Author: johnredwood

My Speech in the Treasury Estimates Motion

October 25, 2022 0 Comments

Rt Hon Sir John Redwood MP (Wokingham) (Con): I am glad the Minister agreed that the £60 billion for the energy scheme will of course adjust according to market prices, and let us hope that the current downward trend in some of the gas prices is continued. We need a mild winter and other bits of good fortune, otherwise we could be back facing even bigger bills. I am sure we are all appreciative of the fact that the new Chancellor wishes to review the scheme after March, because this is a very expensive scheme and there may be better ways of doing it to contain the expenditure.

I hope, for example, that consideration will be given, where price controls are still being offered to consumers, to limiting the amount of subsidised fuel any household can buy to a reasonable amount for a normal household, so that those who are in richer households and making much bigger demands on the fuel system would pay for the additional fuel they need—if they are lucky enough to have a heated swimming pool, or whatever it is—and would pay the full price on the extra fuel that such luxuries require. That is offered as a hopeful idea of how one can start to grapple with the very high costs of this scheme without in any way undermining the crucial guarantee to all those who are struggling with their bills already and want this kind of security.

I also have some concerns about the Bank of England estimate. It is quite true that, from Chancellor Darling onwards, quantitative easing decisions have always been jointly taken by Chancellors of the Exchequer and Governors of the Bank of England. One of the main reasons why they have always been joint decisions is that the Bank of England always understandably insisted on a complete capital guarantee against losses on the bonds, because it was envisaging buying so many bonds that they became very big for the Bank of England balance sheet, and it wanted to be reassured that the Treasury and taxpayers stood behind the system in case of losses.

To the extent that this supplementary estimate is to make good losses on bonds that the Bank of England is selling, I have these questions. First, why does the Bank of England think it must sell bonds at this juncture, when the United Kingdom bond market, the American bond market and lots of other bond markets around the world are particularly depressed by the need for a counter-inflation strategy based on high interest rates? We are crystalising a loss that, as I understand it, the Treasury then has to pay for, whereas if we have an unrealised loss, no payments are of course needed until eventual redemption, and very often the redemption value of the bond is considerably higher than today’s price in the market. I cannot quite understand why the Bank needs to sell these bonds now, and as this has always been a joint policy in which Chancellors have been very heavily involved and have heard Bank of England advice—Chancellors had to sign it off because the taxpayer is at risk, not the Bank of England itself—I hope this will be carefully re-examined.

To those who say that we do need to be selling bonds as well as putting up interest rates to curb inflation, I would say they should be careful not to overdo it. If the Bank really does feel it has to tighten even more, it can do so by a further rise in interest rates; it does not have to do so by selling bonds. Very directly, as we see tonight, the sale of these bonds can realise a loss and then can trigger a cash requirement on taxpayers and the Treasury at an extremely bad time for such a cash requirement. I think all of us have much better priorities than paying for bonds that are underwater, when we see the current state of the economy and the need to route more money to individuals and companies in the right ways, to see off a longer and deeper downturn and provide some balance in the public accounts. I ask the Minister and Chancellor to think again, and to talk again to the Governor of the Bank of England about their joint responsibility. They must ask whether this is really the right time to be crystalising losses, resulting in unspecified amounts of money that will have to be paid.

Leadership, a retrospect

October 25, 2022 239 Comments

The consultation of members of the Wokingham Conservative Association put Boris Johnson in first place, a little ahead of Rishi Sunak. Penny Mordaunt came a poor third. Boris has many strong supporters whilst more Rishi enthusiasts support their man because he is not Boris.

Amongst constituents there was also much more interest in Boris and Rishi than Penny. Both men attracted strong support and evoked strong antipathy from others. Amongst constituents a few  more favoured Rishi, but this seems to be particularly true of people who do not express Conservative values and outlooks and are unlikely to given the attitudes they do express.

Boris and Penny answered my questions about the economic issues but Rishi did not. I look forward to an early statement from him on how he will fight recession whilst continuing the work the Bank and Treasury have done to bring inflation down.

As you now know MPs did not get a vote between the candidates, nor will members. All now rests on Rishi making good judgements of how to pilot the economy and how to build support with the party and the public for what he wants to do.

 

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Ways to cut spending

October 24, 2022 192 Comments

The new Chancellor says he is looking for ways to cut spending to bring the borrowing down. I have sent him a list of ideas familiar to readers of this blog where they have been published before.

Today there are some easy ways to make an impact.

1 Reverse his decision with the  Bank of England to sell some of the bonds they own at a loss. Not selling would save in excess of £10 bn in the year ahead.

2 Work with DWP to improve incentives and support to help 500,000 people on benefits to get jobs. Saving around £5bn from less benefit and more tax.

3.implement Braverman plan to stop small boats illegal migration. Save £3bn in annual additional hotel costs.

4. Cancel HS2 and resell land acquired. Save many billions starting this year.

5. Adjust energy package  to limit subsidised energy for households to the average usage, requiring those who use more to pay full price for the extra.

6 Substitute more UK gas and oil for imports by pressing on with extra N Sea production. This will cut the import bill and boost UK tax revenues substantially.

