Author: johnredwood

The Chancellor tells us he believes in low taxes. In that case he has work to do. Let him prove his point in this coming budget.

First, abolish the tax on jobs he proposes for April with his National Insurance surcharge. The advisers who told him he needed to raise an extra £12bn next year, have now told him he has already raised an extra £46bn in tax in the first half of this year thanks to tax cuts and recovery.  Their revenue forecast was that much out between March and September! Let’s stick with a winning formula of lower tax rates and more revenue.

Second, end the attack on the self employed by cancelling  the changes to IR 35. We need all the enterprising and self employed people we can get to power recovery and change the economy.

Third, remove VAT from green products. The government claims to be the greenest ever, so why charge VAT on boiler controls, on insulation, draught proofing and various other green energy products?

Fourth remove VAT from  domestic fuel to offset some of the large rises in price brought on by the gas shortage. The gas price rise will act as a tax on consumption, cutting growth.

Fifth end the threat of higher corporation tax rates

Sixth, consult on setting the new world Minimum Corporation Tax rate to offer some tax competition to Ireland.

If he did these things he would indeed be a lower tax Conservative., He would also collect more revenue and have a lower deficit because the economy would grow more.

The Budget this week will doubtless be damaged and misdirected by wrong official forecasts. The Office of Budget Responsibility is meant to be independent, yet Chancellors seem obliged to use these forecasts and defend them. Given how wrong they usually  are it places the government in a false position and misleads them over what is the proper policy response. Indeed, it leads officials to recommend advice which will slow the recovery and worsen the outturns.

The OBR and Treasury officials are wedded to Maastricht austerity economics. They slavishly publish the UK’s position against the Maastricht debt and deficit criteria as if we were still in the EU and had to comply with the Treaties. They will doubtless inveigle the old Maastricht debt and deficit requirements back into a so called new statement of economic policy aims and controls for this Budget  despite Ministers rightly wishing to review the framework.

If you are going to steer economic policy around debt and deficit figures you need to be able to forecast them accurately and understand what actions balloon deficits and which ones reduce them. Last year I drew attention to the wildly pessimistic budget deficit forecasts. The outturn was first published as an overstatement of a massive £90 bn in the deficit, even larger than I had dared to suggest.  It was subsequently adjusted down to £64 bn  by proposing that there will be  some hidden losses yet to be determined to add to  last year’s figures. I repeated the claim that this year’s budget deficit was also substantially overstated. At the half year stage it turns out the deficit was overstated by a whopping £43 bn  in just six months.

The main reason is the OBR and Treasury underestimate the buoyancy of revenue in an upswing, and have false models of tax revenues which depress revenues when you cut rates without allowing for behavioural effects which increase transactions and output  with lower rates. Thus we see that in the year to date Stamp Duty has risen by a massive 85% thanks to a mixture of unlocking and the lower tax rates the Chancellor wisely introduced. Corporation Tax is up 20% despite the Chancellor  offering a super deduction for investment which officials are nervous about reading their latest published report.

The Chancellor should announce a strong commitment to low inflation, underlining the 2% inflation target which we are currently breaking. He needs to target tax cuts, regulatory actions and government procurement on scarcity areas where prices are under upwards pressure and offer supply side reforms to boost capacity. Energy, transport, domestic food growing, domestic timber and others are obvious areas.

There should then be a growth target, to send a clear signal to all of government that there is work to be done to boost the growth rate and the productivity rate with great education, training, network investments, incentives for the self employed and small businesses and innovation.

The state debt is currently stated as £2.2tn or 95% of GDP. As the state will own £875bn  of the debt by year end the true figure is £1.325 or 57% of GDP. This is a manageable amount at current low interest rates. Because the OBR grossly overstate the deficit they will demand tax rises which will slow the economy , damage  confidence and impede  rectifying supply shortages.

 

( text amended to include all QE to date, not just more recent)

The 26th COP conference to save the planet takes place in early November. Like its forbears they tell us this is the last chance and that much is riding on the results. Clearly they are right that as the previous conferences have not agreed sufficient action to even begin reducing the total carbon dioxide produced in many places nor to start to cut the total amount of fossil fuel burned around the globe  this conference needs to be more successful than past ones to wean the world off fossil fuels as they wish.  World oil demand at 85 m barrels a day in 2006 is forecast to exceed 100m barrels a day again as world recovery from the pandemic continues, and to stay there for the next decade.  As the Conference approaches we are told that it will  be an extremely difficult task to get an Agreement. I would be surprised if it is allowed to break  up without one. I would also  be surprised if it is the last such conference, declaring job done. In practice the world is nowhere near getting to net zero any time soon all the time China, India, Brazil, Pakistan, Bangladesh and other heavily populated countries see the need to burn more coal, oil and gas to grow.

