johnredwood – Page 105 – John Redwood's Diary

The Bank gets it wrong again

March 22, 2024 138 Comments

The Bank of England forecast inflation at 2% when it was going on to hit 11%. So clearly it does not understand inflation and has little ability to forecast it accurately as it is required to do. It tells us the inflation was caused by the Ukraine war and energy prices which it could not predict. So how come inflation was already 3 times target before the invasion? That main part of the inflation was not caused by the war. How come Japan and China kept inflation down to around 2% despite having to import much dearer energy as a result of the war?

N ow we are told they cannot risk lower rates because there could be more trouble in the Red Sea. Freight rates and insurance rates are already well up and much shipping has been diverted to the long route, so markets know all about that pressure on prices. Meanwhile the money supply has been squeezed, credit is dear and scarcer, mortgage demand has fallen and the Bank ignores all these obvious signs that inflation will come down.

Worst of all is the gross distortion of its balance sheet. They bought far too many bonds at crazy prices in 2021 only now to want to sell them at huge losses and send the taxpayer the bill. Why? The ECB that made the same inflationary mistake is not doubling the error by selling bonds in the market. The Fed is not getting reimbursement from its Treasury. Only the Bank insists on double austerity with squeezed money and less public spending or tax cuts as the taxpayer picks up the bill of the UK’s uniquely bad bond investor, the Bank of England. Never has the Bank lost so much money so quickly for no good purpose.

We need an urgent change of Bank policy, Stop selling the bonds. Cut the base rate by 25 bp. Switzerland, Poland, Hungary, Brazil, China have started cutting their rates.

Wokingham Borough digs a bigger hole over California Crossroads

March 21, 2024 7 Comments

The Lib Dem Councillors got the Borough to send out a “News release” to tell us what we already know, that the Crossroads are badly disrupted by roadworks they have imposed. The “news” they say is that the work is “on track”. Does that mean it will finish on time? What is the promised date to get the roads back? When will the nearby estates be spared the rat runs through to avoid the junction? How much are they spending on all the signs, traffic cones and temporary traffic lights that have sprung up? Is it on budget, large though that is, or will it overrun? This is a junction to the south of my current constituency used by my constituents that comes into the new constituency of Wokingham at the next election.

We are told these improvements come “at no cost to local taxpayers”. Is the Council unaware that Borough taxpayers pay a lot of Income Tax and VAT and this money is being used to pay for these works? The Council designed and approved the scheme despite local oppositi0n. The government provides grant from taxation for schemes Councils choose and undertake and does not seek to impose its own alternative view of what is wanted. This is part of the local road network, not part of national highways run by the government. They reveal a wanton approach to tax revenues in this throw away line.

It says the work will create “an appealing and safe centre “. We already had an appealing and safe centre before they dug it all up. The long works are doing grave damage to local businesses which many people have used in the past but now cannot get to owing to closed roads. The Council has failed to help or reimburse these important local businesses. Locals want to keep them and many need cars to get to them.

If instead of ignoring the consultation replies against the scheme the Council had been interested in how existing users would like improvements the number one ask would probably have been a larger car park. The present car park before road closures could just about handle the shops traffic, but could not handle all the cars needing access to the school at drop off or pick up times of day as well. The Council clearly ignores the needs of parents or believes they should all walk with their children whatever the weather and the distance.

I have often used these shops and garage as a driver and as a pedestrian after parking. Cars went through the old junction at a slow speed so if anyone stepped onto the road to cross the car would stop. The junction allowed the flow of a large number of vehicles safely and successfully. The Councillor says this was “an unloved road junction, which has been dominated by traffic”. It was far from being unloved as the high volumes of car and pedestrian use and use of the shops and school showed. The Councillor implies that the new junction will take less traffic. If so it will make the local facilities less loved with fewer visitors and mean fewer people to keep them going.

We need a new way of forming budgets Conservative Home article

March 21, 2024 97 Comments

The two main parties are locked in a budget battle.They are dug into OBR provided trenches and fighting over the odd couple of billion here or there for a Non Dom tax and a Vat on private school fees tax.

£2 bn is under 0.1% of our economy and around 0.2% of revenues. Even when they get so far as to argue about a £10 bn tax cut or spending increase they are still only talking about a sum under 0.5% of GDP. More to the point they are arguing over small rounding errors in the error strewn OBR forecasts of the deficit. The OBR regularly has to revise its deficit forecasts down by several tens of billions.

