Month: May 2011

Past governments and the present government speak the language of deregulation, but end up regulating more.

Opponents always try to blame deregulators for whatever ills in society regulation was trying to cure. Sensible deregulators no more want fraud, credit bubbles, unsafe factories or bad employers than anyone else.

There are  two  main issues. How effective is each regulation – does it really reduce the incidence of the ill you dislike?  Is  the cumulative burden of all the regulation tolerable, or does the burden in turn create worse ills like too few jobs and lower living standards?

My main argument has been countering Labour’s persistent attacks on me for allegedly favouring less banking regulation prior to the Credit Crunch. What the study I chaired actually said was we needed tougher regulation of cash and capital in banks, as credit was too easy. Events proved that right. We also said that Labour’s expensive and complex mortgage regulation would not work. It clearly failed to keep the mortgage banks safe. No sooner had Labour regulated, than for the first time in a century mortgage banks were at risk.  This is a good illustration that you need to know what regulation is for, and how to make it effective. You can have too much of the wrong type of regulation.

Today the total costs of regulation on British business are high. It is not all necessary and it is not all doing a good job. I have sent numerous proposals to the government to take action to sort this out. I am told that the latest exercise will produce results.

One simple example of what could be done is the question of anti money laundering.  The aim is a sensible one. The means are bureaucratic and not convincing. The system assumes that if every bank and financial business  handling money  demands a passport and utility bill proof of the person’s identity we will be spared money laundering. It is an odd idea, as money launderers presumably have passports and utility bills. If they do not, they would be the kind of people who could forge suitable documents for their purpose.

A simple change would cut down the paperchase and record keeping. Surely any business in the UK receiving funds from a major UK, EU or US regulated bank could be spared having to make checks. They should be able to rely on the checks made by the bank which first took on the deposit. This would remove the overwhelming majority of all the checks in the current system, and allow people to concentrate on the cases where money laundering is more likely – where money comes in in suitcases or cheques drawn on dodgy banks in fringe jurisdictions.

Deregulation is the tax cut that can save the government money. We need  a strong deregulation policy – not to make the world less safe, but to make UK businesses  more competitive. So far this government has put in many more regulations than it has repealed. It needs to get better at confining regulation to the best of causes, and ensuring that the regulation they do put in actually works. They will also discover that the origin of much of the needless, expensive and ineffective regulation is the EU where they will have their work cut out to reduce it.

Taxing the rich is always popular with all save the few who realise they are rich. Many socialists who love higher taxes do not seriously believe  they themselves should be paying a lot more. I remember how much they protested when a  past Conservative government (against my advice)gave everyone the opportunity to make a bigger contribution to better local services through the Community Charge. Labour had  continuously argued for more local spending and here was the opportunity. It soon showed that those who want more tax and spend do not usually want to pay it themselves.

Taxing the rich more right now would be especially popular. Top bankers and celebrities with enough money to issue  a super injunction or two, are far from popular. The question should be how do you do it?

Many think that is obvious. You raise the rate of income tax and captial gains tax. Then anyone rich has to pay more out of their income, or is caught if they try to shift it into capital. The problem with this theory is it does not work. Rich people leave the country. Rich people employ better accountants and tax advisers and find ways round the rules. They delay selling assets with gains. They refuse to invest in riskier ventures. They sit on their money or leave it abroad. Fewer rich and enterprising people come here,a nd fewer already here venture or work as hard. There is less point because the marginal tax rate has gone up.

So what is the way to tax the rich more? The answer is a paradox – set internationally competitive rates, so rich people want to come here, invest here and create jobs here. In the 1980s the then Conservative government cut the top rate of tax from 98% on unearned income and 83% on earned income to 40%. The rich not only paid a lot more tax as a result, but they paid a higher proportion of total income tax.

When this government  raised CGT to 28% they said anything higher would lose them revenue. I agree. Now I see that their forecast for CGT revenue shows that even with a top rate of just 28%, they expect some temporary fall in revenue. UK and US past experience suggests you collect more CGT if you keep the rate below 20%

Right now we need all the jobs, investments and growth in revenue we can get. That requires competitive rates, to tax the rich more. Tony Blair did not allow the Income Tax rate to rise above 40%, and Gordon Brown cut CGT to a very competitive 18%. The Coalition goes in for higher tax rates. They may in turn keep the growth rate down and cost the state lost revenue. We need to tax the rich more. That requires knowledge of the maximum rates to maximise the revenue.

Between the peak of the credit boom and the end of the first quarter this year the balance sheet of RBS contracted from £2.2 trillion to £1.4 trillion. In other words, the bank felt the need to cut its assets and liabilities, its financing of the UK and world markets, by a massive £800 billion.

