Month: January 2011

 

             A little while ago I argued on this site that the squeeze is and will be tougher on the private sector this winter and well into 2011 than the squeeze on the public sector. Indeed, overall the 7%  increase in public spending  under this government so far compared to a year earlier shows there has not yet been any squeeze on the public sector. This does not of course prevent individual cuts and hard done by areas, resulting from poor management or from the allocation of the extra cash. Nor does it prevent much talk about future cuts, as public sector managers try to find ways to get more money out of government or Councils.

           The Governor of the Bank of England has now highlighted the other side of the case I was making – the intensity and duration of the squeeze on private sector incomes.  The increases in Income Tax, CGT, National Insurance, VAT, and fuel duty always meant the private sector was going to take a big cut in spending power  as its  share of the deficit reduction. This has been made worse by the rapid rise in inflation, with big increases in fuel prices which in turn extracts more tax revenue and by the large increases in various pullic sector fees and charges like rail fares.

         The public debate has spent too much time talking about the spending reductions, implying they hit the economy at the end of last year and caused the poor GDP figures, when they haven’t begun, and ignored the squeeze on family incomes. The government needs to take action to cut the public sector’s contribution to the squeeze. It could begin by introducing the fuel price stabiliser, much in need at a time of instability in the Middle East again. It needs to bring inflation back under control by following a more successful money and banking policy.

           To get enterprise growing, creating the many new jobs we need and welfare reform requires, we need tax cuts. The Chancellor should be dusting down plans to get the UK back into shape as a competitive place for business and investment. Recent years of tax increases has left us struggling, losing capital, talent and companies that could make a difference.

 

                     In the 1980s and 1990s, especially around the time of the fall of the Berlin Wall, the world lived through a series of notable democratic revolutions. People threw off the communist or dictatorial yoke, by refusing any longer to obey their governments. In most cases the regimes fell quickly and with mercifully few fatalities. Many of the countries that went through this process have settled down to political parties, free elections and greater civil liberties.

                     This week-end we have been witnessing high drama on the streets of the major Egyptian cities. This follows hard on the heels of something similar in Tunisia. Where the government resists violence occurs. The commentators and experts in that part of the world seem surprised it is happening, and are very unsure of what will happen next.

                      It is difficult to see that the Egyptian President can continue in office. The crowd wants him out,  and he has lost control of the cities. The bungled attempt to impose a curfew failed. The crude intervention to stop people using mobile phones and other modern technology to direct the rebellion is failing. The proposal that they could have new Ministers of his choosing to solve the problem will not convince many. There are limits to what tanks and armed troops can do against a protest as large and determined as this one seems to be.

                   There are two crucial questions for all our futures. Will this spread to other countries? And will it result in a more liberal civil and political society, or some other form of tyranny?

                     There could well be more of this, as other oppositions in  other countries study what the Tunisians and Egyptians have done. The experts are at a loss as to what might emerge in its place. As we have seen in other Middle East countries where democracy has been imposed by new forces after western military intervention, it is unlikely a country can go straight to a western style party based democracy with a good range of civil liberties. Nor, on a brighter note, is it possible to see how any new arrangement and government can impose the same degree of control as in the past, now there is so much anarchic new technology available to the young and energetic populations of countries like Egypt.

                   The ability of government to keep the peace and to keep authority is always a difficult task, even in well organised and stable democracies. Our approach in the west is to say to people you may not like what the government is doing, but you have freedom to campaign peacefully against it, and to work away to dislodge the government at the next election. Where states allow neither of these pressure valves, they are vulnerable to street riots, as we now see again.

                     Elected governments can also experience difficulties in maintaining authority, where they misjudge the mood or make serious mistakes. The Irish government has just been brought down by the pressure of public opinion. The interesting question there is what happens if the Irish people decide to elect a new government or group of parties that do not  accept the EU loan settlement the old government is just pushing through? Then there will be a test of how much democracy an EU member state in special measures still enjoys.

 

            One of the interesting features of the poor GDP figures for the last three months of 2010 was they occurred at a time of rapid increases in overall public spending. Total current spending is up around 7% on the previous year, and in November was up by a double figure percentage increase compared to November 2009.

            Those who think the only thing wrong with the UK economy is too little public spending under the Coalition government need to answer why output fell when spending was so buoyant. No sensible analyst can claim that the problem with the UK economy in recent years has been too little public spending or borrowing.