I understand the need for parties to behave in a fiscally responsible way. They have to live down the huge spending rises necessitated by excessive lock downs as the preferred way of tackling covid. Labour was the bigger offender, always demanding the economy produced less and was subsidised more,always wanting longer and harder lockdown, encouraging huge bills taxpayers could not afford. I do not understand why people think following the OBR will give us fiscal prudence, as they cheered on the covid excesses and now favour an economic austerity that will stifle growth and so depress revenues.

However, in resigned acceptance of the cross party and establishment’s wrong approach to necessary prudence I have set out before how there could be substantial cuts to public spending without damaging core services like the NHS and education. Within misleading OBR rules government could find plenty of headroom to boost growth with tax cuts and or cash for investment for those who prefer that public sector led route.

We start with my old friend the heavily loss making Bank of England. They have lurched from creating inflation by printing too much money and keeping rates too low, to causing a shallow recession by destroying too much money and by driving bond interest rates too high. They have lost us £50 bn since 2022, all reimbursed by taxpayers. Stop the bond sales and follow ECB policy over bank reserves to make a big reduction in the losses and taxpayer subsidies.

Abolish the expensive and useless UK Government Investments . Get Ministers to supervise their departmental monitoring of the nationalised industries and state owned shareholdings that report to them. They already duplicate the UK Government Investments work. Put in management that can stop the huge losses at the Post Office and Network Rail. Dispose of holdings as with Nat West to bring in cash and cut risks. Sell other assets. Mutualise the Post Office. Achieve a substantial reduction in the £33 bn cash injection this year into a heavily loss making railway.

Get an accurate figure out of the Treasury/ OBR on early year capital costs of providing a low wage migrant with a new social home, NHS capacity, school places for children and the rest. Identify the top up benefits , tax credits and public service running costs to support a low paid new arrival. .Increase current targets to cut legal migration by 300,000 and reduce future spending accordingly.

Remove the £20 bn carbon capture spend from future budgets. There is no need for this transitional spend which just makes existing electricity dearer. Press on with cheaper functioning low carbon alternatives. The UK may have good carbon storage facilities so make these available for neighbouring countries producing too much CO 2 financed as a future profit making private sector opportunity.

Speed up policies to get more of the millions of working age not in work back into the workforce. The DWS has some good ideas to reduce the numbers of working age people not in jobs by suitable support, more home working and realistic pay.

Build on the announcement in the budget of a major public sector productivity drive. The 6% collapse in public service productivity since covid can be recaptured before embarking on an ambitious spend to save AI led programme of work. The immediate task should be to impose a recruitment ban on civil service and public sector admin posts to recover 2019 numbers and levels of productivity.These measures offer scope for up to £100 bn of savings through recaptured productivity, lower losses by state concerns, more private green investment and fewer low wage migrants. These things warrant more debate. The odd £2 bn is an OBR fiction that will be washed away in their forecasting errors.

Expanding the grid

March 20, 2024 181 Comments

National Grid recognises that it needs a major expansion of grid capacity to carry all the extra electrical power that will be needed as people switch heating and transport to electrical methods. They also see they need more capacity to handle more intermittent renewable power on the system, as they seek to make more connections available to the mushrooming solar and windfarms seeking access and long distance transport for the power they hope to generate.

National Grid is talking about an increase in electricity volume of 50% by 2035. This is well short of what would be needed for net zero. We will need increased power to handle a growing population, as well as increased power per head when people switch more of their activities to electrical means. They talk of an investment of a large £54 bn. which may well be an understatement. They need to put in subsea cables to offshore wind to get the power to land, and pylon mounted cables to route the renewable power long distances from generation to use. There will also need to be a complementary investment in local power cables street by street and house by house as more people want supplies beyond the capacity of their current installations.

This poses a number of planning and environmental issues. Many people object to pylons strutting across the valleys and landscapes of England, and few want to live under powerful electrical lines where they need to cross urban areas. There will be a lot of pressure to put more of this underground which greatly increases the costs. All this extra capital will need rewarding, so electricity prices will need to reflect the need for so much money to be committed to expanding the grid as well as all the extra cost of additional and different generating systems. More renewables also means more back up generation which is costly to provide, or means the construction of expensive large battery farms, pump storage systems or conversion into hydrogen and synthetic fuels using the renewable power.

