Month: June 2010

Today at the European meeting David Cameron should allow France and Germany to impose new controls on the budgets and economic policies of Eurozone members – they need them. You can’t have an effective single currency without having a single economic government. The borrowings of one are the borrowings of all to some extent, so all need to be able to help control the borrowings of each. The price for Uk agreement should be to remove any liability for UK taxpayers to help bail outs within the zone, and powers back for the UK.

I am relieved there have been so few goals and exciting football in the World Cup, as I have been too busy to watch apart from the England match.

Why don’t they abolish the offside rule so we could then tune in and see more action in a new tournament? Cricket had to invent 20/20 to draw the crowds – now that does give you loads of action. They could keep a tournament on old rules for those who like the no goal game.

The BBC had a funny piece this morning on the joys of the goal free draw.

One cheer for the decision to get rid of the FSA. Another cheer for putting all regulation of the banks together at the Bank of England. These are both things I have argued for ever since Gordon Brown foolishly split banking regulation in 1997. We warned that Brown’s bodged regulatory structure was likely to be bad in a crisis, and warned of the excess credit and monetary looseness in the Economic Policy Review in 2006-7.

I am not awarding the third cheer that is conventional on good news for one very simple reason. The Monetary Policy Committee remains unchanged, yet the MPC as readers of this site will know has had a dreadful five years of misjudgements. The Governor last night said it was the job of the MPC to take the punch bowl away when the party gets into a swing. That is exactly what they failed to do in 2005-7, when they stubbornly against external advice kept interest rates too low for too long and allowed excessive credit.

It should also be the job of the MPC to avoid excessive collapses of credit. In 2008-9 the MPC helped engineer the most dangerous and precipitate decline of credit. Again some of us were going hoarse warning them of the dangers. Even one of their own members saw the problem, but the MPC ignored commonsense. It had lurched from money being too easy to money being too tight. How can we trust this group of people going forward? Inflation remains way over target whilst activity is weak. They have helped get us into a nightmare situation.Their money printing flooded the public sector with cheap money and inflationary tendencies whilst banking regulation starved the private sector of funds.

Which brings me to the new Financial Policy Committee. Their job we are told by the Governor is to turn down the music when the dancing gets too wild. By the same token I hope it is also their job to turn up the music when the dance floor is empty. In case the Governor hasn’t noticed, the dance floor has not been too popular with the private sector for the last couple of years, largely because they cannot afford the entry tickets whilst the regulatory bouncer on the door is keeping many of them out. The first task of the FPC should be to restore some balance to the UK economy, and take the action that needs taking to allow sensible levels of lending to enterprise and growing business so we can have a decent private sector led recovery.

The Governor’s language is appropriate to the conditions of 2005-6 which he misread at the time. It is not what is needed in 2010.

The oil spill in the Gulf makes both the US and the UK poorer. The Gulf states lose oil, tourism and fishing business. They are seeking the $20 billion from BP for starters to make up for some of their losses. They are taking it from a global company which generates a lot of its revenue and profit in the US. As a result of the BP/Transocean disaster these companies along with the rest of the local oil industry in the Gulf region will now be further restricted by the new controls on oil activity the President has introduced. Much of it is a series of transfers of cash and profit within the USA, with the money all in dollars.

The UK has 40% of the BP shares. The Uk therefore loses 40% of the total dividends paid by BP for as long as the dividends are unavailable. Savers, charities and pension funds between them will loses several billions this year, and the Treasury will lose some tax revenue. There will be less cash switched into pounds by BP to meet payments.

The bad news for BP is their Board has done a “deal” with the President that fails to cap the BP liabilities, makes no mention of the responsibility of any of the other companies involved in the drilling accident and places the disbursement of the money in “independent” hands. BP may find that the administrative and legal costs of handling the funds become high whilst the number of potential claimants multiplies. The Group needs to place some kind of limits on how many people and businesses it is responsible for compensating, whilst the President has every interest in maximising the numbers who will look to BP for cash.

Badly chosen words can also prove expensive in the understandably emotional atmosphere of the crisis. The CEO’s comment about wanting his life back has now been matched by the Chairman saying he cares about the “little people”. How do such highly paid people make such obvious errors? I heard a few weeks ago that BP management regarded holding the dividend as central to their task. I did not pass on this on as I thought it incredible at the time. It will be interesting to hear what BP management now think their main aim is.

