Month: December 2010

letter from Dame Lucy Doolittle to all departments

Dear Colleague,

            I am writing to urge all departments to stress in all their output the importance of tackling climate change vigorously. I have been disappointed to see the lacklustre response of some in the media and amongst the commentariat to the bold and comprehensive proposals of the Climate Change Secretary and feel we should do more to help Ministers.

           The background to this is most important. The Thatcher government  energy  privatisations were sold on economic grounds. It is true  they did  deliver a 20% reduction in electricity prices along with  profits on shares acquired by public subscription, but this was not sustainable. We need to stress that this was at the expense of the externalities, as you should not let the free market loose in such a sensitive area. It has been well said that climate change highlights a most glaring market imperfection, as the market does not seek to limit carbon emissions when producing power. You need government intervention to achieve that. It means we  need to regulate comprehensively, and ensure more of the money is directed to good purposes which we can specify.

               Fortunately we can say this in public, as this is not in party political dispute.  All three main political parties agree on the science, and agree that tackling carbon dioxide emissions is a priority. The Greens wish them to go further, faster.  We do however need to deal comprehensively and strongly with three canards in the public debate.

               The first is to reply to those who point out that the Uk has now had three cool and wet summers and two cold winters in a row, seeking  to undermine the idea that the climate is warming. Climate is different from weather, as we keep saying. Howver, if the weather is persistently colder, we need to stress the argument that the UK is a small part of the planet and what is true here is not necessarily true elsewhere. We should also always use the phrase “climate change” rather than “global warming”, so it covers shifts in weather patterns to the colder as well as to the warmer. It would be helpful if those of you who have visited warmer countries and cities like Cancun could furnish us with the relevant reports on weather there to underline the point about variability.

                 The second is to deal with those who say UK human output of carbon dioxide is such a small element in the total world supply of the gas that we cannot make any difference to the overall rise. It is mainly for Ministers to deal with this, but we should brief them to say that the Uk is a leader in the field, that it isa  moral imperative, and that the poorer countries will suffer most from unabated climate change.

                  The third is to combat those who argue that the UK’s policies will put up industrial costs in a way which will harm British manufacturers and lose us jobs. There is scope for disagreement about how much the carbon levy and the guaranteed electricity price will involve higher bills. I would advise that we decline to give complete forecasts, on the grounds that much still remains to be settled before we can work out what it might all cost. We should continue to stress to Ministers the opportunities from low and no carbon technologies and turn attention to the green jobs revolution away from detailed arguments about the prices and costs of power and the impact on the costs of production of other items.

                This is an important issue. Our critics do not like to admit that government has an important role in areas like energy. Without government power would be so much cheaper, which would mean so much more carbon would be expelled into the atmosphere. I know you will want to help us deal with this problem, and ensure we meet our EU targets for renewables and emission controls. The revenues from the carbon tax are also an important part of our deficit reduction strategy.

Yours

Lucy Doolittle.

 

                 Yesterday in the Commons Conservative Eurosceptics were not happy about the EU’s approach to the Euro crisis. Everyone wants to see Ireland treated well, and wishes our neighbours success in getting out of the economic difficulties which have been largely created by membership of the Euro, by the European Central Bank’s decision to run down support and by poor regulation of Irish banks within the EU system. The questions at issue were “Who should pay to help Ireland at a time of difficulty?” and “What policies should Ireland be made to follow by the EU and IMF to help her out of the crisis?”

                 Today these same questi0ns need to be asked about any Euro member state in difficulties as the EU  Heads of government turn their attention to what to do to mend the Euro. The UK government has the full support of Eurosceptics when it argues the  case that future financial support for Euro members should come from Euroland states and not from EU countries outside the Euro. It also has full support in saying any Treaty change to allow and pay for  bail outs of Euro members  should very clearly and expressly not apply to the UK.

                 The EU and Euroland needs to answer the following questions.

