Author: johnredwood

Yesterday’s letter from the CBI was a general cry from the heart that they might not enjoy the influence and access to government they think they ought to have. I suspect they will find with the new government much as they have with other past governments that they will have access to put legitimate points about the business interest to the Ministers and Ministries that tax and regulate them. It should be a professional relationship, not a special friendship.

The CBI has often provided pro EEC/EU advice that has turned out to be very damaging to the UK economy and business interests they claim to represent. I took the large industrial quoted company I led in the 1980s out of the CBI because it insisted on campaigning vocally for the UK to join the European Exchange Rate Mechanism. I was one of the few critics of the scheme. I pointed out the UK would get a high inflation or a nasty recession from membership. I lost the argument to keep us out, and we ended up getting both the inflation and the recession. That deeply damaging economic policy closed many factories, bankrupted businesses and meant the Conservative party spent 13 years out of office and 18 years without a majority. The government should remember the downside of some CBI advice.

I remember having an open door to the CBI and to their member firms when I was the UK’s single market Minister. I had the task of “completing” the single market in the early 1990s, when we had to put through a huge legislative programme of almost 300 new business laws to carry out what the EU thinks is a single market. Many businesses came to lobby me. Practically every time they came, they either wanted me to delay or dilute the proposed measures. Often they would have preferred me to veto it, but I had to remind them we no longer had that power under the terms of the Treaties we had signed with their encouragement.

One of the worst examples of a bad proposed EU measure was the one that would have made the London Stock Exchange’s method of trading illegal. The Directive had been drafted based on continental methods of trading. I went to great lengths to get that proposal changed, including going to Brussels to attend the working meeting of officials myself as well as to the Ministerial meeting. I managed to get the draft changed. Having no veto made this difficult.

Now I advise the CBI to recognise that the biggest threat to London’s financial business is the proposed takeover of the London Stock Exchange by German shareholders. Whilst they will offer short term reassurances that business will still be conducted in London, there will be nothing to stop them shifting large quantities of business to Frankfurt later on. Why isn’t the CBI highlighting this and lobbying to block the merger on competition grounds, as it will clearly reduce competition in European financial transactions.

It is curious that many of the laws that are what they call the single market were thought to be damaging to business at the time they went in, but are now apparently thought to be crucial to business. I would like to reassure the CBI that if they like all these laws now, we could always decide to keep them once we are out. The good news is that once out we can keep them, repeal them or improve them as we please. Where the laws are narrow matters of standards and requirements for the continental market then of course exporters will still need to meet the customer demands, just as they have to meet the different ones for US or Asian exports.

I have a simple answer to the government on seeking advice on Brexit.
They should not seek advice from consultants who were urging us to stay in until June 23rd, who want to charge the taxpayer a lot of money for their advice, and who have not read and understood the many documents which have established the EU.
The task is much easier than many of these wannabe consultants want us to believe. The PM has made clear we are taking back control of our laws and our borders. We also need to take control of our money. This means none of these things can be negotiated.
There are two simple ways of trading in the future. We can carry on as at present tariff free. This is obviously the right answer for our partners who sell us so much. If they want to damage their trade with us, then we can trade under WTO MFN status.
There are various people who have read all the necessary documents, who believe there is a good way through for the UK and who will provide their advice free. I suggest this is what the government accepts. Some of us have recently published a blueprint through Legatum, which covers all these issues and offers a strong negotiating strategy on trade to maximise the chances of a happy outcome and to speed it up to remove the uncertainties.

The extraordinary resignation of a recently elected leader, and the much debated dispute between two MEPs, has created much media interest in who might both win the leadership and then do the job. As some enthusiastic UKIP supporters regularly write in here I am offering them today the chance to tell us who they want and what they think about their leadership contests so far. It would also be interesting to hear what they think the role of the party is now we are leaving the EU. I am not looking for a blow by blow account of any physical contact between the two MEPs, but I and other readers here would be interested to know what the main arguments are that are clearly generating passions amongst UKIP members generally.

I see today the CBI are worried about their relationship with the new government. I wish to make it clear that I fully support Mrs May’s view that some businesses have to improve the way they behave. Many of us have been concerned by the behaviour of some senior business people towards their employees, and by their view of how much money they should take out a company they do not themselves own. I will write at greater length about various aspects of government and business in the next few days.

The myth of Bank of England independence is not just wrong, but it is also damaging.

By calling the Bank independent, people want to endow it with an authority and wisdom that it often does not possess. The false narrative implies that all politicians and the Treasury some of them lead is by definition biased, foolish, unable to make good judgements. In contrast the politics free Bank as an independent can make accurate and uncluttered judgements for the greater good.
The underlying assumption is the Bank employs special experts who are uniquely qualified to predict the future course of the economy and to make well informed and well intentioned judgements about it. Every one of these assumptions should be subject to challenge, as they are all wrong.

