Mansion Tax or for an increase in EU powers or an amnesty for asylum seekers.

Each individual issue of contention will cause argument and may cause rebellions in the Commons. What Eurosceptics have to appreciate – and I have no pleasure in reminding you of this – is that once again we have a Eurofederalist Commons, so rebellious Conservative Eurosceptics are unlikely to win as Labour -certainly under Miliband – will be firmly on the side of more European integration.

It therefore rests with us to influence the Coalition government in the right direction.They have a substantial majority for most of the things the two leadership teams agree. The large Conservative minority is the best buttress of our EU position we have.

The new government has lined up behind the Conservative proposal in the General Election. They say they will cut earlier and faster than Mr Brown was planning in his deficit reduction bill. I agree they need to do just that.

In their Coalition Agreement they say:

” The parties agree that modest cuts of £6 billion to non front line services can be made within the financial year 2010-11….Some proportion of these savings can be used to support jobs”

They need to go further than that. I hope they will put in place policies on recruitment and replacement that will start to yield more substantial savings and productivity gains outside the protected areas of teachers, nurses, doctors and other front line personnel. I hope they will press rapidly on with welfare and other economic reforms to get more people back to work to cut the benefits bill.

The BBC and others are trying to re-open the debate about the balance between tax rises and spending cuts. The Coalition has so far been clear that the bulk of the deficit reduction has to come from spending cuts. They should not waver on this fundamental point.

The only way out of this crisis is to get faster growth in the private sector, creating more jobs to boost living standards and take some of the burden off the publlic sector payroll. Trying to protect existing levels of public sector employment and public sector unemployment support by taxing more could have the opposite effect, making it more difficult to maintain private sector employment levels, forcing more people onto benefit and making the deficit worse.

The government needs an enterprise package to boost employment as well as cost reductions in the overborrowed public sector. Higher tax rates on business, earnings and savings would drive things in the wrong direction. Lower tax rates often yield more revenue because they boost earnings and investments. We also need banking reform, so that the banking regulations are no longer forcing the banks to lend just to the government and not to the productive private sector. Bank regulation is still hopelessly pro cyclical, reinforcing the downturn somewhere near the bottom of the cycle.

I have been frenetically busy for the last 48 hours, so please be tolerant. I have not had time to moderate longer or more richly phrased pieces, but will do so as soon as possible.

PS I am now up to date. If you want something posted quickly please avoid personal attacks on individuals and institutions and remember the censorship laws on free speech in this country.

One of the main constitutional innovations the new coalition government wishes to bring in is a fixed term 5 year Parliament. Apparently the Lib Dems were especially keen to have this, as they feared the Conservatives would use their support until the polls suggested the Conservatives could win an overall majority and then go to the country at a time of their choosing. Of course any looser agreement between the two parties also left the Lib Dems free to dictate the date of the next election as well, as they could withdraw their support at any time.

There are two main reasons why we have not in the past had fixed term Parliaments. The first is the Leader of the governing party has valued the ability to decide when to hold the election in the political interest of his party, and majority parties have usually thought that a good idea. A coalition obviously takes a different view. The second is that binding a Parliament to five years does not allow for accidents which could fail to produce a majority for any government. The right to hold an earlier election could be needed if, for example, a government with a small majority loses that majority through deaths and defections, or it could be needed if the governing party split apart on a big issue.

In practise, the Parliament which enacts a Fixed Term Parliament Act could also repeal such an Act. So if the Lib Dems did wish to end the coalition early and had the support of Labour and others for doing so, I guess they would just move the repeal of the Fixed Term Parliament Act. It is a lock on the door, and finding the key would be difficult, but not impossible. There is some talk of weighted majorities to repeal, to try to make such a course even more difficult. We will have to see whether these are either technically feasible or desirable.