1. Should Euroland countries assist each other when in financial difficulty?  Of course if you belong to a single currency area you have to accept obligations to help neighbours in the same currency. There has to be stronger central economic government for the zone, transfers of money from rich to poor areas, common banking regulation, and controls over the total levels of debt and bank debt in the system.  All this requires further transfers of power to the emerging  Euroland sovereign government, Treaty change and more regulation. It will anyway be the natural response of the EU in difficulties. If you shared a bank account with the neighbours, you would want to be reassured that they cannot overuse the overdraft at your expense. They will want to be reassured that you will help them keep the account solvent, as you are jointly liable.

2. How should the money be made available to countries in distress? All banks within the Euroland area should be subject to effective common regulation of cash and capital. They should all be eligible for as much financial support as they need from the European Central Bank all the time they are solvent, and subject to orderly run down if they are not. All countries should be subject to strong deficit and debt controls. If they observe them they should be eligible for as much financial support as they need, financed from common Euroland bond issues. If they start to break the rules there needs to be a process to bring them back into line, which is far from easy all the time they appear to be independent democracies with views different from Euroland views on spending or taxing.

3. What should happen to non Euro members?  If they are intending to join, then they could be part of the creation of the Euro sovereign and join the economic management arrangements as part of their preparation. If a country very clearly does not intend to join, like the UK, it needs to be exempted from  the panoply of economic controls and management. The creation of stronger economic controls which is now underway should be the opportunity for the UK to redefine its arrangements as well, as we do not need nor wish to be under the degree of Brussels control that a Euro member has to accept. People in the UK will want to know what we are getting in return for allowing the Euroland members to press ahead with Treaty change.

4. Will the austerity programmes imposed by the EU on overborrowed Euro members work?  Normally an IMF programme of spending cuts is augmented by devaluation to allow a shift of resources into exports, and by easier money to allow a general private sector led expansion. Belonging to the Euro makes these two routes difficult, making it much more difficult to see how a Euro member in crisis will generate the faster growth it needs to pay the interest and get out of difficulties. There is no easy  answer to this. Some of us went hoarse explaining that Euroland was not a natural single currency area, and pointing out the architects of the Euro had not brought the different economies closer enough together to make it a success.

It was clear in the run up to the Euro that Greece, Portugal, Spain and Italy failed to meet the EU criteria for membership by a wide margin. They did not get their debt levels down to the specified amount, their deficits were too high, their inflation rates were too high and their long term interest rates were too high. I argued then that these four countries could not get their performance into line to enable them to make a success of Euro membership: “their economies are simply too different and diverge too far from the French and German economies to make it feasible”.

It would be good to hear from the proponents of this scheme what their answer is now. I forecast the Euro scheme would end up with higher taxes to pay for bail outs, and higher unemployment as the economic policy failed to offer growth and prosperity.

 

                 Readers of this site will know that I have disagreed with the analysis and policy of the Bank of England ever since I set the blog  up. I have watched them lurch from too easy to too tight and then back to super easy.  Current policy was bound to produce high inflation by western world standards. The combination of printing money and setting official interest rates at 0.5% was bound to give us what we now have.

                  There are two official explanations for RPI inflation at 4.7% and CPI inflation at 3.3%. They tell us retrospectively that it is the result of the fall in the pound last year, and they tell us it is the result of rising world commodity prices. They point out that inflation may get worse before it gets better because the VAT rise kicks in in January. All of these items are said to be temporary or one-offs which we should not worry about. The world, they suggest, is really deflationary underneath.

                    That is not the world I see around us. Asia and Latin America are experiencing strong inflationary pressures. Indian inflation is around 8%, and the official figure of around 5% for China probably understates what is going on in the shops. High and rising inflation in the faster growing parts of the world create price increases within the world supply chain, and spills out into western markets through price increases for traded goods and components.

                       There is plenty of asset price inflation around, though the Bank usually turns a blind eye to that. Commodities, fine wines, art works, shares and even properties in the main centres are all on the rise. There is plenty of cash around in the hands of the successful global entrepreneurs, amongst the newly rich business classes in China and India, and in the hands of  oil oligarchs. Gold and silver prices reflect investor wishes to hold an inflation hedge as well as conspicuous consumption in the jewellery shops.