The Bank wants to lose money on bonds

October 23, 2022 141 Comments

The Bank of England announced again this  week its plans to sell some of the bonds it bought at much higher prices. Lower bond prices mean higher interest rates.  When it last announced this it then was forced by the  market into wanting rates lower so it flip flopped and bought more. Now it wants rates even higher so it plans to sell them again. I think they are wrong to be selling at current levels. They should wait until they can lower rates again when the bonds will be much more  valuable. Longer rates are quite high enough to curb inflation, as most forecasters see it coming down next year after a probable peak next month.

Mr Sunak as Chancellor approved £450bn of bond buying and got the Treasury/taxpayers to underwrite  all the purchases. When the Bank does sell and takes a loss that loss has to be paid by the Treasury. All Chancellors from Darling onwards agreed to bond buying and agreed to pay any losses.  As the decision to buy was a joint one between the Chancellor of the day and  the Governor, and as the Treasury pays the losses, the Chancellor should tell the Governor he does not have the money to pay for taking losses now and the bonds should be held for better times. How much is the Bank planning to want the Treasury to find to cover losses over the next twelve months? Bloomberg suggests over £11bn.

This week Mr Hunt signed off a Bank scheme to lend money to energy companies if they needed it. Once again the taxpayer through the Treasury is guaranteeing the Bank against loss. I think the government should be more careful about all these guarantees.

As Mr Hunt tells  us he needs spending cuts to reduce the deficit he should start with this one. He must tell The Bank he will not pay for losses on bonds they do not need to sell. That will save us billions. Sometimes saving money can be popular and easy.

Consultation on leadership

October 22, 2022 142 Comments

I continue to consult on who my constituents would like to see as the next PM. A good number have written into my email and some have expressed views here.  The Wokingham Conservative Association has also consulted and is letting me know the balance of opinion amongst members who of course have a vote in any final ballot assuming there are  two candidates with more than 100 MPs backing them. I am also seeking the  views of the  candidates on various matters of importance.

The state of the economy and those official forecasts

October 22, 2022 170 Comments

Consumer confidence remains stuck at the ultra low level of minus 47 on the Gfk index. Retail sales fell again in September. The public sector borrowing figure came in at a hefty £20 bn for September, £5.2bn more than the OBR forecast. All this is proof of a weakening economy. So why do the Bank and some in the Treasury think we need to slow it down more? Can’t they see that will increase the borrowing we need to do, as slowdown reduces tax revenue growth  and increases benefits expenditure.

In the previous two years I had to disagree with the OBR stating they had greatly exaggerated the borrowing needed, as it turned out they had. This year I said I thought their forecast was too low. In the six months to September state net debt has risen by £44.7bn more than the OBR forecast. It reinforces my general point that their forecasting model does not seem to pick up the sensitivity of borrowing to the rate of growth in the economy. Speed it up as last year and revenues surge cutting borrowing needed. Slow the economy down as this year and the reverse happens. It was also clear there had to be policy change to spend more to offset the energy package as has happened.

Given the wonky way they account for interest charges there will  be a big windfall decline in interest costs as soon as inflation comes down. Actual interest being paid as cash payments remains low and very affordable. There could be something like a £30bn fall in their stated interest part of total spending going forward from next year.

Meanwhile the mainstream media send out the misleading narrative that a few tax cuts-not the huge spending package on energy- sank the bond market. They refuse to talk about The Bank selling bonds and deliberately driving rates higher. They ignore the bond sell offs in the USA and Europe. US mortgages are over 6% now. The Treasury and Bank establishment have lots of little helpers.

Another leadership election

October 21, 2022 348 Comments

As if 4 Chancellors in 4 months was not enough we are now pitching for 3 Prime Ministers in 3 months and maybe a fifth Chancellor. It is an irony that a small group who were determined to pull both Boris and Liz down claim we need to stabilise the markets!

Their attitude to the members is arrogant, preferring them not to have a vote or upending anyone they vote for that they did not want. It makes it extremely difficult for anyone elected as PM as they are under constant fire from their own side from people who will abuse their privileged access and look for any slip or error. Having  healthy debate about policy and decisions is good. Personal attacks and venom is destructive and puts many good people off politics.

We now have a short space of time to do again what was done at leisurely pace this summer. The members should look for someone with Conservative views and reject the idea that we want  a so called grown up who will do everything the establishment and the international institutions tell them. The establishment gave us the inflation and now seem determined to give  us  a recession. Why trust them when their forecasts were so wrong and when they continuously lied to us about the inflation they caused but denied for so long.

”Grown ups” usually want to put us back under EU rules, to gold plate any global trend and Treaty requirement even when it is clearly damaging to us, to frustrate the self employed and small business, and to back the big boom/bust swings of Central bank policies as they lurch from printing too much money to stopping credit too abruptly.

