Author: johnredwood

I have been warning for two years that the combination of fiscal squeeze and tight money policy would slow our economy. So it has proved. Indeed if anything I am surprised that our economy has not slowed more. The global background is an additional reason for the weakness, with Germany slowing more than us and the USA less.

The USA has shown that the combination of rate cuts, liquidity provision by the Fed, and big tax cuts are delivering better growth than we and the other Main European economies are showing. That is why I welcome the new government’s decision here to increase spending on schools, the NHS and police. I also think we need some tax cuts soon, so individuals and families have more money to spend on their own priorities.

Those who write in to say I am too lax about the debts misunderstand the position. The government’s proposals are prudent and necessary. Excessive borrowing and spending on Labour plans would undermine confidence and be damaging. Faster growth will boost tax receipts and some of the tax rate cuts will bring in more revenue. After allowing for the state debt the Bank of England owns on behalf of taxpayers our debt to GDP ratio is fine. The QE debts we owe to ourselves so there is no net interest cost.

The latest GDP figures show we avoided recession last quarter and are growing at around 1% a year. We should aim to double that growth rate, which a sensible fiscal and monetary easing with the right tax cuts could do.

The costings of Labour’s programme are off the chart because Labour has made so many expensive pledges or promised so many unaffordable policies. The Conservatives put it at £1200 billion over five years or an extra £240bn a year. That’s a huge tax rise and  a colossal borrowing  increase.

There is the £196 bn cost of nationalising utility firms and the estimated £85 billion cost of the four day week they propose for starters.

Labour say  these costings assume all the ideas and pledges they have  told us about in the 2017 Manifesto and since gives the wrong impression because they will do not do all of them. They will get round later in the election campaign to deleting some of the items to make some reduction in the staggering bill.

This is trying to have it both ways. They want some people to vote for them because they are offering them more money or less work or a slice of nationalisation. They will keep the offers out there for longer to draw them in, and hope people do not notice when they cut some.

Given the enormous cost even after they have cut back some proposals they will still be recommending a huge increase in taxes, borrowing and debt. I look forward to seeing Labour’s costing of whatever programme emerges.

We know what happens when a government spends too much and tries to borrow too much. Labour did in in the early 1970s, had to go begging to the IMF for a loan and ended up making big public spending cuts. Labour did it again in 2008-9. They overdid their spending and borrowing and presided over a huge credit expansion, only to have to slash spending during the recession they created. Just look at the poverty in Venezuela and the cuts in Argentina where governments have tried to spend and borrow to excess in recent years.

Don’t let them do it again.

Today we remember all those who died so we can live in a free country. Their selfless sacrifice in two world wars led to more peace loving democracies emerging in Europe and Asia.

It is good news that 74 years have now passed without our country being enveloped again  in total war.  Today we also remember those who  have died in more recent local and regional wars despite the success in avoiding full on conflict between the great powers.

I will attend the Remembrance  service in Wokingham in a private capacity.  I have explained to local organisers that there are currently no MPs so there can be no official wreath laying on  behalf of the constituency.  Conservatives are not campaigning today in the General election.

The balanced budget rule which says spending on  current  budgets has to be covered by tax income is sensible and prudent. Whilst education is an investment in young people, teachers’ pay is still a current and recurring item of spending.

Some of you are concerned that the government can borrow to invest. Investment means the capital budget where you buy items like new school buildings or a new road which will be used for many years going forward. Most investment in the state sector is building and construction work.

The Balanced budget rule still provides a constraint on how many new buildings you can build to expand a free to the user service, as all the staff and running costs of the new buildings fall on current account under the Balanced budget rule. It does encourage investment in replacement buildings that are more fuel efficient and in other ways cheaper to run or public investments that generate a revenue return.

In order to justify borrowing to invest we need to show the need for the new capital provision and the imputed return where it is for a service provided free to the user. Let us take the case of the M25. This expensive motorway offers no direct financial return to the taxpayers who paid for it, because we do  not have road charging. If we had put in place a road charge system instead of the current Vehicle Excise duties and fuel duties, the M25 would have shown a great return for the state investor. The state has to impute a value to the likely use of the facility to assess one public sector project against another. By definition this can only be a judgement based on  stated assumptions. The state also has to take into account that use is likely to be higher because it is provided free.

