Author: johnredwood

I held a conference in Westminster yesterday on the EU talks.

I was able to praise the government for its opening approach. They are right to insist on talking about all issues in a series of simultaneous working groups. They are right to say we want a Free Trade Agreement, not a comprehensive Partnership Agreement or Association Agreement designed for countries seeking to converge and join the EU. They are right to stress there is no read across from say fishing to free trade. Each has to be settled on its own merits.

The EU still seems to think the UK is the weak party to the talks and needs to make more concessions. It also seems to think the UK will be so desperate for a deal it will crack and concede on fishing, convergence of laws, powers of the ECJ and all the rest of their federal agenda.

The Conference provided unified advice. We do not need to pay to trade. An FTA is very much in the EU’s interest. We need to take control of our fish and land many more of them at home. We want to free ourselves of the controls of the ECJ, and will establish the right to shape our own laws as we see fit. Canada and Japan have FTAs with the EU but do not accept EU laws and the ultimate power of the ECJ. Our defence arrangements should be under our control, and our main collaboration through NATO. We should not impose any border between Northern Ireland and GB and not accept any continuing EU jurisdiction over any part of the UK from January 1. 2021.

The UK government has put in a new control on UK state debt. It is a sensible one. The interest on the debt should not be more than 6% of total public spending. This appears to be quite a tough target, as very year bar one from 1945 to 2000 saw interest higher than 6% of spending.

Today debt interest is around 4% of public spending, or under 2% of GDP. It is down at this level mainly because UK interest rates are so low and look likely to stay low. UK rates remain higher than the Euro area and Japan though below the US.

State debt at the end of last financial year was £1.82bn or a quite high 85% of National Income. This was a gross figure. The Bank of England, 100% owned by the state on behalf of taxpayers, owned £435 bn of that. If you deduct that, state debt was a more realistic £1.39tn or 67% of GDP, a low figure by contemporary standards.

Refinancing UK state net debt today at rates under 1% for up to 30 year borrowing would leave the state with an net interest bill to pay of under £13.9bn or under 2% of state spending. There is every reason to get on with funding the debt longer and refinancing . It is clearly affordable. It is, however, as some will rightly point out, no reason to waste money. Tax cuts are a particularly good idea.

The government has committed itself to levelling up. It wants to adopt policies that spread wealth and income more widely around the country, given the big gaps between London and the rest.

It is right to talk positively of levelling up, and not to talk negatively about taxing the rich out of London to bring London’s figures down to nearer the national average. It’s no help to the other cities of the UK if London is poorer. Indeed, levelling London down might also entail some loss of income and wealth for the rest of the country as well.

There are various differences between London and the rest of the country. London’s productivity is higher. The capital has many more small and competing companies per 1000 residents than the rest of the nation. There is much more private sector wealth and income per person than elsewhere.

One of the curious features of the imbalance is it is much dearer to live, work and set up a business in London than elsewhere, yet more people choose to do it. They do so because they seek access to the better paid jobs, or access to the better off customers that London provides. There are many competing London restaurants, often with high meal prices, yet many of them make a good living. There are so many people in London wanting to buy a meal with the income to pay for them. With more companies and more highly paid people there is more need of lawyers, accountants, business consultants, personal advisers and the rest. In turn these service sector professionals are well paid and create more demand.

In some other cities and towns around the country there is a shortage of spending power and free enterprise. Oxford and Cambridge are demonstrating that it is possible for smaller provincial cities to attract a cluster of new investors and businesses around themes or strengths of that place. It requires ensuring there is suitable housing for those with the money to develop a business or to supply the high level talent the businesses need. As the cluster of new activities grows so the city attracts the supporting trades and services that can work with the new wealth creators.

