Kill inflation

The best way to get the UK economy moving again is to boost real wages. The best way to do that is to control price rises.

Since 2007 there has been a continuous fall in real wages in the UK private sector. For the first couple of years it was sharp, owing to the deep recession. Thereafter it was a bit less pronounced, and mainly occured owing to persistent inflation. The Uk experienced higher inflation than most of the advanced country economies at a time of Credit Crunch.

The Bank has clearly decided to boost money despite the inflation outturn, taking the view that that can stimulate growth. It needs to worry more about the adverse impact on demand and growth that insidious inflation has on living standards and confidence.

Anyone who saves has some of their money stolen by inflation. It can make them even more cautious about spending, as they perceive the need to have more savings to make up for the erosion of value of their money. Anyone relying on work income can find their family budgets become very stretched by price rises. The public sector has increased people’s fears on inflation by indexing many more things to the CPI instead of the RPI and refusing to issue any more National Savings Index linked bonds.

The government is part of the cause of the inflation. Energy prices have been especially troublesome. Both the Labour government and the Coalition government have followed policies of taxing energy more highly and pushing up energy prices in the name of fighting global warming. This has strained family budgets, made UK industry less competitive, and given a great advantage to our competitors in the USA and Asia who have gone for cheaper energy policies.

I have written recently to the Energy Minister, renewing my call for us to follow a lower price energy policy. The recent sharp falls in the oil price will provide some temporary respite, but we need to go much further, and we need to end the extra burden we are having to pay. That means ending the carbon tax, generating more electicity from lower cost options, and exploiting more of our natural resources.

The government has also been keen along with local government to put up fees and charges across the public sector. It would be good to have a two year freeze on all public sector managed prices, allied to requirements that the public sector should not simply raise the subsidy needed for these activites on the grounds that they cannot raise their prices. They should be required to become more efficent instead.

The new Governor of the Bank should be told to renew the inflation target, and told that he should be setting out to hit it soon. The latest fall in world commodity prices, and the current little rise of sterling can help bring this about. Lower inflation would be great news for recovery, and for confidence in UK policy generally.

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138 Comments

  1. Leslie Singleton
    Posted April 22, 2013 at 5:38 am | Permalink

    It comes back to Gold, which, with apologies to Churchill, despite being an almost comically silly control over money, is unfortunately the best, some would say only, one we have. Cowrie shells would be good too but there aren’t enough of them. Anything at all rather than allow governments a free hand to produce money out of a hat and then wonder why its value goes down.

  2. James Winfield
    Posted April 22, 2013 at 5:58 am | Permalink

    Should we dig more coal?

    • lifelogic
      Posted April 22, 2013 at 8:53 am | Permalink

      Indeed we should dig up and burn more coal, and abandon the absurd Cameron religion of sill toy wind turbines on houses in non windy Notting Hill.

      • Bazman
        Posted April 22, 2013 at 5:19 pm | Permalink

        Nobody is going to mine coal for minimum wage with no rights even though you think they should and open cast cannot be used on all coal seams can it?

        • Edward2
          Posted April 23, 2013 at 3:37 pm | Permalink

          Baz,
          Did anyone ever dig coal in the UK for “minimum wages and no rights” ?

          You are right ref your second part, there are 2 sorts of mining for coal:-
          Deep seams of coal underground that need traditional mining methods to extract and near surface seams which can be gathered via open cast methods. We have plenty of both in the UK.

    • Chris Manuell
      Posted April 22, 2013 at 9:24 am | Permalink

      Probably not, the Government is determined to transfer most of our Coal fired power stations (even though the Germans are busy building new ones), over to Biomass most of which will be imported because we cannot supply enough. It is a low energy density fuel and very bulky and by the time you have brought it halfway round the world not very “green”.
      If we did mine more coal it would probably be opencast mined because the world is awash with cheap coal, the USA is using less because of the huge expansion in gas usage. Deep seam coal is very expensive to mine which is why it saw a steady decline from the 1940’s onwards.

      • lifelogic
        Posted April 22, 2013 at 11:52 am | Permalink

        Biomass is clearly nearly always as bonkers as toy wind turbines are in Notting Hill.

    • Leslie Singleton
      Posted April 22, 2013 at 9:30 am | Permalink

      James–I for one have never really understood why we cannot use coal in cleaner ways. For example, remember town gas, water gas and producer gas (Sorry, cannot recall which was which), which we happily used for years, and I don’t mean ‘maybe’ ? I ‘get’ that these gasses were dirtier than natural gas and, we are today told, expensive, but surely with all the “growth” and “progress” since then we could today come up with a better chemical engineering process which at the same time produced gasses stripped clean of the noxious especially harshly acidic pollutants (one of which is of course not carbon dioxide). Let’s hear it for gasometers!

      • Draughtsman
        Posted April 22, 2013 at 11:02 am | Permalink

        There have been technologies out there for converting coal to a substitute natural gas for many years. In the late eighties plans were afoot in the UK to build up to thirteen huge plants to produce a substitute natural gas from coal against the day when supplies from the North Sea ran out. Of course it never happened as other sources of natural gas became available.
        You will not be hearing too much about ‘gasometers’ (holders) in the future as many of them are being decommissioned.

      • Mark
        Posted April 22, 2013 at 2:55 pm | Permalink

        Converting coal (and gas) to oil via Fischer-Tropsch processes may become more economically important in the future. The technique is still used by SASOL at its Secunda facilities in South Africa.

  3. margaret brandreth-j
    Posted April 22, 2013 at 6:01 am | Permalink

    We should definitely get real wages. I have been saying this since 1995. The problem us ex real salaried people saw as they began to fight for working hours was how time consuming the organisation of work was , how expensive travel was, what a lot of extra paper work was involved, how much travelling was involved to get to work, how much work there was preparing for interviews and not least how much money we paid trying to get a salaried job. It was time and money wasting. We were too exhausted to go retail shopping, we didn’t want to spend in case there was no work the next week and really had little money and definitely not enough to save and put in pensions. This scenario has been growing in momentum for over the years as the practice has become accepted. From just a few workers the problems grew and grew and now we are here!

  4. Andyvan
    Posted April 22, 2013 at 6:22 am | Permalink

    The government is almost entirely the cause of price rises. It is also a very large contributor to unemployment via regulation and taxation. It’s policies on poverty, health and drugs are entirely negative as well. That’s always the case when you use force to try and solve something and force is the only method government has.

    • lifelogic
      Posted April 22, 2013 at 8:55 am | Permalink

      Indeed nearly all negative, they just need to concentrate on a sound currency, defense (not attack), law and order and a decent legal system of property rights.

      • Leslie Singleton
        Posted April 22, 2013 at 1:25 pm | Permalink

        Lifelogic–You have been Americanised–in British English ‘defence’ is so spelt. Don’t give in to your Yankee spellchecker

        • lifelogic
          Posted April 22, 2013 at 5:20 pm | Permalink

          I will try not too – but at least I can honestly blame that error on the spell checker.

  5. alan jutson
    Posted April 22, 2013 at 6:32 am | Permalink

    Inflation is the killer

    I agree, but does the Chancellor and the proposed new Governor of the Bank of England agree.

    Inflation is the friend of debt, and the enemy of savers and investors, that has surely been proven by history.

    Printing money helps stoke inflation, so what next, print some more !

    • waramess
      Posted April 22, 2013 at 9:37 am | Permalink

      This of course exactly the point. Milton Freidman, Mises and Adam Smith all recognised that an increase in the money/credit supply causes inflation.

      Unless they are all wrong the Bank of England is perfectly able to control inflation but chose not to do so.

      Rising prices have nothing to do with inflation; they might be a product of it under certain circumstances and, the Banks preferred RPI has nothing to do with generally inflation; it is a flawed price index.

      Try controlling prices and nothing at all will be achieved so long as the Bank continues to print.

      Cheap energy prices are certainly a must for the UK to be competitive but high energy prices will not increase inflation

    • helen jones
      Posted April 22, 2013 at 1:33 pm | Permalink

      If i get one more totally stupid reply from my illustrious MP claiming that the Government is protecting savers and Pensioners are better off thanks to free bus passes and free prescriptions and the triple lock guarantee

      I will scream :-

      As a pensioner almost totally dependant on savings income and only entitled to £66 a week state pension and living in a rural area where the bus service is a joke my loss of £7K a year savings interest is catastrophic

      Funding for Lending is the sole cause of 60% being knocked off interest rates since August 2012 and far from being “temporary” as George Osbourne claims its set to continue and cause more misery .
      We never ever got cheap mortgages
      We did not get the benefit of saving tax free
      We do not get Company Pensions

      Yet my generation of savers are subje3ct to DAYLIGHT ROBBERY of our savings to support the profligate and those who will default on mortgages

      Its totally IMMORAL and UNJUST

      • Mike Stallard
        Posted April 22, 2013 at 7:12 pm | Permalink

        I totally agree!
        And there are very great number of people out there, I am sure, who feel the same>

        • Edward2
          Posted April 23, 2013 at 3:43 pm | Permalink

          Indeed Mike
          There are millions of savers, investors and pensioners who are being short changed by this artificially low level of return with interest rates being almost zero.
          Keynes believed there was a realtionship between consumption, investment and savings and that each needed its incentive in terms of a fair return or price.
          Well at the moment the price for saving (ie interest rates) is too low.