 

The run up to the budget

October 20, 2022 229 Comments

The budget is now a crucial moment for this government. It has to demonstrate that there is a growth strategy, and show how decisions will be made to limit the downturn and point the economy to a better future. It is made more difficult by wanting to put up Corporation tax, making the UK a less attractive destination for inward investment and new jobs, and reducing company cashflows for new domestic investment by companies already here. Since the Chancellor spoke about reversing tax proposals various independent forecasters have been cutting their growth forecasts.

The government has placed itself at the mercy of OBR forecasts. The OBR needs to lift its current year forecast of the budget deficit which I said would be an understatement when they made it. It needs to update it for the extra spending the government has now committed as a response to the energy crisis. It needs to reflect for the following year the likely slowing of revenue growth as a result of economic downturn. The government needs to tell the nation that whatever it does borrowing will  be higher over the next year or so. The choice is whether to offer some offset to the hit to real incomes  from higher interest rates and higher energy costs in order to limit the downturn, or whether to end up borrowing even more  because the downturn is deeper and longer. It seems likely  the OBR will follow the Bank of England in predicting no growth and maybe a recession in 2023. The crucial 2025/6 year forecast which affects the budget judgement needs to be more realistic than last year’s deficit forecast. There will be a windfall on the debt interest programme given the way they state it. As inflation comes down so on their definition the interest programme falls sharply.

The government needs to review the list of projects to expand UK capacity listed in the Growth Plan 2022 released by the last Chancellor. Several important oil and gas field developments are missing at a time when we need to swell the domestic production  of fuels. This would boost revenues at home and cut carbon dioxide from transporting and liquifying imports. The road schemes need to be ones which increase capacity on main roads to allow people going to work in  vehicles freedom from so many traffic jams. They can then book an additional appointment in the day. They should add small modular nuclear reactors to the list where pump priming state investment could lead to a major new manufacturing activity to be privately financed with opportunity for exports.

The government needs reviews of regulations, licencing and subsidy regimes where they affect our ability to grow more of our own food, deliver more of our own energy and produce more of our own industrial products. Your ideas would b e of interest as to what a good Growth strategy should look like.

What economic policy now? (written for Telegraph)

October 19, 2022 135 Comments
The abrupt decision to sack the Chancellor and to signal a 31% hike in business taxes was a bad idea. It leaves the government searching for more to fill its Growth strategy. The political debate over the growth strategy is now even more  fevered and not well informed. Critics of the tax cutting plans assume the borrowing levels that result will be too high, and lasered in on wanting to hike Corporation tax to correct the elusive number they use for the alleged excessive borrowing. They should wait to see the spending plans, and to read the government’s considered forecasts of what might happen to revenues and outgoings as a result of all the changes. The new Chancellor needs to work up convincing spending, taxing and borrowing numbers with OBR  assessment. The OBR need to get a lot better at forecasting deficits as they are so crucial to tax judgements.
It is clear that after two years of wild pessimism about likely borrowing by the OBR, this year their forecast for borrowing was too low. I have found myself having to disagree with  OBR forecasts three years running. The truth of the current situation is whether we raise Corporation tax or not, borrowing this year will be considerably higher than forecast. The main reason  is the cost of the energy package. All agree we need to do enough to help hard pressed consumers and businesses. Forecasting the cost of the current scheme depends on the gas and electricity price over the winter, which could ease the costs or could escalate them. Tweaking the scheme to limit all household consumers to the controlled price  for a specified amount sufficient for the average house could cut costs a bit, charge better off consumers with large houses more  on the extra fuel they burn, and be a further incentive to reduce fuel use. We need to be generous to those on low incomes but careful with overall spending on this package.
The choice we are making  is do we hike taxes  now with the likelihood that this would intensify the downturn and lengthen a possible recession, or do we provide more offset to the downturn through a mixture of financial support and tax reductions? Arguably we will have lower overall new borrowing if we offset some of the downturn than if we rush into tax rises. The economy is going to slow whatever taxes we set, as the Bank of England is determined to drive interest rates and mortgage rates up whilst the high energy prices are like a huge tax rise on all of us. The more we pay for energy the less we have to pay for other things, and the fewer jobs and incomes there will be supplying the discretionary items that many have to give up. As  mortgages are forced up so mortgage holders can afford less. Tax rises will deepen the downturn and slash the revenues as a result.
Amidst all the extreme argument there is some agreement. Most MPs agreed with cutting National Insurance as we do not need a higher tax on jobs at this juncture. Most MPs agree with the general principle of offsetting some of the impact of the energy price hikes to stop a worse downturn. The idea of a Growth strategy is still a good one. If the economy grows faster we get more revenue and have less spending on benefits as more people have better paid jobs and more are in work.
Instead of trying to undermine the Growth strategy the critics should be urging it on and demanding more action. We still await the details of the investments, regulatory changes, incentives, Enterprise Zones and the rest that it will need to boost our capacity, increase domestic energy and home grown food and expand industrial capacity. I want to see a bold set of measures, alongside a budget that tells me what the income is likely to be and what will be spent. Anyone who wishes our country well would want this too. Rushing to make the UK a less desirable place for businesses to invest and create jobs would not be a good start to such a strategy. When we know the whole package we can discuss its balance. We cannot afford tax rises, as these will worsen the downturn and cut the overall revenues.