It is a fairly safe assumption that we have a five year coalition government stretching ahead. Senior Lib Dems have decided to surrender some independence of thought for the opportunity to influence a government, and may well like the experience. The UK does need stable and strong government. Having a majority of around 70 and saying you will legislate for a 5 year Parliament gives you as strong a platform as you can create in the cirucmstances. What matters now is what they do – and events.

I assumed the Lib Dems would negotiate with both sides, even though they said they would just negotiate first with the Conservatives to see if they could do a deal. We now learn Vince Cable was meeting his Labour friends in private whilst David Laws was meeting Conservatives in public. Why didn’t the Lib Dems announce at the beginning it was a contract race or auction, so all could see what it was about and could bid accordingly?

It’s no advert for the “new politics”. It is fascinating that Lib Dems have struggled and argued for 34 years for another chance of a hung Parliament. Now their prayers have been answered they do not know what to do and are by all accounts hopelessly split over whether to do a deal, what type of deal to do and with whom.

On display are all the features of hung Parliament some of us warned about. The politicians have to try to make deals, which entails ditching important promises to electors because no party has the votes to keep its word, and seeking to decide who should govern and how they should govern behind closed doors. Meanwhile government drifts dangerously, when we need someone in charge who can start to sort out the finances in a way designed to fuel and further recovery, and overhaul the approach to the banks with recovery in mind. We need greater honesty and transparency from our politicians. The Lib Dem way of negotiating offers less of all of these things.

I think Gordon Brown was right to resign. However, he has not resigned forthwith and remains in Downing Street. We now know that if Labour does patch up a deal with various parties and stays in office, we will have a Prime Minister no-one voted for as Leader, a person who did not take part if the famous debates to give us all a choice of Prime Minister.

Many Conservatives are resolutely against the Alternative vote. It is not proportionate. Indeed it woudl have cut Conservative representation in past elections, when Conservatives got a smaller share of the seats than they had of the vote. It would be quite wrong for any government to seek to introduce this without first asking the British people in a referendum.

The immediate market crisis of last week should subside today. The Euro member states have realised the serious threat of the Greek crisis spreading to Portugal and Spain. They have decided to put in place huge credit lines in case member states can no longer borrow from the markets at sensible rates of interest. The European Central Bank can now buy up state debt from member states, just as the Bank of England has been buying up UK state debt. The immediate worry of the markets that Euroland member states would run out of money has been eased by the twin facts of more credit and the ability to literally print money.

All of this comes at a political price. It must mean two things. Firstly, there has to be more control and influence over member states budgets. What the EU has failed to do by law and agreement, it will now be able to do as the lender of last resort. It lacked the will to enforce its 3% maximum ceiling on annual government borrowing. Now it has to force reductions where member states have public finances wildly out of control. If member states need access to the special funds, they will be expected to undergo surgery to their public spending and deficit plans to qualify for the cash. Secondly, for it all to work, there need to be in place realistic plans anyway to get the budget deficits down. If there are no such plans, the markets will return to force up government borrowing rates.

One of the ironies of the left of centre thinking on economics that tends to prevail in European circles is they will end up concentrating on cutting spending rather than on policies to promote growth. They will be reluctant to slash tax rates and reduce regulation on earning and saving, policies which could promote faster growth and create a stronger private sector. So, instead, they will have to keep on cutting more out of their public sector budgets.

Meanwhile, the Europeans love of proportional representation and hung Parliaments makes the task of government more difficult. Mrs Merkel has just lost her majority because she went to the aid of Greece. The German political class may be committed Europeans who want to integrate further and who understand that if you share a currency with another country you also have in effect to share a budget. The German people think otherwise. They resent these obligations and degree of common working, and have as punishment snookered their government. That makes handling the next phase of the crisis that bit more difficult.

PS The pro EU Europeans in the UK might like to thank those of us who fought against British membership of the Euro. If the UK had been in the Euro in the last year our public finances would have wrecked the common currency. I remain a strong supporter of our independence, but have to admit it leaves us free to make a mess on our own, instead of helping destroy the common cause. Let’s hope soon we can start to use our freedom from the Euro to good effect.