Given planning delays and the long enquiries used by those against all this is going to take many years to accomplish. What are your thoughts on the feasibility and practicality of this approach?

Municipal roads are letting us down

March 19, 2024 134 Comments

I have watched with concern as Council highways departments have spent much money and time making our roads worse. Motorists and business drivers have to pay huge sums in taxation. There is the taxation on a new vehicle, road fund duty to take a vehicle on the roads, there is the 55% of the fuel price that goes in taxes to the state as fuel duty and VAT, and the taxes on insuring and maintaining the vehicle. The original idea that motoring taxes pay for the roads has long since been supplanted by spending much of the traveller and transporter taxes on anything but roads.

Local authorities do not seem to see the roads as a necessary service to taxpayers where they should constantly consider the ease of safe use of the highways by the taxpayers. Most people need to use roads for good purposes. Van drivers need to get to their next client. Delivery drivers need to get food to the shops and medicines to the surgeries and hospitals. Parents need to drive young children to school in safety. Emergency vehicles need to get to accidents and disasters. Many workers need a car or van to get to their place of employment because of their hours and or the location of their work and home. Few people live in walking distance of a station with an employer in walking range of another station down the line. Few people can do the weekly shop from a bicycle or bus. Buses and cycles too need roadspace.

Years ago when I was a member of a County Council I found then there was a wish to restrict use of the roads by some officers rather than a wish to provide additional capacity and safer freer flowing junctions. Traffic lights were often preferred to roundabouts. More recently Council after Council has set about narrowing roads, removing lanes, creating artificial barriers and bollards to restrict flow, cutting traffic light green phases on busy roads, changing kerbs and painted lines, creating more special zones. They often take out parking spaces and raise the charges, leading to more vehicles circulating looking in vain for a parking place. Many streetscapes now are a slalom course festooned with many menacing signs. Large sums are spent on aggressive kerbs,with b fancy blockwork for carriageways.

All this undermines business productivity, limiting the number of calls someone can fit in. It adds greatly to business costs and therefore to prices of services as the self employed and businesses need to recoup the increased cost of transport and parking. It adds to the stress on drivers and can make roads and junctions less safe, as with the country roads where now one way is occasionally blanked out by bollards forcing vehicles to use the wrong wide of the road to progress. It gives many Councils a bad name and leads the public to be more hostile to all the taxes they have to pay. A council only provides two services to every household, the roads and the refuse collection. If both are damaged and made worse people form a bad impression of the Council as a whole.

Today we see too many roads full of unrepaired potholes, and too many streets narrowed or under road works designed by the Council, against the driver. Too much money is spent on making roads less available and too little on better roads away from pedestrians and homes to allow people and businesses to get about in a sensible way. Coming into work yesterday my optimistic sat nav once again underestimated the time it would take by 17 minutes, not allowing for the all the delays created by Councils through roadworks that many of the public do not want performed.

Reading FC

March 18, 2024 5 Comments

I have been saddened to read of the financial difficulties of Reading FC and to see the understandable impatience of fans with the owner and management. I have not made any public statements as government has no powers to intervene in these matters and it would be wrong to suggest government can find a solution to the difficulties of paying the wages and tax bills and creating more harmony between owner and fans. Reading FC is regulated by the FA.

The Club owner needs to understand that the financial value of the club depends on a strong and loyal fan base willing to buy plenty of tickets for matches and club merchandise. A team is more likely to play well and boost fan numbers if there is no financial problem hanging over them. If an owner cannot get the fans on board and motivate players it is usually best for a new owner to take over. The goodwill and support of the fans is crucial.

A few have written to me hoping regulation could put things right. The government has consulted on introducing a new independent regulator with powers to intervene over issues like financing a club and its ownership. It has promised legislation in due course following more detailed discussions with clubs and the authorities. It will need to balance club independence allowing them to make often expensive decisions that offer the prospect of better results, with Regulator worries about overspending on players, management and facilities and over the stability of income. The legislation is not imminent and is unlikely to be retrospective, so it cannot deal with the urgent issues currently facing Reading FC.

The Bank of England deliberately hiked mortgage rates

March 18, 2024 156 Comments

On 21 st September 2022 on the eve of Kwarteng/Truss budget the Bank announced a 0.5% hike in bank rate. This was designed to push up interest rates. Just to make sure it would mean higher mortgage rates on the same day they announced they would over the ensuing year sell £80 billion of bonds at a loss which they had bought at very elevated prices in the previous year. Selling bonds pushes their price down which automatically pushes up interest rates.

