Author: johnredwood

       The Italians are angry. Being in the Euro means big cuts in public spending to get their budget deficit down and keep it down. It means cuts in pay and spending power  across the board, as they suffer an “internal devaluation” to make themselves more competitive again.  The election results were a cry of anguish about the impact all this is having on families and living standards.

        The pay cuts are correcting the balance of payments. People can afford fewer imports, cutting the deficit on trade account. The Italian budget deficit is under better control than many. The worry the establishment shares in Italy is the need to refinance a very large debt inherited from former governments and decades. The establishment parties and personnel in the Italian government are keen to keep the squeeze on so the markets will not take fright at future borrowing requirements. The EU establishment is even keener, as the last thing they want is Italy to need special loans and support from the rest of the Eurozeone.

           Mr Monti was parachuted in as Prime Minister by the EU although he had not been elected. He replaced Mr Berlusconi, who was making Eurosceptic noises and  beginning to represent the dislike of EU austerity policies felt by many voters. Mr Monti calmed the markets and started to make some progress. Soon he discovered that without his own party and his own MPs in parliament he not get much done. They decided on an election.

            The European establishment threw its weight behind the centre left mainstream party, expecting them to win easily. They hoped Mr Monti too would poll well, and be able to assist the new centre left government. Instead Mr Berlusconi, mildly Eurosceptic, and the 5 Star party of Mr Grillo  polled more than half the votes. Mr Grillo campaigned against politicians, and in favour of a referendum on withdrawal from the Euro.

            The political establishment sees this as irresponsible and damaging behaviour by the voters of Italy. It is surely predictable? If people feel their living standards have been pushed down too much, and are offered no immediate hope of a better tomorrow, they are quite likely to complain and refuse office to those who have been the architects of the single currency led policy. Mr Monti’s  desultory showing in the elections demonstrates just what a huge chasm there is between the political establishment in Euroland and the voters.

            Markets and commentators are shaking their heads in disbelief. They are telling the Italian people they just have to knuckle down and do as the EU and Euro authorities say. The public may not have an immediate and better answer, but is not surprising they are demanding that their politicians find one. Permament austerity, locked into the single currency, is not palatable to many voters.

The original idea behind Plan A that we need a private sector led recovery to rebalance the economy and pay more of the public sector’s bills was a good one. The trouble was the government also tried to pursue other objectives at the same time. Several of these got in the way of recovery.

The government signed up to carbon taxes, renewables and dear energy. That has cut into people’s spending power, and made industry less competitive.
The government carried on attacking the banks and bankers, and forced them hold more cash and capital. As a result they were unable or unwilling to lend to smaller and medium sized enterprises to help them expand.
The government left RBS to get on with it, instead of insisting on an early and full clean up of the outstanding debts and balance sheet. As a result parts of the property market are still suffering from the overhang of the past, and a shortage of new credit for new purchases.
The government backed a High Speed Train plan, and more expensive replacement of railway bridges, instead of spending money on improving the crucial road network which transports more than 90% of our goods.
The Bank of England presided over a rapid inflation, which cut into people’s take home pay and left the markets short of confidence and spending money.
The government’s tax rates on higher incomes, on fuel, and on capital gains were too high, leading to a loss of revenues rather than bringing in more tax. These taxes meant some people left the UK altogether to earn large sums abroad instead, and others could only afford to do less. High inherited fuel taxes have hit everyone, and left many families short of spending power.

It’s that time of year when the government asks Parliament’s approval for increased spending within the 2012-13 year.
On cue I find on my desk three supplementary estimates for increased spending. The government plans to spend an extra £531 million in Scotland this year, boosting that department’s Expenditure Limit by nearly 2%. It plans to spend an extra £327 m in Northern Ireland, boosting the Limit by 3%. It plans another £107m in Wales, a rise of 0.7%.
It would be good to hear a bit from other MPs and the media about these increases and the reasons for them, at a time when we are told about “cuts”.

The problem with Plan A, the government’s June 2010 Plan to get rid of the deficit this Parliament, was it relied on a big hit on the private sector. The Plan was to increase cash public spending over the five years, and to pay for the extra spending and get rid of much of the inherited deficit at the same time by a huge tax increase. It was tax and spend on a vast scale.
It was misrepresented by many commentators as a big cut in public spending – because the original plans were for an even larger cash increase in public spending. Austerity was not visited on the public sector in the way it was on the private sector. Even now, during a wage freeze in the public sector, public sector wages are going up faster than private sector wages.
Now we hear endless arguments about sticking to the Plan. I do not know why. The government abandoned the Plan shortly afterwards. We are well into Plan B, which has delayed cutting the deficit because they now realise they will not get all the extra tax revenue they wanted. We are also into Plan C, a plan based on an attempted large increase in capital spending, the one area they did cut at the outset, based on Labour’s planned cuts.
Before people can comment sensibly on what the Chancellor should do next to rescue some growth, they need to understand what has happened so far. It is silly having to field interviews based on the false premises that they cut public spending, and that they are sticking to Plan A. This week I will be looking at the options for the Budget in more detail. I will include inflation and energy prices, banking and credit, public current spending, capital spending, and taxes.

