Author: johnredwood

                  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.

          Yesterday’s speech by Labour’s Shadow Immigration Minister, Chris Bryant, was a masterclass in how Blair style spinning can miscarry. Briefing  the newspapers in advance of the speech, a technique developed to try to secure more and better coverage, is often a double edged sword. Yesterday it was a spectacular boomerang which came back to damage its sender.

           Over the week-end we were told that Labour would launch an attack on companies that used recently arrived migrant labour in place of local talent to drive down wages and worsen employment conditions. By Monday morning, still before the speech, the author was telling us that he no intention of fingering named companies for bad labour practices, and went out of his way to praise Tesco as a good employer. We were all left wondering who he  has in mind to prove his case, and why he cannot cite individual examples of the bad practice he condemns.

            We were also left wondering why Mr Bryant wished to make this point, when his party had been so keen on giving our borders over to  the EU and allowing in many more people over a prolonged period, people who of course wanted and needed jobs. Is Labour going to follow this up with apologising for giving away so much power to the EU over migration and recommending we re-establish our own policy and controls? I doubt it. Surely Mr Bryant must understand that under the EU rules Labour signed up to, any UK company has to treat fairly any job application by someone from another EU country?

           Many others have written extensively about the sloppiness and mismanagement of this incident. I want to use it to illustrate  something else. Mr Miliband’s Labour is very unlike Mr Blair’s Labour in opposition. Mr Blair went out of his way to woo the private sector. He saw a Labour government has to get on with big business, and needs to reassure voters with a different view of free enterprise from that of the left wing core of the Labour movement. Mr Milband’s Labour party delights rather in finding more and more ways to attack large companies, often in preference to  attacking   the Coalition government.

          The best example of this is Labour’s one senior figure who has civil servants reporting to her and a serious role in influencing the public sector. Mrs Hodge, as Chairman of the PAC, works with the National Audit Office and is meant to be the prod, spur and auditor of the public sctor. Her main aim should be to expose waste and worse in public sector bodies, and draw attention to places where goverment fails to deliver value for money or good results. Instead Mrs Hodge spends  much of her time trying to find ways to expose all the things about large private sector companies which the Miliband tendency do not like.

          I have no time for businesses which rip off the public, damage competition, or otherwise act against the public good. Parliament has a role to set out a fair framework of law for the private sector, enforce competitive markets and to supervise the enforcement of that law. Mrs Hodge has enjoyed bringing the four large accountancy firms, Starbucks, Google, Amazon, BT and others before her committee. She seems  more interested in putting private sector companies on the spot  than in pursuing waste, fraud and bad spending within the £700 billion spend of the public sector.  

          Labour front benchers are also often happier exposing alleged or actual bad practices of private sector companies than saying how they would curb excess public spending, raise efficiency and quality in the public sector, and reform badly performing public services. They are quick to criticise pay day loan companies, private sector health providers, private sector landlords and private sector utilities. They have been less noisy about hospitals that have high death rates, schools that fail to educate children to a decent standard, Councils which charge too much and tax too much, or social workers who have not been able to save children at risk. 

                Where  private sector  companies are letting people down or doing the wrong thing of course government and the law enforcement system has a role to play. Of course government and Parliament should deal with abuse.  For Labour it seems like a default position to avoid talking about any possible imperfections in the large public sector. It is in the provision of public services where government and opposition have most influence and should have most responsibility. Labour’s wish to talk more about bad things in the private sector, and to ignore deep problems in  the public, is so unlike the Blair winning formula.

To govern the country a party needs to show balance and judgement.  A party also needs to understand that it can and should  amend and or enforce the law where the private sector errs, but where the public sector errs it is uniquely responsible and has a wide range of powers to sort it out.

       The pursuit of recovery has understandably taken precedence over rebalancing the economy. The original idea of the Coalition was to shift from too much reliance on a debt financed public sector, to more reliance on an energetic private sector. Within the private sector, there was a wish to reduce dependence on financial services and banking, and increase the share of manufacturing. I was always very happy with these aims, with the possible amendment that I did not wish to see actions taken to curtail successful activities in the service sector, but rather wished to see better conditions to allow faster growth in manufacturing as the best way of rebalancing within the private sector.

           As we have seen over the last three years the government  has not stuck to the task of rebalancing. Real public spending continued to rise, with the pace only recently slowing down.  Instead of just being bombarded with complaints about too little spending, there have been many still writing in against HS2, high overseas aid budgets, the waste of the European budget, misdirected spending in a variety of public services and much else, whilst the modest steps so far taken to curb the gr0wth in welfare spending have led many to want the government to achieve more in cutting welfare bills.

