Month: October 2010

It is important to remember that the UK  joined a “Common market”. The British people have only been asked once for their opinion. In 1975 they were asked if they wished to remain in a  “Common market”. The whole EU project has always been sold to the British people in terms of selling more goods, creating more jobs and having access to the wider EU economy. Usually politicians at the same offered assruances that sovereignty or British “red lines” would be preserved. No mainstream party ever argued that surrendering sovereignty was  for the greater good, or set out the full EU project to the British people.

This is not how most continentals see the project. They have always seen it as primarily a  political project. They wanted the UK in, as they wish to move to common government  in more and more areas. They want to make sure the UK cannot differentiate and outperform.

It is time anyway that the UK government  dropped the argument that we have to go along with much of the EU agenda in order to enjoy all the benefits of the common market. This is way out of date. The world of the 1970s was hedged around with tariffs, which meant belonging to the EU area did lower some barriers. As it happens they lowered the barriers more quickly on industrial goods which favoured the contiental exporters  than they lowered the barriers on services which would helped the UK more. As a result we always ran a balance of payments deficit with the rest of the EU. Today access to the EU market is assured by the rules of the World Trade Organisation, which has lowered barriers more effectively for the world as a whole. Non members of the EU have equally good access to the market as members.

Some in government  recognise this shift, and argue that our membership is important because it allows us a say in  shaping the myriad regulations and Directives which the EU imposes on those who trade within its area. The last government showed it is possible to get little or no leverage over those same rules, as their style of avoiding serious engagement or confrontation on difficult issues meant the UK accepted the lowest common denominator or the Commission view.

The problem for the UK is that the EU lost its economic dynamism shortly after the UK joined. Subsequent decisions to widen the area, merge DM with Ostmark, and then to create the Euro have added to the woes of the central economies. The EU is now a slow growth area at best. It has a malfunctioning currency which cannot work for all the varied economies forced into it. It has a declining  working age population in most countries. It is being rapdily outpaced by the more dynamic parts of the world.

The danger for the UK is that we will be left with too many expensive and inappropriate rules, reglations, taxes and charges as a result of the EU’s legislative excesses. This will hinder us, making it more difficult for us to compete with the freer and faster growing countries elsewhere. If the Uk cannot persuade the EU to embark on a major programme of deregulation and repeal, it needs to negotiate a way out from the more damaging measures for itself.  We should not see our EU relationship as the cornerstone of our jobs and prosperity, but as a problem to manage when the rest of the world is getting a lot more competitive.

The recent meeting showed the problem starkly. The UK government was unable to get cuts in the large and growing EU budget, or even to achieve a standstill, because it has to proceed by majority voting. The government  can dig in and insist on a falling budget for 2014-20, as they have a veto over that. They can also dig in over the proposed new Treaty. If the EU wants to Uk to sign it, the Uk should demand some powers back from the many areas where Conservatives opposed Labour’s past surrenders of authority.

In the debate on thursday on Public Spending Labour pressed home an attack on the question of how many people will lose their jobs in the public sector as a result of the cuts   Everyone seemed to accept the Office of Budget Responsibility’s figures that over the next four years there will be 490,000 fewer jobs than today, which may or may not be true.

I pointed out that you could reduce the numbers by 490,000 without a single redundancy. According to government statements, natural wastage runs at much higher levels than 490,000 over four years.  Labour asserted that all the jobs would be redundancies. Ministers did not immediately latch on to my suggestion and deny the Labour figures.

I was surprised by this.  After the debate I asked Ministers what the true figure of redundancies will be and why they are so coy about it. After all, it is a perfectly reasonable Labour question to know how many such job losses taxpayers may be funding.

The answer I was assured is they do not know. Ministers do not know because they have apparently asked civil servants to review the spending figures and then to recommend to them how they will meet them, including recommending the balance of job losses between natural wastage and redundancy. Parliament will be told after Ministers have been told.

I think Ministers should tell civil servants they wish  to maximise the amount of the adjustment undertaken by natural wastage. They should want a special case to be made where redundancies are thought to be necessary. Redundancies are not  pleasant for staff, and  Ministers need to get their officials onside for the task of delivering more for less. Redundancies are costly for taxpayers. Why do we want to pick up the bill for the payments, if we can achieve the same result for less cost by using natural wastage? Transferring more people onto early retirement is also far from being a cost free option, given the state of public sector pension funds. Voluntary redundancy schemes often result in the loss of some of the best people, taking a large cheque with them to go into a different job elsewhere.