  6. Steve Cox
    Posted April 22, 2013 at 6:32 am | Permalink

    I completely agree with you John, but I don’t see it happening any time soon unless interest rates are normalised and Sterling boosted as a consequence. Look at little Switzerland. It has far fewer natural resources and agricultural land than the UK, and so has to import more food, commodities and energy, yet since 2008 while we have suffered inflation between 3% and 5% it has averaged just 1% in Switzerland. Why? Because they have kept a strong currency, too strong for their own good probably, but it does show how important the value of your currency is in a nation dependent on imports. Oh yes, and the brainiacs at the Bank of England and the other usual suspects keep on about how awful deflation is, and how we must print money and debase Sterling to avoid it (even though it has never actually posed a genuine threat here), the Swiss are now in their second year of falling prices. My goodness, if only we could share in their economic misery and misfortune! Instead we are enjoying the fruits of the Bank’s outdated and misguided devaluation policy – stagnant growth and high inflation.

    • Gary
      Posted April 22, 2013 at 6:55 am | Permalink

      The Swiss franc is pegged to the euro. It has been for a few years now. The euro has been strengthening, the euro zone, under the urging of Germany, has chosen not to inflate but to painfully and messily restructure, with attendant unemployment. Some commentators see this as proof that inflating the currency is a better option, they point to the UK and our relatively low unemployment under inflation. This is a mirage. We are kicking the can, making things worse and delaying a larger crisis down the road. Growth by money printing is like feeling good with opium addiction. It always ends very badly.

      • Acorn
        Posted April 22, 2013 at 11:31 am | Permalink

        The Swiss Franc has never been pegged to the Euro.

        (The Swiss franc is now managed in line with the Euro-ed)

      • Steve Cox
        Posted April 23, 2013 at 6:15 am | Permalink

        Agreed. Central bankers are supposed to take away the punch bowl just as the party is getting started,as the famous saying goes. Instead, In Britain and the US they are constantly topping it up with 100 degree proof rum. The hangover is going to be awful.

    • JimF
      Posted April 22, 2013 at 5:03 pm | Permalink

      Believe it or not, the Swiss are desperate for a weaker currency to keep their exports moving and so that UBS and CS can recover some of the loans made to East Bloc countries. These are what prompted the Euro peg. Their government too are printing money like crazy, actually, and buying Euros with it. The wise population aren’t happy. If the Euro goes down, they go down with it now.

      That is probably why it looks likely that the people will vote in a referendum for the Swiss Govt to stop selling its gold. It’s a shame we couldn’t stop Brown doing that.

  7. Gary
    Posted April 22, 2013 at 6:41 am | Permalink

    You can’t fight inflation by managing prices, you fight it by preventing the over supply of money CAUSING the rise in prices(in addition to the normal supply and demand effect on prices)

    But we are snookered. If we stop QE and the over supply of money, then bond prices will collapse and interest rates will rise precipitously. That will finish off the economy, especially the financial sector. So what can we do ? Bite the bullet and get it over with.

    • sm
      Posted April 23, 2013 at 12:09 am | Permalink

      And what is your view on Steve Keen’s suggested policy of a modern ‘debt jubilee’ – money given per capita to pay down debt or spend?

  8. lifelogic
    Posted April 22, 2013 at 6:48 am | Permalink

    The best way is surely is to reduce the size of the state sector, that prevents the private sector being competitive and growing. Also to have a sound currency and sense of vision that we are actually moving in a positive direction.

    Alas we have Cameron the Eds and Unison in 2 years time. Too late alas for Libdem Dave.

    There are also things that could be done in competition laws and controls that would prevent banks, the energy sector, water, sewerage, rail, insurance, the legal profession, medical professions and telecommunications from over charging as they often are currently often able to do. This by using the unfair competition systems and effective monopolies etc. that exist.

    Confusion marketing with hidden charges and tracks abound to trick customers in many areas. Simple comparisons systems are needed.

    • uanime5
      Posted April 22, 2013 at 5:22 pm | Permalink

      The simplest way to introduce more competition to these industries is to create a state owned company that will act as a competitor for the private companies. Any private company that is worse than the state will soon go bankrupt.

      Another alternative is to reintroduce Statutory Companies. In Victorian times some utilities were run by Statutory Companies which could only declare 10% of their profits as profits and had to reinvest the other 90% in the company.

      • Edward2
        Posted April 23, 2013 at 3:50 pm | Permalink

        Uni,
        1. The last thing we need now is a return to State nationalisation of industry and commerce.
        All the State needs to do to create competitiion is to remove barriers to entry into the various markets so that start up companies and SME’s can get in with the established PLC’s and compete.
        There are already many ways for companies to reduce their profits for tax purposes as you often tell us, so the Statutory company idea would just be another way for businesses to reduce their tax liabilites.

  9. Electro-Kevin
    Posted April 22, 2013 at 6:55 am | Permalink

    Inflation is very disconcerting and is like having the ground beneath your feet turn to quick sand.

    Things seem a lot less certain than they used to.

  10. Robert K
    Posted April 22, 2013 at 7:09 am | Permalink

    I agree that inflation is a plague that should be stamped out.
    Someone whose wages have been flat since 2008, of whom I suspect there are many, will have experienced a 15% drop in real pay if inflation since then has been running at “only” 3%.
    Remember: monetary inflation is taxation in disguise.

    • A different Simon
      Posted April 22, 2013 at 11:53 am | Permalink

      Robert K ,

      The problem I have with headline inflation figures is not that they are fudged but that they omit what should be the single biggest expense : making provision for your old age .

      – Annuity rates 25% lower now than 2008 so need to build up a pension pot 33% greater .
      – Stock market no longer able to offer returns which match long term average . As you would put it flat-lining .

      I accept that there are alternatives to the annuities and pension .

      However the bottom line is that using the stock market to provide for old age will likely require someone to save over double the percentage of their income over the course of their life that they would have been required to save less than a decade ago .

  11. Nationalist
    Posted April 22, 2013 at 7:35 am | Permalink

    Your first paragraph says all that needs to be said really.

    We have price inflation running at 3.5% but wage inflation is only 1%. Inevitably the economy declines since real spending power is eroded. If those two numbers were the other way around we would all be much happier. Someone needs to lean on the MPC to do their job.

    • behindthefrogs
      Posted April 22, 2013 at 12:45 pm | Permalink

      Its worse than that because at least 32% of the wage inflation is taken by the government in income tax and NI contributions. They then take a further 20% in VAT when you spend it. The government couldn’t even raise the lower limit of NI contributions by the rate of inflation in the last budget.

  12. Mike Stallard
    Posted April 22, 2013 at 7:41 am | Permalink

    Prices go up: people demand more wages. 1970s inflation was something like 25%.

    Serious debt and a running deficit mean inflation too. They also mean that the rate of return on investments must be kept low artificially so the government can borrow.

    As an historian, I can smell a serious rat in the banking system. I sense there is something seriously wrong with nearly all the banks and I do not know what it is. Do you?

  13. Peter
    Posted April 22, 2013 at 7:42 am | Permalink

    You are quite right John. Inflation is killing growth.

    But the problem is that the coalition +deliberately+ creating inflation through money printing, negative real interest rates etc as a means to eliminate debt. Just think: 10 years of those policies will eliminate about 30% of government debt.

    It doesn’t seem to have occurred to them that while this policy does indeed reduce debt, it also does massive damage to the economy, far outweighing any of the illusory “benefits”it may appear to offer.

    By crushing savers, it is also monstrously unjust.

  14. Chris S
    Posted April 22, 2013 at 8:44 am | Permalink

    I will go along with your thesis just as long as the usual wrong remedy of putting up interest rates is kept completely off the agenda.

    I have never understood why the Bank Of England has always put up interest rates in an attempt to choke off inflation when it has so often been the rise in Petrol/Diesel/oil/gas and electricity that has caused the inflation in the first place.

    It has always seemed to me the precise opposite of what is required because higher interest rates just take even more money out of the pockets of families with mortgages on top of the extra cost of every kind of fuel. The result : even more pressure for higher wage claims which cause even more inflation.

    In the last four years the only thing keeping Britain away from a full blown economic slump is the continuation of low interest rates. Fortunately George Osbourne seems to have realised this and is following an economic policy designed to keep them low.