In the case of borrowing to provide a new school the case is overwhelming where there are more pupils than school places in a local area. If it is a replacement school then the project needs to show substantial running cost savings compared to the building it is replacing, and preferably a return of capital to the state from disposal of the one it is replacing unless on the same site.

A new railway line is easier to assess, as the railways do collect money from train users. Spending a lot of money on a  heavily loss making line would not  be a wise investment.

Somehow the state has to improve its way of evaluating all these competing projects to come up with a list that genuinely expands the national wealth or are essential to the delivery of good quality public service like health and education.

 

I was disappointed to hear on the radio that it was a sign of the times and surprising that I was supporting the fiscal changes made by the government. The BBC saw me as   some kind of austerity hawk who had suddenly changed, showing the public the BBC think they have every right to comment on  my views without bothering to read  or understand them.

As readers of this blog will know I campaigned for Prosperity not austerity as the driver of policy before the last election as well as for this one. I see recent changes as  good progress in the direction I have wanted campaigning for more money for local schools and the NHS and for a boost to our economy from lower taxes.  

Indeed my opposition to the austerity framework of policy goes right back to my resignation from the government of John Major. I resigned over the Maastricht Treaty and possible membership of the Euro. As I made clear at the time I saw the Maastricht controls on the economy as likely to induce a bust. They had done so in the European Exchange Rate Mechanism and could do so again if we joined the currency.  We did not join the Euro but we have always accepted the Maastricht debt and deficit controls, with unfortunate economic consequences. In the Hammond years they have overtightened our economy, cutting its growth rate.

The new fiscal framework is a bit looser but officials wedded to the 3% deficit ceiling and the 60% state debt to GDP target have ensured there are surrogates. Allowing 3% of GDP borrowing for capital spending with a balanced current budget is a bit looser than an overall 3% budget deficit ceiling with pressure to run a deficit considerably lower than 3% much of the time. The need to reduce state debt as a percentage of GDP is not entirely dropped but it now relates to a whole Parliament lifetime and not to each individual year, and only bites if debt interest exceeds 6% of tax revenue. This allows flexibility to take a bit more advantage of low interest rates,.

Because the  BBC will never explain the  origins of our current controls they do not  wish to expose this kind of detail. It means they misrepresent  the views of those of us who wish our country to be prudent but do not wish our economy to be short changed when inflation is under control and growth is weak.

The new fiscal framework set out yesterday by the Chancellor should allow scope for some tax cuts in the next budget. It is important these are not crowded out by further increases in spending. Tax cuts are the quickest way to boost real incomes and stimulate the economy. People should be able to spend more of their own income.

As the world economic slowdown continues, led by a world manufacturing recession, it is important the UK has an economic stimulus. The US is growing faster thanks to past big tax cuts, spending increases and recent interest rate cuts. Yesterday the Bank of England once again continued their squeeze, refusing to join the ECB, Fed, and the Central banks of China, Australia, Brazil and all the others that are cutting rates to provide an economic boost.

The important principle that people like and support is that healthcare should be free. We should all have free access to the NHS, and should expect to receive timely and good quality treatment in proportion to our health needs. All taxpayers of course pay for the service through taxes.

The only major departure from this was when Labour in the early years of the NHS introduced charges for prescriptions and glasses. Subsequent governments of various parties have given more exemptions to prescription charges whilst continuing with them and from time to time increasing them.

The NHS has never been a fully nationalised service. Labour’s original establishment allowed GPs to be private contractors, running their services from private premises as many still do today. The NHS has always relied on the private sector to supply its drugs, bandages, food and other supplies. For many years under governments of all three parties the NHS has employed private company contractors in various locations to clean and cook, to provide a range of services to hospitals and surgeries.

Nor has the NHS ever insisted on all its supplies coming from the UK. Where foreign companies have developed good drugs that UK manufacturers do not have the NHS is willing to import them. The NHS is also cost conscious and usually negotiates a bulk discount or special terms reflecting its buying power.

Most people do not mind the NHS drawing on the best supplies from the private sector as part of its activity, as long as the core proposition of free good quality NHS care is maintained. The present government has no intention of deviating from this. These are common principles and practices shared by Labour and Conservative governments in office.