The government  needs to control the costs of slimming as well as the costs of everything else. Ministers need to keep control of the job loss programme. If they let civil servants control it it may turn out to have substantial up front cash costs we cannot afford.

The US alliance served the UK well in the Cold War, and was at its best under Reagan and Thatcher when their combined pressure helped bring communism down in Eastern Europe. The relationship has not always been so strong.

In 1939-41 the US was reluctant to come to the aid of the UK at its time of greatest danger. Only the Japanese attack on Pearl Harbour brought the US  decisively to the war and ensured ultimate Allied victory worldwide as the US cranked up its mighty industrial and military machine. In the 1960s a UK Labour government refused to offer military support to the USA in Viet Nam. The US subsequently lost a major military encounter with communism.

Mr Blair and Mr Brown decided to support the various military endeavours of the US during their terms of office.  Looking at today’s Iraq and Afghanistan, and across the borders to Iran and Pakistan, it is by no means clear that our joint strategy will bring lasting peace or secure better government in that troubled part of the world. The UK needs to ask itself  if it should commit to such military interventions in countries with such different cultures and traditions, where there has been a long and sorry history of  unsuccessful western interference.

The prime task of the UK government should be to ensure the defence of our home islands and of our dependent territories. Today these are less threatened than usual.  Our nearest powerful neighbours and former opponents France and Germany are both peace loving democracies with no territorial claims on us. The Russian threat to western Europe has been lifted by the end of the Cold War and the collapse of Russia’s Eastern European empire. The new powers in the East have preoccupations with their Pacific area, not with our Atlantic territory.

Our island situation is a great strength, as it always has been. Our home defence can be achieved by  keeping sufficient capability in ships and planes to make it impossible for any invader to cross the seas close to us  as a precaution even though there is no such threat currently.  Our dependent territories also require us to keep sufficient sea power supported by air power to act as a warning to any country with military expansion plans.

As the government has stated, the new threats come from terrorist groups and rogue states prepared to embark on asymetric warfare. That requires us to be strong in intelligence and ready to handle attacks through cyberspace and on the streets of our cities. It is also wise to retain an effective nuclear deterrent. It might also be both wise and sensible to wnsure we have possession of all the military technology we might need here at home. After all, the UK had to develop its own nuclear bomb after 1945 , and could doubtless do so again.

The US has strong views on the future of the Middle East and Far East, and a substantial military presence to back up its view. We need not always share that view, nor always be available with military support for it.

The government  defines the UK’s interest in terms of two central alliances – the American and the EU. This is old thinking.

It is true that the government has sought to improve and develop the UK relationship with India, and has recognised the growing economic strength of China. We are moving rapidly from a world with one superpower, the USA,  to a world where the super power has an important and increasingly powerful rival in China. We will wtiness the progressive relative decline of the EU as an economic force, as the surge of wealth and income generation from the emerging market economies continues.

In such a world the UK needs to reconsider and modernise its strategy.  The UK’s interests are not necessarily the same militarily and in foreign policy terms as the USA’s, and the UK’s economic interests are not automatically alligned to those of the rest of Europe. The UK needs a modern foreign policy based on the world as it is and is becoming, not firmly rooted in the world of the last century where the two fixed poles were US military and diplomatic power and EU  economic power.

The case for the old strategy was simple. The US is the dominant military and diplomatic power in the world. As an English speaking democracy our best course was said to be to seek to be special friends with the US. The price was supporting the US military endeavours. The gain was US protection during the Cold War and the exchange of  military technology and intelligence.

On the economic front the defeatists about the UK who argued and put us into the EEC in the early 1970s believed that the EU economy was livelier and more thrusting than the UK’s. They thought that binding  us into EU rules and procedures would let the greater dynamism of Germany and France rub off. Shortly after we joined in the 1980s the UK transformed its own performance for the better. In the 1990s much of the rest of the EU sank into a new big government  low growth model.  We will examine the problems our twin foreign policy strategy has created for us later this week.

It was good to hear this morning a plea to simplify and reduce the  bureacratic checks at airports. They are over the top and do not make us safer. There were also wise words on Afghanistan from a man who rightly withdrew Russian forces after a protracted and costly conflict.

