Author: johnredwood

It was good news to read over the week-end that the UK government has not given up on the UK steel industry. The industry and others including me have long been explaining that very high energy costs and business rates are big handicaps to the UK industry. It has also been well known that there is massive overcapacity worldwide, led by the large investments in steel in China, which has slashed prices for the product. If the UK persists with much dearer energy than leading competitors it will be our industry which closes, whilst the CO2 will be produced elsewhere with the jobs and the profits.

The Chinese currently account for around one half of world steel output. They have announced plans to cut up to 150 million tonnes of annual capacity, almost as much as the entire EU industry makes each year. Such reductions will make a big difference to future prices as they are implemented. It could mean that the current low level of steel prices will be temporary, with prices rising again as capacity is reduced. World demand for steel is likely to rise from here as advanced economies gradually recover from the slump of 2008 and as more emerging economies raise living standards. As they do so more people want and can afford cars, domestic appliances and other products with a steel content.

The issue is how will the UK manage to get its energy costs down to assist the industry? Can it do so enough to make a material difference? The government is talking of subsidising the energy costs more, as it has started to do. It’s not an ideal solution, but given the large interventions made in our energy markets to push prices up it may be the only short term fix. The government will of course need clearance from the EU to do so.

Government is in a stronger position when it comes to business rates and other domestic impositions. There it could take some action to allow the industry to keep more of its revenues.

The government has pledged to buy more UK steel as part of UK public sector contracts. Several of the large infrastructure and equipment programmes have a substantial steel content.

It may also be necessary to help create cheaper energy on a longer term basis if the work to save steel is to endure. I have often written on how this could be done, after two decades of expensive interventions the other way. The sooner we do this the better. It is our only hope of keeping and expending our industry.

Germany’s large trade surplus with much of the rest of the EU is doing much harm.

Countries in the Euro in deficit have to borrow from Germany. As countries borrow more from Germany so they become more dependent on the German view. Germany says that she will only lend to other countries in the Euro in return for their acceptance of EU/German discipline over budget deficits, public spending and general economic policy. Germany sees her loans as a way of extending control over the policies of the countries that are borrowing. It results in an EU view of benefits, pensions, general public spending, taxation and deficits becoming official policy in the debtor nations.

In the case of Greece the borrowings have become so big that the country has reneged on its private sector debts and is looking at ways of cutting the amount of interest it has to pay on its borrowing from other EU states and hoping for debt extension or retirement. The Euro area is learning the hard way that if a debtor gets too heavily into debt the creditor may have to forgive some in order to get a bit more of their money back. Bankrupting the debtor nation may not be a good idea for the creditor, and it is certainly bad news in the short term for the debtor. In Cyprus bank depositors had to take a hit when the system was overborrowed.

This conflict between the German view of the need for discipline and the view of many in the debtor countries that they need a different economic approach to lift people out of unemployment and poverty has spawned new parties and political movements to try to shift the German position. So far challenger parties have been able to do well and even take government in Greece, but they have been quite unable to alter EU policy which remains under the strong influence of the German state as bank manager.

Some senior Germans think the UK should join the Euro if we stay in the EU. They see allowing the value of the pound to change as a way of escaping the disciplines of EU/German economic policy which they regret. In the meantime the large UK deficit on balance of payments means that German investors can buy into UK private sector assets and companies, and start to exercise more control over our economy through private sector ownership.

I fully understand the German view that they work hard and manage well to produce a surplus, and they expect others to do likewise. There is nothing wrong with a modest surplus. The problem is when a country runs a persistent and high surplus it means others are running a persistent and high deficit. This can become unsustainable, and is ultimately damaging to the surplus country as well. The first round bad effects are recession or no growth in the customer economies, leading to less business for the main exporter. Second round effects can be reneging on debt, as we have seen with Greece, or nationalising assets acquired as sometimes happens in emerging economies without such a strong rule of property law.

I have always thought the UK’s balance of payments deficit is a bigger problem than the state deficit, though the two are in part related. I have spoken about it often here and in Parliament. The reason is the longer we run a large balance of payments deficit the more money we will owe to foreigners, and the more of our industry and property will be brought up by overseas investors. Progressively a country loses economic control as it sells many of its assets and mortgages the rest.

A larger state deficit can in some circumstances be financed at home by lending to ourselves. We do not necessarily lose overall control of our destiny, but switch money and assets around amongst ourselves. The state can always repay the debt, though if it overdoes the borrowing it will end up repaying in devalued pounds, partially reneging on the debts through inflation. The state will pay for itself at the expense of domestic savers or by taxing productive people more to repay the debts. Done to excess it makes us poorer. A large state deficit may also mean having to accept loans from abroad. These are more difficult. These usually require repayment in someone else’s currency , so we do not have the power to simply print that. If we borrow in foreign currencies the debts may get bigger and more onerous to repay if and when our currency falls in value.

