Author: johnredwood

The July figures show government current spending up by 3.7% and net investment up by 49%. Borrowing, at £500m, compares to a repayment of £800m  in July 2012. For the four months April-July total borrowing was £36.8bn compared to £35.2bn the previous year. I do hope people will stop talking about the cuts and austerity, given these figures. The public sector is continuing to expand and to borrow substantially to boost demand.

The Treasury has recently released updated figures for past years. These confirm the analysis and forecasts of this site. Between 2009-10 (last Labour year) and 2012-13 total current public spending rose from £604bn to £657.5bn.  In real terms it also rose, by £14bn.  Large increases were seen in social security, up by almost £20bn, tax credits, up by £2.4bn, public sector pensions, up by £3.3bn and EU contributions, up by £2.7bn. Capital spending was cut, but this is also now rising again on the latest figures.

Labour likes to think of itself as the party of equality of outcomes, just as Conservatives like to think of themselves as the party of equality of opportunity.

Yet over the 13 years of recent Labour rule the gap between the richer and the poorer regions of the UK grew wider, not smaller. London, the largest region in 1997, expanded more rapidly than the rest. It rose from 20.5% to 21.9% of UK activity and income.  The South East also did well, reaching almost 15% of output. The North East, in contrast, fell to just 3.2% of UK output and income.

North Eastern household  income per head was £13,600, compared to London at £20,500 and the South East at £18,100.

This was not for want of public spending. There  were no cuts in overall public spending. Indeed for several years there was a very large increase in real public spending.  Public spending was much higher as a proportion of the total and per head in the poorer places than in the richer places. Labour’s strategy was to direct more public spending into the poorer areas to narrow the gap, but the more they did it the bigger the gap got.

By 2008 public spending  was a mighty 57% of the North East’s output compared to a modest 34% in the South East and 37% in London. From memory more recent figures shows the proportion in London falling further as the private sector recovery speeds up there.

By 2011/12 UK public spending was £8745 per head.  The South East had spending of just £7565 a head, compared to Northern Ireland at £10624.

Throughout the Labour years the regions with the lowest public spending per head grew the fastest. It looks as if the same is continuing to happen under the Coalition. Why doesn’t high public spending produce better answers, when so many urge it on us as an answer to poor economic performance?  Why have years of regional policies pursued by successive governments of differing political persuasions been so unsuccessful at lifting the growth rates and household income levels of the poorest regions? Is it coincidence, or is there any causal link between low public spending per head, high productivity, higher incomes and  a larger private sector?

            Much of my work as a government Minister was spent dealing with the issues arising in areas of the country dominated by Labour MPs and Councils. These areas attracted the largest sums of money in public spending, looked to government much more for the answers to their social and economic problems, and expected a good service from Ministers. 

             Ministers are in office to serve the whole country. They are there  to reach judgements in the national interest. If areas controlled by the opposition need more help, it is the Minister’s job to give it, or to discuss better ways of solving the problems. Democracy only works where the majority understand their duty to the minorities, and where the minorities accept the need to oppose in democratic ways.

            It is the same for an individual MP. You campaign as a party representative, but you do the job seeking to represent all and to understand those who disagree with you as well as those who support you.  I do not try to find out how people vote before taking up their cause or looking into their case. 53% voted Conservative in Wokingham in 2010, but that does not mean I can or should ignore the views of the 47% or regard all that they say and do which is different to my view as wrong.

                I would guess from the emails and letters I receive that I spend far more of my time dealing with the views and queries of those who do not vote Conservative, than with those who do. Many of the people who write in on policy issues write from a UKIP, Green or Lib Dem viewpoint on a range of issues, and some write in regularly on issue after issue.  I do not tell them I will not deal with their points because   UKIP only got 3% and the Greens 1% at the last Wokingham General Election . People who back single issue parties, or parties that are associated with single issues, are often more vocal and persistent than the majority. They sometimes raise difficult and important matters which MPs need to tackle.

             Indeed, I sometimes have sympathy with what UKIP are saying and am trying to secure a referendum on the EU which is one of their demands as well. I have sympathy with the Greens when they are seeking to defend great countryside from inappropriate development or have good ideas for reducing the use and therefore the cost of energy.

          It is a sign of a flourishing democracy that those elected regard it as their duty to represent those they disagree with. Government needs to lead, to argue, to convince, to impart a sense of direction. But it also needs to be able to compromise, to understand the other viewpoint, and to make timely concessions that are welcomed but do not derail its strategy. Getting the right balance between strategic direction and tactical accommodation is the art of elected politics.