Once again I am not offering investment advice on this site. BP remains in acute difficulties all the time it fails to cap the well and stop the flow of oil into the ocean. Once the well is controlled then BP needs to establish some fair limits on its responsibility for clean up and compensation. The Group has important and valuable reserves, but they come with an expensive leaking well and an angry President targetting the company which could prove very expensive even for a Group as large as BP.

Last night in the Commons the new government brought forward proposals to create a better and stronger Parliament.

There will be a September sitting, so the government does not go from July to October without Parliament to ask awkward questions. The Commons will have a backbench Business Committee with time to allocate as we see fit, which amounts to the equivalent of around one sitting day a week. In due course there will be a House Business committee, to co-ordinate backbench time and debates chosen by backbenchers with government time and debates.

The last Parliament did not meet often enough, and too much of its agenda was chosen for it by the government and supported by use of the Labour majority. This Parliament will meet more and have more freedom to debate the things that matter most to the country and the issues that the government may find inconvenient to discuss. The last government introduced “topical” debates on a Thursday which were often just the spin theme of the week for the PM. These debates often proved unpopular even with the majority that sustained them, and increased the House’s frustration at the inability to choose subjects that the vocal and often substantial minority wanted to debate.

The Office for Budget Responsibility produced a new and much lower forecast for growth. Out has gone the old government’s heady and unrealistic trend rate of growth of 2.75%. In has come the new age of austerity 2.1% long term rate. The OBR does think the next three years will see a trend of 2.25% growth, with it falling off after that. That means they are not expecting much of a recovery from the big slump of 2008-9. They clearly do not believe the Bank of England’s view that there is loads of spare capacity just waiting for orders for the economy to take off. They have come closer to my view that the trend rate of growth is now below 2%, compared to the post war average of 2.5%.

The OBR also said that the structural or underlying budget deficit is higher than Labour said. They did, however, lower the total deficit forecast for each of the next four years. This change depended on two moves to less caution in the figures. They have firstly decided more VAT will be collected as a proportion of the amounts owing than in recent past experience, and they chose to use the middle of their growth forecast rather than the bottom of the range used in the previous deficit estimate. They also believe that the sharp drop in the budget deficit compared with forecast in the last three months of 2009-10 came mainly from a sustainable increase in Income Tax receipts. They dismiss the idea that most or all of the increase was a one off from people and companies bringing forward income and bonuses ahead of the higher rate of tax for 2010-11. I wonder if they are right.

They do not produce a full and true balance sheet. They do point out there are £770 billion of unfunded public sector pension liabilities on out of date 2008 figures. The true position must be well in excess of £1 trillion by now. They come up with quite low figures for the off balance sheet liabilities through PFI and PPP, and duck giving a true view of the banking liabilities.

On spending, they reveal that on unchanged policies net pension payments surge from £4 billion in 2010-11 to £9.4 billion in 2014-15. EU net contributions rocket from £3.1 billion in 2008-9 to £10.3 billion by 2014-15, the price of Mr Blair’s bad negotiating. Social security goes up from £169.3 billion in 2010-11 to £192.1 billion by 2014-15, and debt interest from £42.1 billion in 2010-11 to £67.2 billion in 2014-15. These are some of the figures the new government has to seek to curb and control.

We now know what Labour thought the answer was to this problem. Over the thirteen years of left of centre government the maximum tax take was in 2007-8, when taxes took 36.4% of all our incomes or GDP. This compared with the Conservative high of 38.2% in 1982-3 when the then Conservative government was tackling the large inherited debt from the previous Labour government, and with the 31.8% low the Conservatives got it down to at a later date. Labour inherited 34% and always charged more than that in their thirteen years.

This is why the new government is right to say we have to cut spending. Spending is running near to 50% of GDP. It needs to be realistic in relation to possible tax levels which are more than 10% of GDP lower. Why should we think suddenly the UK economy can sustain taxes of more than 40% of GDP when no previous government in the last 40 years has thought that possible? Who would stay to pay them? Who would carry on working hard and risking and investing more in such a climate? It’s a very competitive world economy, and our main economic competitors already have income taxes and capital taxes well below ours.

The result of Mr Budd’s likely revisions to our forecasts today will be to raise the deficit by lowering the forecasts of future tax revenue from slower growth. If slow growth is our problem – as I believe it is – the correct response is to cut the tax rates on saving, investing, working and creating jobs, not to increase them. Just as the England football team needs strikers to score more goals as well as a goalkeeper to make more saves, so the UK economy needs a bigger tax base as well as less public spending. We need better Treasury control of the spending, and a better private sector performance to bring the money in.