    On the other hand, if the policies of Ed Balls were followed, Britain would quickly find the cost of borrowing rising on international markets with disastrous results.

    • waramess
      Posted April 22, 2013 at 9:52 am | Permalink

      The Bank puts up interest rates to deter borrowing however keeping interest rates at an unrealistically low level does more than encourage poor investments which will iltimately lead to higher bank defaults, it also discourages savers who look for higher returns than Bank deposits.

      This in itself also leads to bad investment decisions and will result in bubbles forming in the economy.

      Just look at the stock exchange and ask yourself why it is at such a high level when the economy has not grown.

      There are many similar bubbles forming in the economy and all will burst at some point. Perhaps we should hope they do not all burst at the same time, although I suspect they will.

    • Nationalist
      Posted April 22, 2013 at 11:03 am | Permalink

      Putting up interest rates makes sterling more attractive hence increases its value. This in turn makes oil cheaper hence reduces the price of petrol at the pump. (We are a net-importing nation. A strong pound reduces our inflation rate.)

    • behindthefrogs
      Posted April 22, 2013 at 12:50 pm | Permalink

      Every time the price of fuel goes up the government takes its cut in VAT. Rather than taking fuel duty and VAT they should be honest, remove VAT on fuel and just have a fixed rate fuel duty. This would help stabilize prices and also in the case of remote locations help to level the playing field.o

  15. oldtimer
    Posted April 22, 2013 at 9:05 am | Permalink

    A large element of inflation is the result of energy policies made in Downing Street and DECC. These alone are enough to kill off any prospect of regeneration of the UK economy. Unless and until these are reversed there is no hope for a recovery. Consumers will save to provide for the higher inflation they expect; energy using manufacturers will make their investments in lower cost countries.

    • stred
      Posted April 22, 2013 at 11:55 am | Permalink

      The cost of energy seems to be having a bizarre effect in the area of London where I stay weekdays. The Ford engine plant, producing a million engines pa. is to close, following the van and stamping factories. Production is moving mainly to Turkey. Yet the Dagenham factory is wind powered, with 3 turbines producing almost 6Mw, nominally. The plant is highly efficient and labour relations have not been a problem until now, when they think a strike is the best way to stop closure! When it closes, the site can probably make a lot of money selling power to the grid at a hugely subsidised price. Stand by for more turbines.

      JR is to write to the energy minister. Best of luck. Greg Barker was on the parliamentary channel yesterday addressing the energy committee, which had raised some questions on the effects of legislation. If ever there was any doubt about the ruin of the Conservative party, then his performance confirmed it. He is the longest serving energy minister and he really believes that all the changes are putting the UK in the lead as a green economy, in which green industries will prosper and outstrip the rest of the world.

      This PR man, whose partner is another PR man, thinks that 8 inches of insulation and render on the outside of victorian houses will improve their appearance, and so this is the one to be offered in the Greendeal. He is proud that our wind farms are increasing quickly and that the grid is being rebuilt so that we can charge our electric cars when we want to. He is also proud of the big increase in PV, producing electricity at 5 or 8 times normal cost and paid for through bills.( I recently saw one that was on an east/west roof and shaded by 2 large dormers.)

      He obviously has no idea what he is talking about and cannot understand that wind only produces a small fraction of the total and requires inefficient carbon fuelled stations to run inefficiently as back up. He probably can’t understand that producing ethanol for fuel from corn produces no real saving of emissions but will certainly produce expensive food.(re Sir David King’s website) He also thinks that chopping up American trees, transporting them to Drax and burning them saves lots of CO2. He probably did not understand that fixing a limit on carbon production on generation at about half that required by the EU will prevent us building efficient coal stations like the Germans. He thinks that building an expensive link to Iceland is a good idea, even though his team’s own book on the subject does not.

      But he does understand that a large proportion of voters don’t understand much either, and that if he puts JR’s letter in the bin, few will even notice. Perhaps he may be hoping to work for the green lobby if he is chucked out in 2 years time. They will certainly need a good PR firm when the power cuts and factory closures happen.

      Reply I have written to Mr Fallon, not Mr Barker.

      • Mark
        Posted April 22, 2013 at 3:05 pm | Permalink

        At least Peter Lilley demolished some of Barker’s conceits.

      • A different Simon
        Posted April 22, 2013 at 4:20 pm | Permalink

        “He is the longest serving energy minister and he really believes that all the changes are putting the UK in the lead as a green economy, in which green industries will prosper and outstrip the rest of the world.”

        That is a frightening disconnection with reality .

        Whenever I hear a politician talking about Britain leading the world I get a bad feeling in my wallet .

        Shocked to hear ‘Nam may be closing .

        John , is closing down heavy industry Government/Establishment policy ?

        Greg Barker sounds like he must have failed maths at school .

        We really need t0 elect some engineers and scientists to Westminster , not that the PPE crowd would relinquish any positions of power .

  16. James Reade
    Posted April 22, 2013 at 9:40 am | Permalink

    Interestingly you note the fact inflation has been higher here in the UK than elsewhere, yet don’t note one of the main contributing factors – the depreciation in the exchange rate. The US has also engaged in QE but didn’t have a large depreciation, and as a result their inflation rate has been lower.

    Next, it’s interesting you advocate the Bank focussing solely on inflation and not on growth – you’re what Mervyn King would describe as an “inflation nutter”, essentially. Can you provide me with the empirical evidence that such an exclusive focus on inflation at the expense of growth would aid growth?

    As usual, you bemoan the impact on savers, but I wonder whether you’ve any figures on the proportion of the population actually saving currently? In particular, the amount of the population currently saving relative to those in debt (for whom low interest rates are helpful)?

    Of course, it’s often the case that the more well off have savings, whilst those less well off, just about surviving from pay package to pay package, don’t. I wonder why you’re so keen to penalise those who aren’t quite so fortunate to be in a position to have savings?

    • Mark
      Posted April 22, 2013 at 3:16 pm | Permalink

      US inflation has been much lower than ours because they have not pursued an expensive energy policy, and because they have permitted their property market to correct, instead of inflating rents via welfare subsidies. The markets reward economically sensible policies with a better exchange rate.

    • Edward2
      Posted April 22, 2013 at 3:46 pm | Permalink

      Im no expert in economics like you James and our host, but I do remember trying to run a business when inflation accelerated away to double figures and all the problems that caused.
      So I am worried inflation at even its current rates is already damaging and should be reduced.
      Low inflation and growth should be the aim.
      What is the point of one but not the other, because 5% growth and 5% inflation is just an illusion of growth.
      And just 5% inflation per annum halves the value of pensions and savings in 10 years.

      • James Reade
        Posted April 23, 2013 at 11:13 am | Permalink

        Edward2, there’s little doubt that runaway inflation is harmful. But inflation just about reaching 5%?

        The problem is whether in reducing inflation you further harm economic prospects.

        The MPC is composed of economists (i.e. those that study the economy rather than those who play politics for a living) takes a number of days and consults evidence presented to them compiled over many weeks to come to a decision for the interest rate based on how the economy is performing. I don’t doubt their decisions can be wrong, but I also doubt whether one MP taking a quick look at a few choice bits of data and with a preference for savers over those who cannot save is able to make better decisions than the MPC about the state of the economy.

        • Edward2
          Posted April 23, 2013 at 5:10 pm | Permalink

          Inflation is like a beast, once released its difficult to control and get back into its cage again.
          People like me of “a certain age” remember the seductive tones of economists who said “just a little bit of inflation wont hurt you and might even do us all some good” and then before you knew it it was over 25%

        • Lindsay McDougall
          Posted April 25, 2013 at 7:25 pm | Permalink

          If a lot of inflation is bad for us, why is a little inflation good for us? Don’t give me your usual “The experts know best” crap. Argue your case from first principles.

          Incidentally, 5% per annum is hardly ‘low inflation’. It means that money halves in value in 14 years. The old actuaries’ rule of 70 still applies. 5% is the sort of inflation rate that Greece should be allowed if it leaves the Euro.

    • JimF
      Posted April 22, 2013 at 5:14 pm | Permalink

      I think the point is that those who have savings are LESS fortunate than those with assets and debt, not better off. The question is whether the balance should be tipped the other way or not. If I have say £10’000 in a bank account, is it better for the country if I a/keep it there, b/spend it on tat or c/buy a machine with it and export widgets?
      Undeniably the third option is best for the country, but that would only lead to a further £10’000 arriving in the bank account and the same question gets asked again. So I am down to a choice of buying tat or keeping it an account. Now given that at some stage I won’t be able, through age, to work the machine to make widgets, why shouldn’t I be able to command around the same rate of interest on my savings as my kids are paying for their mortgage, which strangely equates to the inflation rate (say 4-5%)? At least then I will be able to buy the tat in my dotage without inflation having eaten it away.

