Author: johnredwood

I read in the papers that the Treasury is busy scrambling around to find more taxes they can put up. If they stopped giving away so much of our money to the EU and   stopped trying to find ways to carry on giving away our money to the EU  they would not need to worry about where to find the cash. If they fully embraced the idea that lower tax rates often lead to higher revenues we could make more economic progress.

This week the Republicans at last rose to the challenge of tax cutting. They announced a blockbuster package. If it or something like it passes it will increase US growth materially, it will  be a boost to the whole world economy, and it will suck business into the USA from higher tax regimes elsewhere.

The  Bill includes slashing the Corporation tax rate from 35% to 20%, and to just 12% as a one off to get large US corporations to repatriate profits they have been holding offshore to avoid high rates. It gives a big boost to the average earner by cutting bands of Income tax from 7 to 4, and lowering the tax take on all but the richest. It is costed as providing a $1.5 trillion stimulus over ten years. In practice I suspect the proposals will collect rather more revenue than the conventional official models predict, but it will certainly be stimulatory in its impact.

We do not need at the same time a budget in the UK looking for new ways to tax small business with extra VAT or National Insurance. We can live without a tax attack on the self employed. We do not need further tax attacks on homeowners. We need to match the US approach and show some enthusiasm for lower tax rates. We need a more dynamic economy, collecting more revenue, which comes from fewer, simpler and lower tax rates.

So much of the UK economic establishment is dominated by endlessly repeating the arguments of the Brexit referendum for no good reason.  Instead they need to talk about tax cuts and tax reform, appropriate deficit levels and Central Bank policy. There is a danger the UK will be left behind by the boldness of the US approach. If they carry this package or something like it it will have an electrifying effect on the US economy.

The Bank and the FSA allowed far too large an expansion of credit and derivatives prior to 2007, as many pointed out at the time.

They then decided to crash the banking system by withdrawing liquidity and putting up rates, leading to the Great Recession.

Since then they have restricted banks in making new loans, and have sought to offset the negative effects of this on jobs and output by keeping interest rates near zero and creating money themselves which they inject by buying up state debt.

Savers suffer from the low rates, but benefit from the inflation of asset prices this causes. Credit is cheap from banks but rationed strictly. Alternative credit from shadow and non banking sources is quite expensive.

This is not a good model. Getting to a better one will take time and patience, but we need to sketch the direction of travel.

The first task is to wean us off QE, by setting out a programme to cancel the state debts the state  now owns and to cease reinvesting the income and capital proceeds from  the state owned  bond portfolio. We will then  see that UK state borrowing as defined by international standards is relatively modest at around 65% of GDP.

The second task is to allow the commercial banks to create a bit more credit to finance a bit higher rate of growth. This should be done by adjusting the macro prudential requirements now that the banks have much better capital and reserve ratios.

When better growth is restored then the Bank can gradually increase rates when the data justifies it.

The aim should be to end up with 2% inflation, growth at over 2% and a small real return for savers instead of a negative real return.

I thought the interest rate cut some weeks after the Brexit vote was needless last summer. The economy was speeding up at the time, credit growth was lively, house prices and home building were on the up, new cars sales growing strongly and unemployment coming down. The Bank had all the wrong forecasts , arguing that unemployment would rise, jobs would fall, house prices would fall and confidence would crash.  Instead of looking at the data the Bank trusted its own wrong forecasts and cut rates!

Yesterday the Bank did the opposite. The data shows house prices slowing, car sales falling, credit growth slowing and money growth retreating. The Bank should know that because it has deliberately brought it about by ordering a credit tightening under its macro prudential powers.  The latest retail sales figures, growth figures and house prices figures are showing much slower rates of growth than in the summer of 2016. So what does the Bank do? It puts rates up!

Its argument is s sloppy one. It says we are getting close to capacity, and cites the fall in unemployment. This it says requires a rate rise to bring inflation back to target though it has previously always said the inflation spike this autumn is a one off which will subside.

It is odd that the MPC in its explanation of the economy refers to Brexit several times and makes no reference to the Bank’s own monetary tightening, reduction of credit growth and tax attacks on housing and cars by the government. The Bank seems to have lost its impartial interest in the figures and gained an unhealthy wish to blame Brexit for anything adverse. If Brexit is such an all pervasive influence why doesn’t it get the credit for the strong jobs growth, the rise in housebuilding and the strong manufacturing performance over the last year?

If you look at a graph of car sales they rise strongly up to March 2017, with no effect from the vote or the Article 50 letter but a big effect from the budget and government statements on diesels. If you look at a graph of BTL investment you see it takes big hit in April 2016 before the vote when the government introduced big tax rises. I suggest people look at the evidence instead of trotting out alleged Brexit effects for bad news, and saying despite Brexit for good news.

Whilst official forecasters and the clever moaners were telling us of a housing collapse in the UK after the Brexit vote, we saw instead continued increases  in new housebuilding, strong demand, and a brick shortage.

UK brick capacity was slashed from 2.6bn bricks a year in 2007 to 2bn as a result of the crash. The Great recession led to many brick kiln and plant closures and reminds us of how much damage this did. In recent years as a result the  UK has turned to importing more bricks from the continent whilst we await new plant investment to replace the lost output and meet our domestic demand.

Bricks are heavy items to transport, so the imported product has to carry the extra costs of long distance journeys. It is taking time to rebuild UK capacity, though Ibstock are currently putting in a 100m brick plant which should come on stream soon.

Building materials generally is an area where the UK can and should do more to substitute home production for imports given the transport cost advantage of home output. It is also the case that builders often prefer to buy locally as it reduces threats to their supplies which distant factories and busy roads and ferries can create.

