Month: March 2011

As readers will know, when public spending is rising by £90 billion a year over five years, it is difficult to see why so many think the main adjustment to deal with our overspending is being made by the public sector. The truth is, that so far all the adjustment has been made by the private sector.

In 2008-9 the private sector lost 1 million jobs. The recession was deep. Many companies had to shed labour on a large scale in order to survive. The sudden lurch to too little money after years of excessive credit knocked the stuffing out of them, and in many cases halved demand for their products during the destocking period. Labour appointed 400,000 extra people to the public sector at the same time.

During the recession many in the private sector who kept their jobs lost their bonuses, and some even experienced pay cuts. Many had to forego the annual pay increase. Meanwhile, in the public sector, wages and salaries kept on upwards with annual increases.

In the last year it is true there has been a small decrease in public sector employment at a time when job growth has picked up in the private sector. Public sector wages have continued this year to grow more quickly than private sector pay.

At the same time as prospects in the private sector start to improve, the public sector has decided to increase tax rates and the tax take substanially to try to limit its own deficit. We have seen big increases in VAT, Income Tax, National Insurance and petrol tax revenue, accompanied by increases in rates. So far deficit reduction has meant squeezing the private sector more through tax, rather than cutting levels of spending.

There has to be some limit placed on how much the government does squeeze the private sector. The surge in world commodity prices on the back of the last government’s devaluation of sterling has intensified the squeeze on real wages, as price increases have leapt ahead of pay awards.

The budget needs to call a halt to the tax and inflation squeeze on the private sector. So far too much of the adjustment has fallen on the private sector’s shoulders. As the plan is to raise so  much more tax from the private sector in the next four years, it is important to cut the rates and relax the squeeze. It will only be through growth that the private sector can generate as much tax as the public sector wants. It is only by setting realistic tax rates that we will get the growth.

 

              The Euro crisis has not been resolved. It is a rolling crisis, a series of accidents and market falls, often made worse by rows around the Council of Ministers table or by unfortunate and diverse spin from member states governments.

              This week Portugal and the markets have returned to the issue of how that country will finance itself in future. Portugal has to pay more than twice as much as Germany to borrow money. This week her credit status was downgraded again. The Opposition in Portugal do not agree with the latest austerity programme. Many are worried that more cuts, more tax rises, and no final resolution of the borrowing problem leaves the Portuguese economy weak and unable to grow itself out of trouble.

            Last night the UK Parliament was asked to approve a motion to “take note of draft European Council decision EUCO 33/10 (to amend Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism of Member states whose currency is the Euro)…”

               The goverment wished to assure that the UK would not be part of the bail out mechanism after 2013, and had to go along with these changes to help Euroland buttress its position. Some of us have asked before that the UK government use their need for our assent to this Treaty change to get some powers back for the UK. We also want clear language which gets us out of all obligations to help bail out Euro memebr states in trouble, now as well as after 2013.

                We were not offered such an approach by the government, so we were not able to back the government’s motion. The Oppositon, of course, did not wish to vote against the government, so there was never any chance of Parliament turning this all down. An amendment which Bill Cash drafted which I supported was not allowed for debate and the vote has been postponed.

               Euroland is rushing towards stronger economic governance, and to some relaxtion of the purse strings so the stronger member states do bail out or support the weaker. The EU wants to press ahead with tax harmonisation, and tougher controls over budget deficits for Euro members. That all makes sense for those who share a currency, but none of this should apply to the UK who wisely kept out.

 

               It now appears that the armies in Middle Eastern countries determine the future of governments. Brave popular uprisings have forced governments out in Tunisia and Egypt, where the armies declined to support the incumbents. In Libya it looks as if the rebels are now losing, as the dictator seems to have command of enough mililtary might to crush them horribly.

               For once the USA has decided it does not wish to use its might to intervene, to prevent the Libyan reassertion of brutal power. Libya is in the EU’s back yard.  Italy and France have the military means to intervene to help the rebels, but have decided not to.