The EU model put out by the Remain campaign is a model for economic dependence. Taken to extremes it leads to bankruptcy as we have seen in Greece and Cyprus. They say they want to attract more overseas investment. They welcome more purchase of UK companies and assets by French nationalised industries or by German shareholders. That means running a bigger balance of payments deficit and placing ourselves more and more in hock to overseas investors. They do not come here out of charity or kindness. They come to earn a return, to make a profit and to take money out of our country from their activities. One of the main reasons our balance of payments has been deteriorating so quickly is foreign investors are now taking much more out in terms of profits, dividends and interest charges.

The Remain model welcomes German investors taking majority voting control of our Stock market, and accepts we will import German steel rather than make our own. They welcome large imports of German cars and French food products. They do not tell us the truth, that the UK has to compete to maintain and improve our living standards. We cannot afford to allow too many industries and services go uncontested. There are limits to how many activities we can give up doing altogether or can sell to overseas buyers.It is interesting that Tata wants to exit all steel making in the UK and also wants to invest in German steel making. By doing so it accepts the EU logic that Germany should as the creditor nation keep on strengthening its industrial base to export to the other states. They in turn become more dependent economically on Germany. We see the dangers of going too far down that road when you see what happen to an economy like Greece which is now very dependent on the goodwill of Northern European creditors led by the German state. The creditors forced a 25% cut in Greek incomes as they tried to rebalance their books.

Let us draw an analogy with an individual household. It is true that you can boost your spending power above your income for a bit by borrowing more to buy new things . You can also boost it by taking out a loan on your home or selling some of your furniture and other assets. Done in moderation you can buy assets on borrowings which go up in value and make you better off. Done to excess you can end in grave financial difficulty. You find out that you then have to work harder and earn more just to pay the interest on the extra debts. If you are not careful you will reach the position where the interest charges take up too big a percentage of your income and your living standards fall as a result. You eventually reach the end of your ability to borrow more. You also run out of assets to sell. You can only sell your house once to spend the proceeds.

I want the government to curb the national deficits. I want us to generate our own power, make our own steel,produce more of our own cars. I believe we can do this. It requires taking back control from the EU, cutting energy levies and prices, and redoubling efforts to create good conditions at home to produce and sell our goods and services. Leaving the EU will immediately improve our balance of payments deficit and give us back more of our own money to spend on our priorities as I have pointed out from my analysis of the balance of payments deficit. At the moment we are being made to borrow to send money to rich continental countries to spend on what they want.

According to the Remain campaign, if the pound falls against the dollar that shows investors have fears about Brexit. In recent days the pound has been rallying against the dollar. They have gone quiet. Is this a reappraisal by investors, who now see the substantial gain to our balance of payments from leaving?   The pound fell from $1.47 to $1.38 between January and the end of February, but has since improved to $1.44.

If we take up the Remain view that investors are mainly moved by Brexit considerations and have been so far this year, then we can see that investors have some good thoughts on the advantages of Brexit. So far this year the number of jobs is up, vacancies are up, and a record number of people are in work. The Remain fears that Brexit worries would damage the jobs market have so far proved inaccurate.

The cost of government borrowing has gone down since the end of last year. The cost of borrowing ten year money has fallen from 1.99% to 1.4%. Why don’t the Remain people hail this as a substantial improvement, and see that implies investors are positive about Brexit? The US in contrast has to pay 1.8%a year  to borrow for ten years.

Then there is the prediction that inward investment will dry up. At a time when German investors are keen to take a majority share in a merged company with the London Stock Exchange ahead of the vote, it is difficult to sustain this argument. Various industrial businesses with five year investment programmes have confirmed they are not going to cancel if we vote to leave.

I think the Remain campaign exaggerate the impact of Brexit on the economy and on markets. Sterling has been falling against the dollar since last summer, as have other currencies, mainly on forecasts of rising US interest rates. The pound fell from over $2 in 2008 to $1.4 in 2009 when we were firmly committed to the EU, so we know other influences can generate large sterling movements. Whilst I would like to claim hopes of Brexit as the main cause of lower interest rates it is as difficult to do so as to claim Brexit caused the fall in sterling. Advanced country bonds have generally been rising in price with the European and  Japanese authorities both heavy buyers of their own paper.

In January, the last month for official figures, the UK imported £202m of steel from the rest of the EU and only £80m from the Rest of the world. The way EU energy, regulatory and procurement policies are enforced in the UK versus the continent allow much more steel to be produced in the rest of the EU than here. This should be one of the prime issues.
As the government looks for a buyer with Tata it should also evaluate Tata’s closure costs so a buyer can have a realistic negotiation over a dowry for the plants.