    • Denis Cooper
      Posted April 22, 2013 at 6:32 pm | Permalink

      It’s nothing to do with being an “inflation nutter”, although maybe it is to do with being a “rule of law nutter”, because it’s the law as enacted by Parliament that the paramount focus of the MPC must always be on meeting the inflation target set by the Chancellor, and only subject to that can it consider the economic policies of the government, eg to promote growth. That’s unless Parliament agrees to the normal system being suspended, with the Treasury then being allowed to give the Bank instructions on the conduct of monetary policy, which could be done through a provision on reserve powers in the Bank of England Act 1998, but which has not been done by either Darling or Osborne.

      • James Reade
        Posted April 23, 2013 at 11:16 am | Permalink

        Well the point is that by focussing solely on inflation the MPC would have done things differently since 2008. When inflation was at 5%, they should have increased interest rates, if the pure focus was inflation in the present. It’s hard to imagine this would have had any other effect than to decrease economic activity, and would likely have brought inflation below its target before long.

        Japan, the subject of John’s post today, has had such an ultra conservative monetary policy for years (contrary to John’s take on events), and has suffered deflation. Sure they haven’t seen the value of their savings eaten away so quickly. But there hasn’t been much growth either.

        • Denis Cooper
          Posted April 24, 2013 at 2:29 pm | Permalink

          The MPC has failed in its statutory duty to conduct monetary policy to meet the inflation target set the Chancellor.

          The Chancellor could helped them to fulfil their duty by adjusting his inflation target, or he could have asked Parliament to agree to the activation of reserve powers under a provision of the Bank of England Act 1998, which would have temporarily relieved them of that duty, but he did neither.

    • David Price
      Posted April 23, 2013 at 8:50 am | Permalink

      You seem to have a very black and white view of economics, are you sure there aren’t large numbers of people who are both savers and borrowers? In any case why are you so eager to penalise those who strive to make provision for their families and their future?

      I also wonder why you are so keen to force those on fixed incomes into paupery by maintaining significant levels of inflation??

      • James Reade
        Posted April 23, 2013 at 11:19 am | Permalink

        What is a “black and white view of economics”?

        I’m not seeking to penalise anyone, please stop putting words in my mouth. I’m just questioning John’s incessant focus on a small fraction of the population, those in a fortunate enough position to have savings.

        As for the question regarding those who are both saving and borrowing, well they’ll have a net position, either net negative or net positive. It’s just maths.

        And finally – at which point did I say I want to “maintain significant levels of inflation”? I would like to see our policymakers aim for growth so that a low level of inflation can exist alongside real growth so that nobody is being forced into “paupery”.

        • Mark
          Posted April 23, 2013 at 8:45 pm | Permalink

          Back in 2010, Nationwide reported that it estimated that 79% of adults were savers. That’s a pretty large “minority”.

          http://www.moneyextra.com/news/nationwide-reports-rise-in-number-of-uk-savers.html

        • David Price
          Posted April 24, 2013 at 8:43 am | Permalink

          How do you know that only a small fraction have savings? I and the majority people I have known have tried to minimise personal debt and saved even when we have had mortgages. Saving for an extended period of time has then enabled us to eventually change from being net debtors to net savers.

          Yet on the basis of an unfounded statement that savers are a small fraction and so not worthy of consideration you declare they must be well off/rich and can therefore be used as a scapegoat to promote your view that inflation is not a bad thing – merely a concern of inflation “nutters”.

          It isn’t just “maths”, it is about attitude – you may view economics as simply maths but the economy is all about people, what they value and how they behave. For savers, inflation is viewed as theft of what they have already earned whereas growth might offer improvement sometime but only for some, and likely not for those on fixed incomes. Your counterpoint is that these people who believe they are acting responsibly are “nutters”.

          Is this the kind of “objective” perspective you offer your students?

  17. Richard1
    Posted April 22, 2013 at 10:03 am | Permalink

    You are right to highlight energy prices. The way policy is now, this is going to have an increasingly negative effect on real incomes. As pointed out in an excellent article by Martin Vander Weyer in the Spectator, costs, and even more importantly uncertainty over supply, must now be a major disincentive to industrial investment in the UK. Conservative MPs need to get tough with the leadership and say that adherance to the green religion is too high a price for the country to pay for good coalition relations.

    Reversal of QE must surely be the big issue for the new governor. With a 5-year term, he must be expecting the QE of recent years to come through in inflation during his term of office. He should therefore press the govt for a more rigorous deficit reduction programme and for tax cuts to boost a real, private sector led recovery. he needs the market conditions to sell these gilts back.

  18. Bob
    Posted April 22, 2013 at 10:05 am | Permalink

    “Both the Labour government and the Coalition government have followed policies of taxing energy more highly and pushing up energy prices in the name of fighting global warming.”

    I’m surprised that LibLabCon isn’t claiming credit for the absence of any global warming over the past 16 years.

    Does anyone know how much juice has been produced by Mr Cameron’s private wind turbine?

    • Chris S
      Posted April 22, 2013 at 4:29 pm | Permalink

      As far as I know it didn’t work and Dave had it removed !!!!!

      My 4kw solar panel array on the other hand is producing more power than predicted despite the poor weather. It’s achieving a real return on my investment of 17.9% tax free, it’s indexed linked for 25 years and carries zero risk.

      As a retired investment manager I’m in a good position to report that it’s the best investment I’ve ever seen.

      Thank you to everyone who is contributing to this marvelous investment through their electricity bills and to Gordon Brown who introduced the ludicrously generous feed-in tariff !

      • Mark
        Posted April 23, 2013 at 9:22 am | Permalink

        At least you have the honesty to admit you’re being subsidised by the rest of us. However, that doesn’t work for the economy in aggregate.

  19. Max Dunbar
    Posted April 22, 2013 at 11:14 am | Permalink

    “Pushing up enegry prices in the name of fighting global warming” is a good description of how we, the taxpaying British public, have to subsidise the misguided obsessions of a few extremists who have managed to impose their views on the government via pressure and lobby groups. And not only do we have to pay for this insanity, we are condemned as “deniers” if we dare to voice any view contrary to global warming orthodoxy. However, the government is happy to play along with this charade as it raises large amounts of cash to waste on all sorts of other initiatives such as the never-ending Stephen Lawrence road-show. Why is our prime minister being diverted by this nonsense when there are matters of far greater importance to be dealt with?

    • uanime5
      Posted April 22, 2013 at 5:29 pm | Permalink

      You forgot that scientists have shown that global warming is real and that the deniers lack any evidence to back up their claims.

      • Edward2
        Posted April 23, 2013 at 8:10 am | Permalink

        Yet again Uni, you trot out the totally meaningless statement “global warming is real” just as you sometimes say “climate change is real”
        Yes we all know that in the 20th century temperatures on this planet rose by a little under 1 degree on average and that since the beginning of time the climate has changed.
        Who is denying this?

        • uanime5
          Posted April 23, 2013 at 2:08 pm | Permalink

          Most people on this blog seem to be denying either that global warming is real or it’s occurring because of the CO2 produced by people. You’ve also ignored that the level of CO2 in the atmosphere is the highest that it’s been for 200 million years.

          • Edward2
            Posted April 23, 2013 at 5:40 pm | Permalink

            You are now changing your tune Uni.
            Up to now its been “climate change is real” and “global warming is real” which is a stupid placard statement.
            Now you say its all caused only by mans CO2 output which is much less certain.
            Who was measuring CO2 200 million years ago??
            Why is the predicted expoential rise in temperatures from 2000 not happening despite CO2 rising?
            Why are the islands in Al Gore’s film still not under water?

      • Richard1
        Posted April 23, 2013 at 8:56 am | Permalink

        In increasing numbers scientists are recognising that the warming effect of man-made CO2 and the forecast catestophic events have been exaggerated in the original models (upon which all climate change legislation is based). The evidence which has prompted these conclusions is the fact that there has been no statistically significant warming for 16 years, contrary to the forecasts made in 1988 by Hansen et al, the IPCC in 1990 etc. The deniers in this debate are those such as you who do not acknowledge this.

        • uanime5
          Posted April 23, 2013 at 2:11 pm | Permalink

          Care to provide any evidence by scientists to back up your claims. Make sure you include you include scientific papers to back up the claims of these scientists, rather than quotes from the Daily Mail.

          Also NASA has shown that every decade has been warmer than the previous decade so your “no global warming for 16 years” claim is clearly wrong.

          • Richard1
            Posted April 23, 2013 at 6:36 pm | Permalink

            There are numerous publications on the sceptical side. Email prof R Lindzen at MIT I’m sure he’ll point you in the right direction. The issue is not whether CO2 is a warming gas, the issue is how much warming it causes.

            It is amazing that alarmists quote the rise in decadal average temperatures as evidence in contradiction to the fact that there has been no warming for 16 years. Elementary mathematics show the 2 facts are not contradictory.