            They could learn from the poor experiences of Greece and Ireland, that if a state spends and borrows too much it can trigger much higher borrowing costs, a loss of confidence, and  less economic output, not more. They could see from Japan that continuous injections of more public  spending and borrowing over a 20 year period can fail to raise the growth rate, ending as it did this week in yet another sovereign debt downgrade.

             Let us take a very  simple model of the   economy. There are 4 people in the private sector on £20,000 a year each. There is one person in the public sector, on £15,000 after taxes . There is one person unemployed, on £10,000 of benefits paying little tax.

              The private sector people and their employer pay overall 40% in taxes. So they get to spend £48,000 from their income, and the state receives £32,000 from them. The state spends £25,000 on its own employee and unemployed person, and another £17,000 on other bought in goods and services. It pays for this with the  £32,000 of tax from the private sector and £10,000 of borrowings.

              Some say we would all be  better off if the state hired the unemployed person.  Let us suppose it could do so for £14,000 a year net of taxes. The figures would then become:

State spending  on employment £29,000

State spending on bought in services  £17,000

This would require an increase of £4000 in state borrowing, or a 40% increase  from the already extremely high levels. This would take the state well into territory likely to lead to a financing crisis.

Alternatively the state could add say £2000 to the borrowing and £2000 to taxation.  This would then cut private sector incomes by an further £2000, reducing demand and offsetting some of the  demand increases from the extra income in the public sector. Meanwhile the private sector faces having to pay off another £2000 of debt, and in the meantime has to pay interest on it. This will have confidence and spending effects.

As we have seen, there are limits to how far a country can go in extending additional public sector employment on borrowing before there is a collapse as seen recently in various European countries. When a state is at its borrowing limits, it does not add to economic activity to borrow more – it can tip the economy over into worse performance, as in Ireland and Greece.  Even if the state can borrow more, it does not add all the extra spending to output, owing to the impact of the extra spending, borrowing and taxation on the private sector. If the private sector faces tax rises, or expects later tax rises to pay off the borrowing, the effect of the extra spending is offset to a greater or lesser extent. If a country is already setting uncompetitive tax rates it can lose more of its taxable business base quite quickly. THis country badly needs more private sector jobs. That’s why there have to be limits to the rate of growth of public spending and outstanding state debts.

 

            I like trees. They are an important part of our landscape, especially the native deciduous varieties. They may shed their leaves, causing trouble to the nationalised railway, but they are at their most magnificent in the autumn when they change colour.

           I look out at home at trees in my neighbours’ gardens. I suspect my neighbours like trees as well. I have never had any trouble with a neighbour wanting to cut them down. I now discover that these trees, shock horror, are private sector trees. Private sector trees, according to all so many active campaigners, are not the same as public sector trees. They are either not so attractive, or they will be cut down as soon as possible to be replaced by an office block.

         The misleading  and over the top campaign against the sale  of some  Forestry Commission land reflects the worst of UK public sector debate. Some run pictures of heritage woodlands that are in the public sector, and imply these are threatened with closure to the public or with development. The only problem with all this propaganda is the government has stated very clearly that no heritage woodland will be sold. The government is not trying to get money for the bits of the  New Forest or the Forest of Dean that the state does still own.

         The campaigners do not put up pictures of the plantations of conifers which make up an important part of the Forestry Commission land which the state might sell. Nor do they point out that the government is only proposing to sell a long lease, so the private sector can farm these trees more efficiently and supply the state with much needed cash in the meantime.

           Nor do they point out that where the public currently has rights of access and enjoyment of the farmed forest in state hands, all such rights will continue as part of the private sector’s contract. They suggest the private contractors might prefer to grow houses or offices instead of trees, without ever pausing to answer the question why would local Councils suddenly grant planning permission for such activity? The sales of leases do not come with revised planning permissions. And why should someone want to develop, if the state gets it all back at the end of the lease period for nothing?

             The only trees that have been cut down or threatened in my locality have not been destroyed by private sector demand. They were parts of a woodland owned by the National trust, where the owners decided they did not  like the trees and wanted a different landscape, or a beautiful old oak  tree that stood in the way of a highway  development the Council wished to push through. The nationalised railway has also done its bit by hacking back natural growth along the railway line.