The UK as joint chair with Italy has set out four crucial areas to get agreement – coal, cars, cash and trees. They will  need to negotiate the question of grants and loans from the rich countries to the lower income countries, as they are making this an essential part of co-operating with the general green revolution. A recent meeting of the 20 country strong Like Minded Developing countries (includes China, Saudi, Pakistan, Malaysia, Bangladesh) issued a tough communique saying the advanced countries as a whole needed to cut their carbon output more quickly as they had put plenty of carbon dioxide into the atmosphere during their industrialisation. The rich countries needed to  be tolerant of the developing world’s need to grow using fossil fuels, and to offer far more financial support for green transition by them. They pointed out that many developed countries had failed to make their full contribution of cash under the Paris promises, and had not met their own carbon dioxide reduction promises either.

It seems likely the Conference will have to proceed without either President Xi, or President Putin being present. China is by far and away the largest producer of carbon dioxide, at 28% of the world total, and Russia is in fifth  place at 4.5%. It now seems likely Prime Minister Modi of India, in fourth  place with 7%, will attend but it is unlikely he will be able to pledge cuts in Indian use of fossil fuels and will understandably want more financial support. China and Russia will send delegations and will offer national plans of sorts, but they will fall far short of what green campaigners would expect. There is unlikely to be an early phase out of coal by emerging countries, with China aggressively adding coal mines and coal power stations to her energy mix.

It will  be easier to agree more trees, though difficult issues remain in parts of Latin America and Asia over cutting down forests to grow crops and graze cattle. Everyone will  be sympathetic about electric cars.

The central Agreement will therefore rest on further pledges of progress from the world’s second and third largest emitters, the USA and EU. The UK will assist as the one larger  advanced country that has already done the most to cut its own carbon dioxide output. Getting a better commitment from Germany to cut out coal would help them. There are rumours that a possible new coalition government there might want to bring forward the elimination of coal from 2038 to 2030. The EU will doubtless find it more difficult to get an improved commitment from Poland, another large coal user.

Without larger and faster contributions from the first, fourth and fifth largest producers of CO2 in the world it is going to take more such conferences to chart a reliable path to net zero for the world.

To the BBC and Remain critics a free trade deal with the EU was essential to our economy, whilst a free trade deal with anyone else is a big threat to  our own farms and industries, allowing foreign competitors more of a chance to lift orders  from us.

They never see the contradictory nature of their twin positions. Apparently New Zealand lamb could drive our sheep farmers out of business. No such damage they say is being done by the EU.  They ignore the way German cars, French dairy, Italian textiles, continental steel and others drove many of our companies out of business  when we went to zero tariffs with the ECEC on  joining , let alone the damage the CAP did to farming and the Common Fishing policy did our fishing grounds and industry.

The truth is we rely for our substantial foreign trade on WTO membership which secures most of it with or without top up trade deals. A top up trade deal can be helpful overall, but of course it only helps our business where we are competitive and harms it where we are not. We have a massive deficit with the EU thanks to the asymmetric  way tariffs and barriers were taken off industry where they had an advantage, but kept barriers on service  where we had an advantage.

The other criticism they advance of a deal like the New Zealand one is our trade is relatively small.  This of course contradicts the other criticism that it is seriously harmful. The NZ deal cements  a friendly alliance that matters, but it is also progress to joining the TPP which is large Asian trading area of faster growing economies which we can do more with.

The absurd argument that we have swapped a great deal with the EU for one with smaller counties is silly. We have a tariff free deal and WTO access to all EU markets, no we are adding a bit better deal with places like NZ and Australia, preparatory to joining TPP which the USA may well also join.

Brexit supporters always had a sense of perspective over trade deals, knowing the key was WTO membership for trade access. We left to run our own affairs generally. Membership of the EU single market did considerable damage to industry, agriculture and fishing owing to the asymmetry in its rules. They could fish our waters, for example, but we didn’t get rights to Mediterranean fish.