Manchester in its prosperous past was King Cotton. Liverpool developed from a great port with many merchant traders. Birmingham was always a big manufacturing and engineering centre. Modern versions of these concentrations of talent and investment will drive wealthier and more productive cities and towns around the country. The levelling up agenda needs to make it easier for them to attract the talent and investment it takes to build a much bigger private sector. The policies needed include lower taxes, more supportive government interventions and fewer penal regulations, and a belief at all levels of government that free enterprise is a big part of the answer, not part of the problem.

Other countries have been doing what I have advised the UK authorities to do. We are now witnessing a rash of policy announcements by Central Banks and governments around the world to boost their economies . They want to arrest the global slowdown and prevent a global recession. The UK as the world’s fifth largest economy needs to help them.

Australia, the USA, China, Turkey, Russia, Brazil and others have cut interest rates recently.

The USA, China, Japan and Euro area Central Banks have all put more money into markets. The Fed has bought T Bills, the ECB government bonds, the Japanese both bonds and shares.

China has relaxed lending restrictions and offered cheap finance for distressed companies losing revenues from the virus effects. Hong Kong has given HK$10,000 to every adult.

We can argue about the wisdom of individual measures, but they are right to be trying to generate more activity and see business through a difficult time. In this environment boosting demand and ensuring liquidity is probably better than cutting rates.

So what should the UK do?

The Treasury should lift its tax attack on small business contractors, by cancelling IR35

It should abolish VAT on green products and domestic fuel to cut the costs of living

It should cut Stamp duties and VED to promote more home and car sales

It should offer all small businesses a 3 month holiday from Business rates as some will suffer cashflow problems from virus disruption.

Cut Income tax to give all employees a pay boost.

The Bank of England should ensure a plentiful supply of liquidity to markets. It should facilitate lending to companies with temporary liquidity problems brought on by virus disruptions to sales or supplies who have a decent future business model.

It has been fashionable for many years to set up so called independent state financed bodies to carry out functions of government away from direct Ministerial supervision. Thus transport Ministers created a Highways Agency to run the main roads, the Environment Department an Environmental Agency to run water, anti flooding and a range of other environmental policies, and the Treasury set up the Office of Budget Responsibility and a so called Independent Central Bank to limit Ministerial control over economic policy.

Some MPs seem to want to transfer more and more things to such bodies. The ultimate of course was the mass transfer of powers to the EU. The public often say this trust the experts approach is a good idea, until the policy miscarries or mistakes are made. Then they expect Ministers to intervene, sort it out and take the blame.

The problem is independent civil service activity often does go wrong. I have chronicled the bad mistakes of the Bank of England in recent years which helped create the ERM recession, the banking crash and the recent economic slowdown. The Environment Agency policy of discontinuing pumping and dredging led to bad floods in Somerset and the need for Ministerial intervention. The EU invented the Common Fishery Policy which did so much damage to UK fish stocks and to our fishing industry.

Well paid senior civil servants in or out of quangos are set targets and asked to run particular programmes or services. There is nothing political about ensuring high quality and efficiency in most cases. Should these targets be used to influence promotion? Is there a level of  performance so bad that it warrants loss of job? Should  senior civil servants stay put in a role for bit longer than the current average, with named responsibility for what they are meant to be managing?

In a democracy there can be no independent branch of government. The public through their Parliament or Congress can demand that anything changes or gets better. Ministers cannot go on saying a branch of government is independent of them when it is doing harm or failing to perform.They will be forced into changing the structure and or the personnel, in order to get the change of policy people want.

The Bank of Japan has promised “ample liquidity”  whilst the US Fed says “We will use our tools and act as appropriately to support the economy” .

The theory is straightforward. Ministers decide on policies they wish to see implemented, or identify problems that need government solutions. Civil servants advise on the best ways of implementing a policy or solving a problem. Ministers decide between these options and civil servants get on, implement and administer the policy.

Civil servants can  refuse to implement only if the Minister is wanting to do something  illegal or contrary to the agreed view of the government. They are not meant to let their own personal preferences and political views get in the way of carrying out a governing party Manifesto or the agreed wishes of the Cabinet or  of a Minister with devolved power.