Let’s allow for the fact that a lot of this was global, not UK. Let’s allow for the fact that a lot of it was cutting positions in derivatives and futures. Nonetheless, it was a huge reduction in liquidity and credit for world markets. What the Bank was doing just in the UK market was bound to have an impact on growth and activity.

What RBS was doing on a huge scale other banks were doing to a lesser extent. The banking regulators lurched from being too easy, allowing a credit binge, to being too tough. Their new belief in better cash and capital ratios meant that all banks decided to cut their loan books and take other action to improve their balance sheet ratios.

The government became aware that smaller and medium sized enterprises were finding it difficult to get bank finance. Large companies regained access to the corporate bond market and the equity market on acceptable terms, options not open to the broad mass of UK companies. So Ministers invented Project Merlin. The banks have promised to do better and lend more to UK companies.

Let’s hope they do, and let’s hope such loans are well based and successful. It would be easier if the banks at the same time were told they now have enough cash and capital, so they do not have to keep squeezing the loan book down to improve the ratios. Ratios are much healthier than in 2007-8. The time for the Regulators to demand more cash and capital is once growth has picked up and credit is flowing freely. It is not a good idea to demand more when the economy is growing slowly and credit is still scarce.

Many now say they believe in counter cyclical regulation, but there is no evidence of it happening. Regulators fuelled the boom, and helped create the bust by lurching from too easy to too tough. The UK economy needs a bit more help at the moment from credit, not a further hair shirt.

We also need more competition  n the banking market. We need more banks on the High Street, with some banks pioneering a newmodel – or recreating an older model- of local relationship banking to banks the smaller businesses sensibly.  That can be done through the Vickers Report remodelling. I would also link it with returning the state owned banks to the private sector as soon as possible.

           The government’s whole financial strategy rests on growth. Deficit reduction is planned primarily through a surge in extra tax revenues, which grow as the economy grows. By 2014-15 the government forecasts £172 billion a year more from taxation than in the last Labour year.

           This big increase in taxation is needed to pay for the increased total public spending, up by £73 billion a year over the same time period, and to cut the deficit substantially.  Public spending cuts have been cuts in Labour’s planned increases, or cuts in certain programmes in order to fund larger increases in the government’s priorities that include overseas aid, the EU budget and assistance to Euroland.

            Most commentators and politicians agree that growth is needed to help the UK out of the financial hole it is in. Growth reduces the need for spending cuts and tax rises. If growth does not move to above trend from next year and stays there for the following three years, there will be a shortfall in revenue and extra public spending.

              Critics of the government say it has cut too far and too fast and jeopardises growth as a result. As the government plans to borrow an additional £485 billion over its planned five years, more than the total state debt just ten  years ago, it is difficult to sustain the argument that it has been too tough. Given that public spending rises by a substantial cash amount, the argument is more one over what that money can buy. If the government enforces a fairly successful public sector pay freeze for a couple of years, and manages to buy things more cheaply as it has promised, the cash increase could even translate into a real increase in spending.

              Promoting faster growth requires changes to banking, regulation and taxation. We will look at each of these in turn this week.

               A week ago  Monday I was the guest speaker at a Centre for Policy Studies lunch, talking about how to speed growth and create more jobs. Whilst I was there they showed me the work they have just published on returning the state owned bank shares to the public.

              They have come up with a good scheme. They propose that every taxpayer – or every voter – is given shares in Lloyds and RBS. Voters can only sell their shareholding once it has gone above the government’s original purchase price. On sale the government gets its money back, and the voter keeps the profit. Alternatively the voter can buy the share from the governemnt at the government’s original purchase price, and then subsequently keep all the money on sale. The government and the banks would  also able to raise more money from the markets at the original government purchase price, as the threat of a sale of shares at that price or lower is lifted by the transfer of the shares to new owners who cannot sell at those lower prices.

            I am keen for the government to start the process of selling its shares and assets in state owned banks. This scheme is an excellent way to line up  the interests of the banks and the taxpayers more closely. Taxpayers would become the owners of RBS and would be free to choose the management and fix their remuneration. They would take more pleasure in the banks returning to profit and in the shares going up in value if they benefitted directly from that process.

              It would still be possible to require the spin off of bank branches and loan assets to form more competitive banks in the UK retail banking market as well as doing this with the shares in the Groups concerned. We do need more and more competitive banks and must not lose this opportunity. One of the main problems impeding faster growth is the shortage of bank loans for many companies. Companies do need to borrow working capital and investment money fi they are to expand. More banks, with more bank capital, would mend this.

              Yesterday the UK was a generous host. We gave the President a great platform, and the pictures he wanted for back home. The President as a good guest gave the UK government the words of friendship they wanted. I have no wish to analyse the speech, as it was one of those occasions which did what both sides wanted.

