Author: johnredwood

One year on from the Russian invasion of Ukraine we send our condolences to all those families who have lost loved ones in the conflict. We condemn the needless violence and the damage to Ukraine’s cities.

NATO has made clear it does not want a war with Russia. It has told Russia NATO is no threat to Russia’s land or people. As proof of this it will not send NATO personnel onto the battlefield nor will it allow Ukraine to fire off NATO supplied weapons outside Ukraine’s borders into Russian territory.

NATO under Biden got off to a slow start helping Ukraine but has now escalated its support by sending a much greater range of weapons and technical assistance. Putin argues that NATO provoked the fight as he seeks to provoke the West. The Ukrainian forces stopped the Russians reaching Kyiv and are now counter attacking in the South east where Russia has made gains.

Neither side currently want peace talks, as both think they can achieve more on the battlefield. China talks of a possible settlement but has yet to spell out how and what it would look like.

What would you like NATO to do next? What kind of a peace would be fair?

The government since 2019 has not been shy with the cash. Record increases and record sums have gone into the NHS. The output of operations, treatments, medical consultations has not gone up as hoped for with all the extra money.

Of course more money was needed. There needed to be pay rises as inflation picked up. There needed to  be extra capacity as the population expanded considerably given a generous policy towards inwards migration and difficulties in stopping illegal  arrivals. There also needs to be good management choices about how to spend the extra money. There needs to be good employee relations. Management needs to design achievable workloads and create a favourable environment for productive endeavour.

The 36,000 managers need all to contribute to a better mood and mutual support of staff. All need to be focused on delivering more healthcare. More of the extra money has to buy extra capacity – more beds with staff to look after patients, more GP and nurse consultations, faster tests for diagnosis.

Above all the extensive  management and personnel functions need to grade, evaluate and create worthwhile and feasible jobs that people are proud to hold. Too many staff leave, work on short term contract and feel unhappy about their job spec and remuneration.These are the very issues within their large budgets managers need to sort out, given the staff unhappiness on display. Did they put in the right  evidence to independent pay review? Can issues be remedied in next years settlement? Did the Pay Review body think enough about the impact of higher inflation on their settlement?

It is becoming more and more difficult to see an accurate picture of the nations finances given changes to the definitions and runs of data and the  accounting methods deployed.

Yesterday we learned that there was a £5bn surplus of revenue over expenditure in January., This was considerably   better than the OBR recent forecast. We should expect there to be a healthy surplus each January, as substantial sums of self assessment income tax, CGT and other annual taxes are paid following the filing of returns.

I found the more interesting figure was the one for the government’s cash surplus last month. That was a much healthier surplus of £21 bn for the one month. That is the excess of revenues over total bills paid by the government that month. The big discrepancy with the headline figure of just £5bn can be explained by non  cash items like the payment of £4.2bn of taxpayer  cash  to the Bank of England for its losses, where the cash sent to the Bank remains within the wider public sector, and the so called interest bill including the indexation changes on indexed government borrowings. The state does not pay these out as cash payments but they are rolled up until the maturity date of the bond which may be 20 years or more away. It will then be reborrowed, not  requiring tax revenue to pay out.

The figures suggest there is what the Treasury call headroom for some tax cuts in the  budget. The OBR will score lower tax rates  as losing the state revenue. There is an issue with this, as cuts in tax rates for taxes like Corporation Tax and higher rate Income Tax have always in the past led to more revenue  not less. Overseas experience as I highlighted yesterday is a lower rate of  business tax brings in much more revenue, encouraging so many more businesses to locate and invest in low tax jurisdictions. The headroom will be enlarged by Treasury accounting. By the year end when many expect the inflation rate to have more than halved there will be a big saving in the interest programme as the Treasury charge the  non cash item of indexation increases on inflation linked state debt to the debt interest programme. The energy subsidy programme will also produce large savings after the wind down in April.

Among the ideas the Treasury should adopt to assist growth and more capacity in our economy are cancelling the Corporation tax rise, improving the tax system for the self employed, raising the VAT threshold for small  business and suspending VAT on domestic fuel.

