Month: June 2011

           There are two well known ways to end an English drought. The first is to appoint a Minister for drought, or declare an official drought with policies to tackle it.

          The second is for twenty four grown men to put on white clothes and for thirteen of them to stride purposefully into the middle of a grass area with ten sticks placed in the centre.  Eleven MPs assembled with two umpires to do just this on Friday. Down came the rain.

          We were very disappointed. We wanted to play a game of cricket for the charity Chance to Shine, to spread cricket widely through our community. It was the first time the Lords and Commons had been invited to play at Lords since 1939. Some of us were very conscious of the honour of playing at such a great ground, one that  our very modest cricket abilities and lack of training and practice would have prevented us achieving . Nonetheless we trust we helped the charity, and loved the ground and its facilities seen for the first time from  the player’s side. I would like to thank all involved. Perhaps a special thank you is due to Ed Balls  who made the whole event so newsworthy.

         I have been hearing on the media that we have just had the hottest April and May for many years, as measured by maximum temperatures. This is a curious way of reporting recent weather. You would have thought they would record average temperatures, as this is a more normal representation of what we experience day by day. I guess the careful wording leaves out the minima which were not so hot.

        I remember in early April receiving ice warnings in my car each morning because the outside temperature was zero  degrees centigrade when I left home. Coming back in the evening it was none too hot either. On Sunday last when I was playing cricket it was just 12 degrees centigrade – and raining for some of the time. Yesterday was around 12 degrees again, and this is June.  This morning was similarly chilly, though as on other days it warmed up a bit by noon. I went to an under cover summer production yesterday evening where we the audience were at outside temperature. I have never seen so many rugs, anoraks, blankets, capes and other unusual makeshift garments be produced as the temperature fell to 7 degrees C.

          The impression I have is of more easterly winds than usual, accounting for the absence of rain in eastern and southern England. It also would account for the more continental temperature range, from lower to higher than usual when we face our south westerlies from the Gulf stream. The recent rains have come in the back of our old prevailing south westerlies. The more weather we get from the continent, the wider the temperature range and the drier the winds.

         Now all the outdoor events are with us there seems to be more rain around. I accept even if it  rains more from now we have had a very dry year so far in the south and west. The complaints about a possible water shortage should be no surprise. Given the large increase in population, and the growing prosperity of people over the years (despite the nasty recession and set back), we need more water capacity. The government should turn its attention to that with the water companies, whatever the weather forecast.

Just when the government is discussing the right mix of public, private and charity sector provision i n health,  fly on the wall spy camera documentaries reveal cases of private sector maltreatment or poor performance. Channel Four does do a similar operation on an NHS hospital and shows some nurses in a bad light, but it does not have the same impact.

I fear there are cases of poor treatment, abuse of patients, low quality care  and inefficiency in  both the private and public sectors. The BBC treats these very differently. They rightly gave tough interviews to private sector institutions that had performed badly, not letting them off the hook. Yet when it came to the Care Quality Commission, the public sector regulator of care , they were asked by the Today programme if they had insufficient funding and insufficient people to monitor and control the wicked private sector.

The provision of public service in the UK is much more complex than a simple division into public and private would suggest. The NHS relies on for profit drug companies to supply the treatments. It relies on private sector businesses to supply everything from bandages to replacement body parts, from crutches to ear grommets. Many GPs are private sector contractors, and the NHS now contracts out some operations and medical treatments to private sector institutions.

Public service in the UK is supplied by a mixture of monopolies and competitive businesses, by a mixture of institutions employing public sector and private sector employees, and mixture of provision between free  at the point of use and customers paying for what they need. The NHS itself is largely monopoly but  now contains competitive elements. It is largely free at the point of use, but charges many for prescriptions, dentistry and glasses. Private companies deliver cleaning and catering, banking and consultancy to it.

It is high time journalists accepted that the public and private sectors are much more muddled up and interwoven than they often allow, and important that we should recognise that both the public and private sectors can do a bad job. It would help the  public debate if we had more fly on the wall documentaries about parts of the public sector.When it comes to health, we should remember the dominance of public provision, and expect more exposure of what they are up to.

It may not feel like it but we are now in the third year of the economic recovery.  The Stock market hit bottom at the end of the first quarter 2009. By 2010 there was  moderate growth, which has continued with the interruption of the last quarter of 2010, variously blamed on the bad winter weather and problems with calculating construction output.