                Too many UK politicians think spending other peoples’ money is popular. It’s how they define their job. In opposition the Conservative leadership did tell the party we needed to prepare to cut spending. We were advised that we would not find it comfortable or easy, but it would have to be done.

            Instead, in government, there are still a whole series of areas where Conservative MPs and many voters are keen to see cuts, where the government resists.  Tomorrow the government could make itself popular, and contribute to reducing the rate of increase in state borrowing, by announcing no more aid for Egypt. What’s not to like about that policy?

           Daily we see pictures on our tvs of an army in control with the latest in armoured vehicles, small arms, and plenty of troops. That may well be their spending priority, but it shows a state with plenty of money to spend on defence and internal repression. They could spend more of that alleviating sickness and poverty if they wished.  Giving them more money seems perverse in these conditions.

            The government could make itself even more popular, and possibly save some money, by saying it intends to persuade the EU to stop giving aid to Egypt as well.  Even better would be to secure agreement to that cut , along with agreement to sending the money the EU plans to spend on Egypt back to the impecunious member states. They could decide whether to cut their deficits a bit more or spend at home as they see fit. Again, what’s not to like with that policy?

           Over the week-end more news came out about the possible future escalation of the costs of HS2. The government has recently announced an enormous spending increase of £10 billion on delivering HS2. Critics think they will want to add more tunnels, more noise abatement, and more station  stops to win people over to the Midlands and northern routes, which in turn will mean more cost. If the government is not careful Labour will decide to offer to cancel HS2 as part of its future spending plans, and suggest much more attractive ways of spending all that money.

             There has also been recent news about increases in spending on consultants by government. There is plenty of evidence of that at local level in many of the higher spending Councils as well. As a necessary process of slimming bureaucracy is undertaken, it is most important to avoid simply hiring back the same or similar  people through contracted franchises or consultancies, sometimes at higher cost. The approach should be to slim and raise productivity by natural wastage, and avoid extra consultancy and contracting out costs in compensation.

                  Early in May as Mr Carney was preparing to take up his full duties as Governor of the Bank of England, the interest rate for the government to borrow 10 year money was just 1.6%. Yesterday the 10 year interest rate hit 2.7%, almost double the low point of September 2012.

                   We need to ask if this matters. After all, Mr Carney’s one major intervention in the monetary debate so far has been promise us the continuation of ultra low interest rates for the next three years, whilst unemployment comes down a bit and the economic recovery strengthens.  Mr Carney actively sided with the borrowers against the savers in his statement, because he clearly thinks we need more borrowing to promote recovery.

                  Some might say the rise in government borrowing rates does not have any impact on individuals, families and private sector companies. After all, mortgage rates are still between 4.5% and 6%, as they were three months ago. Banks and Building Societies still offer a concessionary first couple of years at much lower rates.  Savers can still pick up 1% for 1 year savings, and 2.5% for 3-4 year savings, levels well above the official 0.5% short term interest rate, as they could three months ago.  As I have written before, Quantitative Easing and low Bank base rate were devices which have kept the cost of government borrowing artificially low, whilst creating a parallel private sector market in money and credit at higher rates.

                  However, Mr Carney would be wrong to simply ignore the markets.  People in property are already talking about higher borrowing rates for new projects on the back of rising government rates. Savers canny enough to have cash will be able to buy into bonds or other financial assets at lower prices and on better income yields, whilst invested savers will lose on their current holdings. The government has been out of the main savings market for some time, refusing to issue National Savings products at the higher rates prevailing in the savings market when they can borrow so much more cheaply in the government bond market.

                 Mr Carney has three options from here. He could welcome the rising rates and help steer the whole market to more realistic rates for savers and borrowers. There is a bigger adjustment needed in the government market than in the private sector one. He could defy the markets, and state that when he said he wanted low interest rates to prevail he meant it. He will then have to initiate substantial new bond buying programmes to force the rates back down. Or he could largely ignore it, and take the line that he is relaxed about the cost of government borrowing going up all the time it does not hit the cost of private sector borrowing in ways which will derail his strategy.