Angela Merkel is afraid that the German constitutional court could challenge the legality of the bail out arrangements put in place for Euro zone members to get them through the last crisis. She is pressing for a new EU Treaty to define  the EU powers and to put them beyond constitutional doubt.

France is looking for EU  solidarity and support at a time of spending and deficit crisis. Other member states with large deficits  are hoping that the bail out measures in place will one day be available to ease their pain.

This all makes it more likely that the EU will press ahead with a new Treaty seeking wide ranging powers of economic government. The combination of legal uncertainty, the reluctance of many Germans to pay taxes to support the southern states, and the ever present aim of the EU bureaucracy to extend its powers will come together to demand a substantial extension of EU economic government.

This leaves the UK in a potentially powerful and interesting position. The UK will presumably say it intends to surrender not one iota of extra power to the EU. Otherwise it would in conscience have to grant a referendum which it does not seem keen to do. The UK does not have to sign a new Treaty, even if it does include an opt out that works. The Uk should require a good offer to persuade it to let  the others go ahead with stronger central controls. There are powers and money to get back to improve the UK’s deal.

It will be a good test of the UK government’s negotiating skills, and  a chance for them to show how determined they are in wishing to cut back on central controls and high spending budgets in Brussels.

Yesterday the Prime Minister talked about the right thing at the CBI – how does the UK sustain its current recovery and speed its growth. Readers of this website will know that the government’s whole economic policy is based on achieving and sustaining above trend growth for four years, starting next year. It is the growth that brings in the massive extra tax revenue, which in turn brings down the deficit. No growth, no extra taxes. No extra taxes, much extra borrowing.

The main point in the Prime Minister’s address which offered the prospect of better performamce was his wish to see a £200 billion infrastructure investment programme over the four years, largely financed by private capital. We do need more and better broadband, more rail and road capacity, and more energy generation. Putting this in boosts  the economy of itself, and provides better conditions for other businesses to expand. If you want a manufacturing revival you need good transport for raw materials, components and finished goods, and plenty of reasonably priced energy.

Some others  have mentioned the Green Investment Bank as crucial to accelerating growth. This is costed at just £1 billion.If they spent the £1 billion over a four year period, it needs to be compared in scale to the £6 trillion of economic output we can look forward to over the four years. The Green Investment Bank would account for just 0.02% of output. If they gear the bank, lending ten times as much as the £1 billion of starting capita. it still only amounts to 0.17%. Of course if it had a way of backing winners it could make a welcome contribution, but we need to remember the significant figures.

The truth is the economy needs to mobilise large sums for investment and for exports to achieve the sustainable growth the government seeks.To do this we need the large banks with trillion pound balance sheets, not just those with billion pound balance sheets, to have money to lend to worthwhile projects. It might be possible to exceed the PM’s sensible wish for an extra £200 billion of infrastruture investment. To raise such sums we need to allow the banks to lend on that scale.

The good news is the money is available from past quantitative easing and from recent profits for the banks to lend the extra needed each year for a good programme of infrastructure investment. We do not need any more QE, or any more public spending to bnring it about. We do need a change of regulation for the banks to allow them to place more sensbile risk on their balance sheets so they can lend the money needed for the new projects.

The current strategy on public spending, borrowing and taxing is  presented by some as a case of  “there is no alternative”. I agree with the government that there is no alternative in the sense that leaving the deficit to grow at Labnour’s pace is not an option. However,   I think there are choices, there is an alternative  (TIA) to consider to get it down at a healthy pace.

I wish to concentrate on the two years starting today. I am always suspicious of five year figures, because so much can change over such a time period and often does. I am worried that the present plans outlined by the government both cut so much in a limited number of sensitive areas, yet entail spending more and borrowing large sums  overall. I am concerned that many of the “real terms” reductions happen in the second half of this Parliament, when there will be obvious political pressures to relax.

I do not think we should spend so much time debating the split of spending between departments and programmes. I would not be spending political capital defending  “cuts” that may or may not happen in 2014 or 2015.  I think we should spend more time discussing the expenditure in  terms of how many people, how much bought in service and goods, and how much overhead do you need for each thing you do need and want to do.

A business does not usually  begin a cost reduction exercise by asking which departments it should close or which parts of its customer service it should worsen. It reviews all its inputs, and asks how it can reduce those whilst lifting the quality of service and the attractiveness of its offer. Looking at the public accounts, the thing we certainly cannot afford is inflation, yet inflation is built into the plans to translate cash rises or standstills  into “real” cuts.