                       The Bank holds to the view that because the UK economy lost a lot of output in the slump, there must be plenty of spare capacity around now. So, they argue, there cannot be price inflation as companies will wish to fill their factories and offices before they put prices up. This is the biggest misunderstanding they seem to have. Talk to almost any industrialist and he will tell you his company is having a good year. Final demand has picked up from the low levels of 2008-9, and there has been strong demand to restock.

               During the slump in  the UK manufacturing laid off a lot of labour and closed more factories. Companies did not have the cash to carry on spending on new mahcinery. There is much less spare capacity around than the Bank thinks. Businesses are held up for shortages of skilled labour,  for lack of specialist materials and components, and for delays in the supply pipeline from Asia. Global businesses are affected by the inflationary pressures on the other side of the world. Many UK companies decided to take some or all of the benefit of lower sterling in form of higher margins rather than higher volumes, keeping prices up.

               The government’s decision  to switch public sector index linking to CPI from RPI has so far worked to cut the public sector cost increases, leaving those who will receive less feeling bad about it. A better solution for the government is to encourage the Bank to get inflation down to target or below. As I have often argued, given the public spending pattern set out for the five years of this Parliament, we cannot afford much inflation. If we could get to zero inflation in the public sector then we could preserve all valuable public services without cuts. It will not be possible to get public sector inflation down to zero and keep it there if general inflation is going to continue in the 3-5% range.

                  So what does the Bank have to do? It needs to reassure us all that there will be no more quantitative easing. US QEII seems to have gone straight into commodity and asset price inflation. China thinks the US policy is destabilising its efforts to curb its credit and inflationary pressures.

                  The Bank also needs to take heed of the rising interest rates for government bonds which the markets are now imposing. The official 0.5% rate is looking increasingly detached from market realities. No-one in the private sector can borrow for anything like 0.5%, and savers are increasingly angry that the returns on their money are so far below the inflation rate. Even the government now has to pay well over 0.5% for its money for any sensible time period. The monthly ceremony to settle the rate is no longer commanding the markets or informing lenders and borrowers how to price their transactions. It is time for a reality check in Threadneedle Street.

 

                 As I arrived early  at work this morning the contractors were busy putting out sandbags and reorganising the crowd barriers around Parliament Square. They are expecting a fourth day of peaceful protest doubtless laced with extreme behaviour. Last week almost 3000 policemen and women had to be taken off normal duties to deal with the minority of protesters who thought violence the right approach to influence how we pay for higher education in future.

                  All of this response to the protests costs the state more money. That’s more money taxpayers have to provide, or the country  has to borrow. The irony is   these  students will have to help  repay it all once they have jobs and taxable  incomes. It means less money to spend on the kind of items the students would like to see the government  pay for.

                   We need to ask how they propose the government  would pay for every student to go to university with no student contribution to the costs. They seem to have two models. One is to tax the rich more. The other is to borrow more. They probably would end up as the same policy.  If we raise tax rates on the rich to higher levels today, we will probably end up with less revenue, as we have often argued on this site. So both policies in practice  mean the state would have to take out a bigger loan from someone.

                      The price of fewer student loans is a bigger state loan. The difference between a state loan and a set of student loans is limited. The same people, the graduates from this student generation, will have to repay a  bit more of  the debt if they borrow it themselves as student loans , or they will have help from people on lower incomes if the state borrows it.

                      In the meantime, the UK will need to borrow more in world financial markets. The Chinese lowly paid worker could have the pleasure, under the rioter’s model, of making and delivering us our goods, and at the same time lending us the money to pay for them. It is, apparently, moral for the UK student to borrow in this way. The UK person can enjoy three years of university, get a well paid job  and then with the help of people who haven’t had that privilege get around to paying some of the money back to the Chinese workers.

                    The huge imbalances in the world between the hard working and low paid east, and the high borrowing and protesting west, are not sustainable. The west is going through a painful process of getting nearer to living within its means. Violent protests make that task more difficult. The more we spend on law and order, the less we have to spend on education.

                        Meanwhile Dr Cable’s scheme still leaves the state needing to borrow large sums in its early years. Taxpayers will have to pay more tax to pay for the 18,000 students who will have their fees paid for, and to write off the loans of all those graduates who over the following years do not earn enough to repay in full. The Cable scheme is a fully state backed scheme, which means it too adds to public borrowing.

