Author: johnredwood

The Governor of the Bank of England’s speech yesterday was well researched and well phrased. He leaves the issue of Scotland’s future to the Scottish people. He accepts that were Scotland to vote for Out of the UK, the question of the currency would be a major issue for the political negotiation that would follow between the two governments.

His research reveals, however, that an independent Scotland would have a much larger banking sector relative to the size of the economy than the Uk currently enjoys. This opens the question of could Scotland have afforded to stand behind HBOS and RBS in the way the UK did, during the crisis? Any agreement on a common currency would need to make it clear that Scotland would have to stand behind Scotland’s banks. But would that work? What would happen if Scotland was unable to stand behind them? Would Scotland agree that a common currency must mean common banking supervision? How would the rest of the UK be sure we would not be expected to mount an expensive rescue? How could Scotland be sure the full currency union and the Bank of England always stood behind her banks?

He also points out that if Scotland keeps all the oil the Scottish economy is materially different from the rest of the UK. Scotland’s output per head and tax revenue would be very affected by the oil price, and by the likely secular decline in the Scottish oil province, which is now well past its peak output. The more diverse two countries in a union are, the more the pain of adjustment without the mechanism of the exchange rate to take some of the strain.

I am not myself a Scottish nationalist, but if I were I would want my country to have its own currency. You cannot be independent, with your own economic and tax policy, if you belong to a currency union. Members of the Eurozone are discovering this as the Euro crisis rolls on. Belonging to a currency union, you are forced into internal devaluation – cuts in wages – if you cease to be competitive at the common exchange rate. Greece and Spain could warn Scotland about that. You are forced into increasing tax and benefit transfers around the union. The Rest of the Uk and Scotland would need clear and fair rules about the extent of these transfers and the limits on mutual financial assistance.

Today the sterling currency union works because there are very large transfers of money from the richer to the poorer parts of the union. The labour market works fairly well, with common levels of benefit payments and pay top ups from the state, and similar wage levels. A so called independent Scotland would need to mirror much of the rest of the UK’s approach to benefits, wages and fiscal policy for the continuing currency union to succeed.

From the point of view of the rest of the UK it would be easier if Scotland did decide to quit the UK if she left the currency union at the same time. Political union and currency union are two sides of the same coin. Take one away, and the other collapses or buckles under the new strains.

In a way I was one of the first modernisers. In 1995 I told the Conservative party it was a case of “No change, no chance”. I had in mind especially a change of policy and approach.

So when people tell me the Conservative party has to change or modernise, I do not automatically disagree. It is one of the ironies of conservatism, that a doctrine that wishes to preserve the best and keep some of the continuity of our lives, has always had to embrace change. Indeed, some of the most successful Conservative governments have been some of the most radical. Maybe we are at our best when we are boldest.

Conservative radicalism is based around delivering to the many the advantages of the few. Just as enterprise capitalism retains support and gains friends by ensuring that the luxuries of the rich in one generation become the commonplace of the many in the next, so Conservatism at its best brings the rights and duties of the privileged few of a previous generation into the lives of the many. Conservatives have in the past campaigned to abolish slavery, to  extend the franchise to all,  to encourage the many to own their own home, and to seek an ownership revolution. It has supported more generous welfare and health provision for the many paid for out of taxation.  We want higher living standards and more civil liberties and see no contradiction between the two.

I was surprised in the early opposition years after 1997 to read that Conservatives were split between mods and rockers, between libertarians and authoritarians. It seemed like an artificial conflict, as most Conservatives seek a balance between liberty and the rule of law. I was also surprised to see some advocate a modernising agenda which meant moving closer to Labour’s positions just in time for the implosion of Labour’s model of more European integration, more migration, more public spending and debt, and the eventual inevitable financial crisis.

There is nothing wrong with the underlying principles of Conservatism – belief in the individual, the family, the small platoons, the independent charities and companies, the wish to spread ownership and property, to defend the individual’s liberty against the overmighty power of the state, the wish to conserve the best of our institutions and countryside, the wish to see the inherited tradition improved and developed by the present, and the wish for the state to help those who cannot help themselves. Of course these need updating, with policies based on the modern context, on a regular basis. The ideals and values do not need overturning. Most Conservatives do not lack compassion, charity, decency or belief in  liberty. We just do not believe these things can simply be bought by the government spending more of other people’s money. There needs to be money and oxygen left for the many to provide for themselves, to work for family and the common good, to profit the nation as they profit themselves.

At the end of the last century I wrote a book predicting that Labour’s constitutional revolution would be very destructive of the UK. At the time Labour derided my language, claiming it was excessive to argue that their modest constitutional changes were revolutionary and would lead to the destruction of the UK as we knew it, and to overturning its way of government.  I think it is time to look again at the forecasts and to ask what has happened?