Brexit will offer us many opportunities to substitute home production for EU exports, especially in food if they opt for the WTO model with tariffs.

Meanwhile today the Bank of England which last cut rates when the data was strong and did not justify it will probably raise rates when the data does not justify it. The Bank has slowed the economy by other means this year.

The Treasury is worried about the need to control spending as it still wants to eliminate the deficit during the next decade and to reduce it this Parliament. Its task is likely to be made harder by the well leaked suggestion that the OBR will slash their forecasts for productivity growth for the next five years, which in turn will cut their estimates of tax revenue and boost their forecast for the deficit. This is the body which was too pessimistic this year with its deficit forecasts. The deficit so far is £13bn less than their guess.

I am all in favour of eliminating waste, spending more wisely, and concentrating spending on priorities. I would suggest the Treasury could do a much better job in each of those areas. It also needs to get its own views into line with public perceptions of where we are spending too much and where we need to spend more. Here are some areas for savings.

1. The EU. The Treasury seems to be in the lead to carry on paying large sums to the EU for as long as possible, and even to pay them a large lump sum we do not owe them. They need to understand that a majority of voters wants to end our contributions in March 2019 and has no wish to pay them any additional money, as there is no legal requirement to do so. This would be the single largest saving the state has achieved for a good few years.
2. Overseas Aid. Parliament is unlikely to want to revisit the pledge to pay 0.7% of GDP, but many MPs as well as voters do want to make sure we spend the Overseas Aid on items that help. We need to revise our and the international definitions to make sure that all military spending on disaster relief, peace keeping and in some cases peace making is charged to the Overseas Aid budget. We need to ensure that when we go to help  Caribbean islands the money spent is also charged to  Overseas Aid.
3. Railways. We need better financial discipline at Network Rail where I have in the past highlighted their losses and questionable expenditures. We need more rail capacity but this should be primarily brought about by smarter signalling. If we pressed ahead with this we would not need to build expensive new lines as we can run more trains on what we have already.
4. Housing. A good system for more homes for sale will limit the amount of public capital needed to provide more homes. Moving to a new borders and migration policy could also cut some of the pressures on the housing budget.

We do need to spend sufficiently on schools and hospitals, and need to provide the cash for pay rises as these come through in the public sector.

The Bank of England has told its regulated businesses to prepare for No Deal. It has also asked them how many jobs would be lost on the worst case scenario from the City. Their answer, we are told today, is 75,000. It  is difficult to believe  their figure . What I see is companies continuing to commit to new space and new recruits in London at a time when there is no sign of a deal. I also hear from the continent that many financial businesses there are keen to keep their access to London and its large pools of talent and capital. The Bank at least has scaled back its gloom, which got all its forecasts wrong about growth and job losses for 2016-17 on the back of a No vote. UK Employment increased then when they said it would fall.

Meanwhile one of the gloomy worries  put around that the planes will not fly the day after Brexit if we leave without a deal has been refuted by someone who should know. Willie Walsh, the CEO of British Airways has said he expects the planes to fly. Will the doom mongers now stop using this absurd forecast? BA is owned by IAG who have every interest in UK planes flying to the continent and Spanish planes flying to the UK. They are right to expect that to continue, even without a UK/EU general Agreement.

It was good to hear some candour from a former Prime Minister. The main reason of course that Mr Brown’s tenure came to an abrupt end in a General Election was the failure of his economic policy, and  the disaster of banking regulation by the FSA and the so called independent Bank of England. Mr Brown put the UK economy through a cruel boom/bust cycle. First they let the banks expand far too much, as many warned at the time including the Opposition parties. Next they collapsed the credit by withdrawing too much liquidity too quickly, leading to a deep and damaging recession as a few of us predicted.

In this he did on a larger scale  what John Major did by adopting the European Exchange Rate Mechanism. They both achieved the same outcomes. They delivered a  recession to UK households and businesses. People lost their jobs, and businesses closed down.  This in turn led to huge and understandable unpopularity, and to the end of their respective parties in power for a long time.  In John Major’s case it kept the Conservatives out of power for 13 years, and without a majority for 18 years. In the case of Mr Brown it is 7 years out of power for Labour so far, and at least 12 years assuming this Parliament lasts the Statutory five years.

The second order issues of Mr Brown’s  handling of the social media, his attitude to the softer side of politics and communication, are minor in comparison to the economic damage. It is true he was no Tony Blair or David Cameron when it came to making a friendly presentation of what they were trying to do. Those two  had a considerable amount in common.

Both Mr Blair and Mr Cameron were well presented, intelligent and articulate. They “looked the part” of PM. Mr Cameron came to the job with great self confidence born of apparently effortless success in his life to date. Mr Blair acquired great confidence from his large majority and from his ability to take to the corridors of power with enthusiasm. He especially seemed to enjoy the relationships with foreign leaders.

They both had a fixation about following the EU and avoiding disagreement with it. This led Mr Cameron into terminal trouble when he failed to stand up to the EU to  negotiate any kind of good deal to stay in. Mr Blair got away with his feeble approach to new EU Treaties and aggressive accumulation of powers from the member states because most in his party did not want to fight him over EU matters and agreed with him to keep it all quiet and pretend  the Nice, Amsterdam and Lisbon Treaties were unimportant.

Both wanted to use UK military power to intervene in a number of Arab states, and were impatient with critics in their own parties who thought such interventions ill judged or even illegal. Both liked disagreeing with their own parties in the hope that this would attract voters from other parts of the political spectrum. In the case of Tony Blair he did convert a number of Conservative voters to his  cause in the first two elections. Mr Cameron remained stuck some 7% lower in the popular vote than Margaret Thatcher, and alienated a chunk of his voters by his pro EU stance.