      • Mark
        Posted April 23, 2013 at 9:20 am | Permalink

        The denials come these days from those who forecast sharply rising temperatures on the back of discredited climate models. They seem unable to accept that their models are wrong.

        • Dan H.
          Posted April 23, 2013 at 1:00 pm | Permalink

          The climate change advocates also conspicuously forget that if the worst does happen, and a rapid rise in global temperature does occur, it is not at all beyond the wit of mankind to reverse this change. A large number of orbital reflectors over the equator ought to do the trick, as would injecting large amounts of aerosols into the upper atmosphere.

        • uanime5
          Posted April 23, 2013 at 2:13 pm | Permalink

          The denials are coming from non-scientists who haven’t done any research. That’s why they’re never able to provide any evidence to back up their claims.

          • Edward2
            Posted April 23, 2013 at 5:34 pm | Permalink

            There is plenty of scientists out there Uni you just refuse to open your eyes and do some looking

          • Richard1
            Posted April 23, 2013 at 6:41 pm | Permalink

            This is nonsense, there are numerous sceptical scientists, as frequently pointed out in answer to your posts. By contrast, many of the most hysterical climate alarmism does come from non scientists such as Lord Stern.

          • Mark
            Posted April 23, 2013 at 8:41 pm | Permalink

            You mean people like you, who haven’t done any research, are denying that climate change models are wrong.

            Quite.

      • Leslie Singleton
        Posted April 23, 2013 at 10:15 am | Permalink

        unanime–But I thought we had agreed that it was “climate change” not global or any other “warming” now, what with temperatures not actually going up – as “predicted” – and all?? And in any event who cares if there were a smidgeon of warming for it is the cold that kills people and warmth that grows crops.

        • uanime5
          Posted April 23, 2013 at 2:14 pm | Permalink

          Global warming is causing the climate to change. Do try to keep up.

          You’ve also ignored the number of people who die of heatstroke every year. Warmer does not mean safer.

          • Edward2
            Posted April 23, 2013 at 5:35 pm | Permalink

            So Uni are you now saying global warming can now make the climate get colder?
            How very Orwellian you are becoming

          • Leslie Singleton
            Posted April 23, 2013 at 6:12 pm | Permalink

            unanime–Baloney, simply because there is no warming. And your comment on heatstroke is well down to standard. You should try living in Detroit (by no means particularly cold in relation to higher latitudes) where regularly people die in big numbers by reason of the cold. A door slams behind you and you are dead in minutes and if your car breaks down you better pray somebody will stop for you except that trying to attract help requires you to get out of your car which again kills you. You need to understand an advanced concept called the net effect.

  20. Mike Wilson
    Posted April 22, 2013 at 11:38 am | Permalink

    I think Mr. Redwood is labouring under an illusion. In many parts of the private sector economy, wages for unskilled and semi-skilled jobs have been stagnant for, in some cases, getting on for 20 years.

    How much do lorry drivers and bus drivers earn? How much do basic office/admin jobs pa?. I look in the windows of the recruitment consultancies in Wokingham and see lots of office/admin jobs on offer at 14k to 18k a year. They have been paying that level of salary for years. 10 years at least, maybe even 20 years.

    Wages in IT (where I work) have been static for years as outsourcing has undermined demand.

    The only place wages go up regularly is in the public sector. In the private sector, courtesy of the pressures of globalisation, many jobs have had stagnant pay for a long, long time.

    The government cannot control global commodity prices … but it can control the amount of nonsensical charges we are paying to combat alleged global warming.

    I, for one, am becoming increasingly depressed by government of all hues. I will be voting UKIP in future in the hope that they might actually put the interests of the people over the bankers and the global corporations. It would make a refreshing change.

    Reply: I understand that some wages have been stagnant for longer, but average real pay has only been falling since 2007.

    • Mike Wilson
      Posted April 22, 2013 at 2:42 pm | Permalink

      Reply to reply. I think you are wrong. Wage stagnation and, therefore, falls in real terms have been around for a long time. It has been masked, to some extent, by low interest rates and the fact that society has changed. Now we have many families where both parents work full time to make ends meet. The husband’s (for example) pay has, in real terms been eaten away over the last 20 years and, now, his wife works full time too. Now, even with low interest rates providing (relatively) low mortgage payments (for anyone in the market longer than 10 to 15 years) – both parents need to work because, as I say, wages have been declining in real terms for a long time.

      There is only one employer you need these days – and that is a public sector employer. At least you get some sort of rise each year. My rates are basically unchanged for 15 years now.

      • Wokingham Mum
        Posted April 23, 2013 at 8:04 am | Permalink

        Agreed.
        I work harder and longer, for less job security in the private sector and earn less than I could earn 10 years ago. Oh I’d love a job in the public sector.

    • A different Simon
      Posted April 22, 2013 at 4:45 pm | Permalink

      I work in I.T. myself and am making about 9% less than I was making in 2007 .

      After 24 years in software development I make less self employed than a Met Police Sergeant when pension is taken into account and that is before any overtime they might get remunerated for .

      Wage increases are no good for me because my customer is based in a country where wages are about two thirds what they are in the UK so if I was to put my rates up I’d lose the business .

      What I need is for :-
      – the cost of living in the UK to come down
      – cost of wages elsewhere to go up
      – companies in the UK to buy my services …. but there are less and less all the time

      How about insisting India and China show social responsibility towards their citizens ?

      John , why does your party think house price inflation and rent inflation are good ?

    • Edward2
      Posted April 22, 2013 at 10:21 pm | Permalink

      Mike
      I worked for many years in engineering/manufacturing and I agree with what you have said about wages at all levels over the last 20 years, which reflect your experiences in IT and the effects of glogal competition.
      During the same period the public sector have zoomed ahead with good final salary pensions and salaries (over 8000 now earning above £100,000 in the NHS) and the quangocrats and charitycrats earning similar levels, all paid for by the taxes they take from us.
      My local Council “CEO” is on nearly half a million. When I was young this person would have been called “The Town Clerk”, someone proud to serve the local people in return for a secure job, a pension and perhaps an honour on retirement to go with a with a quite modest salary.

      • A different Simon
        Posted April 23, 2013 at 11:29 am | Permalink

        Edward2 ,

        Do you really mean 8,000 over £100,000 or 8,000 over £100,000 basic plus a further £30,000 -£50,000 pensions benefits ?

        If they told us that 60,000 NHS workers earned more than £100,000 total package it might create ripples but that might be an underestimate .

        It’s important to pay the rates of pay needed to attract and retain the best medics and have the next generation taught by the best people to teach and even provide grants for their tuition fees .

        Both education and health should be seen as investments rather than expenses imho .

        As someone who has not had access to a vocational pension I just wish those who do would be a bit more sensitive and quote their total package when discussing pay .

    • stred
      Posted April 23, 2013 at 1:36 pm | Permalink

      We just had to pay our boiler man £800 for one and a half days work, labour only. And he pinched our pump and copper pipe for scrap! The total cost £2100. Our old friend had a large company ‘take care of her world’ to do the same job but with a less expensive boiler and they charged over £4000.

      Labour and parts inflation for regulated industries is soaring.

  21. adams
    Posted April 22, 2013 at 11:44 am | Permalink

    No mention of an increase in interest rates John ? The old fashioned way to reward savers and stop inflation . Why so silent on this point ?

    • Mike Wilson
      Posted April 22, 2013 at 2:38 pm | Permalink

      Because raising interest rates to try to stop inflation caused by rising global commodity prices would be utterly pointless. You raise interest rates to control demand led inflation.

  22. Denis Cooper
    Posted April 22, 2013 at 12:13 pm | Permalink

    If you read the letters exchanged by Darling and King in 2009, then the picture being presented to the world was of a Governor worried about the prospect of a deflationary spiral, and a Chancellor agreeing to the Bank’s unconventional proposals designed to make sure that it could meet the +2% pa CPI target set by the Chancellor.

    The Bank’s new Asset Purchase Facility or APF started out as a scheme for the Treasury to lend the Bank existing money to fund the purchase of selected private sector assets to improve market liquidity, morphed into a scheme for the Bank to create new money to buy a mixture of private sector assets and gilts, and ended up as a scheme for the Bank to create new money and spend virtually all of it buying up gilts previously issued by the Treasury while the Treasury continued to sell new gilts at much the same rate – that is, in reality, a scheme for the Bank to create vast sums of new money and get it passed to the Treasury through the gilts market.