The following letter from Dr Roy Spendlove to Dame Lucy Doolittle has come into my hands:

Dear Lucy,

                 I have just got back from Cancun to find that various departments have answered questions on how many regulations they have passed in the last six months and how many have been repealed. This kind of information  does not make for orderly government and can so easily be misconstrued. I do not think Ministers in the last government would have let this unexpurgated material out. I appreciate that fortunately there has not yet been any media campaign based on it, but there could be. We need to be careful.

                  When an MP asks such a question we need to prime Ministers. They should be told that a Statutory Instrrument is not a homogeneous unit of account. They should be reminded that some departments need to make  orders for temporary purposes on a regular basis – as at Transport. Many departments now are smoothly integrated into the EU system, and have to implement general European agreements. More regulations are an essential feature of modern government.

                      These MInisters should be told that their own priorities will require substantial rule making. I understand the Chancellor is chairing an exercise to seek to cut regulation. His own department will need considerable new regulation to implement its wishes to control banker bonuses, bank balance sheets and other priority matters for the Coalition. At the same time we are in the throes of a very active programme strengthening European regulation of all banking and financial services, which in turn will require precise transposition into UK law.

                    At Justice The Lord Chancellor wishes to create more community sentences to replace prison. These will need considerable staff  input to come up with the right regulatory provisions. The Home Secretary has asked her team to work on riot control which may well lead to additional legislation. The wide ranging reforms of the Health service require careful guidance to be issued for the new bodies which will replace the Health authorities that are being removed. Some of this will also take the form of lengthy new regulaiton,. The changes of course allow us to improve on the old framework and ensure we cover the items that had been missed in the past.

              You will be well aware of these pressures. The problem arises with resources to handle all this. It is not acceptable to many of us that we are under instructions to reduce the numbers in our units and divisions by 30% over four years when there is so much additional work to be done. I appreciate that spreading it over five years was designed to ease the difficutlies and allow second thoughts in later years, when the normal pressures of governemnt might be more apparent even to these Ministers. However, there is the additional complication that the redundancy terms are being reduced shortly. As a result rather more colleagues have decided to leave early than is good for the health of the service, seeking to take advantage of the better terms. This will leave us very stretched.

                 I would appreciate your thoughts on how we can tackle the presentational issue of extra regulations under this crude proposal of  one in, one out. I also need to put in for some replacement people given the current levels of staff loss and the high level of activity we are experiencing from Ministers.

Yours etc

 

               In what passes for debate on economic matters, you are expected to  favour the Irish loan, rescuing Irish banks, assuring Ireland’s trade and prosperity for the future and so looking after the UK’s interest in our nearest neighbour. If you refuse,   you are  said to be crassly in favour of letting Ireland “go down”. Now we are told that the loan will be a good business proposition for the UK, as we can borrow the money more cheaply than we will charge the Irish.

             Let me again try to explain some of the downside in the current EU approach to these matters. Prior to October the Republic of Ireland could borrow ten year money for less than 6% in the market in the normal way. It was when the EU claimed Ireland needed a special loan, and when Frau Merkel said bondholders with Irish or Greek bonds might have to take a loss or hair cut, that the normal debt markets virtually closed to Ireland. The interest rate Ireland  would have to pay soared to over 9%. The first mistake was to do all this in public and to undermine the Irish ability to borrow.

                 The second mistake was to insist Ireland needed to borrow when the government said they did not. It appears to have been the European Central Bank’s decision to threaten withdrawal of liquidity from the stressed Irish banks that forced the Irish government to the table to negotiate. The ECB could have held its negotiations with Irish banks and the Irish state in private, and agreed a plan for longer term withdrawal of ECB support, without triggering such a public crisis.

                     The third mistake is to think that providing large extra amounts of lending at 5.82% is the answer to Ireland’s problems. It is unlikely to be so. The interest rate is high, so Ireland will still struggle to pay the interest and in due course repay it, just as it was finding it difficult with market debt before the created crisis. The loan solves none of the underlying problems.