                      I favour the first of these courses. I would couple it to more vigorous prosecution of the plans to break up and sort out RBS for the reasons often described here. We need competitive banking with more banks allied to rates of interest more subject to market selection. The ultra low government rates of quantitative easing have to end sometime. The quicker they are in mending the commercial banks, the quicker the special measures can be removed. It does need to be worthwhile to save. Many  borrowers would like greater certainty more than a temporary period of ultra low rates followed by a rush upwards in rates.

            The mass murders in Egypt, perpetrated by the authorities in the name of restoring order, are a reminder of how long and arduous the battle for true democracy can be. They are also a  vivid and bloody illustration of the tendency of many states to abuse their near monopoly of force in society in the name of keeping the peace.

            In 1819 in Manchester the Hussars were let loose on a peaceful assembly campaigning for “Liberty” and “Universal suffrage”. Yesterday was the one hundred and ninety fourth anniversary of that protest. On that dark  day 11 people died of their wounds at Peterloo and maybe another 7 died in related incidents. British democracy was far from perfect. A Englishman might have his liberty compared to many other societies around the world, but only prosperous freeholders got a vote in elections. There was a rule of law, trial by jury, and innocence until proven guilty, but the legal regime was harsh by modern standards, and society was  class ridden.

          Though the British establishment exonerated the Magistrates who had taken action to arrest the leaders of the protest and had unleashed the troops, many were rightly shocked and incensed by the barbarism of the slaughter. The  widening of the franchise and other democratic reforms  followed a few years later. The massacre, mockingly dubbed the battle of Peterloo, became part of the impetus to further democratic reform.

          Today states have even more power to control, subvert or harm their citizens. A strong state uses that power sparingly, and only with good cause. A state should be very reluctant ever to shed the blood of its citizens, when it normally has the power to arrest, detain,and punish where appropriate. The dead at Peterloo were a needless scar on the UK’s record. The far bigger massacre in Egypt is a huge tragedy. It will make governing and uniting Egypt that much more difficult. The only good would be if practically all Egyptians reacted in horror at the scale of the deaths, whatever their wishes concerning who should govern. Whether it will lead rapidly to a change of approach and a happier outcome, as in 1830s UK, is more difficult to believe.

           For democracy to succeed the majority in office has to govern in the interests of all the people as it sees it. It certainly has to avoid so damaging or suppressing the minority that they lose faith in the system. The opposition  has to accept that its way of redress is to win the next election and reverse what it does not like once it has the majority. Government has to allow democratic, noisy, peaceful challenge. Opposition has to accept the ultimate right of the majority to govern until the next election. In the UK case in 1819  the army was brought in by the magistrates with the effective acceptance of the democratically elected government, but it still proved to be a deeply unpopular move which affected politics.

                 It is fashionable now to criticise government housing policy. Some people argue that helping more to buy their own home through Funding for Lending and Help to buy will simply fuel a new boom. They then often go on to criticise the tendency for others to invest in buy to let properties, as savers seek some way of earning a real return on their savings at a time of ultra low interest rates. If you do not like either of these it just seems to leave the idea that the government should borrow or print even more money to build  more Council houses.

           I appreciate some here simply want to stop all inward migration and say we have enough homes. This is not about to happen, with only the Conservatives of the 3 main parties in Parliament pledged to make a substantial reduction in net migration, and with continuing membership of a common work and  border area with the rest of the EU the will of this Parliament’s  majority. There would still need to  be some new additional homes in popular parts of the country anyway. In some parts of the UK there are plenty of homes, but in others, there are acute shortages at affordable prices.

            I favour helping home ownership. Most people either own their own home or wish to do so. It is the most flexible type of housing, leaving you free to sell and move in a way which you cannot do from social housing. It is the kindest on the elderly, as by the time you retire you will have repaid the mortgage. If you live in rented accommodation you will pay the dearest rents in your elderly years when you have less income, which is far from friendly. It is the best to give you the greatest freedom to adapt, decorate and enhance your property as you see fit, and change it over the years as your family needs change and fashions evolve. It also means you own an asset, which may be useful as security for borrowings if you wish to venture in other fields.

             I have no problems with the government helping bridge the gap for people with too little savings to make the large deposit for a first home. Banking Regulators have lurched from allowing or encouraging banks to lend far too much against each home, to letting them lend too little. The government  has decided to intervene directly whilst the banks and their regulators are being so cautious.