    Now, with £375 billion of new money having been created by the Bank, and virtually all of it passed to the Treasury through the gilts market, with minor transmission losses, and then spent by the Treasury paying the government’s bills, there are some who think it would be OK to compound this by allowing the Treasury to default on its debts to the Bank’s APF by cancelling its entire £375 billion stock of gilts:

    http://www.bankofengland.co.uk/markets/Pages/apf/results.aspx

    and withdrawing the Treasury indemnity given by Darling in his first letter of January 29th 2009:

    “The Government will indemnify the Bank and the fund specially created by the Bank of England to implement the facility from any losses arising out of or in connection with the facility.”

    so the Bank itself would then be bust …

    Back in early 2009 there was a kernel of truth in King’s expressed concerns about the possibility of deflation, because if he had refused to co-operate with the scheme for the Bank to create vast sums of new money and indirectly lend it to the Treasury then the Treasury would have been left relying on increasingly reluctant private gilts investors to lend it existing money to cover the government’s massive budget deficit, and the Labour government would have been forced into making rapid and drastic cuts in its public spending, and that would have had a strong deflationary effect as unemployment rose and demand fell.

    Reply There is no-one suggesting that the Treasury guarantee be removed or that the Bank be bankrupted. As the gilts fall to be repaid the fund can simply use the repayment money to square its book.

    • Mark
      Posted April 22, 2013 at 3:31 pm | Permalink

      The BoE used the proceeds of the redemption on March 7th, together with some £0.5bn of the accumulated coupon income from the redeemed gilt to purchase a further £6.6bn of gilts for the QE fund. The example calculations of repayments they provided in their recent BEQB article could hardly be described as anything other than highly stylised, and certainly not realistic.

      http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130103.pdf

      They seem determined to avoid the precedent of any plan to reduce the fund.

      • Denis Cooper
        Posted April 23, 2013 at 12:05 pm | Permalink

        By writing his letter to the Governor dated November 9th 2012:

        http://www.hm-treasury.gov.uk/d/chx_letter_091112.pdf

        saying in effect:

        “I might as well have some of the accumulated interest the Treasury has paid on the gilts held by the APF back now rather than later, but whenever any of those gilts mature you can reinvest the principle sum in other gilts”

        Osborne was putting off the day when he might have to write another letter like that of July 5th 2012:

        http://www.hm-treasury.gov.uk/d/chx_letter_050712.pdf

        saying:

        “I authorise you to create more new money and use it to buy more gilts”.

        Because while Mervyn King and some other members of the MPC keep voting to have another £25 billion of QE, Osborne must know that for good or bad reasons public opinion has become increasingly hostile to the policy of printing money.

        Of course he is also putting off the day when the Bank of England can announce that the APF no longer holds any gilts and is being wound up, and making it less likely that the final squaring of the APF books does not involve the Treasury making a large payment to cover its losses so that it can repay all of its loan from the Bank.

        My own feeling is that by the time that the APF is finally wound up, if ever, hardly anyone outside the Treasury and the Bank and sections of academia will even remember what the APF is and why it was set up, let alone discuss whether it was a good or a bad idea, or try to work out whether overall it was a gain or a cost for the population.

    • waramess
      Posted April 23, 2013 at 2:28 pm | Permalink

      The Government under the guise of the Central Bank purchase its own debt, fail to cancel the debt which is then held to maturity and the Government then repays itself.

      Rising above the niceties of the origination of this nonsense, I wonder if it might be a sketch from either Monty Python or Black Adder?

      Frankly I think the Emperor has no clothes

    • Lindsay McDougall
      Posted April 25, 2013 at 2:02 am | Permalink

      I thought it was high time that I read up how QE actually works. bbc/news/business expresses it succinctly:

      “Under QE a central bank purchases government bonds from private sector companies or institutions, typically insurance companies, pension funds and High Street banks. ……………… This means that the companies who sold the bonds may use the proceeds to invest in other companies or lend to individuals.”

      However, it only works if the sellers of the bonds don’t have financial problems. Imagine yourself as CEO of RBS for example. You haven’t made a profit for 5 years, your balance sheet has shrunk, you might not have fully disclosed the extent of your ‘toxic assets’, the EU wants you to retain a higher capital ratio, and you have to set aside an unknown amount for being sued in American courts for fiddling the LIBOR rate. Would you not be tempted just to sit on the cash?

      I would quite like to know from which companies and institutions the BoE ‘bought’ £375 billion of government bonds.

      It seems to me that either QE doesn’t work or it leads to inflation.

  23. forthurst
    Posted April 22, 2013 at 12:16 pm | Permalink

    The private sector is being squeezed and the public sector believes it is because it is repeatedly told so by the BBC. The way to unsqueeze the private sector is to reduce taxes and reduce government originated costs as well as to disconglomerate the taxpayer owned banks. The public sector should be reshaped to accommodate a reinvigourated private sector and to continue to bear down on the deficit otherwise, with continuing negligible interest rates, the BoE is deprived of both its accelerator and its brake to control inflationary pressures and savers and pensioners are being squeezed with no respite in sight. It’s time to stop pretending that the current size of the public sector is either necessary or tolerable.

    • uanime5
      Posted April 22, 2013 at 5:38 pm | Permalink

      So how do you want the public sector to be reshaped to accommodate a reinvigourated private sector? Closing down all the state schools and NHS hospitals so that everyone has to buy services from the private sector?

      • waramess
        Posted April 23, 2013 at 2:31 pm | Permalink

        You forget to mention the massive tax reductions that might be expected to follow

  24. behindthefrogs
    Posted April 22, 2013 at 12:36 pm | Permalink

    The best way to increase real wages is to take less of them in tax. The sooner we reduced National Insurance contributions both employer and employee, the sooner the economy will start to improve.

    We don’t need price control, we need control of the government so that they spend less and let people have higher take home pay. Just look at all the quangos that were removed a couple of years ago. Half of them have re-emerged in some other disguise.

    • Mike Wilson
      Posted April 22, 2013 at 2:45 pm | Permalink

      Which quangos were removed? I seem to remember a promise of a ‘bonfire of the quangos’. A year after the election they were nearly all untouched. As you say, new ones have emerged too.

      No government seems capable of balancing the books. They are either afraid of a fight with the public sector or they can’t stop handing out jobs to their friends.

    • uanime5
      Posted April 22, 2013 at 5:37 pm | Permalink

      Your plan won’t benefit those who work part time or those in low paid jobs as they already pay little or no tax.

      • Edward2
        Posted April 23, 2013 at 8:20 am | Permalink

        So pedantic Uni.
        Yes, actually we do realise people pay no tax or NI on low levels of income.
        But the vast majority do pay tax and NI, even at modest levels of income and would benefit greatly from a reduction in these taxes.

        • uanime5
          Posted April 23, 2013 at 2:46 pm | Permalink

          Edward2 your comments show just how ignorant you are of the mean earnings in the UK.

          According to the HMRC in 2010-11 2,892,000 people earned less that £10,000 per year. So 9.2% of the people who work will get no benefit from income tax cuts.

          According to the HMRC in 2010-11 2,810,000 people earned £10,000-11,999 per year. So 8.5% of the people who work earn the equivalent of minimum wage or less. So these people will get little to no benefit from income tax cuts.

          So 17.7% of the people who work will get little to no benefit from income tax cuts.

          Given that you have to earn over £30,000 before you have to pay the 40% tax rate this means at least 18,022,000 people (57.6% of those who work) who earn less than £30,000 won’t get any benefit from cutting this tax rate.

          http://www.hmrc.gov.uk/statistics/personal-incomes/tables3-1_3-10.pdf

          The same report also showed that 12.7% of the population earned over £30,000 per year and only 8.3% earned over £50,000. So the vast majority of the people in the UK are unlikely to greatly benefit from income tax cuts.

          • Edward2
            Posted April 23, 2013 at 5:32 pm | Permalink

            As usual you twist statistics by using means instead of averages.
            The majority of working people in this country pay some tax and NI and would benefit from a reduction
            Im amazed you are not in favour of the less well off members of society having a tax cut instead of the rich you always complain about

      • Leslie Singleton
        Posted April 23, 2013 at 10:20 am | Permalink

        unanime–Best be quiet about that lest it be decided that taking more lower-paid out of tax is not in fact the Way To Go because such people will no longer vote for tax reduction

  25. `John
    Posted April 22, 2013 at 1:03 pm | Permalink

    When considering the price of electrical energy some consideration should be given to the price of water.
    Large conventional power stations use enormous quantities of water and endeavour to recover as much of it as possible with their giant cooling-towers. Nuclear stations use sea-water for their intercoolers and are located on the coasts.
    Some years ago it was the case that the electricity generating industry used about half the total available water from the water industry. I don’t know what the figure is today, but it is still considerable.

    There is at present a deliberate attempt to try to make water even more expensive on the grounds that it is a rare, precious substance that will become even more rare and precious due to global warming. This is EU policy that we in the UK are following.
    We are blessed here with very large quantities of available water and it is only necessary to harvest a minute fraction more to secure plentiful supplies, whatever the weather.