An alternative plan to curb the deficit substantially in the next two years would include:

1. An effective two year pay freeze – the governemnt is proposing this, but it does not seem to be fully reflected in the nuumbers

2. An effective and strong use of natural wastage. If staff turnover is  running at 8% as the Chancellor says, that means almost 500,000 people will leave public service voluntarily over the next twelve months. Let’s recruit  replacement  teachers, nurses, doctors and other important front line staff to replace those lost, but not in other areas. Two years of this could cut the number of  posts by 500,000 with no compulsory or v0luntary redundancy. There is no need to spend money we do not have on pay offs and pension deals to encourage volunteers to leave, given the numbers leaving anyway. I hear there are plans to spend a lot this year on pay offs – there does not appear to be any need to incur such costs given the natural wastage figures.

3. The staff that are not needed because their quango or activity is coming to an end should be offered alternative positions elsewhere in the public sector, to fill some of the gaps as others leave or retire.

4.  Buying goods and services in. The aim should be to achieve zero inflation on external purchses for two years. This could be done easily on average  whilst allowing some higher prices in particular areas where cost pressures are unavoidable. The government has rightly started on a cost reduction  programme in its purchasing, so some of these benefits should be coming through immediately.

5. Keep down the rising interest  bill by accelerating the asset sales programme.

6. The latest figures on both borrowing and spending illustrate that the cuts have been delayed until next year. Spending and borrowing are both well up on a year ago. There has been no concerted attempt across the public sector to stop marginal projects and spending. There are, for example, large numbers of roadworks schemes putting in new kerbs, changing the layout and surface of roads and rearranging junctions. This is not crucial work that has to be done now.

7.Cut out the things you do not need or want to do – as the government is already doing – like Regional government, selected quangos, ID cards etc. That frees some cash for areas where you need something more than a cash freeze.

8. Delay the earnings link on pensions for two years, delay increases in overseas aid for two years and decline increased contributions to the EU. Impose a cash freeze on all programmes, other than health and benefits where they have to respond to demand under the rules.

Level funding or no cash increase or loss for two years for most areas should be achievable. If you succeed in stopping public sector  wage and price inflation for two years then this equates to no real cuts. If you could simply peg spending levels it would also mean a lower deficit in two years time than currently planned.

I am all in favour of famine relief, and want our country to be generous when other countries face disaster or extreme poverty. I am not in favour of an EU diplomatic service, and do not think Russia, China and India need our overseas aid.

Two of the budgets which are rising over this period of public sector restraint are the EU and Overseas Aid budgets. Over the five years  of this planned government  £41 billion will be spent on contributions to the EU and £39 billion spent on overseas aid, a grand total of £80 billion. The annual figure for the two combined hits £18.9 billion in 2014-15.  The  government plans to borrow an extra £460 billion over period 2010-2015, so these two programmes account for over one sixth of the additional borrowing.

The immediate problem is the EU budget. Many in Brussels and Strasbourg favour a substantial increase in the budget next year, to pay for an expanded Diplomatic service and for new regulators in the financial field placing themselves above the Uk regulators. The UK government’s position is to modestly ask for a standstill budget. Many of the government’s supporters would like it to seek a reduction in the budget, believing more of the EU spending is marginal than the domestic spending that is being cut. Current expansion plans for more powers and more staff should be put on hold.

You would have thought when there are riots on the streets of Paris over domestic spending cuts, trouble on the streets of Greece over their big cuts, unhappiness over the  budget cuts in Dublin, Lisbon and Madrid, now would be a good time for the governments of the EU to call a halt to the ever upwards climb of the EU’s budget and responsibilities. Surely others can see what we can see – total spending is too high, and EU spending is less important than many parts of domestic spending?

EU officials are busy lecturing the member states on the need for them to rein in their budget deficits and get them back  down to 3% of National Income or less. Why then doesn’t the EU show them by example how to do it? The EU should be offering us all a rebate or a reduciton in our contributions. It is a sobering thought that all the contributions to next year’s  EU budget are being borrowed, as every member state is borrowing to keep itself going. If the EU is serious about curbing the debts, it needs to curb itself.

I want the Uk government  to up the pressure on other member states to bring this wayward budget under control. Now is the time to win some influence and bring the EU to a more commonsense answer to their budget conundrum.