                       What the IMF and the EU do is to create preferential creditors – themselves – over the normal bondholders for countries at risk. There is then an additional task in recovery, to get a country out of special finance and back into more normal finance. The Republic of Ireland needs a work out, not a bail out.

                If the Regulators are not happy with Irish  banks’ solvency then they need to agree a plan of asset sales, capital raising, salary cuts,  business wind down, merger or whatever to sort out the underlying problem. If the Irish state needs to borrow too much itself, there needs to be a budget and economic growth plan which makes sense and which the markets believe.

              There was no need for an international loan when they forced one. The ECB could have carried on financing the Irish banks, as it has a duty to do, or could have done a private deal on sorting them out if it did not agree with the Regulator’s view that they are all fit to trade.

                If the Uk had declined to join as, as a non member of the Eurozone, the Euro zone would have provided the money. After all, it was just a refinancing of Eurozone loans anyway. As the UK is now involved it needs to stress three things:

1. It will not help bail out another Euro zone member, if the EU decides on a similar foolish course with another member.

2. The UK recommends that the Eurozone concentrates on stabilising and improving its banks quickly, before more damage is done with another banking slide.

3. The UK recommends that the EU as a whole adopts more business friendly policies so that the Eurozone has more chance of growing out of deficits and difficulties.

Creating or waiting for another member state crisis would be a bad idea. Demanding early refinancing of more ECB money would be unwise. They need in secret to sort out banks and country deficits in a more workmanlike way. If stronger states lend to weaker states, it weakens them and puts up their cost of borrowing. The UK’s cost of borrowing has risen since we announced the Irish loan.

As a campaigner  for deregulation I have continued to take an interest in what the government proposes. Chosen sensibly, getting rid of rules and regulations can give business an effective tax cut at no cost to Treasury. Even better, it can also result in savings for government itself.

The Coalition government has not adopted my proposal of regulatory budgets. These would apply to each department, and require them to reduce the costs they impose year by year to an agreed timetable. It has instead adopted the policy of “One in, One out”. For every new Regulation they say they will repeal one of similar weight.

Ever keen  to assist with a good idea, I asked a series of Parliamentary questions to see how the departments are getting on. The table below is revealing:

6 months figures for regulations introduced and regulations removed, with net balance introduced:

Communities and Local Government  plus 21       minus    40         total -19

Department for Environment                 +31              _45                  -14

Cabinet Office                                                0                 0                     0

International Development                            0                 0                     0

Foreign Office                                                0                 0                      0

Defence                                                           +4                0                    +4

Treasury                                                         +9               -2                    +7

Home  Office                                                 +10              -2                    +8

Culture Media and Sport                              +11              -3                    +8

Energy and climate change                        +14               0                     +14

Transport                                                        +15               0                     +15

Health                                                               +19              -2                     +17

Work and Pensions                                         +31              -11                   +20

Business                                                          +20               0                     +20

Justice                                                              +22              -1                     +21

TOTALS                                                           +207          -106                  +101

Both Local Government and Environment have been impressive and active in rolling back needless and less desirable regulation, and account for more than 80% of the repeals. Business and Work and Pensions account for a quarter of all the new regulation : the Business department figure is worrying as they should be keen on deregulation.

The figures are as defined and supplied by government departments. The Statutory Instrument  is not a unit of account that can be relied on, but it does give us some indication of which departments are entering into the spirit of the One In One Out policy. I will be following up to see if the other departments start to repeal, and get the idea behind the policy.

 

        Yesterday’s democratic frenzy over how to pay for university places got plenty of air time. There has been precious little all week for the huge changes being contemplated in Brussels for banks, government bonds, state borrowing,levels of state spending and economic government.

          The Economic and Financial Afairs Council which met on Tuesday had before it a large agenda. They reported progress on:

1. Possible Treaty amendments, regulations and directives to strengthen economic governance by the EU over member states.

