Author: johnredwood

Car sales in China fell 92% in the latest figures reflecting the closures and stay at home advice in that epidemic torn country. Meanwhile EU plans to accelerate the shift to electric cars is hitting diesel and petrol sales in Europe.

Countries are falling over each other to cut demand for petrol and diesel vehicles with steep car purchase taxes geared to output of CO2. French sales fell sharply in January by 13% on the back of new higher taxes. UK diesel car sales are well down over the last year thanks to higher VED and threats of more taxes and regulations to come. Germany is imposing bans on older diesels from entering various cities. The new EU Commission intends to make a frontal assault on CO2 the centrepiece of its economic and industrial strategy.

Even in the USA where the government does not share EU fervour against CO2 car sales fell last year. The industry is wrestling with the shift to electric, the more draconian environmental regulations, higher taxes and a strike by many buyers not persuaded by the new ideas.

On top of this a new generation of urban dwellers doubts they need to own a car, whilst some look forward to a future when many more will hire a car when they need it, slashing the number of cars required to sit in the garage or in on street parking for most of their lives.

It is unusual for governments to set out to damage a big industry like this in quite such a concerted way. It is even more unusual for the industry to accept it and to collaborate as freely with the demise of its existing products and method of working. I find it odd the industry in the UK lobbied so hard against Brexit which was not designed to damage it, yet does not lobby against the many EU policies determined to close all factories making diesel and petrol cars as quickly as possible. It means writing off huge amounts of sunk capital and firing many workers. It is also possible the winners in the electric car wars will be new companies.

The small spike upwards in inflation last month is likely to be temporary. Inflation remains below the 2% target. The recent 20% fall in the oil price, and the fall in a range of other raw materials is likely to push the CPI figure back down again.

In the Euro area and in Japan the authorities are desperate to get inflation up a bit. The general disinflationary and deflationary forces worldwide remain a worry. The virus has struck China and made a temporary hole in her output. It has also hit international travel and tourism. Japan reported a fall in GDP in the last quarter of 2019 owing to her tax rise and is still weak owing to the effects of the epidemic. The car industry everywhere is reeling from the tax and regulatory attacks on diesel and petrol vehicles. US GDP is losing important output from Boeing with the current cessation of manufacture of what was the firm’s best selling plane, the 737 Max.

Meanwhile the media that spent three years boring us rigid with silly false scare stories about supply chains after Brexit say very little about the genuine threat to our supply chains from the big decrease in Chinese production this month. We are currently living on product made before the Chinese New Year, as it takes a month for product to reach us by ship. What happens next month?

The Bank of England will doubtless use the uptick in inflation and the stirrings in the housing market as an excuse to do nothing. The rest of the world is busy fighting the downturn with monetary as well as fiscal action. The Bank should join in. The government may face pessimistic OBR forecasts of the kind they specialise in. To the extent that they are sensible, based on the big world slowdown, the problems in  the car industry and the effects of the virus, they need to be offset by positive action.

One of the follies of the UK system is it is usually pro cyclical. When a downturn or slowdown hits, forecasts show revenues falling and spending rising, so the demand goes up for  spending cuts and tax rises. Instead policy needs to seek to offset any slide to low growth or no growth.

Yesterday the government released more details of the new Immigration system it plans to come into effect on 1 January 2021 when we are finally out of the EU Implementation period.

The aim is to reduce numbers coming to the UK by preventing people coming to the UK to look for a low paid job, or coming to the UK to take up a pre arranged UK job at a low salary. This should make quite a difference to numbers which in turn will take some of the pressure off social housing and public service provision.

The points system will require an individual to have 70 points. 50 points are awarded for someone who can speak English, has a job offer and some skills. The additional 20 points come from appraisal of skills, qualifications, salaries and professional training. Speaking English will be a requirement for all to meet.

There will be clear routes for new NHS staff to be recruited and granted an NHS Visa, for students to come to Universities on a Student Visa and for top talent in science and maths to get easy access.

Anyone under the general scheme must have a job paying more than £25,600 a year unless they have a job offer in a field identified as a shortage area where special temporary factors may apply.

This looks like a good improvement on open borders under the EU scheme. Employers will have to pay a bit more to attract local talent. They need to spend more on raising productivity to justify better pay. This can be done through better training and or through investment in computer and machine power to raise output per employee.

Like some other media driven campaigns, the anti global warming movement is being damaged by its share of  hypocrites. Some   grandstand on the issue yet live their own lives ignoring the imperatives they set for others.

It is most important that those who lecture the rest of us to change our lifestyles  to lower our carbon footprint show us by example how to do it. It is true that Miss Thunberg’s supporters and funders have been very keen to show she will use trains and sail boats , though it has led to questions about how realistic it is to sail across the Atlantic and how green it is to need so many people to support one traveller’s journey.

Others in government and the business world seem to think the rules should not apply to them. Attending important environmental or business conferences apparently justifies international jet travel and chauffered cars whilst telling others they should not take a plane for a holiday and should leave the car at home. Nor should we regard diesel trains or even electric trains fed by the general grid with fossil fuel power as necessarily the answer. Trains with few passengers may be a high carbon way of travelling. The idea that carbon dioxide emissions should be the prerogative of those able and willing to pay premium prices for their comforts is not a good way to promote the cause. Many of the green answers are higher taxes on normal behaviours for personal transport and domestic heating, which the rich can afford.