I wrote then

“The UK is in the grip of a constitutional revolution. The cumulative effects of the (EU) treaties are made more radical by the quickening pace of European integration on the continent….The ECJ is making more and more advances…The Court now overturns Acts of Parliament…. The Labour government has adopted much of the European agenda as its own…Labour willingly advance the cause of more European government…the Social Chapter…the European Charter of Human Rights…limiting our legislature in criminal and judicial matters.  Labour’s plans to split the kingdom into regions are often urged to ensure that we have regional governments that can act as supplicants for European funding… Even their plans for proportional representation are part of a scheme to bring us into line with the continent. ..The British government has decided to introduce these (PR) for elections to regional Parliaments and the European Parliament. Undoubtedly the government’s devolution plans will create more tension and conflict, not less. It is helping to fuel nationalist movements in Scotland and Wales…

“Third Way politics is allied to a hatred of Parliament, which remained stubbornly confrontational and argumentative. …Ensuring Parliament met as infrequently as possible, arranging set piece meetings on subjects like Northern Ireland more likely to produce cross party agreement, and scaling back Prime Ministerial appearances…were all part of the plan to try to prevent parliamentary argument disrupting third way consensus.  A Parliament elected by a different means that did not produce a majority government would be the ultimate conclusion of this course of action.

“devolution Labour style will devolve more power not to people but to politicians and administrators. Far from cementing the UK, it will pull it part as advocates of a Europe of the regions intend. ….the relentless drive to a European state continues. It is time to ask the question, will this government break the UK apart? How far do they wish to go in transferring government from London to Brussels and regional centres?”

Much of what I feared came true. Over the following decade Labour signed the Nice, Amsterdam and Lisbon Treaties, transferring 168 major areas of policy from UK control to majority voting in the EU. That included control over our borders and immigration policy, energy and some criminal justice amongst many.

Their devolution policy, far from settling the kingdom, gave a huge boost to Scottish nationalism and has led directly to a vote on whether Scotland wants to stay in the Union at all.

The Human Rights policy has led to senior Judges now pointing out that Parliament has lost its sovereignty in crucial areas of law, and to many domestic complaints about actions and judgements that the UK can no longer decide or control.

Parliament has been damaged by moving to shorter hours and fewer days in session, by a single PM Questions each week, and above all by now facing many areas where Parliament cannot change the law even if it wishes to, owing to EU law.

Labour changed the UK and its constitution radically. We no longer have a constitution based on a powerful  Parliament subject to  the sovereignty of the people, expressed at election time in the ballot box and the rest of the time as public opinion. We are now a member state under European control in many fields, and a divided nation arguing about whether to stay together or not. I rest my case.

The change of direction that was partially flagged this week by the EU’s review of its energy policy from 2020 to 2030 has all the hallmarks of ineffective political compromise and none of the qualities of good leadership for Europe’s troubled industries. The underlying truth is that EU energy policy today is the same as last week, and going in the wrong direction.

Recognising the danger of more factories closing and more businesses setting up in cheaper energy parts of the world, the EU now talks of the need for competitiveness to be part of the consideration when making future energy policy. Still keen on being the greenest part of the world, the EU has also decided on setting EU level targets to increase the amount of renewable energy from 20% to 27% over the next decade, and to continue the drive to cut the output of carbon dioxide gas. This time they want to cut it by 40% on 1990 levels by 2030. How does this square with wanting energy priced more like that in the USA so we can compete?

We need to ask how this will happen, what consequences it will have, and  how the EU plans to enforce the policy.

The big change is to shift from individual member state targets for CO2 reduction and renewable power to EU wide ones. The member state targets could be enforced by EU court action and fines. I guess the fact that Germany is unable to curb her CO2 output at the moment is making the EU nervous about enforcement action anyway. Once they shift to an EU target there does not appear to be any way they could prosecute an individual member state for failing to increase its renewables or for increasing its carbon dioxide output. Which countries will want to carry on with these initiatives to try and hit the EU targets?

The quest for more renewable power is also being questioned  by another branch of the EU authorities, the competition authorities. The attack upon subsidies for solar and wind power could make it difficult or impossible to increase these forms at the rate needed to hit the EU target, given the importance of subsidy to current rates of investment in these expensive forms of electricity generation.

The EU is not changing the member state targets for the period up to 2020, so in theory all stays the same with the EU enjoying another six years of the pursuit of dear energy  before changing course somewhat in 2o20. The member states remain under pressure to increase solar and wind output, and to carry on getting rid of older fossil fuel electricity plant even though it produces much cheaper power.

The ailing energy policy of the EU will become one of the major disasters of this superstate experiment, alongside the Exchange Rate Mechanism and Euro which has cursed so many countries with high unemployment. Industry is today highly automated. It needs cheap energy. Europe’s competitors abroad have not embarked on anything like the EU’s dear energy strategy, so they have a large advantage. The latest EU moves recognise the problem, but do nothing this decade to correct the error, and leave us uncertain about how  it might start to be improved after 2020. Try harder EU.

The 50p tax rate is popular according to the polls. Most people like the idea as they think it means the rich few will pay more so they will pay less. Unfortunately, the opposite is the truth. A 50p tax rate will raise less revenue from the rich, so those on lower incomes  will have to pay more.