It is further agreed that only Ministers speak to the public and Parliament to explain and defend the policies and actions of the government, with the exceptions that civil servants may be employed as spokesmen and women to put across the agreed government policy in off the record briefings or occasionally as  nominated experts on the record. Ministers do not reveal what advice they were given and civil servants do not brief out their views on the advice and on how the Minister took the decision.

This system sometimes breaks down. Ministers can let fly about civil servants and civil servants can brief against Ministers. Throughout our period in the EU our membership of the EU has created a substantial tension  between Ministers wanting to govern the country and a civil service keen to maximise the constraints the EU imposes on self government.

The civil service as a whole admires the EU and likes the behind closed doors approach to legislating in the Council. Ministers are often told they cannot carry out their promises or meet the wishes of many UK voters because to do so would violate some EU Directive or regulation or Treaty requirement.  When I was a Minister and since then the civil service preferred method of dealing with the EU is to find out what it wants to do next and tell Ministers they should welcome it  or go along with it.

The current rows between Ministers and officials are related to the wish of the majority of the public to “take back control”. The paradox is the civil service does not wish to do this, but has used every opportunity in the last three and half years to try to recreate many features of current EU governance once we have “left”. Instead of preparing us for the opportunities of exit they have run a Remain based Project Fear machine. We have seen the results in  some published statements and reviews, and in leaks. Much of it is shoddy and alarmist, unrelated to the reality of what is likely to happen.

So we have the Home Office trying to dilute the borders policy to recreate free movement of people. We have the Treasury trying to bake Maastricht debt controls, the austerity policy, back into a domestic version. We have some in  the Environment Department trying to perpetuate EU fishing and farming policies. We have some Defence and Foreign office officials wanting to bind the UK into common defence procurement and more common operations with EU forces to make a European army  more feasible. We have Trade and FCO officials not wanting a US trade deal for fear of it annoying the EU. There are of course many able and good individual civil servants and some who do like Brexit, but overall the civil service wants to take no risks by the UK doing something the EU may not approve.

It is this culture of EU best and EU first that some good Ministers are trying to change. Expect more sparks to fly. I know  which side I am on.

I have written many times before about the way the UK economic establishment has been wedded to the EU rule that we must bring state debt down to 60% of GDP. This has been the main constraint and guide on economic policy for the last decade. We need instead a new central aim of promoting faster economic growth whilst keeping inflation low.

I have also drawn attention to the Establishment’s unhelpful use of two pieces of economic theory, the Phillips curve and the Laffer curve. The Phillips curve which says inflation rises when unemployment falls has not been adjusted for the global economy we live in, failing to understand how inflation has been kept down by large inward movements of low wage labour and by importing substantial quantities of cheaper goods and services. As a result money policy has been tighter than needed.

The Treasury used to deny the Laffer curve, which states that if you raise a tax rate above an optimum level revenue falls. Now they accept the theory but choose to assume the optimum rate is much higher than experience tells us it is. As a result they have had bad shortfalls on taxes like Stamp Duty and have failed to maximise tax on higher incomes.

Since the 2016 referendum the Establishment wrongly forecast an immediate recession, and then has gone on and on about an alleged hit were we to leave without a trade deal. Meanwhile they have continued to tighten the fiscal policy of the UK and keep money tight , which has predictably slowed our performance whilst still in the EU single market.

The government has added to the difficulties by successive Chancellors making a tax raid on property through higher Stamp duties, and on new car purchase through higher VED. This has predictably hit both the housing and car markets, the two largest purchases people make.

It is time to relax policy to promote growth, and to set tax rates that allow enterprise and activity to flourish. The external shock of the virus means the case for tax cuts is even more urgent now. There is both a demand and a supply shock. Tax cuts can help a bit on the demand side. Lower interest rates are less useful. We are getting lower rates for government borrowing anyway.