People never feel really good about the economy unless it is overheating and things are clearly strong, as in 2006-7.  This recovery has been slower than many, owing to the long shadow cast by too much borrowing in both the private and public sectors in recent years.  In the west generally it seems likely growth will be slower than in the build up to the Credit Crunch, as people, companies and governments battle their debts.

This week there was bad news about gas prices, and more bad news about food prices. These basic purchases are going up in price too quickly, keeping the inflation rate high. This in turn is increasing the private sector squeeze. Wages and salaries remain under control, so people are finding it more difficult to budget as it becomes dearer to feed and heat the household.  This in turn cuts demand for the luxuries and nice to haves, as a bigger proportion of the typical income goes on the basics. The inflation coupled with VAT and other tax rises means a substantial squeeze on the private sector, which is slowing down recovery. It illustrates that keeping public spending and borrowing  high has a price as many have to pay higher taxes to pay for it and for the accelerating interest payments on the growing debts.  The Coalition forecasts  £32 billion a year extra of debt interest by 2014-15, which has at some point to be found from  taxes.

It seems likely that central London is once again performing much better than the rest of the UK. Demand for homes and office accommodation is strong. Empty space is being filled, rents are going up, capital values are in  many cases in the central districts higher than in the market peak of 2008. The city feels busier. Taxi drivers, hoteliers and restauranteurs are  not complaining so much about business levels. Whilst there is some domestic recovery, the property agents report the importance of foreign buying in the higher price ranges for central London residences. After the big devaluation of the pound London property seems cheaper to buyers from overseas than it is to tax paying UK citizens paid in pounds.

             Most MPs want the Coalition government to be a one term government. Labour wants to replace it, Conservatives want to win a majority next time in their own right.  Some Lib Dems would rather form a Coalition next time with Labour, hoping the numbers would allow them to do so. This makes it an unusual government, as most of its members are not dreaming of a second term for the government they support.

              When the government set out its stall a year ago it told us it wanted to do two big things. It wanted to bring the deficit down, stabilising the country’s finances. It wanted to be a reforming government, changing education, health and welfare and public service more generally.  It wanted to do both these in a five year period, and legislated to underwrite its intention to govern for a full five years. So how is it getting on?

               In its first year it did cut the deficit a little, by raising taxes. The deficit fell by £13 billion, whilst taxes went up by  £35.8 billion. The plan based mainly on cuts in public spending in practice turned out to be a plan based on a forecast large increase in revenue, with a 5.3% increase in public spending in the first year. It seems likely that they will reduce the deficit more over the life of the Parliament, but also seems likely the revenues will undershoot current forecasts whilst spending in cash terms continues to rise. We should  expect steady but not dramatic progress in cutting the rate of increase in public borrowing.

               In the first year it set out boldly on a wide range of public sector reforms. The Prime Minister let us know that he had learnt from Tony Blair not to waste the first term as PM. He said he wanted to be seen as a reforming PM: “I want us to make our schools and hospitals among the best in the world. To open them up and make them more competitive, more local and more transparent. To give more choice to those who use our public services and more freedom to the professionals who deliver them”

               The Education reforms based on introducing more academies and free schools have gone through at a fast pace. There is momentum in the academies programme. Conservatives are disappointed there will not be more grammar schools, as many see these schools as the best way to encourage upwards academic mobility for all those who cannot afford independent school fees, but pleased with progress otherwise.

                The Health reforms are being paused. It is too early to say how much of the pioneering enthusiasm of the White Paper, prepaerd jointly by the Coalition partners and approved in the Letwin-Alexander review will survive.  Key to the plans – in the manifestos of both Coalition parties – was offering more choice to patients and more competitive pressure on provision to raise standards and to control costs. The German system of healthcare, for example, is largely delivered through charitable sector and private sector hospitals. Will the UK go further in that direction, set up by the previous Labour government? At the moment it is looking more likely that the government will back away from some of the Blair reforms.

                  The forest reforms and changes were dropped after a strong campaign against them. I never understood why the heritage forests were included in the plans, as that was always going to be contentious. Will the Coalition government even sell as much commercial forest as Labour did? Time will tell.

                 The welfare benefits reform is in development stage, with a large computerisation programme under way. Implementation will take place much closer to the election. It is far too early to forecast how radical and successful this might be. The same is true of pension reform.

                The government will in practice be judged by how long and strong its economic recovery is. Radical and successful reform of one or two public services would be a bonus. It appears the government is moving from radical to cautious in several important areas.

                Meanwhile the unelected Archbishop of Canterbury says no-one voted for the Coalition’s radical reforms of health, education and welfare. I suggest he reads the Conservative and Lib Dem manifestos, which contained reforming proposals in each of these areas.