The evidence from the period of 50p tax rates in the UK is quite clear. Self assessment Income Tax fell from £21.7bn in 2009-10 (after the crisis)  to £20.6bn last year. It is forecast to surge to £27.4bn in 2014-15 with the lower 45p rate. The Treasury figure of £100m extra revenue is not confirmed in anyway by the pattern of past tax collection. Numerous high earners left the country to avoid the 50p tax rate when it came in, meaning lower income taxpayers have to pay more.

The Sunday Times provides other figures which show a surge in tax revenue at the lower 45% rate, from £41 bn under the 50p rate to £49bn now. There has also been a sharp increase in the  number of people earning more than £1m now in the UK, from 13,000 at 50p to 18,000 at 45p. That’s a large increase in tax revenue from the rich.

There has been a political spat about this recently.  The Conservatives are right that if you take changes in pay, and adjust those both for price inflation and for the tax cuts through the rising tax threshold, people are on average better off.

It is also correct that not all people are in the position of the average. Some have not had any pay rise, some have not benefitted so much from the tax cuts because some benefits go down as income goes up. Many people do not feel better off. We all tend to notice the items like petrol and electricity which have gone up, and not notice so much the items which have stayed the same or gone down.

Sometimes in these political exchanges it is a good idea to go to neutral source. Asda publish a regular income tracker. Their latest tracker says that family spending power has risen in each of the last three months, an improvement on recent years.

Clearly there is more income overall, and more income being spent, as we can see from the GDP and consumer spending figures. Retail sales have been rising. These of course need adjusting for the numbers of people in  the country and in the workforce, as there has been some further growth in the size of the population.

There is one category of people who must now be better off – all those who were out of work and have now got jobs thanks to the rapid growth in employment in the last three years.  Many budgets are still very tight, and pay has been lagging prices for much of the time since the crash of 2008. No wonder many people do not feel well off, given the large loss of spending power they experienced in 2008-9.  It is taking  time to get back to where real  incomes were   prior to the crash.

Those who write in to say the UK does not need to curb spending or to  control its deficit and who think monetary and financial excess is rewarded should take heed of the messages coming from emerging markets.

At the end of last week the Argentinian peso fell 11%, making imports much dearer and people worse off. The official rate of 8 pesos to the dollar compares with unofficial market rates of 13 pesos to the dollar.  President Christina Kirchner has now had to impose restrictions on internet shopping , and tough  foreign exchange controls to try to stop the flight of money out. Inflation is around 25%. Her policy of higher social expenditures and some nationalisation is not bringing prosperity but a crisis.

The Brazilian real has also been falling. It has moved from around 2 to the dollar a year ago to almost 2.5 to the dollar now. Interest rates have been raised to 10.5% to try and stem the flow. The balance of payments deficit is large. President Dima Rousseff is finding her more generous policies are backfiring and cutting living standards and growth.

The Turkish lira has also fallen sharply, from 1.7 to the dollar a year ago to 2.32 now. Interest rates at 7.75% are thought to be too low by many in the markets. The balance of payments is heading for a very large deficit this year.

Spending and borrowing more do not help in situations like these. These countries are being  forced into new austerity to stop the slide. The art is avoiding getting into such trouble in the first place. That requires some prudence.

Since Mr Carney arrived as Governor, the economy in the UK has taken off. Unemployment has come down. Inflation has come down. Output and jobs are up. There are even signs that real incomes are stabilising after a large fall in the recession and further downwards movement since.

Is this just good luck and good timing? After all, many of the policies which are now yielding and assisting recovery were in place before he arrived. I think it’s a bit more than that. You do have some influence over your own  luck. If you do the right things you can get luckier. The Governor has helped.

Mr Carney clearly decided from the outset that what the UK needs is a decent recovery. If you wish to solve the continuing weakness of some banks, what better way than to assist more profitable businesses, and rising asset prices? Those assist a bank by reducing the number of bad assets, and improving loan cover.  If you wish to help bring down welfare spending and cut the government’s deficit, what better way than to have an economy generating a lot of new jobs in the private sector that people can take instead of being on benefits. If you want to bring down inflation, why  not encourage more output to ensure competitive prices, and obviate the need for so many tax and government inspired prices rises.

As Governor there were some things he could do to encourage that recovery. He told markets he was going to keep interest rates low, so businesses borrowing to expand would not face large bills. He presided  over the Funding for lending scheme which helped banks find the cash to lend more to business.

The markets have been fighting him, by putting up longer term interest rates despite the Governor’s reassurances, and arguing for an earlier increase in Base rate than the Governor seems to want. Events have also surprised the Bank’s forecasters, with unemployment falling much more quickly. The Governor has moved to reassure those who want low interest rates. The fall in unemployment to 7% does  not mean an early short term rate rise.

Most things are looking a lot better for the UK economy. However, the government does need to respond to the beginnings of a shift on energy policy in the EU. Dear energy remains a foe of a UK industrial revival, and an enemy of the consumer, delaying rises in real incomes to power more growth. I will return to this soon.