Author: johnredwood

Part A

Part B

The main point I was able to make yesterday in the short speech Parliament allowed was that we need the cuts in tax rates now to promote faster growth. The Chancellor rightly says he wants them in due course. They should not be a reward for managing to grow against the headwind of high taxes. They should be a necessary part of a growth strategy. They will speed  growth and make the rest easier to achieve.

The budget moved huge sums of money thanks to a major rethink over the official forecasts from just six months ago. The OBR has lifted its forecast of growth this year by a massive 2.5% or more than £50bn. It has raised its inflation forecast for next year from 1.8% to 4%. It has slashed its unemployment forecast from 5.6% to 4.9%. It has discovered £44 bn more revenue in the first six months of the year that it forecast in March. I argued that the March forecast was wildly pessimistic. Now the economy is slowing the forecasters have decided to up the projections for this year!

The OBR expects growth to slow to an average of just 1.5% a year in the three years  2024-26. Despite this it proposes a 3.8% per annum real growth in public expenditure. To make such large sums more affordable it is imperative to lift the growth rate. That will require the various measures I have written about to boost underlying capacity in many things from energy to food, from transport to engineered products.

The Treasury needs to review public spending to secure value for money.

Part A

Part B

I am all in favour of the government spending money to obtain high quality health and education services, to ensure our country is properly defended, our law upheld and all those in need offered financial help. Governments understandably concentrate on making announcements where they are planning to spend more, and claim that the mere fact that they are spending more means things must be better. Opposition parties from the left of centre encourage this thinking and usually oppose on the grounds that not enough is being spent, making it impossible for things to be better. A badly run part of the public sector will usually blame a lack of cash rather than any error of policy or misdirected effort on their part.

This budget needs to go beyond stressing where the government is spending more, to examine where it can spend less or where it can spend to better effect. It needs to remind us all that simply spending more cash can be inflationary, or can fail to deliver what is wanted. Higher public sector wages are often desirable but need to be offered against a background of working smarter. They are affordable if backed by productivity gains, they might prove to be inflationary if more money chases the same output.

There are many areas where spending can now come down. The government is rightly ending the Furlough and other special income support measures it brought in to handle lockdowns. It needs to come up with a new plan for the railways to avoid spending a subsidy fortune on sending many nearly empty trains around the country to service patterns of work demand that have disappeared with the homeworking revolution. The government will doubtless think it too late to cancel HS2, but its poor business case has just been undermined more by the big reduction in passenger rail travel. The railway can be repurposed for more freight travel, to contribute to the green initiatives and to take lorries off congested roads.

In the health budget the huge sums committed to finding a vaccine, setting up a vaccination programme, designing and implementing a test and trace system, and putting in more testing capacity can in part be redeployed to getting waiting lists down and doing the day job as the pandemic wanes. There will also be the saving on putting in and then closing the extra Nightingale capacity. All of these sums stay in the overall budget and are rolled over for the years ahead as if these commitments would repeat.

In areas like energy, transport and housing where we need more capacity we can finance more of these through private sector investment.

The sooner the government stops illegal migration and regulates economic migration at sensible levels the better. Everyone we welcome to the UK needs a major investment in housing, public services and transport infrastructure to make their lives decent. Reducing these pressures would ease budget difficulties in several areas.

Modern Central Banks ironically do not think money matters. Most of them no longer target money supply, and many provide little or no commentary on it. This is surprising given the fashion they entertain to create more and more money to tip into circulation. They should understand that if you create more money and all else stays the same prices will rise, as more money will chase the same volume of goods and services. That is why money matters.

I guess their response is that as  they create massive new amounts of money the velocity of circulation, the amount of use people make of that money, will fall. So it need not be inflationary. It is true that in the short term in the pandemic lockdowns more money was an offset to the collapse of demand, and use of the money tumbled as many people  and companies hoarded what new found cash came their way.

It did however have a first round inflationary effect, as it was planned to do. It inflated asset prices, pushing up the price of government bonds which the money was  used to buy. The people who sold the bonds to the Central Banks then often bought other assets like shares with that money, pushing their prices up even more than the  bonds. So far so good. The governments could borrow loads of money on the cheap, and the inflation cheered up anyone with assets and did  no harm to those without. I supported a vigorous Central Bank response to offset some of the worst economic consequences of the anti pandemic measures. I also thought governments would get away with a massive one off increase in borrowing, financing it at very low rates, all the time activity was so depressed.  There did need to be a  big offset and rescue packages given the economic severity of the policy.

If you carry on creating more and more Central Bank money to keep government borrowing rates low there becomes more danger that the money will start to find its way from asset markets into creating demand for goods and services. All those extra savings people made during lockdown as they saved their going to work costs whilst still banking their pay could be spent in a rush, driving up the velocity of money use.  If commercial banks use the extra cash they have to expand credit that too creates more demand for goods and services. By these means more created money can lead to goods and services inflation if the money starts to create more potential demand than there is supply.

Central Banks in the USA, UK and the EU should stop their money printing and bond buying now to reduce this risk. They and the other bank regulators should ensure total money growth is sufficient  to  allow decent growth without encouraging too much extra inflation. That can best be secured by setting appropriate levels of permitted lending / balance sheet strength for the commercial banks using their existing powers. States should continue to cut back their deficits and borrowing substantially by promoting growth policies which will swell revenues and cut crisis spending.