The Bank has been “independent” since 1997. Over that time period its economic forecasting record has been no better than the typical private sector average, which it often sticks close to. Like most professional forecasters the Bank completely missed the banking crash and great recession until it was in full swing. The Bank on the way to “independence” in the later 1980s was similarly unable to forecast the devastating consequences of joining the European Exchange Rate Mechanism, a policy it actively promoted.

It is difficult to see the Bank is politics free. It shares many of the assumptions of the governing elite and the general economics profession. It plays politics all the time, operating day to day with regular exchanges with the Treasury and wider government. It holds news conferences and intervenes in the political debate, as it did notably in the run up to the EU referendum when it decided to support the losing side. The Bank relies heavily on a concept of capacity utilisation influencing inflation and expectations in a way which is difficult to measure. It is tortured by trying to define the cycle in an age of huge technical changes to products and buying patterns.

I find it difficult to distinguish most of the time between the Treasury view and the Bank view. They usually forecast similar outcomes, and usually agree about the direction of policy. That is a good thing when they get it right, but a bad thing when they make one of their periodic large collective errors of judgement. Where the Treasury and the Bank have disagreed, as over rate cuts during the banking crash, the Treasury was on the right side of the argument.

The truth is there is no magic expertise held by the Bank that makes them uniquely able to set interest rates well. It is a judgement. It helps to study what has happened, and to have some knowledge and experience of what is likely to happen for given changes of policy. The Treasury is as able to do that as the Bank. A private sector forecaster or economically literate business can do it as well. Better policy making results from a clash of views and from open minded study of what a range of experts are saying.

Bank “independence” has coincided with the worst banking crash since the 1930s, with a great recession, and a long period of depressed rates and slowish growth. Is that the best we can settle for?

Constitutionally the Bank is the creature of Parliament. In recent years Parliament stripped the Bank of major powers in the late 1990s, whilst giving it more independence over settling interest rates. After the 2010 election Parliament gave back important regulatory powers to the Bank. Any so called independent power the Bank enjoys it does so only for as long as it pleases Parliament.

In practice the Bank has to accept the instructions and judgements of the government. All the time the government commands a reliable Parliamentary majority the Bank accepts the guidance and views of the Chancellor. Sometimes these are formal and published. For example Mr Brown changed the role and powers of the Bank by Statute, and he altered the inflation remit which controls the MPC during his tenure. Mr Darling overrode the MPC rightly during the banking crash and forced them to cut interest rates more quickly than they were planning. Sometimes the influence is behind the scenes. There is often a happy conjunction of incorrect forecasts between the Bank and the Treasury. The Bank took a similar line to Mr Osborne over the short term consequences of a Leave vote. It appears that the Treasury,OBR and Bank work closely together and often share the same judgements. Were there to be big divergences it would become a matter of controversy.

The government and therefore Parliament has kept to itself the power to approve Quantitative Easing programmes. This is a crucial power to reserve at a time of near zero interest rates. It means that even the devolved independence of the Bank on interest rate setting is constitutionally very constrained, as QE is clearly the major feature of current monetary policy. The latest burst of QE was formally approved by published letter from the Chancellor. Parliament could at any point debate and vote on these matters, but so far has been happy to approve what successive Chancellors have agreed on QE. I am pleased to see the PM is of the view that we do not need more QE, something I have urged here.

A lot of outside commentators misunderstand the powers of Parliament. Leaving aside current EU obligations which do constrain Parliament, Parliament is free to debate and vote on whatever it likes, and to change the law affecting any institution or policy it wishes. This includes whatever the Bank does. So it must be in a democracy. Ultimately the Chancellor should get the credit for economic policy success, or the blame for failure. The electorate can dismiss him at an election, not the Governor of the Bank. The fact that Parliament has chosen in recent years to allow the Bank to set interest rates, and has on the whole not been critical of what it has done does not mean the Bank is independent. It is accountable directly to Parliament, but more importantly it is mainly accountable through the government to Parliament. On two crucial occasions in the past Chancellors have intervened directly in the interest rate setting process itself, and those are the ones we know about. Maybe now it is time for Parliament to be more critical of its Bank, as its present policy of QE and ultra low rates is driving the pound down too much and undermining savers.

From the moment the referendum result was declared the UK’s relationship with the rest of the EU changed in an important way. Whilst it is true the government has not yet formally notified the rest of the EU of our intention to leave, the EU has known for three months that we are going to leave. Few on the continent now doubt it.

The rest of the EU have already altered their behaviours. They have started holding the odd EU meeting without us – a violation of the Treaty which seems reasonable, and would be defended on the grounds that it was not a proper EU meeting. They have given more public prominence to polices like the EU army that they know the UK opposes. The Commission has postured over their response to Brexit, whilst trying to warn member states off from talking about it or even discussing it with the UK. We will discover with Brexit, as with other crises and big changes for the EU, international politics takes over from Treaty clauses and EU laws. One notable feature of the EU and the Euro area under crisis is its flexibility when its Treaty based dirigisme creates yet another disaster.