  26. Mactheknife
    Posted April 22, 2013 at 1:27 pm | Permalink

    “I have written recently to the Energy Minister, renewing my call for us to follow a lower price energy policy. The recent sharp falls in the oil price will provide some temporary respite, but we need to go much further, and we need to end the extra burden we are having to pay. That means ending the carbon tax, generating more electicity from lower cost options, and exploiting more of our natural resources.”

    That will fall on deaf ears from the watermelons in DECC. They are wedded to their green agenda and all the evidence in the world will not convince them that the case for AGW is weak at best and non-existant at worst.

    • uanime5
      Posted April 22, 2013 at 5:36 pm | Permalink

      Just because you don’t believe global warming is real won’t change the fact that all the scientific evidence shows it is real.

      • Edward2
        Posted April 23, 2013 at 8:21 am | Permalink

        See comments earlier above Uni,
        meaningless statement alert :- “global warming is real”

      • Mark
        Posted April 23, 2013 at 9:17 am | Permalink

        Just because you believe in global warming doesn’t change the fact that the scientific evidence is showing that the previously favoured climate models are wrong.

        • uanime5
          Posted April 23, 2013 at 2:47 pm | Permalink

          Just because you don’t like global warming doesn’t change the fact that all the scientific evidence shows that the average global temperature is rising and that this rise is man made.

          • Edward2
            Posted April 23, 2013 at 5:29 pm | Permalink

            No Uni wrongagain.

            Not “all the scientific evidence” just some.
            A cosy concensus of “pal reviewed” papers all based on the same flawed computer models which are now not coming true.
            What happened to the expoential increases of tempertaure from 2000 that were predicted by all your genius scientists?

          • Mark
            Posted April 23, 2013 at 8:27 pm | Permalink

            I quite like a little global warming actually (not too much though), but I value scientific truth rather more highly. IPCC are busy suppressing the truth about climate change, and are failing to admit that their models have been proved wrong by real scientific data. They would do well to go away and do some more science so that they understand the forces that change climate rather better.

      • Leslie Singleton
        Posted April 23, 2013 at 10:22 am | Permalink

        unanime–It doesn’t become real just because you say so–your “all scientific evidence” is risible

        • uanime5
          Posted April 23, 2013 at 2:48 pm | Permalink

          Unless you have any evidence to back up your claims they’re clearly fallacious.

          • Leslie Singleton
            Posted April 24, 2013 at 10:31 am | Permalink

            unanime–So I need evidence to prove that (at the very least) your use of “all” as regards scientists is wrong do I? Given that of course just one scientist to the contrary would rebut that, I think I am on strong ground especially as there is a whole cohort of them. The Daily Mail did not make up the simple fact that temperatures have not risen in 16 years. Even if the 16 years statement is wrong (I do not believe it is) any rise is on any basis tiny (what would be surprising is for temperatures to stay constant–they go up and down, don’t you know) and the reaction to it, that is even if it existed at all, disproportionately indeed insanely large. Think of all that additional Welfare you could provide with the money that is being wasted instead of stealing other people’s money.

  27. Lindsay McDougall
    Posted April 22, 2013 at 2:22 pm | Permalink

    Well said. This is music to my ears and it is good to have such an influential politician on my (and our) side. It is clear why Government is reluctant to cure inflation by raising the base rate. Were they to do so, the annual interest on the Government’s debt might rise substantially from its current £47 billion, making deficit reduction more difficult. As Japan has found, debt and deflation is a lethal combination, which is why Mr Abe has dramatically loosened policy.

    I suspect that if the Chancellor were determined to reduce the annual deficit by £20 billion every year no matter what, the economy would come right. However, he is in coalition and he has only 2 years to the next election.

  28. Mike Wilson
    Posted April 22, 2013 at 2:47 pm | Permalink

    From the article – the first two sentences.

    ‘The best way to get the UK economy moving again is to boost real wages. The best way to do that is to control price rises.’

    NO, the best way to ‘do that’ is to CUT TAXES.

  29. Leslie Singleton
    Posted April 22, 2013 at 3:25 pm | Permalink

    Didn’t read the whole paper but I note three references in today’s Torygraph to how useless GDP is as a measurement or even a definition. I have been banging on about this for yonks. As an aspiration maybe or perhaps something in a theoretical textbook it might mean something but the idea of changes in it of as low as 0.1% being used to base decisions on is bonkers.

  30. Martin
    Posted April 22, 2013 at 3:27 pm | Permalink

    You might wish to point out that energy prices are now so high that the market will happily curtail consumption and by implication emissions.

    The real problem with interest rates is the housing market. If interest rates go up then I suspect the housing market will go into a tailspin. Not clever for any party close to an election.

    Re wage rates in IT – who will stop these Commonwealth Work Visas?

    • Mark
      Posted April 23, 2013 at 9:14 am | Permalink

      I’m not sure how much influence house prices have on election results. Major won in 1992 despite sharply falling prices, but lost in 1997 despite rising ones. Brown had managed to get house prices rising again by the time of the 2010 election. Thatcher won in 1983 despite a period of stagnant prices – falling in real terms. Callaghan lost in 1979 despite near record levels of house price inflation. Heath lost in 1974 despite even higher house price inflation.

      If anything, it seems that the correlation is the other way around.

      http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

  31. uanime5
    Posted April 22, 2013 at 4:02 pm | Permalink

    Given that a committee of MPs has determined that fracking is unlikely to provide cheap energy it’s unlike that the UK’s energy prices will be reduced any time soon.

    http://www.independent.co.uk/news/business/news/fracking-unlikely-to-give-uk-cheap-gas-report-says-8582089.html

    Also Jeremy Hunt, the Health Secretary, has decided to address the failures at Mid Staffordshire by forcing anyone who wants to be a nurse to work as Healthcare Assistants for one year. Unsure how this is going to fix the problems caused by understaffing and the management sacrificing patient care to meet targets. I suspect that this change has been made because Healthcare Assistants need to be paid minimum wage (about £12,000 per year) while trainee nurses only get £6,000 per year. So expect at least 20,000 Healthcare Assistants to be fired and be replaced with cheaper Nurse Trainees.

    http://www.independent.co.uk/life-style/health-and-families/health-news/nursing-leaders-raise-major-concerns-over-staffing-levels-and-governments-plan-to-get-trainee-nurses-working-as-healthcare-assistants-8582081.html

    • Mark
      Posted April 23, 2013 at 8:43 am | Permalink

      I don’t think Charles Hendry and Baronness Worthington have the slightest clue about the possibilities of UK shale gas, let alone the global development implications. The DECC and the Parliamentary Committee are sitting on revised estimates of the extent of UK shale gas from the BGS, because they undermine the utterly stupid energy policy that these people are pursuing. One of the problems the the ECC Select Committee is that only one member has any real expertise – Peter Lilley.

      • Mark
        Posted April 23, 2013 at 1:54 pm | Permalink

        The link offers a big clue:

        http://www.forewind.co.uk/news/64/34/Charles-Hendry-appointed-as-chairman.html

        He is hardly likely to be supportive of a competitor to the business of which he is Chairman.

      • uanime5
        Posted April 23, 2013 at 2:52 pm | Permalink

        No even the companies that are going to extract shale gas are saying that it will reduce prices. Face it no one is claiming that shale gas will lower energy prices because all the evidence shows that it won’t.

        • Leslie Singleton
          Posted April 23, 2013 at 6:16 pm | Permalink

          unanime–You do say or at least imply some strange things–so the enormous gas price reduction in America is a figment of somebody’s imagination, is that it?

        • Mark
          Posted April 23, 2013 at 8:20 pm | Permalink

          The only evidence we have is that in the US, shale gas has resulted in much lower rices. Face it.

    • Edward2
      Posted April 23, 2013 at 12:10 pm | Permalink

      On the second point you make Uni, you are wrong again.
      You are trying to link two seperate things
      The training of nurses is being altered. Some will need degrees to qualify for the more highly technical areas of nursing and nurses training experience will in future include greater time working in hospitals to gain an experience of patient care.
      This change isn’t due to the failures in Stafford Hospital

  32. Chris S
    Posted April 22, 2013 at 5:07 pm | Permalink

    Lots of talk here and a real consensus on the need to really reduce public spending rather than just pretend that this is what is being done.

    Perhaps it’s about time the ring fencing of the NHS was removed, judging by the recruitment advert I’ve just seen on the Telegraph website today :

    £130,000 a year (no doubt plus the obvious perks and pension) for an NHS property manager to “Shape the success of a brand new national organisation”

    With responsibilities devolved to NHS Trusts, why do we need “a brand new national organisation” to run NHS Properties said to be worth £4bn ?

    Words fail me.

    Sounds like another letter needs to be written, John……….