                I think intervention is fraught with difficulty, and could end up killing too many of the people they migtht like to help. I understand their reluctance. The various conditions set included UN support, which was never likely to be forthcoming.

                  It tells us something about the modern world. The USA now has to take more account of the emerging power of China, and  is having second thoughts about the rersults of its past interventions in Iraq and Afghanistan. The European countries do not think as one, and find inaction easier to agree than action. It is a better time to  be a dictator as a result. The world does not like its US policeman when he does take action, but misses him when he’s not around.  Middle Eastern countries do have armies prepared to meddle in politics. Their leadership and loyalty of the troops is now what decides the future of governors.

                 So far it looks as if Bahrain and Saudi do control their military machines, and are using them to keep order. Saudi has made clear it intends to help Gulf states governments, where they were not prepared to help the Libyan regime.

 

                Mr Huhne has brought out a publication entitled  “Carbon Plan”. In it he says:

“Climate change is one of the greatest threats to both UK and global security and prosperity…..without action to curb emissions there is a very high risk of global warming well beyond 2 degress relative to pre-industrial times.” This he thinks will lead to melting of ice sheets (presumably land based),and a major sea level rise.

          His paper contains a global average temperature table for the last 160 years. This shows that it was getting colder from the 1870s to the 1910s, and in the 1940s to the 1950s. The rest of those decades it was getting warmer. There is no explanation of why for almost half the time during the long period of industrialisation chosen, it should have been getting colder.

            Selling global warming antidotes is made more difficult by the succession of two cool wet summers and two cold snowy winters. I appreciate the  theorists will write in and tell me this is just weather, but we have had a lot of weather recently.

            Mr Huhne not only believes that global warming is caused by excess CO2, and that this comes from human activity, but he also believes that the one response we should make is to cut a portion of the 2% of man made CO2 emissions that come from the UK.  He proposes a £110 billion investment in new low carbon electricity generation, substantial increases in energy efficiency investment in homes and commercial premises, and the development of electric vehicles.

                He forecasts that over the six years 2009-2015 the Uk could create an extra 100,000 jobs in green activities. This was a lower figure than I was expecting him to claim. He anticipates the electricity generation investment flowing from a high floor price for carbon, feed in tariffs, back up capacity for windmills and other intermittent ways of generation, and an overall limit on how much carbon dioxide any generating plant can give off.

                  As Mr Huhne acknowledges, this is a global problem, and the UK’s contribution to the output of CO2 is modest. One way for the UK to get her output down to the tough target levels Mr Huhne wishes would be to cut back on energy intensive activities like cement manufacture, steel making, glass making, aluminium smelting and process industry in general. Unfortunately,  if our demand for these goods was merely satisfied by imports rather than home production there would no reduction overall in CO2, and we would be the poorer for it.

                That is why Mr Huhne needs to consider very carefully what price he is going to set for his floor price or carbon tax level. If the UK sets it much higher than elsewhere, we will merely lose our industry without cutting overall world output of CO2.  The government’s general  policy is to build up manufacturing, to welcome more industry. Industry is energy intensive. If we are successful in building up industry  it will make hitting the CO2 and energy targets that much more difficult. If the UK sets too high  aprice for carbon and therefore for power, it will make it very difficult to attract new industry, and difficult even to keep all the energy intensive activities we still have. Energy intensive industry spends more on energy than on wages. It is a very important cost. The UK is in danger of becoming uncompetitive on its energy prices.

I am all in favour of better deals to make it worthwhile for people to save energy. I am also strongly in favour of getting on with putting in the extra and replacement electricity capacity we need, and with making the Uk more energy self sufficient in a politically unstable world.

 

               As an MP I have always thought I should be loyal to my constituents, to my country and to my party – in that order. I have always taken seriously what I promised electors at the last Election and done my best to further those aims. When the Conservative party has won an election and formed a majority government, I have felt I should usually   be loyal to the Manifesto of the party. When we lose an election the party itself usually changes or cancels some of  its promises from the previous election, as it seeks a more attractive package for the next one. In Opposition the last Manifesto is a starting point for improving the party’s policies, not a binding contract.