            The Conservative Economic Affairs Committee intends to take up the issues of falling money supply and difficulty in small and medium sized companies getting loans to expand and to finance their businesses.

             Various commentators assume monetary policy is loose, owing to low official interest rates. The impact of the quantitative easing is now well behind us, and the  devaluation which accompanied it. That policy helped the public sector borrow cheaply, but did not  help many private enterprise companies who still had to pay much higher rates of interest if they could get credit at all. It also intensified the private sector squeeze by lifting the inflation rate.  Now we are back with falling money and inadequate credit.

              Interest rates are no longer doing much for money policy. Official rates are as low as they can go, whilst effective rates for the private sector are considerably higher. This reflects the credit rationing, brought about by bank regulation and the demand for banks to hold a lot more capital for any given volume of lending. Some banks find it easier  to adjust their balance sheets by running down the loan book, than by raising new capital or generating sufficient profit to build up the reserves.

              The Committee intends to raise the issue of bank regulation with the Bank of England and with the FSA.  Counter cyclical regulation should mean demanding much more cash and capital of banks when there is too much credit and money around, as in 2006-7, but being less severe when there is little, as today. The current inflation owes much to weak sterling based on substantial quantitative easing some time ago. Current money policy is far from inflationary, and is one of the constraints on a stronger private sector led recovery.

                No-one knows just how much a country can borrow before the lenders worry, demanding higher interest rates,  or refuse to lend more. Most people agree there does come a point where a country, like a company or an individual has borrowed too much. Once that is generally the view the options for that country narrow to the unpleasant or even to the self defeating. If you cannot borrow more you have either to cut your spending or increase your revenue, or a combination of the two. Until the potential lenders are convinced you can do it sufficiently, you are unable to borrow at  affordable rates. You can end up like Greece, having to squeeze both the public and private sectors too much, the one with spending cuts, the other with tax increases. You can end up in vicious circle of cuts, slump and more cuts. Borrowing more is not an option because no-one will lend you all the money you think you need.

                The UK government’s critics mainly tell it to spend and borrow more. They usually are unaware of the cash increases in spending in current plans, totally ignorant of the increased spemding and borrowing put into the 2nd Coalition budget comparted to the first, and only just aware of the clause which says if the economy grows less fast the Chancellor plans to borrow more. In other words, their Plan B is largely the Chancellor’s Plan A presented differently.

                  The problem with Plan B if taken further than the Chancellor’s revised plans of March is it would reach the point where the markets no longer believed in the deficit reduction approach. Lenders  might then decline to lend at managable rates. Given the heavy reliance on extra revenue from growth some contributors to this site seem to favour a Plan C, which would cut the risk of the levels of borrowing becoming too high.

                  What would these commentators’ Plan C look like?  A modest Plan C could, for example, have stuck to an increase of just 2% per annum in cash spending, instead of allowing the 9% plus increase in spending in the first two years of Plan A. This would have meant an £18 billion lower spending increase in 2010-11, and a  £30 billion lower spending increase  in 2011-12. Over the whole five years it would have reduced the spending increases by a cumulative £138 billion, and cut the proposed additional borrowing from £485 billion to £347 billion.   As we now know the markets can live with the prospect of borrowing an additional £485 billion over five years, this would have given welcome leeway in case growth comes in below forecast. It could also have allowed no VAT increase, cutting the squeeze on the private sector and reducing the inflation rate in 2011. Restoring Labour’s top rate of Income Tax and CGT rate could probably have increased revenues over the five years as a whole compared with the higher rates levied by the Coalition.  

             Such a plan is not going to be adopted, but I thought I should introduce it into the debate given the interest  by some contributors in what would happen if spending controls were stricter. It would of course still be possible to do more  by way of spending control this year.  Plan C is a theoretical comparison to Plan A and any bigger borrowing  version called Plan B. It would produce a less pronounced private sector squeeze in years one and two, and keep interest rates lower in years 3-5. As illustrated it still allows public sector cash spending to rise every year by the pace proposed for the last three years of Plan A. If public sector costs were kept under control it would mean important public services could still experience real increases in funding. It is interesting to note that in yesterday’s IMF Report on the UK they propose tax reductions to add stimulus should the growth rate drop too low. Plan C’s mixture of tax cuts, less inflation, and a smaller private sector squeeze should deliver better growth than Plan A. Ths in turn would deliver more tax revenue, and reduce the deficit more quickly.