Author: johnredwood

          The Coalition’s policy in the first two years in office was to expand current public spending. To pay for this and cut the deficit, they decided on private sector austerity, requiring large increases in tax payments. The extra tax revenue was  to result from higher rates of tax (VAT, Income Tax, CGT, Stamp Duty, fuel duties etc), from economic growth, and from higher levels of compliance with tax law in a crack down on  gross avoidance. As the public sector was still growing, the private sctor ended up  shrinking  to pay for the public sector.

             They said they could bring  this about whilst growing the private sector, thanks to an easy money policy agreed with the Bank and inherited from the outgoing Labour government. Unfortunately, the easy money policy has not generated the private sector led growth they sought.  This is partly because the banks are still stressed and under  regulatory pressures, and partly because the tax and inflation squeeze on the private sector has been too hard. Real incomes have continued to drop, as they did in the later Labour years.

            The next budget should lift the squeeze on the private sector, to encourage the private sector led growth the economy needs. This in turn could increase the amount of tax revenue brought into the Exchequer at a time of high public spending.

          The aim should be to set tax rates that maximise the revenue. 50% Income Tax cuts the revenue. 28% CGT cuts the revenue.  Pushing too many into the 40% tax rate cuts consumption in the economy. Setting rates of 40% for Income and 20% for  CGT would boost growth, transactions and activity and increase revenues from richer people. Taking more people out of the 40% tax band, as well as continuing to take people out of Income Tax altogether, would boost private sector purchases.

          There is also a case for temporarily suspending Stamp Duty to get the residential property market moving more quickly. This would then promote more housebuilding, by helping make homes more affordable and removing some of the current blockages in the market.

            Today newspapers are seeking the guilty in the FSA and the UK government.

           This is rather curious, when agriculture policy is settled in Brussels. Most of the subsidy, the controls and the regulations are EU ones. So too are all the rules concerning the single market in food products, food labels and the rest.

             I thought the whole point of the EU according to its supporters was to take power over the food industry (and the rest) so that it could ensure high standards in Romania as well as in the UK. We have to accept product from the continent in return for assurances that the EU government will guarantee and set high standards throughout the zone.

             Maybe it is time a Commissioner was woken up on on a Sunday morning and made to answer.

              In recent weeks the value of the pound has gone down. The government’s cost of borrowing money has gone up.

               Maybe the authorities are happy with the first of these changes. They are keen to create more money. That is always likely to lower its value. The pound has fallen from $1.63 to $1.56, and has also fallen against the Euro.

              The authorities will see this as evidence that the  Quantitative Easing is working. They might also hope it will lower imports and boost exports.  Last time the devaluation tended to boost profits more than the volumes of exports, as some companies took the advantage of the devaluation with higher  prices rather than volumes of exports.

               The danger is that a further devaluation can boost inflation. Ever since the crisis hit, private sector incomes have been falling once adjusted for rising prices. Inflation has ben higher in the Uk than in Japan, Germany and the USA. As we import such a large proportion of our needs, we are vulnerable to a falling currency. It makes things dearer and cuts the value of our pay.

               The authorities are probably not so happy with the rise in the cost of government borrowing. Despite the large bond buying programmes of the Bank of England, the cost of ten year money for the state has gone up from 1.5% to 2.1%. It’s still a low figure by historic standards, but it is a 40 % rise in the interest cost. As the state still plans large deficits for the next couple of years, and has record levels of debt outstanding, this is a problem to watch carefully. On £1.1 trillion of debt every 1% increase in the borrowing rate matters  as the debt comes to be refinanced at higher rates.

           In 1971 the USA decoupled the dollar from gold. From that day onwards inflation rose rapidly in many parts of the world. Whilst it is perfectly possible to enjoy monetary discipline without a gold standard, the Central Banks and governments of many major countries could not resist the temptation to allow more credit and money to circulate, which led to more inflation.

            This tendency was particularly rife at times in the UK, especially in the 1970s. Inflation in the UK since 1971 has averaged a very rapid 6.2%. You would need £12 now to provide the same value as £1 in 1971. The value of money has fallen by a massive 92%.

              The rate of fall in our money was brought down from the very high levels of the 1970s, but has remained quite high by international standards. In the last two years inflation has averaged 4.2%, taking the value of our money down by another 8%.

             There is little evidence to support the idea that a higher rate of inflation produces more growth. Indeed, the recent inflation has eroded real incomes and made it more difficult to generate a private sector led recovery. When inflation was out of control in the 1970s, the UK economy performed especially badly, with a recession and a trip to the IMF  to borrow to keep the country afloat.

                Mr Carney the new Governor of the Bank of England  may well wish to produce a monetary policy which fosters more growth. He needs to also be aware of the tendency of the UK to too much inflation. I suspect he will wisely decide to keep the inflation target. He should also ask why it has been missed so much in recent years, and ask whether better control of inflation might not be part of the answer to instilling confidence and encouraging more growth.

             Dropping the inflation target gives him no freedom he does not enjoy anyway, given the way the Bank has behaved in recent years. It would, however, worry some people in the markets in a way which would be unhelpful. Making it more flexible may be more honest than the present regime has been over the target, but implying it is not being taken seriously at all would also be an unwise move.