2. Tougher capital adequacy regulations for EU banks.

3. A strengthened supervisory regime for all financial institutions in the EU.

4. A system of bank levies to raise money for “resolution” funds in each mamber state, money to enable regulators to put risky banks into a kind of adminsitration

5. A draft directive over savings taxation to tackle tax fraud

6. Possible measures to limit “harmful” business tax competition.

7. A general plan for “crisis management in the financial sector”, which includes more intervention before a bank gets into difficulties and stronger powers to appoint temporary management, demand asset sales, or change personnel at individual banks to prevent a crisis the regulators think likely.

Whilst they did not report progress on it, they doubtless also debated the issue of EU sovereign bonds to replace some national state debt. They did finalise the proposals for the Irish loan.

None of this was reported back to the UK Parliament in an oral statement or debate, yet all of it is fundamental to our economic futures.

The EU is very clearly using tax fraud and tax competition as reasons to encroach more into the formerly reserved area of taxation. They reaffirmed a minimum 15% VAT rate as a reminder that VAT is a European tax.

The EU is right that it needs more control over spending, debt and deficits for Euroland member states. The weaker states are now making claims on the stronger, and need more transfers from them. There is every reason to move swiftly to a common policy. There is equally no reason why the UK or any other non Euro member should have anything to do with any of this.

It is also clear that Euroland member states need to take a close interest in the methods of bank and financial regulation in each other’s countries. If banks go wrong in one place that can have serious knock on effects in others where they share the same debt risks and interest rates through the evolving common system. Again there is no reason why the UK should be part of this common framework. It is big enough to have its own, and needs its own to guarantee the solvency of its own institutions and to reassure the world of its security as a major world financial centre.

The new resolution regime is reminiscent of the UK interest in living wills for banks. It may be sensible. What is not sensible is for the UK to bind itself to the wheel of EU led regulation and bank levies, when the UK may have good reason or need to make its own judgements in these crucial areas.

 

           This week has seen important changes of moods within and between the parties at Westminster. A Labour party asleep when it came to the job of opposition has woken up to campaign against the Cable plan for Higher Educaiton. It has united them for a few days and given them purpose, after weeks of bickering, failing to vote against important government measures,and failing to provide enough speakers in main debates

             The Liberal Democrats have decided to air their disagreements in public in a protracted and damaging way, according to them.  Today I heard a Lib Dem MP on the Today programme telling us it has been damaging. I then heard that the Deputy Leader has decided not to support Dr Cable’s policy. They are likely to end up split in such a way that they make no difference to the overall vote, as an equal number are likely to vote Yes and to vote No.

               Which brings me to the Conservatives. There are quite enough Conservatives to defeat Labour and the smaller parties over tuition fees, assuming a happy and willing team. Last week when I made enquiries I was told that David Davis would vote against, and maybe two others. All seemed quiet and under control from the government’s point of view. There was little discussion of the Higher Education issue amongst Conservatives around the Commons.

                The last couple of days have seen a change of mood. MPs including many elected for the first time in 2010 queued up to tell the government its EU Bill does not do what Conservatives want. Many Conservatives are angry about the increase in the EU budget, the expansion of the EU diplomatic service, the surrender of powers in Home affairs, the involvement in the Euro bail outs, the increase in EU City regulation and the forthcoming EU Treaty change on Economic governance.  The unfortunate decision to launch an inadequate EU bill two days before the tuition fees vote has led to more backbench doubts about the HE strategy.

               Many of the new MPs have also found  weaknesses in the new expenses system from both taxpayers’ and MPs’ points of view. The government’s decision to block a backbench bill to seek to resolve the issues about the current scheme, after accepting a Motion requiring change a day earlier, has added to their annoyance.

                Conservative MPs did not want to vote for a referendum on the Alternative Vote, a system they dislike. Many did not want a reduction in the number of MPs and the boundary changes that entails so soon after winning their seats for the first time. They did not want to support the increased External Action Service of the EU or the expanded EU budget. They did not like the 5 year Parliament  bill, the increase in the EU and Overseas Aid budgets nor some of the defence cuts.

                         This week is the week when many of the new MPs on the Conservative side have decided they want change in the way they are treated and in the balance of policies put forward by the government. I think they will give the government its HE Bill, but they are also putting down markers about the problems that worry them.

                         These three developments certainly make Parliament interesting again.