           Nor has the government done enough to trigger a major manufacturing revival. The task has been made more difficult by the continued recession in Euroland, a prime market for industry. It has also been deferred by the high and rising energy prices, which have made high energy using industries less competitive and also made it tougher for any well automated factory. There has been no breakthrough with reducing the costs of EU regulation. The Coalition has watched as new law is heaped on new law, often making it dearer to do business in the EU. The policies needed to raise educational and training standards and produce a new generation of engineers, physicists, chemists and mathematicians of the kind modern industry needs by definition will take time to come to fruition.

                   The government does need to concentrate on a supply side revolution. Productivity has been poor in the UK since the crash. There are still sectors where competition is weak or non existent thanks to government interference.  Our transport networks are not as good as we need. The government is now turning  its attention to water, to power, to roads and to broadband. It needs to do so. The march of the makers the Chancellor vividly wanted will depend on a better approach to education and training, to transport, to energy and to competitive markets. Above all it needs cheaper energy to  bring about, something the Chancellor is keen to achieve.

The world’s economic advance is increasingly spearheaded by the great cities of the world. Europe only has two of them, London and Paris (and there is Moscow). The USA has several, whilst rising Asia is pitting  its traditionally successful city states against a new tide of fast growing cities in India, China and elsewhere.

If we look at the OECD list of richest regions in the world as measured by GDP per head, it is led by London (Inner west) at a mighty $152,116 a head. The District of Columbia around  Washington USA comes second, at $131,343. Paris is the best of the continental cities, at a very successful $76,146 for the city as a whole. Edinburgh appears high up with $49,970, parts of the UK Home counties do well and Inner London east is there at $47,470.

Germany is not well represented. Its best performers are Hamburg and Munchen at  just under  $47,000.

It is another way of looking at the German/UK comparison we tackled yesterday. If the successful world model today is the large conurbation that attracts people of all types and languages to bring their skills, energy and money, the UK , US, and France have what it takes and Germany does not. To succeed a world city needs to encompass a population of  around 10 million in the city proper and close surroundings. It needs to be very open to talent and money from outside. It needs to have premium properties available for foreigners to buy. It needs a  great ambience, plenty of good high specification modern commercial space, and preferably some iconic older buildings and symbols of the city. It has to have great food, great drama and music, great art, and generally great entertainment.

Some object to this model of development. The gaps between the typical income in say central Paris, and poorer rural France can become very large. This is, however, no greater a gap than that between the eastern regions of united Germany and the richer south west. Mr Hollande’s attempts to curb the inequalities by imposing higher taxes on the successful has led to difficult court challenges and to a big exodus of well paid people, reminding him that if he wants France to keep one of the world’s great cities it has to understand the need to remain competitive.

             I missed the BBC propaganda movie arguing it’s better in Germany. Apparently the German emphasis on more rented housing and industry makes for a richer and more successful economy and society. Let us examine that proposition.

                If we look at the income per head figures the comparisons are interesting. In Europe the two richest countries are non EU members, Norway and Switzerland.  They are more than $5000 a head richer than Germany. Norway manages it thanks to great natural resources, fish and oil, that stay outside the clutches of the EU. Switzerland manages it thanks to excellence in selected industries like watches and chocolate, complemented by banking and financial services.

                  All the surveys also show that the USA is richer per head than Germany or the UK, by around one quarter or $10,000 a head. If the BBC is keen to see how we can live more prosperously, it might make the odd film that was complimentary about the USA.

                     The Penn (Pennslyvania University) World survey shows the UK just ahead of Germany in income per head by $300. The IMF shows the UK a little below, by around $2000. All the main surveys agree that the UK and Germany are usefully ahead of Italy and Spain, and most put the UK ahead of France and Japan. There is nothing in the figures to suggest Germany is way ahead, or that Germany is anywhere near catching the USA, Singapore, Norway, Switzerland  and the other world leaders. Germany is also usually ranked below Sweden and Denmark ,  non  Euro members of the EU. On the numbers there is not a great deal to explain about alleged superior German performance.

            I cannot see how having more rented housing is a magic ingredient that helps Germany. The UK has experienced a rising private rented sector in recent years, but these have been poor years for overall growth of the economy. Most people still have a strong preference for ownership, and there is nothing wrong with an economy that seeks to satisfy that natural wish for as many as possible.

          It is true that Germany has a strong and successful engineering sector, larger than the UK’s in many segments. Where the UK is strong in aerospace engineering and defence related, Germany is larger and stronger in cars, heavy plant and machinery. Where Germany is strong in basic chemcials, the UK is strong in pharmaceuticals. The UK relies on a bigger and more successful service sector, especially in business, legal and financial services.

           As someone who has in the past  run companies with engineering plants in the UK, the US, Germany and elsewhere I would urge people to beware of facile generalisations. I have seen poorly led German factories where Anglo Saxon managers can teach them things, and I have seen brilliant German factories with state of the art equipment. There is a bigger spread in quality and achievement within both Germany and within  the UK when it comes to factories, than between the German average and the UK average. USA  productivity is on average higher. The BBC should go and find out why, by talking to some US workers.