Plan A June 2010

Total Spending 2009-10 £669bn 2014-15 £737bn (plus 10.2%)
Total tax revenue 2009-10 £479.7bn 2014-15 £656.5bn (plus (plus 36.9%)

(Red Book Budget 2010)

Plan B December 2012
Total spending 2009-10 £669bn 2014-15 £731bn (plus 9.3%)
Total tax revenue 2009-10 £479.7bn 2014-15 £604bn (plus 25.9%)

Green Book (Autumn Statement 2012)

Plan C
Add a £50 billion Infrastructure funding scheme to the cut level of capital spending in the original plans.

Plan B accepts a revenue shortfall of more than £50bn a year by 2014-15 compared to Plan A, leaving a much larger deficit and more borrowing.

Dear Lucy,

Just when I thought Ministers were learning of the compromises and commonsense government needs to progress, I am alarmed by some recent developments.

Our carefully crafted compromise over the EU designed to keep the Coalition together is in danger of being broken by the Prime Minister’s latest speech. Many of us are deeply unhappy about his new language. The UK does not need a new relationship with the EU. There is nothing to put to the British people in a referendum, as there is no new Treaty in the making that the Uk is going to sign. Some of us think it a pity we did not join the Fiscal and Banking unions, but understand the political sensitivites at the current time. We think ti will be very difficult to maintain our position at the European table with all this ultra sceptic rhetoric flying around.

The Foreign Office has rightly been saying under this government that it is in the British national interest to be a full member of the EU and to stay engaged. It has been long standing policy of all three main parties that the Uk needs to be a member of the single market. We need to explain this more to some of our current Ministers. They seem to think it is or should be a free market or even a free for all market. That was never the idea. It brings duties and responsibilities. The European single market is about regulation to combat climate change, regulation to ensure high labour standards, regulation to ensure it is a social market, regulation to promote more environmentally friendly methods of travel, and regulation to ensure high standards of health, safety and cleanliness.

We need to explain to the Environment Secretary that the agricultural and fishing policies are to do with solidarity and sharing around the whole European space. These were not entered into lightly, and cannot suddenly be renounced by the UK. We need to tell the Welfare Secretary that the UK does have obligations to people coming to the UK from other member states. We cannot have a welfare state for poeple already here, but deny it people arriving from elsewhere in our Union.

I do hope the Home Secretary’s wish to pull out of many of the Justice measures so carefully compiled in recent years will be tempered by the need to re-enter many of these agreements. We need to co-operate fully on justice matters with our partners, and need to grasp the requirement to share intelligence and enforcement with our partners now most of the border controls have been dismantled within the Union.

I will pass over our major worries with the Education Secretary, who seems to think he needs an alternative civil service to carry out his duties. I would be grateful to hear from you what we can do to prevent the march of unreason over EU matters.

I would also be grateful for guidance on how much we have to accept from the new arrivals in the form of senior Ministerial advisers from outside the service. We must avoid traffic accidents and misunderstandings , which become more likely if Ministers do not trust and confide in us, their faithful servants. The last government wrestled away control of media and communications from us, which was just about tolerable. It is not possible to govern well if they wish to take away control over policy as well.

Yours ever

Roy

I drew attention to the rising UK bond yields and falling sterling sometime ago. Moody’s decision to remove an “A” from the UK rating reflects changes already occurring in markets, and should come as no surprise to readers here. The UK both needs more growth and less public sector borrowing. I have talked about changes that would help bring this about, and will return to this in my pre Budget pieces soon.

I have recently co signed a letter by several Conservative MPs to the Transport Secretary. We have asked him to speed up consideration of airport capacity in London. We think the Uk needs to decide quickly where its main hub airport will be in decades ahead, and start investing in the extra capacity needed.

We point out that it may not help at the next election to be unsure about where a major airport is going to be sited. Far from making it easier to attract votes around London, it could leave many places blighted by the prospect of a major new airport next to them. It also leaves many people with jobs in aviation and at Heathrow unsure of their positions.

Howard Davies could speed up consideration and reach a conclusion this year if needed. The main arguments and plans for expanding Heathrow, for building an estuary airport from scratch, or expanding one or more of the existing airports for London beyond Heathrow are well known. It requires a decision.

I would rule out immediately the idea of building a new hub airport from scratch anywhere west of London. I cannot see the advantage of changing sites from the present west of London location to another around twenty or thirty miles away, further out of the capital it is serving. I can see many political and economic disadvantages, and plenty of people who would oppose such a move. The cost would be huge, requiring a new set of train, underground and road links into the centre of London.

Nor do I see much advantage of trying to shift the main hub airport from Heathrow to an expanded Gatwick or Stanstead. It is true there is more land available at those locations than within the current perimeter of Heathrow. It would be a breach of past promises to place more runways at those places. They are further out of London, have poorer road links than Heathrow, and no tube links.