           The EU has agreed a 7 year budget settlement lower than last time.  The UK Parliament  passed a motion requiring a reduction. The UK has negotiated  a reduction.

             The last  ceiling was Euro 943 billion. The Commission with various countries in support wanted to increase this to Euro 988 bn. Instead they have now agreed a cut to Euro 908bn.

             So the settlement is Euro 35bn than the previous one, and Euro 80 bn below the original proposal.

            If the Prime MInister had persisted in using the veto on this they could have resumed annual budgets by majority votes. The agreed settlement is Euro 60 bn below what they could spend without an agreement.

            I am glad the Uk dug in, and glad that for the first time the budget is coming down instead of going up. Of course I would like a lower budget than this. I do not think the Prime MInister could have got  more by threatening further use of the veto.

           The worst news is that the UK contributions will go up, thanks to the reckless way Mr Blair gave away part of our rebate. Mr Cameron refused to give up more of our rebate, though he was under pressure to do so.

I looked up the forecasts for the revenues from self assessment  Income Tax before my lecture last night.

In June 2010 the Budget forecast for this  tax revenue for 2011-2014 was a very useful £85.9bn.

In the Autumn Statement 2012 the forecast for the same time period was just £66.7bn.

That’s £19.2 bn down, or a loss of 22.3%.

They got the growth rate of the economy wrong, and the underestimated the way higher rates depress revenues.

            There has been debate recently over whether an MP should vote for a personal view, or should seek to represent his constituents. People often say they like “independent” MPs, MPs who will disagree with their party where necessary. They say they like an MP who represents his constituents. On many issues constituents are very divided and hold a wide range of contradictory views.  People also vote in very large numbers for leading parties, recognising that is the way to influence who governs.

             Let me try and shed some light on how an MP forms his or her decision. The MP’s personal view, if he or she holds one at all on an issue, is not the most important consideration, and can  often be irrelevant. Indeed, if the MP holds a personal view based on  his or her personal interests, the view has to be ignored or suppressed. An MP should not be using public office to further a personal agenda.

               An MP should ask what is in the national interest. He should ask what is his party’s view? What did he and his party put as their view at the last Election? What is the view of his constituents – is there a strong or majority view? Is that view in agreement or disagreement with his party’s view? 

                  When you first become a candidate you discover you need to have views on a wide range of topics you had little considered before. One of the great interests of the job as an MP is the huge range of issues, often quite detailed, that people expect you to take an interest in or to have a view on. Belonging to a  large party can help. Your party will have experts in most topics, and will have considered many of these issues. You may find the party view on a matter you do not know much about is just fine, offering you the back up you need on the topic. As you  become a more experienced MP you gain confidence in your knowledge of a wider range of issues, and learn more of the limitations of some party positions. You are also in a position to seek to influence or change your party’s view.

                    The “free vote” issues are ones where the main parties agree to disagree amongst  themselves and leave it to candidates and MPs to have their own view. These tend to be issues where the great religions  have strong views and are often Home Office and Justice Department matters. Some MPs have strong views themselves on these issues. Others seek to reflect majority opinion or majority opinion within their local parties on these things.

                  In the current Parliament many Conservative MPs wish to be true to the principles and policies they and their party set out before the Election, despite now being in Coalition. Some decry the lack of Conservative loyalty to the leadership. Others understand that many Conservative MPs are trying to keep alight the flame of Conservatism at a time when their leaders make compromises with Lib Dems to keep the Coalition together. The Conservative rebels mirror the Lib Dem ones. It is just that there are so many more Conservative rebels, because there are so few Ministerial jobs for Conservative MPs proportionately compared to the Lib Dems.

                 An MP has access to plenty of opinion and information when making up his or her mind on an issue. A sensible MP also understands the limitations of his or her understanding and relies on others or on professional advice where necessary. I am not a nuclear scientist, so I would need professional advice on the risks and methods of nuclear generation. I am a long term student of banks andthe  financial system, so can form more of my own view of what is needed to transform the UK banking industry. MPs who specialise often are more effective. They may start with expertise from past jobs. They may increase or create the expertise by being intelligent readers and questioners in a given area of policy as MPs.

                 There are as many ways of forming a judgement about matters as there are MPs. In the end the main question should be What is in the national interest?  The important balance to strike is between the wishes of constituency, party and commonsense. A personal opinion is a luxury that may not be appropriate.

 The UK Parliament voted to cut the EU budget.

 Now I see countries who get more out than they put in saying the budget must be increased to promote growth.

Every pound or Euro they spend has to be taken from taxpayers somewhere. Why are they better at spending it than the people who earned the money in the first place? EU spending does not and is not promoting growth. The EU is in recession.

Indeed, many of the EU’s policies are preventing a proper recovery by EU economies, because they  make countries in the EU less competitive in world markets. The EU prefers unemployment to policies that promote growth – policies like cheap energy.

Just stop the build up of government debt, and let people spend more of their own money.

The UK should dig in against the budget plans.