Alan Budd’s job at the Office of Budget Responsibility is to inject realism into the inherited forecasts from Mr Darling’s Treasury.

He inherits some racy forecasts for economic growth. The last government thought the UK economy would sprint to growth of 3-3.5% next year, and stay above 3% for the following two years. The average of independent forecasters think 2.1% is likely in 2011, followed by 2.4% in 2012 and 2.7% in 2013.

There’s a difference in the impact on the government deficit. If the economy grows by 1% more next year that will generate around £6 billion of extra tax revenue, and save maybe £1.5 billion of unemployment and other costs. If the following year the economy grows by another extra 1% roughly the same favourable improvements occurs, taking the cumulative total to £15 billion. Go on like that for long and you will be talking serious money.

Turn it round, and it means that the new government may have to say the prospective deficit in 2011 will be several billions higher, and the 2012 one worse still compared with the current forecast.

When I wrote the Economic Policy Review I commissioned a paper which looked at the long term growth rate of the UK economy. Labour had recently hiked it to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away. It is true there is a big downturn to recover from, but it seems very unlikely that the long term rate of growth is anything like 2.75%, which in turn makes it unlikely we can enjoy three years of growth above 3%.
The only thing that could change that is aggressively to set out to make the UK the best place for jobs and business in the developed world by following pro enterprise tax and regulatory policies.

Yesterday I was asked to speak to a ruling group of Councillors – not in Wokingham. They wanted my advice on how to cut their budget more.

I asked if they had imposed a staff freeze to take advantage of natural wastage. They said they had, but then confessed that in the case of the last four posts that had become empty they had allowed the officers to fill from outside recruitment. They need to say “No” to any such requests. If the post is essential, recruit from within.

I asked if they had closed off the temporary staff and consultancy routes that some Council officers to use to thwart staff number controls. They were hazy about that. They need to terminate temp and consultancy contracts wherever possible.

I asked if they had forced a de-stock on supplies. They had not. They should impose immediate restrictions on ordering and purchasing, until they are satisfied stocks have been brought down and cash freed.

They confirmed that their staff turnover is still running at 5.7% leaving every year, so it gives plenty of scope to cut costs and improve exisiting staff members prospects of promotion.

I was pleased to learn this morning that at the MOD new officials are being brought in as bosses with the remit of controlling defence procurement costs. There are cuts I want to see in the defence budget. The sooner we get out of Afghanistan the better. We cannot afford a war in our current financial plight. We could also bring the army home from Germany. The army is overstetched, so why not leave continental European defence to the European continentals. We need to concentrate on home islands defence, maritime and expeditionary. If we withdraw from Afghanistan and from Germany we could run with a smaller army for a bit by recrutiing fewer new people whilst we rebuild our financial strength.

I have been sifting through CVs and application letters. Many of the applicants have come from the 20 something generation. Many of these young people have never held a full time job paying a sensible rate of pay. They have moved from temporary post to Job experience, from volunteer to Intern. They have found the job market of the last couple of years hostile. It is one of the tragedies of the Credit Crunch and the boom bust policies of the last decade that many of them are now languishing without a sound start to their working careers.

Many of the ones I have been reading about have degrees. They send in CVs which start with similar paragraphs that they have been taught to write. They usually claim to be excellent at team working, brilliant communicators,and to offer good leadership. They are all highly motivated, enthusiastic, pro-active with strong organisational and problem solving skills. The rest of the CV sometimes belies the standard phrases of the opening. Some are unable to write a sentence. There are usually spelling and typing errors – understandable in the rush of everyday communication but glaring in a considered and formal document like a CV. One example produced the following second sentence to the application: ” I fill the experience I have gained in past employment will put me in good persian for this role” . Often through no fault of their own a person who sounds as if they should at the very least be a senior executive has never held a more senior position than that of Intern or helper in the local cafe.

Probably because they send out so many applications, many fail to adapt their CV and application email to the post concerned. They do not think themselves into the job. They are usually still living at home with their parents, and will have trouble finding affordable accommodation for jobs in central London. Too many rejections can make them both fatalistic and very willing to adjust to what the potential employer wants. A few years ago anyone seeking work with an MP wanted to be the researcher/speech writer/Chief of Staff. Now more understand that dealing with the follow up to case work, pursuing the dialogue of the deaf with quangoland and helping with the endless demands of the new regulatory culture can be more useful for the MP who knows his own mind.

The current jobs market is not healthy. The way young people are trained to present themselves does not always help them. Too many of them present the tutor’s package, rather than telling prospective employers who they are, what they are good at and what they want to do.