It looks as if some at the heart of government thought a trade agreement over red and green lanes would be sufficient to fix Northern Ireland and EU issues. It seems that the meeting with Unionists pointed out to the Prime  Minister that the application of EU law in Northern Ireland was the bigger matter where the EU had  not made the changes required.  Under the Protocol itself parties are meant to give priority to the Good Friday Agreement which needs  the consent of both communities to any changes . The Unionist community does not agree to the EU approach to the Protocol and to lawmaking for NI.  As a result the Prime Minister doubled down on his words that there was still no Agreement to publish. He required his negotiators to return to the EU to sort out the issue of law making and enforcement in NI.

The Protocol was meant to be a temporary or holding arrangement. The EU needs to reconsider it position on these matters to assist in restoring  Stormont and the tradition of working through the agreement of both communities.

One of the main arguments ahead of the budget is the one about what changes you get in revenue if you put tax rates up and if you cut tax rates. This is especially important and hotly contested over business taxes. UK corporation tax revenues increased as George Osborne cut rates. The Republic of Ireland collects proportionately much more tax from business by having a much lower rate than us and attracting many large businesses to locate more in the Republic. Indeed, in 2022 Ireland collected  24.4% of its total tax revenues from corporation tax with a 12.5% rate. The UK only managed 9% of tax revenues with a 19% rate.

There are also studies showing that if tax free shopping is allowed for visiting foreigners the UK will collect more tax overall, as it will boost  taxation on shop profits and shop employee incomes and on the hotels and other facilities the visitors use. UK revenues have been very sensitive to overall economic growth rates. rising more than official forecasts when times are improving, and producing less revenue than expected when growth falls away.

I noticed in the recent Sunday Times survey of economic forecast outturns the official OBR performed relatively badly in the table for 2022, reminding us how difficult it is for Chancellors to  make  the right policy  judgements when the supporting forecasts can be well off.

Angered by the cost of living squeeze and sky high energy prices, many people are  now hostile to the whole idea of company profits. It is encouraging them to demand ever higher windfall taxes to confiscate more or less the whole profit, and leads on to demands for  nationalisation. It is perhaps time to remind ourselves what profit making enterprises have achieved to raise our living standards, to provide well paid jobs and drive growth. It is also time to ask why countries like Venezuela that went the whole way in nationalising and imposing price controls ended up in poverty with large shortages. Many Venezuelans  are fleeing the country to live somewhere where profits are allowed and  living standards are higher.

The UK’s own experience with  nationalisation was poor. A nationalised steel industry put in five large integrated plants but could never sell enough of the steel given their cost levels and spent the  next two decades arguing over how many people to sack and how many plants to close. The nationalised railway had a poor record on safety, punctuality and service. It sacked many staff as its market share of the travel market plunged downwards. It lost a fortune for taxpayers who had to pay the bills. A nationalised phone company fell years behind the USA where competing private sector companies leapt ahead with better service and newer technology.  In the UK  there was little choice of phone, long waits to get a line and rationing including having to share a line with the neighbour for many customers. The electricity industry relied on coal power stations when cleaner and more efficient gas was available. The industry leapt ahead driving costs and emissions down by putting in combined cycle gas plants as soon as it was privatised. The coal industry was in long term decline, with bitter disputes about job losses and mine closures.

Wherever price controls have been tried investment falls and supply reduces. This makes the problem worse. Rent controls seem like a great and popular idea, but as rent controls come in so people withdraw properties from rental and shelve plans to build more. This usually makes the property shortage worse and results in higher rents in the medium term than if controls had not been introduced.

The combination of double corporation tax, a planned rise in the rate of business tax by 31%, and windfall taxes that will be imposed for several years whether there are windfalls or not is putting companies off investing in UK oil and gas production. These taxes will not only mean we import more and become ever more dependent on high and volatile world prices, they will also mean we collect less revenue in future. We will lose out on taxing good cashflows from oil and  gas fields under UK control, and watch as we pay high taxes to foreign governments to import their energy instead.

Profits are used to pay for investments in extra supply, which in turn sustains more and better paid jobs. No profits, means no investments. Fewer investments means lower living standards.