             Today as the leaders of the G8 meet in France they need to get down to discussing the areas of trouble and doubt. These include:

1. How much further can they go in bombing Libya, given the clear purpose of the intervention agreed by the UN  is to limit attacks on civilians, not regime change?  Shouldn’t they be reducing their military intervention?

2. How will they move from war to negotiation in Afghanistan, to try to create a more settled country as the troops leave?

3. How will the US improve its relationship with Pakistan?

4. What advice will they give the Eurozone about sorting out its problems before they threaten wider damage to the economy and banking systems of the west? Will anyone there point out that the bail outs are not working, and that new policy developments are needed if Euroland wants  a single currency to work?

5.  What actions are appropriate to head off further sovereign debt crises? When we faced a bank debt crisis the Heads of government were full of ideas,ever ready to blame malefactors,  but now we face recurring sovereign debt crises they seem strangely silent. How do they intend to get western government levels of borrowing and debt under control so they do not destabilise economies and banking systems?

                   The summit is also scheduled to discuss internet regulation, counter terrorism, green growth, relations with Africa and development matters. They won’t be short of things to say.

             The April figures for public borrowing were a new high for April. The government borrowed an extra £10 billion. They explained that this was more than April 2010 because in that month the government received the one off £3.5 billion tax on the banks. This has been replaced by a regular tax which does not come in in one lump.

                 What the detailed numbers show is that the main reason for the extra borrowing in April was extra spending. Public spending rose by £2.6 billion or 5% compared to the same month a year ago. Revenues were  £42.9 billion in April 2011, compared to £43.2 billion in April 2010. In other words £3.2 billion of the £3.5 billion one off bank tax was replaced by other tax increases imposed since. Extra public spending is a far  bigger cause of higher borrowing than revenue decline in these figures.

                   There was some good news . 2010-11 borrowing came in a little lower than forecast. The net cash requirement, which had hit an unbelievable  £199 billion in 2009-10, fell to £140 billion in 2010-11.  It needs to fall a lot further this year and next, to avoid interest charges taking up too much of the rising spending.

                    The overall balance sheet shows total UK state debt at £2252.9 billion, or around 150% of GDP. This excludes public sector pension liabilities, which would add more than an extra £1 trillion. £1.2 trillion of the debt is the consoldiation of the state’s share of its banks balance sheets. Early privatisation would make a big difference to the figures.

                      The UK state needs to cut the risks on its balance sheet by asset sales. It needs to reduce the amount of bond borrowing it requires, by better control over spending and by asset sales which bring in cash. It is difficult to understand the OECD’s point about slowing the spending cuts, when every year of the five year plan spending rises in cash terms. It would also rise in real terms if the authorities  control inflation.

            Today I plan to hear President Obama’s foreign policy speech. He will deliver it in Westminster Hall, a building which has seen more than 900 years of English and British history. The struggle to control the King and impose Parliament’s will was acted out here: it was the scene of the trial of King Charles I. It was the place to try powerful advisers to monarchs who were thought to have abused their positions. The Parliamentary chamber that witnessed the great debates to establish Parliamentary democracy was destroyed by fire, whilst Westminster Hall, old  home to the courts and host to great state trials has survived as a memorial to the growing pains of democracy.

The President will doutless genuflect to any British nervousness about the state of the US/UK relationship. The British in private will probably wish to show some independence of thought over the joint approach to the Middle East.  The President in his early days did not control all of the details to reassure the UK he understood the long term nature of the joint actions, whilst the Prime Minister in his early days wanted to show he would be no US poodle. All this has been written up and written about too much. In practice the US and UK remain linked by common language and history, by many cross Atlantic family ties, by substantial mutual investment in each other’s countries and by their common causes through NATO.

US Presidents usually come round to the view that even though there is  a large imbalance in size and power between the two countries, having the UK’s moral and mililtary support in pursuit of common world aims can be helpful. UK Prime Ministers usually take the view that they need to get on well with the world’s superpower, though occasionally they may show flashes of independence. Margaret Thatcher had a close working relationship with the US but was memorably caught telling the US not to wobble. Harold Wilson wisely stayed out of the Viet Nam war but the relationship survived that display of independence.

Today I want President and Prime Minister to rethink the past approach to the Middle East and the spread of democracy. Mr Cameron has said that you cannot impose democracy from above by bombing from 30,000 feet. In private they should agree a timetable for getting out of military  commitments in Afghanistan and Libya.

Whether they call the relationship special or essential does not matter as much as the press seem to think. What they do decide on future military commitments to the Middle East matters much more. If we believe in self determination of peoples, democratic process and peace, we need to amend what we do and learn from recent wars.

          The House was denied a vote on the Mark Reckless motion. We got instead a vote on the amendment to dilute it. That amendment carried by 267 votes to 46. Labour abstained, with a few notable individual exceptions to the whipping.