To me the choice is between expanding Heathrow or building a new Eastuary airport. From the days of Maplin onwards I have been a fan of a new airport with a large seaport to the east of London. Now I fear the success of Heathrow and the magnitude of the investment already made there makes it a difficult prospect. The transition from Heathrow to Estuary could be drawn out, expensive and damaging to the UK’s commercial inetrests. The airlines will be reluctant to go there at first. Trying to run two large airports near London will split service provision and make interlining difficult.

I conclude we need to get on with developing Heathrow. It may need to expand to the west over the M25, and may need more fast transit sytems between terminals and into London to make it user friendly on its already spread site. The sooner we have more capacity the better. Local residents rightly want an effective night ban on movements, and want less noisy aircraft taking off and landing in ways which cut the noise footprint.

              After a good bout of rich bashing, it is time for the politicians to move on to some London bashing. After all, London is  much richer than the rest of the country. It can’t be fair. London should pay more to the rest, and the rest should be given bigger favours to stem the tide of London’s success.

             In the Economic Policy Review I wrote with my Committee in 2007 I pointed out that the London economy had grown 41% between 1998 and Q3 2006, the UK economy by 27% and the Scottish economy by just 16%. This large outperformance of London has continued in the troubled years since.

              Why should this be? London has benefitted from substantial inward migration of talent and money from abroad. It has been host to the very successful financial and business service sectors. It has offset some of the damage of inadequate UK bank finance for property after the crash by the strong flows of foreign money into its market.

           Some now say that London is doing damage to the rest of the UK, sucking up too much of the talent and wealth. They do not seem to appreciate that London is crucial to the financing of the rest of the country. The recent collapse in financial service  and banking profitability has been one of the reasons tax revenues are disappointing, after years of relying on large tax revenues from this successful sector. High earning teams shifting arboad is another part of the low tax revenue problem. If London loses this business it is unlikely Leeds or Bradford, Manchester or Stoke will pick it up. It will more likely vanish to Hong Kong, Shanghai  and Singapore.

            Much of the world’s wealth and progress is coming from the rise of vast and energetic cities. In China it is the move into the cities which is fuelling the growth. In Western Europe the Paris basin is far more prosperous than most of the rest of France. Around the world growing and successful vast cities are locked in competitive struggle for the world’s rich, and for the world’s creative, financial and  industrial talent. These cities are asked to help support the populations closest to them in their nation state or federation.

            It is important to keep one of the world’s large cities here in the UK to help pay the bills. There may be all sorts of issues over who comes and what they expect, but there would be one thing worse than having a city like London on our doorstep – not having one. I am all in favour of more jobs, more enterprise and higher living standards throughout the UK. I just do not think that bashing London will help bring that about. Using London is a brighter means of spreading the good news.

           In June 2010 the OBR/government forecast a big rise in tax revenues, based on increases in CGT, top Income Tax and Stamp Duty rates, Fuel duties and much else. The country could afford to increase cash public spending, and cut the deficit, thanks to buoyant tax revenues. (All the figures here come from the official  June 2010 Red Book, and the December 2012 Autumn Statement  Green Book)

          They said self assessment income tax, running at £22.5bn in 2008-9, would rise to £29.2 bn by 2012-13, thanks to the higher rate of tax on top incomes and growth.  This autumn they are forecasting just £22.6bn for this year, almost the same as four years earlier. That is 23% below the 201o forecast.

          They did say  CGT would fall heavily from the £7.8bn recorded in 2008-9, to just £2.7bn this year, a fall of  65%. The December 2012  forecast is for a smaller decline to £3.7bn. This is still a fall of 52%. The higher rates have not raised additional revenue compared to pre crisis.

           They said Stamp Duty Land Tax would double from £4.8bn in 2008-9, to £9.3bn in 2012-13. Instead this December they forecast £6.5bn. That still does represent a useful rise on 2008-9, a year of low transactions in the property market, but a fall of 30% compared to plan.

           They forecast Fuel Duties at £30.3 bn for this year in 2010. The latest estimate is for just £26.2bn, the same as 2009-10. The government has been forced to cancel some of the rises, and the rises have made people economise more on amounts of fuel used.

            Total Income Tax is running £13bn below the 2010 forecast, but VAT is up a little and National Insurance around estimate.

             It looks as if the government has reached tax saturation point with many of these taxes. High Stamp duties impede transactions in the property market, where the number of sales of properties over £1m fell by 11% in the first half of 2012 compared to 2011.  Fuel duties have stopped people using so much fuel, making it difficult to get more money out of fuel buyers. Capital Gain Tax receipts are forecast to fall following the rise in rate. Income Tax receipts have suffered badly from the attack on top incomes, and from the general lack of growth in pay and the economy.

          Governments of all persuasions have previously kept tax below 40% of national Income.  As the government nears this point it encounters substantial resistance from taxpayers to paying more. In some cases it seems the tax rates set reduce the amount of revenue collected.