             Of course I have no wish to see another unsustainable boom like the 2005-8 one. The government is limiting the time for its Help to Buy and Funding for Lending scheme. If it started to trigger high price rises and overheating  they would need to wind it down or reduce it sooner. If we wish to see more homes built where people want them  then we do need to ensure a sensible flow of finance to the home market. Recent years have seen all too few new homes built, making it more difficult for people to find the home they need in the parts of the country under pressure.

         I am also intrigued by the hostility towards Buy to Let. It was not so long ago fashionable commentators were urging the UK to be more like the continent and have a larger private rented sector. Now it is expanding it has its critics. I see nothing wrong with people  using savings or prudently assessed borrowings to own and rent out property. Government has not been a great landlord, and is itself so hugely overborrowed that it is not in a good position to borrow to build Council houses on a big scale.

At the beginning of May the UK government could borrow for 10 years at just over 1.6% per annum. Yesterday that rate rose to just over 2.6%, a full 1% or 100 basis points increase. This has happened despite Mr Carney’s very clear indications that he intends to keep short term interest rates low for the forseeable future, short of a major upset on inflation.

So why have the markets responded like that to his Forward Guidance? After all that was designed to keep interest rates and interest rate expectations low.  There are two main reasons. The first is the strong impact US rates have on us. US rates have risen even further than in the UK in recent weeks. Secondly, the UK economic figures have come out much better than  expected, bringing forward investors’  ideas of when rates might or should rise, despite the Guidance on official short rates.

US rates have risen on expectations that the Fed will soon end its large Quantitative Easing programme. They have risen despite various attempts to reassure people that the stimulus will not be withdrawn prematurely, to damage recovery. When the UK withdrew or temporarily suspended its QE programme there was no such impact.

Central bankers have to try to guide market expectations in the way they wish, to keep enough confidence in an economy without letting inflation race away. So far in his short time as Governor Mr Carney has been lucky, that he arrived just as the UK economy was showing good signs of revival. He was less lucky with the background for launching forward guidance. The US pushing rates up has had more impact on the UK bond markets than the Bank’s statements. It has produced the irony that the Governor’s policy was designed to keep rates down, yet the markets have pushed borrowing rates up rapidly for the government.

             There are four main ways to pay the growing bills for the railways. As so often in the UK political debate, most only discuss two of them. The public is invited to choose between all taxpayers having to pay more tax, the Labour way, so the railway gets an even larger public subsidy, or putting the fares up, the way approved by the Coalition government and the Rail regulator.

             If that is the only choice, then I reluctantly side with the government. The people who use the railway should pay a larger proportion of the costs of their chosen method of travel. Of course it is not the only choice, and the results of the last  years of Labour and Coalition living with Network Rail  has been to increase the costs to both taxpayers and rail users to unacceptably high levels. So what are the other two ways of solving the problem of the railway’s bills? How can we get a better deal for the hard pressed rail commuter without having to fleece him and her as taxpayers instead?

              The first is to sell more seats at sensible prices. The peak hour tickets are very expensive to try to put people off. Many of the off peak prices are very low, in a desperate bid to get more people to use the railways. I have no problem with  off peak bargains, but they do need to sell more of them. All too often when I travel on a train it is mainly empty, with maybe only 20% of the seats sold. The railways need to do more to find out what extra journeys people might like to make by train, and at what price. They could then arrange timetables that maximised use and revenue, with off peak trains at times and between places that attracted enough business. The railway seems to spend a fortune on hurtling empty first class carriages around the country for much of the day.

            The second is to cut costs.  Of course they need to spend money on ensuring safe travel, but most analyses of our railway shows it is considerably more expensive than railway systems elsewhere in Europe. The McNulty Report pointed to the need for large efficiency savings. The capital programme does need to bring more seats for busy routes, more efficient trains, and newer stations in some cases. But does it really require £960 million to improve just one provincial station, Reading? What could they have done for say £750 million there?

                I have at last received an answer to my recent letters to members of Network Rail. I will not publish it, as it does not of course answer the questions I posed. It is instead a simple eulogy of Network Rail of the kind you can easily read on their website and in their literature, telling me that the financing and efficiency levels of Network Rail are just fine. Therein lies the problem. There is not enough willingness to search for better and cheaper solutions, nor is there enough sales and marketing flair to fill enough seats.  That is why rail fares are going up. We await news from Mr Miliband about who he would tax to subsidise the railway more. Doubtless it will include the commuters whose case he says he wants to assist. The railways are just another travel business. They do not seem to run in the same businesslike manner that the unsubsidised public transport operators often manage.