The bond market fell in the days before the mini budget because US bonds were falling and interest rates rising , and then because the Bank so clearly signalled it wanted rates higher. This was a bad background for the Kwarteng announcements.

On the following Monday it became clear in the market that a number of pension funds had bought too many government bonds through levered funds. As bond prices fell they had to put up more money for bonds they owned but had not fully paid for. They did not have cash to pay for their losses so they had to sell bonds to raise money, on top of the planned massive sales by the Bank. No wonder the bond market tanked.

The Bank of England responsible for the overall solvency of the system at last realised their dreadful error of selling so many bonds when pension funds were so weak. They suspended the sales and agreed to buy some. The market surged upwards, Pension funds had space to reduce their heavily overcommitted positions and the crisis past.Between 28 September and 14 October the Bank bought £19.3 bn of bonds to correct its errors.

These were the special UK factors of autumn 2022 that temporarily increased volatility. The UK trend was the same as the US and EU. The higher mortgage rates that resulted were caused by Bank of England policy.Todays higher rates have nothing to do with the long cancelled Truss budget.

Mortgage rates

March 17, 2024 168 Comments

I write to counter the Labour lies that Liz Truss’s mini budget of September 2022 caused higher mortgage rates, owing to unfunded tax cuts.

I wish to make it clear Liz Truss did not take my advice on either the mini budget or the policy on the conduct of bond buying and selling. As set out on my website I recommended tax cuts matched by some spending reductions , with support for energy bills limited to lower income households, not for everyone. I strongly argued against starting a large programme of bond sales from the joint Treasury /Bank portfolio amassed under Quantitative easing.

So first the facts.

UK ten year bond yields rose to a peak of 4.4% on 9 th October 2022, more than two weeks after the budget. They fell back to 3.1% on 20 th November following temporary reversal of the Bank’s aggressive bond sale programme. They hit a new higher high on 13 th August 2023 at 4.67%. They are currently at 4.2%.

They largely mirrored US ( and EU) bond rate rises. The US ten year yield rose to 4.2% on 21 October 2022. The US bond rate rose to a higher high of 4.9% on 20 October 2023.

These changes were not reflected in Japan or China as their Central banks did not make the same errors as the Bank of England, Fed and ECB who needed to rein in excess money they had created by forcing up interest rates.

This pattern shows there was no big special effect from the Kwarteng budget. It also shows rates went higher a year after the Kwarteng budget had been reversed, as happened in similarly placed EU and US,

Tomorrow I will explain two special factors hitting the UK in the autumn of 2022 from Bank policy which did temporarily cause sell offs in the bond market.

Wokingham Borough Council wastes more money on worsening the refuse service

March 16, 2024 8 Comments

Householders have been sent a glossy leaflet telling us from this summer Wokingham Borough Council are going to cancel weekly household rubbish collections and go over to fortnightly.

They are scrapping the blue bags and spending money on black bins for everyone. Recycling from the green bags will also be downgraded from weekly to fortnightly. However, they still need to go to every house every week and offer a weekly collection of the food waste.

Why go to all this trouble and cost? It is unlikely there will be any savings as they still have to get round every house every week. It will be frustrating for householders to see the waste service arrive and leave but not be able to get either recycling or household waste removed that week. This looks like another case of paying them more for a worse service, something this Council specialises in. They should try listening to what residents want, and should drop unpopular ideas.

UK short of capacity

March 16, 2024 114 Comments

I was talking last evening to a US specialist in AI who had come to the UK. asking about what it would take for the UK to catch up with US AI and digital success she made two interesting responses. Lay on more electricity and water.

If the UK is serious about building on its relative success over the rest of Europe in now being the third tec hub a long way after the US and China tge UK needs to expand its web capacity. This needs large increases in electricity supply to power the Cloud servers and storage centres, and plenty oof water to cool. It is also going to take more broadband capacity.

I would add that it would help to take corporation tax down to 15%. The Republic of Ireland has proved this generates a lot more revenue than 25%. If the golden triangle of Cambridge, Oxford, London is to be the new hub it takes more homes, trains and road capacity too.

The UK is far behind the US in tec and so in GDP per head, growth and numbers of large companies. Much of the necessary extra capacity can be financed in the private sector, but it will take more energy by government to get it going.

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Author: johnredwood