Some advisers in the UK want to make a lot of money or media capital out of interpreting Treaty rules in particular ways and claiming the UK will have to confirm to them to its own cost. This misunderstands both what we are embarking on, the assertion of independence, and the way the EU will in practice have to respond. The EU has always had a very partial or lop sided approach to enforcement. Most member states have continuously flouted the central state debt rule, and many have broken the fiscal deficit rules. Many sign up to carbon reduction targets which they fail to hit. The no bail out rule and the rule against the ECB helping with monetary financing of member states have been sorely tested by ECB QE programmes and bank recapitalisations. Consultants may wish to earn large sums by being literal in a skewed direction, but in practice there will be an arrangement as it is in everyone country’s interest to have one.

The UK needs to think through what it intends to do during the transitional period. Any new Regulation will be directly acting and will have to be governed by the same approach as the rest of EU law. New Directives need not be transposed into UK law in future if we do not agree with them. Other member states have poor records at getting on with the task of transposing EU measures. Why would we bother to transpose ones we do not like?

Once we are out we should ensure there is no residual ECJ jurisdiction. All will agree no-one can bring a new case to the ECJ against us once we are out. There is the issue of what should be done about outstanding infraction proceedings against the UK on leaving? Again the sensible thing would be to discontinue them, as the UK would not be inclined to pay a fine for a past failure to transpose a Directive.

In May 2016 the Governor of the Bank of England warned of the dangers of a vote to leave the EU. He was quoted by both the BBC and Bloomberg as saying “that the risks of leaving “could possibly include a technical recession”. I have not seen any suggestion that was a false quote.
Today Deputy Governor Ben Broadbent tells us “the central projection in the August Inflation Report didn’t involve a recession, simply a slowing in the economy’s rate of growth. But that slowing looks so far to have been more m0derate than we feared.” Mr Broadbent is careful to define a single central forecast made at a later date.
It all seems to mean that the Bank got their various statements and forecasts wrong, and now are changing their tune about the outcomes for the UK economy this year. It is good news the Bank now agrees with those of us who have consistently said there will be no UK recession in 2016. The Bank has revised its Q3 2016 forecast up.

There are some parts of the IMF forecast that I think may well prove to be right. They anticipate global growth at around 3.1% this year and 3.4% next year. They think India and China will continue to grow much faster than the advanced countries. They think that over the medium term the UK will grow 0.5% per annum faster than the Euro area. The UK has been growing faster since 2010 than the Euro area, and on current policies I agree that is likely to continue. They also think the UK will be the fastest growing of the major economies this year – quite a contrast to others.

Where I disagree is with their 2016 and 2017 forecasts for the UK. They seem to have been too influenced by the early adverse July manufacturing PMI survey which they cite , where leading executives of large companies expressed their frustration at losing the referendum. They have a 2016 forecast of 1.8%. Given the robust retail sales, service sector output, car sales and new homes sales figures we have seen since June 24th it is difficult to see why it is below the Treasury March forecast of 2%. However, their forecast is somewhere near that Treasury forecast, and is way more optimistic than all those forecasting an early recession following the vote. My disagreement with it is minor. It’s all a big change of tune from the many gloom mongers this summer saying the UK economy would tank immediately after the vote.

They have instead marked down 2017 more, to just 1.1%. They draw attention to how “the aftermath of the Brexit vote weighs on firms investment and hiring decisions and consumers purchases of durable goods and housing”. So far employment has gone up, new home buying has increased, and car sales and output hit high levels in August with robust growth. If in the immediate shadow of the vote confidence remains high, why should it crumble next year when the anger and upset of those who wanted to remain will have calmed a bit more? They do not mention the large monetary stimulus that has been administered by a lower pound, a cut in interest rates, and a large money creation programme from the Bank of England.

At least they are not forecasting recession any more for the UK. Could the UK economy get hurt? Yes, if a crisis somewhere else in the world blew up. I suspect the IMF is right in thinking we can avoid a major banking crash anywhere for the time being, that China will continue to grow, and worldwide authorities will want to assist expansion. On this basis there should not be a recession in the UK this year or next.

Meanwhile the news media highlights a small fall in the pound this week, but ignores the fact that the FTSE 250 and the smaller companies indices have recently hit new highs. We are told that the FTSE 100 has gone up thanks to overseas earnings. Why have they lost interest in the FTSE 250 which they told us after the vote was the one that mattered? Is it because it too has embarrassed them by going up and hitting a new high? That’s not owing to overseas earnings! Yesterday was strong dollar day. The dollar rose against sterling, the yen and the Euro. Sterling rose against the yen, but our media suppressed that fact as it blows their Brexit thesis about the fall in the pound out of the water.