               Campaigners should try reading the facts before they launch their campaigns. The Coalition proposals on the Forestry Commission are very mild and sensible. Private sector trees can be just as attractive as public sector ones.  You can walk through private sector woods on public footpaths and bridleways, just as much as through public sector woods.

             This week’s politics have been dominated by the economy. The GDP figures will lead to further measures to promote growth, and to much more debate about where we are heading. Meanwhile, business on the floor of the Commons has been dominated by the government’s EU Bill.

              The Bill was meant as reassurance to Eurosceptics. It aims to reassert UK Parliamentary sovereignty. It does so by pointing out in law that the EU only has powers in the UK thanks to Acts of Parliament. It offers a “referendum lock”, binding this and future governments to hold a referendum if certain future transfers of power are desired  by the UK government and the EU.

                The debates have been remarkable for the absence of any Liberal Democrat or front bench Labour federalist making a case for more EU power, or even justifying convincingly the amount of EU power there already is. Eurosceptics have made all the running, tabling all the amendments, making all the suggestions for improvement and strengthening the law, and winning all the arguments. Sometimes it is the Minister who makes the Eurosceptic case. Often it is an active Conservative backbencher who does so, urging Ministers to go further. In one important case over a possible future transfer of criminal justice powers, Ministers have agreed to improve the Bill following such backbench pressure.

                  However, the cruel logic of the arithmetic reminds us daily that the British people elected a pro EU Parliament. Whenever Eurosceptic Conservatives push their proposals to a vote to increase Parliament’s grip over the EU or to widen the number of issues which would require a referendum, they are heavily defeated as Labour and Liberal Democrats have no wish to make any such changes to the Bill. UKIP, of course, makes no contribution whatsoever to these important matters, as there is no single UKIP member elected to do so. UKIP will just criticise from outside that none of this is sufficient. What we need is votes inside, and only Conservatives can supply those.

 

                  Yesterday I agreed with much of the Governor’s analysis in his speech. He was right to stress that the high inflation we are experiencing has come from increases in the prices we have to pay for commodities and energy, all imported. He is right, as I have been pointing out, that the big squeeze so far has been not on the public sector but on living standards, as prices have risen faster than wages. He is right, at last, to recognise that inflation will get worse before it gets better, and right to warn living standards will have another bad year. He is right to support cutting the deficit as a necessary part of recovery.

                    Where he and the Monetary Policy Committee are wrong is to say there is nothing they can do about this imported inflation. They fail to ask themselves why Germany and the US do not have an inflation problem, when they too have to buy energy and commodities on world markets. The UK is different for one very simple reason – the Uk has had a bigger devaluation.

                      Let’s take a simple case. The price of oil is around $90 a barrel. That is well up from the lows of 2009, but well down from the high of 2008 of over $140. If we  were  still at $2 to the £1, a barrel would cost us £45. Instead, at around $1.5 to the £1 , a barrel of oil costs us £60. A 25% devaluation against a fairly weak dollar costs us an extra 33% on the price of a barrel of oil.

                       Yesterday’s speech by the Governor led directly to a 2 cent fall in the value of the pound, or a fall of 1.25%. That means more inflation on all those imports as we pay the price. The reason the pound fell was the markets realised that on the back of the Governor’s speech there would be no early increase in interest rates.

                         If we devalue more we will make ourselves poorer. We need to curb inflation and end devaluation. At the same time we do need a growth strategy, which incldues regulating the banks in a way which allows or makes them contribute to recovery by sensible lending for needed projects. That is why I have long advocated that the Bank needs to regulate banks as well as interest rates and money, so it can have a policy which both promotes growth and curbs inflation.  Briefing that a higher official short term rate stops the recovery is silly. Anyone in the private sector could tell the Bank that the official rate has little impact on lending rates which are much higher, though it does help penalise savers.

 

            The problem with the provisional figure for GDP in the last three months of 2010 is it was a long way short of the consensus. That means many people have to explain and change their viewpoint. It will mean a greal deal of politics will be generated around it.

               Labour and their friends in the media will say it just proves that you should not cut public spending  too far and too fast. Their analysis and conclusions will be miles out. Any proper analysis of the figures shows public spending rose swiftly in the last three months of 2010, so on their analysis the economy should have done better. There have been no overall cuts so far.