There is also the position of some countries that talk the talk on cutting carbon dioxide but do not cut their output in the way the UK has done. China for example buys into the problem yet keeps on increasing its own carbon dioxide output. It has been able to use the argument that as an emerging economy it needs leeway to increase its use of fossil fuels. Now it is better off and more successful surely it should ask itself if its conduct conforms with its concerns. It opens new coal mines and is very reliant on fossil fuels for its industrial activity. It is the largest source of manmade CO2 in the world. Germany closer to home and much richer than China also is a heavy user of coal and gas to generate electricity, and a big user of fossil fuels in homes and factories for heating and power.

There is also a question of whether it works well enough to sell pardons in the form of offsets . There is now a market in various assets and activities thought to provide some offset to more carbon dioxide released into the atmosphere, which again allows those with the money to continue with fossil fuel comforts whilst paying for an offset.

I do not wish to publish personalised attacks on named individuals in reply.

Since 2008 the Maastricht EU Treaty rule that state debt should not exceed 60% of GDP has governed our economic policy. It did not do so before Labour’s big build up of debt because we were below the ceiling.

Three Chancellors of very different views and ambitions, Messrs Darling, Osborne and Hammond all accepted Treasury and legal advice that state debt as a percentage of GDP had to drive policy. They battled first to get the annual deficit down to the Treaty ceiling of 3%, and then took it down more to get debt as proportion of GDP down.

Pro EU people often argue the UK did not have to do this because we were not Euro members. This is untrue. It is true we did not face fines for non compliance, but we were bound by Treaty rules and the UK state always accepted the discipline. Every year Parliament held a debate on our compliance. Every Red Book and OBR report included a report on progress with hitting the debt targets as a central part of economic policy.

It was bizarre to hear Opposition MPs condemn the budget stance as austere whilst insisting we stayed in the EU and obeyed its Treaties, as the Maastricht rules were at the centre of the policy.

Now we are out the new PM and Chancellor are right to expunge the state debt rule from our economic policy. Current levels of UK state debt are not too high. The UK can borrow at 0.6% for ten years, showing markets have no worries about debt levels. They supply affordable debt.

The Maastricht rules did not allow us to use the true figures of state indebtedness which should be net of the one quarter of outstanding state debt which the state has bought in and owes to itself. Adjusted for this our debt to GDP ratio is around 67%. This is low by international standards, well below Japan, Italy, Germany, France etc. The Maastricht rules are right to make Euro area states include State debt the ECB has bought in, because of course a Euro state does still owe that debt to an outside party, the ECB. The UK owes money to the Bank of England which it wholly owns.

UK Economic policy should be geared to growth and low inflation, not to state debt levels as the main target.

Inflation is at 1.3%. (CPI 12 months to Dec 2019) compared to the target of 2.0%. Thanks to the world slowdown and the Chinese epidemic oil prices have fallen by one fifth this year, with freight rates and other commodities also well down. The pound is rising against the Euro and yen. All this points to no inflationary surge ahead. Indeed if there is an inflation problem it is it will be too far below target, as the target is meant to be symmetrical.

The Bank of England should recognise that its tightening of credit conditions through two rate rises, FPC advice against car loans and consumer credit, and tough rules on mortgages has greatly reduced money growth. Tight credit has helped slow the UK economy down to almost a standstill. There is nothing wrong with some increase in credit to people in  jobs to buy homes and cars, or to businesses needing more stock and equipment  because their revenue is growing. The Bank has to work with the commercial banks to assist  low inflation growth.

I do not think a 0.25% cut in the low official rate will do much. I would prefer a new round of Funding for Lending, a scheme which makes cheaper money available to UK banks prepared to undertake sensible new lending to the UK economy. This worked well before and would ease pressures in various areas.

The second is to do what the Fed is doing and make clear to markets that the Bank will make cash available by buying Treasury Bills if needed to preserve liquidity and enforce the current low rate structure in money markets. Commercial banks need to know the Central Bank is not about to squeeze them or damage them as the Bank of England did in 2008-9 by leaving markets short of cash.

Prosperity, not austerity, was my slogan for both the 2017 and 2019 elections. When it became clear Mrs May was going to keep Mr Hammond as Chancellor and allowed such a  negative approach from the Treasury and her top officials, I joined with others to replace her so I could advance the cause of Prosperity.

The new Prime Minister made clear his economic policy is the promotion of Growth and Opportunity. He has from the start injected a welcome optimism into the country’s view of our future. When his chosen Chancellor fell for Treasury pessimism and tax rises, he asked him to work using shared advisers with No 10. I think the PM was right. The Chancellor was unwilling so  had to resign. I think we will be better off now we have a new Chancellor who should understand what the PM is trying achieve.

One of the Chancellor’s  jobs is to tell Treasury officials that we want realistic optimism about the UK’s economic prospects, with an expansion minded budget which will boost our growth and improve our outlook. It was not a case of the outgoing Chancellor valiantly defending a Treasury orthodoxy that is right against a PM who wants too much expansion. It was a  Chancellor giving in to the excessive pessimism of the Treasury/Bank/OPBR that has fuelled so many bad and wrong forecasts from them since 2015. The new Chancellor needs to say that we have growth in  our own hands, and that whatever the outcome of trade talks with the EU the UK can have a good economic future if we take the correct decisions now.

In future blogs I will  be looking at the range of measures the government now needs to take to shake off the slow EU style growth rate we have sunk to, and to liberate damaged sectors that have been hit by too many taxes and wrong policies like housing, cars, general manufacturing  and retail.

The Bank of England too needs to work with the government on promoting growth. Inflation is below target and looks set to remain  weak for the time being, so the Bank should assist the drive for growth.