Author: johnredwood

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.

Since I and others raised this in the Commons last week during the passage of the Environment Bill the Minister has supplied additional information about how they are proposing to get rid of bad discharges to rivers as we all want:

• “Between 2020 and 2025, water companies will invest £7.1bn on environmental improvements in England.
• Of this, £3.1 billion will be invested in in storm overflow improvements specifically.
  • We have also made our expectations crystal clear in our draft Strategic Policy
  Statement to Ofwat where, for the first time, the Government will tell the industry’s
  economic regulator that we expect water companies to take steps to “significantly
  reduce… storm overflows”, and that we expect funding to be approved for them to
  do so.
  • In August 2020 we established the Storm Overflows Task Force to bring together
  key stakeholders from the water industry, environmental NGOs, regulators, and
  Government in order to drive progress in reducing sewage discharges.
• The Task force has agreed a long-term goal to eliminate harm from storm overflows.
  • We have committed to reviewing the case for implementing Schedule 3 to the Flood
  and Water Management Act 2010 in England, which would set mandatory build
  standards for sustainable drainage schemes on new developments, and which
  many have called for. This action has the potential to markedly reduce quantities of
  water unnecessarily entering the sewerage system.
  The significant action I have detailed will deliver real reductions in the harm caused.”