              A Coalition government is clearly different. Its programme contains items which did not form part of the Conservative Manifesto, and leaves out important items that were in that Manifesto. The Lib Dems have just demonstrated that they do not think they owe loyalty to the Coalition Agreement. They have voted down the government’s mutually agreed Health policy, and many of them have expressed their dislike of Dr Cable’s tuition fee policy, despite it being drawn up and proposed by a Lib Dem senior Minister.

             A Coalition government  has to work hard to encourage as wide a base of support as possible, and to reassure and keep on board the MPs and members of the two parties that make it up. I did not myself dream up the Forest proposals, and would not have invented the particular version the government produced. I decided I should not oppose  their approach, and wrote explaining it to my constituents who were worried based on some of the rumours and alarmist fears spread around by its opponents. I sought an assurance from Ministers that they were going to see it through and that being loyal to the policy would be wise as well as helpful. A few days after receiving that assurance they cancelled the policy.

I did not help draw up or lobby for the Health changes. They were in the Conservative Manifesto in some detail, though many people do not seem to have read them until recently. Again I felt I should offer some  support and explain them to constituents, given their origins. My comments on how they could be amended, improved or put across to those charged with implenting them are usually made in private.

Nor did I draw up or lobby for the tuition fee package. The Conservative Manifesto did not contain an answer on tuition fees, though I did warn in the election that I thought any government coming to power was likely to raise the fees that Labour had first imposed. When I  saw them I was concerned about their financial impact on both students and taxpayers. Over the next few years taxpayers will have to borrow more money in order to make the advances to students to pay the Universities, at a time when public finances are very stretched.

Even though the proposals came from a Lib Dem Minister and were not from the Conservative Manifesto, I have done my best to support and explain them to constituents. I have urged the creation of more access funds by a variety of interested parties so more gifted students from low income homes can have the benefit of a grant aided or scholarship supported education.

The issue that I have found most difficult with this government is the issue of the EU. The Conservative  Manifesto said “We will ensure by law no future government can hand over areas of power to the EU or join the Euro without a referendum. We will work to bring back key  powers over legal rights, criminal  justice and social and employment legislation to the UK.”  It concluded by saying  “The steady and unaccountable intrusion of the European Union into  almost every aspect of our lives has gone too far. …. We seek a mandate to negotiate the return of these powers (as above) from the EU to the UK” .

I have sought to be true to the  promises I made about the EU  to my electors , and to the words of the Conservative Manifesto where it covered the issue.  The range and nature of constitutional change that the Coalition has drawn up was not part of my promise in May 2010. I will be opposing AV, and do not believe the 5 Year Parliaments legislation can be binding if a future government does not  want it. I do not support further transfers of power to the EU, and do want powers back.

A government finds it easier to command loyalty if it comes up with sensible proposals to start with, and sticks with them when they are attacked and criticised. It is more difficult for supporters if a government develops a reputation for backing down. Supporters are then reluctant to give public support in the early stages of a new policy, for fear it will be ditched if pressure develops.

If Lib Dem criticisms of the Health policy result in major changes, Conservative party  members will want changes to policies they don’t like.  For example, many of them would like the overseas aid budget increases scaled back, would like the Ark Royal and Harriers reinstated, and Buckinghamshire protected from expensive new train lines.

When it comes to claiming credit for popular policies, Conservatives would say that they too wanted civil liberties restored, Income Tax cut, and the earnings link restored for pensioners. In government there has to be both a sharing of the burden of  less popular measures, and a sharing of the credit for the popular ones. If the budget produces a reduction in fuel tax, that is something MPs of both Coalition parties have been seeking.

 

                   Money has been easy for the UK public sector. The 0.5% interest rate is the one that applies only to government. Government has enjoyed using it to the full, borrowing collosal sums on the back of it.