Yesterday’s figures for the UK’s balance of payments made bad reading by the standards of this worrying series of figures. The deficit reach a new high of 5.2% of national output for last year, and 7% for the last quarter. These are records we do not want to break.

The deficit had three main components. There is first the running deficit on government  account. Overseas aid payments combined with payments to the EU which we do not get back amounted to 1.4% of GDP or one quarter of the total deficit. As government policy is to continue to increase these payments in line with economic growth only Brexit could reverse this trend and cut this part of the deficit.

The second is the gap between money we have to send abroad to foreign owners of property, businesses and shares in the UK and the money UK investors receive as interest and dividends on their overseas investments. The gap is likely to carry on growing. All the time we run such a large payments deficit it means more foreigner buying more UK assets and expecting more interest, rental  and dividend income to be paid to them.

The third is the gap on trade. The UK is still in trade surplus with the rest of the world, but is in massive deficit with the rest of the EU. Common EU policies from fish to steel and from farming to energy are pushing the UK into more and more dependence on imports. We now import electricity which we could produce at home, import steel and steel based products especially from Germany, import more fish as overseas vessels take more of our resource and import food as the vagaries of the Common Agricultural Policy do not always help us.

I would like the UK to adopt a policy of improving our balance of payments deficit. To do so it will be easier once out of the EU. We get the immediate benefit of not having to make contributions. We can then adjust domestic policies to help our industries more than the EU does. I appreciate that the UK has added to some of the difficulties created by the EU common energy policy, but the EU policy constraints are now being used as the main reason we cannot change. It is also the case that the UK feels very circumscribed in responding to the steel crisis by both the state aids rules and the public procurement policy. The problem with interventions in markets like the heavy interventions in energy cause distortions which then lead to the need for other interventions to try to offset them

I want the government to find  a means  for a new owner or owners of our steel industry to keep open our current plants and to maintain a steel capacity in the UK. There are ways government can and should help bring about a new settlement that offers hope of continuing  steel production. Government can and should respond to demands over business rates, energy costs, anti dumping actions and public sector steel purchases.

The Welsh government could give Port Talbot rate relief, as business rates have shot up in recent years. Very high energy costs have been a problem for sometime. The government says it is doing something, but it needs to do more as I have been urging. The EU has taken some action to deal with dumping by Russia and China, but has imposed lower tariffs than some other countries around the world. More allegations of dumping are being investigated. This is entirely an EU competence, so we rely on them for action.

The UK government is working to secure more orders for UK steel works. the large building programmes it has for railways, utilities and property all require substantial quantities of steel. It needs to ensure UK bidders have good access to the possible contracts.

They need to help the management and workforce negotiate with the current owners, Tata, over the terms of transfer of ownership. If no-one emerges for early purchase Tate will face large closure costs, so government can help persuade it to include a dowry with the plants for the new owner which will still leave Tata better off and free of future liabilities.

The problems of our steel industry has led to exchanges over Brexit. What is clear is membership of the EU has not protected our industry, and some EU policies have made the problems worse.

To those who think nationalisation offers a simple solution, I suggest they read the sad history of nationalised British Steel from its establishment in 1967. Government had a bold vision of five new large coastal works to produce and sell 35 m tonnes of steel by the end of the 1970s. They embarked on a huge capital investment programme to construct the plant necessary for the task. The private sector industry they took over produced and sold 27 million tonnes in 1965. Output from the nationalised industry slumped from that figure, despite the large investment in new capacity. In 1972-3 British Steel Corporation  produced 25.1 million tonnes, in 1975-6 just 17.2 million tonnes, and in 1978-9 17.3 million tonnes. In the early 1980s a new Chairman concluded he had to plan for just 14.4 million tonnes of output, 59% less than planned output under the investment programme.

Thousands lost their jobs both under the Labour government of 1974-9 and the Conservative government from 1979 onwards. The workforce of 250,000 in the early days of nationalisation became just 50,000 in the early 1990s. Large numbers of redundancies were needed both because capacity had to be reined in so much and because UK steel productivity was well below US and Japanese levels. Bilston, Cleveland, Consett and Corby all had to be closed. There was still far too little work for the five main new coastal facilities which ran up colossal financial losses for taxpayers. The Conservative government  decided to keep Ravenscraig open despite advice from the Corporation that they  had too much capacity and Ravenscraig had the highest cost base.

Today of course the EU  rules on state aids would not allow any government to pay the huge losses successive governments paid for in the 1970s and early 1980s. They would not allow the £2bn of public dividend capital which turned out to be free money for the business nor the large capital write offs which BSC enjoyed in the 1970s.