  33. Rods
    Posted April 22, 2013 at 5:29 pm | Permalink

    Excellent blog, hitting the nail on the head! Unfortunately, there are still people in the BOE that want more QE. I’ve never been convinced on the merits of QE or seen any tangible result here in the UK or elsewhere, particularly Japan who have been trying this approach, unsuccessfully, for the last 20 years. The BOE when asked if it has been successful can only state that things would have been much worse without it, but haven’t stated why. This is hardly a convincing argument.

    Where we have above target inflation in such a long recession / depression, what will happen with lots of excess liquidity in the economy, once growth does pick up? I suspect that this will fuel inflation staying above target for some considerable time yet. Will the BOE call this next 5 year high inflation period ‘as temporarily above target ‘ like they have the last 5 years?

    In a blog last week you stated that private sector wage rises over the last 12 months were 0.5% and public sector 1.7%. Where public sector pay is currently typically 10 to 20% above the private sector for the same level of skill and responsibilities it looks like this gap is still growing. Where the Government has limited public sector wages increases to a 1%. I can only assume that the 0.7% is due to grade wage scales that increase annually. Is it time that these annual automatic wage scale increases were reviewed to more effectively reflect the realities in the private sector? Maybe they should discretionary and only apply if the department makes cost savings through productivity increases, so they are cost neutral or even better produce cost savings?

    Unfortunately, with the current near zero economic growth, I fear that all we have to look forward to for some considerable time yet is stagflation, stagflation and stagflation!

    Personally, I think the country is in the unfortunate position of the public sector consuming far too much of the countries resources, green and EU policies adding far too many costs to industry and taxes being far too high. The economy is hit with declining North Sea oil and gas revenues, a squeezed Eurozone with most of the country’s in a recession / depression or with slowing growth and deteriorating economic conditions, which reduces export opportunities and suicidal EU ‘plant food’ centric energy policies.

    Any gains that are made by growing sectors of the economy are being wiped out by the declining areas. As well as setting policies to boost the growing sectors, it is also important that you do more to slow down or stop the decline of those that are in this position. I do acknowledge that you have sensibly done this with the tax policies for North Sea oil and gas exploration and production and the development of fracking and that you are personally attackling the energy cost issue.

    What should the Government be doing but they are not:

    1. Rebalancing the economy by ruthlessly cutting public sector costs and using the savings to cut taxes. At the moment discretionary spending including Overseas Aid is still growing and many of the cuts have been to cover our ever increasing interest costs from the deficit and rising debt burden. I do support the Government’s approach to 1% austerity and that higher rates to reduce the deficit faster would be counterproductive, as the Eurozone is constantly proving! However, this does not prevent greater greater public sector cuts with the money being returned to the economy in the form of tax cuts. I’m convinced that this will boost growth and automatically as a result cut our debt to GDP ratio and deficit. The only risk is that the tax cuts are used to pay down private debt rather than used to boost spending, but with the squeeze on real wages over the last 5 years, I think this is unlikely.

    2. Boosting cost effective infrastructure projects and do note that you are keen for more private participation here. A major boost to the economy and a large private sector project would be sorting out London airport capacity especially at Heathrow and Gatwick where flights are daily subject to unacceptable delays due to the near 100% runway use, as there is no spare capacity. This will boost trade, where there are more direct flights to BRIC and other high growth developing countries and also provide a tourism boost. Unfortunately, the Government have backed themselves into a corner on this one through bad politics.

    3. Scrapping our carbon emissions tax and formulating a low cost energy policy so we don’t continue to lose high energy industries.

    4. Continue to reduce the highest levels of taxation, particularly targeting the 45% rate and reducing it to 40% and the 50% anomaly above £100k from the withdrawal of the personal allowance. No it doesn’t affect me, but I recognise the importance in keeping and gaining from around the world, high net worth individuals so their skills and investment boosts growth.

    Personally, I look at the current Government’s approach to our economy as being much better than the disastrous Labour years, but not enough to stop a real economic hard landing and Sterling crisis, which may happen before 2015, but is more likely in the next Parliament.

  34. Jon
    Posted April 22, 2013 at 5:35 pm | Permalink

    I hear we are about to kill off the Mr Wippy vans. Even though there are only a few of them and they do a low mileage apparently there will be armageddon and the world will end unless they are taken off the roads.

    Not the best thing that should be happening in these economic times.

    • Chris S
      Posted April 23, 2013 at 7:51 am | Permalink

      A fiendish plot left wing plot, obviously.

      Remember a famous, sadly deceased Chemist was on the team that developed Mr Whippy

  35. Acorn
    Posted April 22, 2013 at 5:50 pm | Permalink

    JR, you need to do the equivalent of your economic policy review; this time on UK inflation. There is something weird about inflation in the UK. With the current state of the econometrics, inflation should not be circa 2.8%.

    You might say that the UK is in a stagflation condition with flat GDP growth. High street corporates are discounting left right and centre. Yet inflation is still high, it does not make sense. We should look more like Japan.

    Back in 2010, MPC member Paul Fisher, wrote this, (BIS Review 91/2010).
    “And we have to monitor inflation expectations to check that they are not adversely affected by a succession of temporary shocks to the price level. If people came to believe that inflation was not going to be brought back to the 2% target, then Bank Rate would have to change by a potentially much larger amount in order to ensure that inflation is, in fact, returned to target. The recent high rate of CPI inflation can be largely attributed to a number of temporary factors, combined with weak downwards pressure on inflation from the subdued level of demand. Nevertheless, given the expected degree of spare capacity in the economy over the next few years, and that the temporary factors should wear off, the most likely outcome is that inflation falls back to below target over the next couple of years as shown in the May Inflation Report (Chart 12). On that basis it was sensible not to try and offset the recent rise in inflation by tightening policy.”

    Fisher wrote that in JUNE 2010. According to him, we should be at or under the BoE 2% inflation target by now. So the bottom line is, the MPC hasn’t got a clue either.
    http://www.bis.org/review/r100705f.pdf?frames=0 .

    • Acorn
      Posted April 22, 2013 at 6:48 pm | Permalink

      I may be suffering from some unknown affliction but please forgive me when I say that I am warming to Margaret Hodge MBE MP (née Oppenheimer; born 8 September 1944), formally styled The Rt Hon Lady Hodge MBE MP.

      Yes, she does play it to the gallery as chair of the Public Accounts Committee, (words left out ed); but, she does appear to have the balls for the ultimate elected office.

      I can’t believe I just wrote that.

    • Denis Cooper
      Posted April 23, 2013 at 12:50 pm | Permalink

      His May 2010 Chart 12 projecting CPI is based on only £200 billion of QE.

      If it had been known then that Osborne would later authorise an additional £175 billion of QE then presumably that would have pushed up the projections of CPI, maybe by about 1%?

      I notice a nice Chart 11 with the sterling trade weighted index bumping down a steep cliff during 2007 and 2008; that graph could now be extended horizontally at around the 80’sh level for another three years to the present day.

      About that 25% depreciation of sterling during 2007 and 2008, he wrote:

      “Estimates are uncertain but my best guess is that it is probably adding between 1 and 2 ½ percentage points to the current inflation rate.”

      Three years later from when he was writing, and the effects of that steep fall in sterling on the annual CPI changes will have long ago worked their way through, and there has been no comparable fall in sterling since then despite the extra £175 billion of QE.

  36. con
    Posted April 22, 2013 at 5:51 pm | Permalink

    UK energy policy is a disgrace.

    I do not accept there is nothing the government can do about it ‘because of the coalition’, or because of our masochistic ‘climate change bill’ – second only in stupidity to the King Canute wave change bill.

    I despair that we would do this to ourselves for no good reason. Even if the climate change brigade is right, the UK has no need to take the lead.

    On this subject we should be a follower – far behind the idiots in the rest of the eu.

    And if Cameron couldn’t get coalition support? Take it to Parliament anyway and let the voters see just who is trying their hardest to destroy our competitiveness and push up inflation.

  37. The Voice of Reason
    Posted April 22, 2013 at 8:25 pm | Permalink

    Why doesn’t the UK just default on its debts and start again ?
    Why prolong the inevitable ?

  38. David Langley
    Posted April 23, 2013 at 8:07 am | Permalink

    I gather ministers will be presenting their budget requirements soon to the PM. I wonder if any of them will remark on the £500 millions fraud perpetrated on us by the EU, (and thats a minimum figure) recently announced and condemned by a parliamentary committee. I wonder if any will remark on the total EU spend we make each year. Perhaps they will comment on the cost of the gold plated EU regulations stifling our return to economic growth.
    Some might wonder why we have not sorted out the banks yet and returned to sensible loan structures like rebuilding building societies on proper footings. If your plans for the economy make sense John why is it the PM follows paths leading nowhere? It surely would make sense to him as it does to most of us. Get rid of Cameron and his useless and weak cabinet, we need a wartime cabinet, I would give a few of them a stay of execution but not many..

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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