Over the next few years we will face a reduction in nuclear power as older stations are closed, well before a new large nuclear power station comes on line. We will experience growing demands for electrical power as more people switch to electric cars and electric heating, and as the economy and the population continues to grow creating more need. There will be a further major increase in wind power, which will cover the days when there is the right level of wind to maximise turbine output without needing to shut them down through too high a wind speed. The question remains, what is the back up plan for days of high demand when the wind does not blow and when solar output is also low?

In the short term the government has brought three coal power plants back on stream to deal with shortages. These have to be kept, and perhaps could be converted to biomass to make them more reliable and popular contributors to our power output. The country relies heavily on its remaining combined cycle gas stations which produce less carbon dioxide than the coal stations per unit of output. It would be a good idea to bring several old retired gas stations back into a state of readiness to be available to produce power when the wind drops. These are matters which our managed system of generation can commission by offering capacity payments to the owners to make the facilities available.

The government should also look at how it can increase domestic gas output. Currently half the gas we use is imported. Some of this is dependent on paying high and wildly fluctuating spot market prices. Some of it is shipped long distance on tankers. If we produced more domestic gas this could pass to users via pipeline and could be purchased under contract at more stable and lower average prices. Immediately the government could allow Shell to progress the Jackdaw field, which can use the existing Shearwater platform and the existing gas and liquids pipes into St Fergus/Cruden Bay for onward distribution by the existing pipe network. This would be a greener method of supplying gas than the imports and provide us with more national resilience in energy provision. The government should review its other options for producing more UK gas as a transition fuel whilst it puts in place much more reliable renewable electricity and better storage for variable wind power.

Yesterday the government launched its strategy for cutting the carbon dioxide output caused by heating buildings. They wish to promote heat pumps, and will offer grants of £5000 to people willing to install these devices who meet their criteria. The details of the scheme will be announced prior to a launch in the spring of next year.
They also reiterated their strategy of banning all new petrol and diesel cars from sale in the UK after 2030, preferring universal adoption of new electric vehicles where people are buying new.

I pointed out that for this strategy to work the UK would need to generate all its electricity by approved green means, as otherwise we would simply burn the fossil fuel in the power stations prior to running homes and cars on electricity. As we are often still relying for 60% of our electricity on fossil fuels when the wind does not blow and there is not much sun that is going to take a major investment in new green capacity that will work when the weather is not helpful to certain renewables.

The Minister in reply did not promise a major expansion of green generation from reliable power sources. He did not comment on the possible shortfall in electrical power if the government is successful in getting widespread adoption of fuel pumps and electric cars. He did say the government sees gas as a transition fuel which clearly will do a lot of the work in generating power and heating buildings for at least this decade. Nor did the Minister answer those who asked when it was going to commission more nuclear power. This is reliable carbon free power, but we face the reduction in the amount of nuclear produced over the rest of this decade as old nuclear power stations are closed. down. This will add to the difficulties of supplying enough green power this decade.

Tomorrow I will set out again more of the ways the government can act now to ensure we have sufficient generating capacity and sufficient access to gas as transition fuel for this decade, whilst they put in place the major investments in reliable green electricity they will need for the next decade and beyond. They need to announce new nuclear, new small nuclear, more biomass more hydro and pump storage and more battery storage and hydrogen conversion for wind energy when the wind does blow well.

This article is reproduced from Conservative Home where it appeared yesterday:

The Government is strongly in favour of the Union of the UK. So is the Official Opposition. Scotland held a referendum and voted to stay in the Union. At the time all parties agreed it would be a vote for a generation, though the SNP now wobble over the desirability and timing of a much earlier re-run of the vote they lost. The rest of the Union has not campaigned for a vote about their membership. So why is there such nervousness about the subject?

The biggest threat today to the Union comes from the EU. There is a strand of EU thinking that has surfaced in press briefings and the odd comment that says there must be a price to Brexit for the UK, and that price should be the detachment of Northern Ireland from the UK.

The official public line is the EU needs to insist on special governance arrangements in Northern Ireland to avoid goods coming across the border into the Republic from the UK that might not be compliant with EU rules and customs.

To make this difficult the EU chooses to interpret the peace Agreement governing the two communities of Northern Ireland as meaning there should be no border controls, though throughout the UK’s time in the EU there were VAT, Excise and currency controls governing trade between Northern Ireland and the Republic. These were largely handled through electronic means, and away from the physical border.