                Establishment supporters of the Bank of England will say it just goes to show how they needed to keep interest rates on the floor, and might need another round of quantitative easing. They need instead to answer how come inflation is so high if output is so depressed, and answer why the last large QE and permanently low short rates have not done the job.

              The government says that it is mainly a weather related incident. The damage occurred in December, when ice and snow closed down service businesses, made life difficult for transport and construction, and stopped people getting to shops and restaurants.  They have on their side the fact that manufacturing output accelerated, rising faster than in the fourth quarter. Energy also rose. Most planes were grounded for many days, train  services were much disrupted and even cars and vans  found it difficult to get around.

                 On any analysis the figures are disappointing. There may be a  bounce in January as last January saw very bad weather. All surely can agree, however, that we need more growth for the private sector led recovery which is central to the government’s economic policy. The government needs to listen carefully to those who say we need a deregulatory and tax package that promotes enterprise and job creation, and a banking system that can deliver more credit for worthwhile projects including the  construction of new power stations, roads, homes and factory capacity. We also need to work out how to snow proof more of our economy, just in case we are in for more bad weather.

Thank you for your letter of 30 November 2010 to the Home Secretary enclosing comments from readers of your website about the Intra-Company Transfer (ICT) route.  Your letter has been passed to me to reply.  I am sorry for the delay in responding to you.

We are clear that the UK can benefit from immigration, but not uncontrolled immigration.  Over the summer we consulted on our proposals to ensure that we took a wide range of views into account.  One of the key questions that we asked was whether ICTs should be included in the limit.

The ICT route makes a substantial contribution to inward investment in the UK, boosting our economy and creating jobs for resident workers, not just migrant workers.  UK workers also benefit from working with the most highly skilled workers from around the world and sharing expertise.  We are also bound by our international trade commitments which do not allow us to, for example, require that ICT posts be advertised or that workers must have more than one year’s experience with their company before being transferred.

However, ICTs account for a significant proportion of Tier 2 numbers and those who come to the UK for an extended period will inevitably draw on public services.  We have also taken on board concerns that the route has been used by some companies to undercut and fill jobs that could be done by resident workers, particularly in the IT sector.  It would be remiss of us not to consider how ICTs should be accounted for in a policy for controlling migration.

Whilst we have decided, on balance, that ICTs will be excluded from our limit, we are making other reforms to the route to ensure that it is used as intended.  We will raise standards by only allowing senior managers and specialists, the people who the route was originally intended for, to enter for up to five years. These staff will need to be earning at least £40,000.  We will allow other ICT workers earning between £24,000 and £40,000 to enter the UK, but only for up to 12 months, after which they will need to spend a minimum period overseas before they will be allowed to return. In addition, we will remove a loophole that currently allows long-term transferees to stay in the UK for more than five years.

The minimum salary rates above apply to all ICT posts, not just the IT sector (where salaries are relatively high compared to many other sectors). In addition, for each individual type of job, employers must pay the appropriate salary rate that would be paid to resident workers, as specified in the UK Border Agency’s guidance for sponsors.

We do not think that employers should be penalised for ensuring their workers are properly accommodated in the UK.  Accommodation, through rent or mortgage payments, makes up a significant proportion of most workers’ expenditure, and we think that it is right that some level of accommodation allowances should be included.  We do not take into account business expenditures, such as travel to and from the migrant’s home country.

Salaries also cannot be artificially inflated on the basis of tax not paid.  If a sponsoring employer states that they are paying £40,000, then that is what they must actually be paying to the worker.  If the company does not pay the stated salary, they risk losing their sponsor license.

Many of the points raised by your readers relate to international tax agreements, which are not part of the Home Office’s remit.  Migrant workers benefit from international tax agreements in the same way that UK workers benefit when employed overseas.  Further information is available on the Directgov website at: www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/LeavingOrComingIntoTheUK/DG_10026136.

The changes we are making will help to stabilise the numbers coming through ICTs, which had previously been rising.  The changes apply to all ICTs, including those covered by the EU-India Free Trade Agreement.  They will ensure that we continue to give certainty to businesses that they will be able to recruit people with the skills they need, without admitting migrant workers to do jobs that could be done by resident workers.

Yours ever 

Damian Green MP