                  Money has been much tighter in the non bank  private sector. Effective interest rates for borrowers have been 5% or more, more than ten times base rate. Savers have suffered from the low official rates, but even they now enjoy a multiple of 0.5% for savings plans of 1 – 5 years.

                 The main reason money is still so tight for the private sector is the Regulator’s demands that the commercial banks continue to strengthen their balance sheets. The large  profits the banks can make out of low official rates for themselves and the government, and the much higher lending rates, helps. Their super profits are the result of the favourable monetary conditions fopr banks, designed to boost their retained profits and so their balance sheets.  It still leaves a lot more to do. That encourages the banks to lend less or to limit the growth in their lending. It is easier to lend less to improve their ratio between the amount of capital and the amount they lend, than to raise new capital.

                 Because lending is effectively rationed by regulatory orders, it is easier for the banks to lend more money to large companies, low risk individuals and corporates, and the government itself, than to lend to riskier and smaller ventures. The large loan books in London for the corporates and the financial sector are easier to administer than the large numbers of small loans in provincial UK.

              This is the essential background to the budget. Getting the banks right is far more important than the small government  schemes Ministers like to dream up for particular areas, sectors or themes. A few hundred million for Enterprise Zones, and a couple of billion for a Green Investment bank are small in relation to a £1.5 trillion economy.

              The danger now is that growth could start to slow later this year or into next. Emerging market economies are being forced to slow down to curb inflation. The US monetary stimulus expires in June. Euroland is struggling  to grow outside Germany and is already talking of monetary tightening. The oil price hike will reduce demand around the world as energy takes a higher proportion of the consumer economy incomes. If oil prices stay high because oil production is cut, all are losers.

            The government is waiting for the Vickers Report into the banks. Much is now riding on that piece of work, and on the government’s response to it. Only by mobilising the banks for sensible levels of money and credit to go into the private sector can the economy hope to make faster progress. Meanwhile, it would be good if the government got on with making a major building programme in the energy sector possible, as we are going to need  more domestic enegry soon.

           I think the USA is right to say that any No fly zone would need UN backing, an invitation from the Libyan democratic movements, and agreement from the immediate neighbours of Libya as pre-conditions. These are all unlikely to come together. They are also right to warn that a No fly zone may require warfare to impose it. It may need the bombing of land installations that maintain and support the Libyan airforce, or may entail bringing Libyan planes down over inhabited territory. It may well result in the deaths of Libyans who are not party to the uprising or who are on the democratic side. The arithmetic of war is always unpleasant to weigh, and poses all sorts of legal and moral issues for anyone thinking of interfering in a civil war from outside. If it is attempted, the west needs to be sure of its legal and moral ground, and to see how it could mount an operation where the positive results outweighed the damage done. Any campaign is about hearts and minds as well as about planes and bombs.

              The UK is not in a position to carry out this task. Yesterday the government decomissioned Ark Royal.  Tripoli is around 1500 miles from London,  and over 1000 miles from Cyprus. If NATO forces are to carry out this task it would be easier for the US to do it from  carriers nearby, or for Italy to do it. Palermo is around 350 miles from Tripoli and Naples a bit over 500 miles. France is considerably closer too.  Marseilles is about half the distance from Libya compared to  London.

               Many of us would like to see the brave resistance of the democratic uprising be successful. It is heart breaking to watch the tv pictures of the brutal repression now underway in Libya. They show that the more serious threat to the Libyan people comes not from the Libyan airforce, but from the tanks, heavy guns and small arms fire of the troops still loyal to the dictator. If you wanted to stop that it would require a western military presence with force on the ground. Trying to stop that from the air would mean numerous deaths and much destruction of  Libyan cities from air bombardment, with no guarantee of success.  The Libyan army could go to ground in the buildings of the cities.