The UK has offered several ways in which it can make sure non compliant goods do not wander from NI to the Republic without imposing new border posts. Mutual enforcement of the rules would do it, with the UK authorities ensuring there is no passage of non compliant goods.

Electronic manifests for each consignment, to be inspected before arrival by EU officials, would do it. Trusted trader schemes where most firms were trusted to enforce the EU rules and avoid non compliant deliveries would do it. There has always been smuggling across the NI/Republic border, and there has been a long history of co-operation by the authorities on both sides to avoid it becoming excessive and to punish those who still try it. That will continue after the new arrangements.

The fact that the EU has rejected all these sensible proposals implies it does not want to solve the narrow issue of trade. It may be that the immediate objective is to divert large amounts of trade from GB/NI into Republic to NI trade. That is what is happening.

Faced with the EU blockage of simple GB/NI movement of goods in the way we used to enjoy, consumers in NI are being forced to buy from the EU via the Republic instead to get their deliveries on time. The EU is assisting a large diversion of GB/NI trade. This is expressly against the Protocol which rules out such a diversion in Article 16. The UK for that reason alone can legally change things unilaterally to stop this happening.

It may be that it is part of a wider EU plan to ensure more common governance of Northern Ireland with the Republic under EU control. The wish is to impose every regulation and directive on NI that the EU regards as important to its single market.

The remit of the single market is now very large, encompassing everything from environment policy to labour policy, from transport policy to energy policy, alongside the more normal definition concentrating on product standards and trade terms. The EU wishes NI to accept large amounts of EU law with no voice and vote in its making and no right to repeal or amend.

The NI Protocol rightly expresses strong support for the peace process, which is based on the mutual consent of both parties. The EU claims to champion this, yet fails to grasp the fundamental problem with its approach.

Its demand that it can legislate for NI and control many things in NI in the name of preserving the integrity of its single market does not have the consent of the Unionist population. Indeed the EU has united Unionists against its Protocol because they see the EU seeking to split NI off from UK law and NI consumers from GB suppliers, going well beyond its legitimate needs to police its trade.

The Protocol stresses at the beginning “the importance of maintaining the integral place of Northern Ireland in the UK’s internal market”. The EU is doing the opposite. It says “This Protocol respects the essential state functions and territorial integration of the UK”. It does not feel like that to many in NI.

When the UK challenges the EU over its wish to govern Northern Ireland in a different way to the rest of the UK, the EU asks why the UK keeps on going on about sovereignty. If it wishes to show sympathy for Northern Ireland and wish to understand the nature of the problem it needs to grasp that sovereignty as at the heart of the issues long dividing the two communities. The EU’s view of it does not work for the Unionists.

The UK government needs to see off this needless threat to the Union by insisting on UK control of GB/NI trade as is required under the Protocol. People in NI have to be free to have easy access to products available elsewhere in the UK within our internal market.

The EU should take up one of the many generous schemes the UK has put forward to ensure full co-operation to avoid non compliant products passing on from NI to the Republic. Lord Frost needs to move swiftly now, as much damage is being done to the view of the EU amongst the Unionists and much trade is being diverted against the wishes of the public and against the words of the protocol.

Meanwhile in Scotland the SNP say they want an early referendum, but not one yet. Doubtless they are watching opinion polls which still do not show a clear window for majority support to reverse the last referendum result. Many Scottish voters want to get on with their lives without further uncertainty over this issue, and many want to see the SNP make devolution work to deliver a better outcome.

The UK government should not fall for the Gordon Brown line again that a bit more devolution will solve this problem. Brown’s passion for devolution gave the SNP a bigger platform and gave them the opportunity of a referendum on the Union.

Devolution did not end the matter as Brown promised. UK Ministers who are keen to buttress the Union need to show by their deeds and words why the Union is good for all its parts, and need to govern wisely so people join in with their support.

Suggesting more powers for just one part of the UK in response to the campaigns of those who wish to split the UK is a bad idea. Voters wanting Scottish independence will not be won over. They will see it as a weakness by the Union government, and propose a further push to secure full independence.

If it is right for the Scottish Parliament to have more powers, what is the stopping point in powers before you reach independence? How would you draw a stable and defensible line? The way to defend the Union is to stand up for it, and to show how the Union powers are benefitting all its parts.