                 The EU is unlikely to be the body that takes such a decision or mounts such an operation. NATO is the organisation  with the command and planning capacity  and potential military support which could do it. NATO will rightly want greater certainty about local reactions before committing forces, and  a plan which gave a reasonable chance of success. The truth is that today the position of the democratic forces does not look good. Tomorrow may bring a change. It is also difficult to see how the dictator can govern a country where  he has so clearly lost control. It is one thing to force people into temporary submission. It is another to govern them, when your army is relatively small and when so many people have reason to resent the government. The dictator’s government will be like an occupying power for many parts of the country. Once  government troops have recaptured a city they need to ask themselves how can they protect themselves once the hot fighting has stopped? How can they enforce the government’s will when there will be so little support from many of the citizens? Brutality can take you so far, but it only works as a means of governing if most people most of the time accept the authority that imposes it.

              The National Audit Office has entered the debate about public sector staffing levels and costs. They tell us the civil service actually cut its numbers by 1% in the last ten years, but put the real costs of employing people up by 10%. It was especially generous with promotions, creating many more senior positions.  The public sector as a whole increased its wages costs by 40% more than prices over the last ten years, with an increase of 13.7% in the numbers employed .

               The Office concluded that ” Organizations do not have comprehensive understanding  of their own staff costs or skills in order to support this cost reduction activity adequately”. What’s stopping them gaining this understanding quickly?

                They also conclude that there will need to be redundancies. It cannot, they say, all be done by natural turnover. It would still be a good idea to maximise the use of natural turnover, which is not currently happening.

 

                     I have been involved in turning round companies that had too much borrowing, too little cash and too big a running deficit.  When a new team goes in to save them, everything in the first few months is designed to stem the outflow of cash. You first have to stop the losses or the running deficit, then move on to repaying some of the debt.

                      First actions usually include:

1. Ending all new recruitment. The CEO’s permission for any new person, replacement or additional, is only given if the company lacks a particular talent needed to carry out the turnround, or suddenly wins so much  new business which requires new people to provide the service or make the goods. Normally as people leave they can be replaced from within, and posts removed.

2. Ending all capital expenditure. The only exceptions the CEO might make are items that have to be replaced because they are essential to the business and no longer function, or plant and equipment specific to new orders just won.

3. Stopping all purchases of supplies and components, save where it can be demonstrated the company no longer holds stocks and is about to run out of the item.

              The second round of actions are concerned with motivating the people in the business. The aim should not be to cut wages or make life more miserable for staff. The aim should be to reward greater productivity and output. Staff will buy into a recovery plan, if they know that failure of the recovery plan means the loss of all the jobs and the end of the business, or if they see that  at the very least failure of the plan  will mean more job losses and poorer wages.  The use of natural wastage to slim staff numbers offers better promotion prospects to all employees, as more senior jobs will become available with priority given to inside candidates. It may be necessary to close the final salary pension plan to new members and to new accruals if one still exists. There should be no action taken against earned rights within pension plans. A defined contribution plan should be made available for future use. There should always be a message of hope. The changes are needed to move the business from the danger list to the success list.

           The third round entails seeing if there are assets or businesses that are surplus to requirements or peripheral to the main aims of the company that could be sold. Early disposals can generate cash, cut or eliminate the first year’s deficit and get the programme of deficit control off to a strong start. They also simplify the management task, concentrating on the main parts of the business that remain.

              The fourth round of actions will be ones to raise more revenue by selling more of the good or service. This may require quality improvements, better marketing, and in due course the launch of new ranges. Harnessing the energies of the team to this is positive work, creating a sense of optimism. As quality improves so sales and margins should improve. As new products are launched, so the business has a newer and more exciting feel to it. Staff have something to believe in.

                   The first three rounds of work for a company turnround also apply to local or central government fighting the battle of the deficits. Government does not have the option of winning new business. The nearest it has to that is raising more tax revenue. This can only be done on a sustained basis by creating the conditions for faster and  more sustained growth of the economy. Raising tax rates is self defeating, leading to slower growth and more trouble in raising living standards, consumption and public morale.