Author: johnredwood

             The government is busy trying to stop the next banking crisis. I want it to sort out the last one. It is all very well giving the Bank of England powers to force the break up or segregation of a large conglomerate bank in the future if it lends too much and runs too much risk. The real issue is how is this government, now, going to get RBS working properly and lending enough to the starved UK private sector?

             Giving the Bank of England an electric ring fence does not mean a future problem is sorted out. An electric fence warns but does not kill an animal that encounters it. An electric fence would not withstand a determined herd of animals wanting to trample it. Metaphors are often misleading. The issue in the future is would the Bank see the need to use its new powers at the appropriate time?  Would they turn the current on when things seem to be going well? The problem in 2006-7 was not a lack of power to rein in excess banking risk, but an unwillingness or inability to see the need to do it. Can you really see in the next boom the Governor going to a very powerful, profitable and successful world bank in London and telling them, he will force break up or better segregation? Why wouldn’t they just change domicile?

              Meanwhile, close at home and largely owned by the taxpayer lies the damaged RBS – becalmed  because it still cannot get rid of the taxpayer shareholding and rarely makes an overall profit. If ever there were a candidiate for break up, there is one. The government could agree a break up with the minority shareholders. The UK needs more soundly financed competitive clearing banks to finance a recovery. The government owns many of the components to do that in RBS. Why doesn’t it get on with it before it is too late to improve the economy before the next General Election?

              It is one thing for an underemployed and talented backbencher to ponder an assault on the leadership in  thirteen years time when he thinks Mr Cameron might retire (“He should be leader for 20 years” says Mr Afriyie). Mr Afriyie has confirmed that” he loves Mr Cameron” and was only thinking of running much later when there is a vacancy. The Afriyie plot has been much exaggerated, and misinterpreted.  He was not running around asking people like me to sign letters to get rid of the Leader. He has told me personally he is a Cameron fan.

           It is altogether another thing to read that the supporters of a leading and well respected Cabinet Minister, the Home Secretary, are getting ready for a Leadership camapign as if there might be one along any day soon.(Daily Mail Saturday)

           I assume Mrs May plays  no part of this speculation. I recommend she calls in those keen MP supporters of hers who have started to brief the press in her favour and tell them they are no friends of hers or the government’s. She has a wise friend or two in Downing Street who would tell her just how quickly things like this can get out of control if you allow senior MPs or whoever to brief like this.  This is not the right time for such moves. Mr Cameron needs the full support of his Cabinet to do more to improve the economy, and to fight the local elections in May for the party he leads. Dissension now before important elections is a particularly bad idea. He and the Chancellor need to be given every encouragement to take the measures needed to see a resumption of decent growth.

               There were mutterings at the end of last year and before Mr Cameron made his big Europe speech in January. A few colleagues asked me what they should do – should they write a letter demanding a vote on Mr Cameron’s tenure? I explained I was not going to do that. I thought Mr Cameron would change the party’s policy on the EU in a way we wanted, and he should be given every chance to do so.  I recommended that they waited to see Mr Cameron’s EU speech. It was clear the party needed a new policy on the EU it could believe in. It regarded a referendum, and the hope of a new relationship under a Conservative government, as essential first steps.

              Many in the party liked the new policy on the EU. So much so, that the only criticism is can we get on with it more quickly? I read that MP Mr Baron next week will launch a Bill to try to speed up the legislation on the referendum. I would urge my colleagues to get behind the Leader, and give him every support in the forthcoming local elections.  Attacking the Leader now is not the way to bring about the improvements people want. It will give encouragement to the federalist parties, Labour and the Lib Dems. Far from making a referendum more likely, it will encourage the Federalist parties to think they can get  away without offering one. It will divert attention from the essential task of mending the economy and reforming the public services so we can afford them.

          The Coalition planned to raise an extra £11,500 from the average family of   four by 2014-15, compared to 2009-10. (June 2010 budget)

           They needed all this extra tax to cut the deficit, as Labour had been spending so much more than it collected in revenue.The country cannot carry on living on a rising overdraft for ever. They also had  to pay for the extra £6000 of  current  public spending for every family of four that the Coalition itself planned. Even allowing for the cuts in capital spending, the Coalition needed a big tax rise.

         The Coalition decided to live with Labour’s proposed rise from 40% to 50% on higher incomes. They increased Capital Gains Tax from Labour’s sensible 18% to 28%. They increased Stamp Duty on property. They raised VAT to 20%.

        The only one of these tax rises that produced some of  the extra revenue they sought was the increase in VAT. The higher rate of Income Tax accelerated the departure and the decline of high end incomes in the UK, and revenue fell sharply.  The new CGT rate is forecast to yield lower receipts this year. The high end Stamp Duty has led to a big slowdown in sales of expensive flats and houses around the £2m plus mark in Central London, hitting revenues and mobility compared to estimate.

        The government has stuck to its current spending plans. The going gets tougher on these next year, when there are smaller increases than in the first three years. It is trying to buttress its falling tax revenue compared to forecast by exhortation and loophole closing. It is seeking the elusive extra billions from rich people and companies that all hard up governments seek.

         On Friday I was reminded by Andrew Neil on the BBC Politics programme just how far and fast the UK Tax Code has expanded under this government. As smart accountants, lawyers, tax advisers and Finance Directors find new legal ways round the tax code, so the Treasury hits back with yet more loophole closing measures.

        If you want to collect more tax there is a simple motto you need to follow – fewer breaks and lower rates. Higher rates and more breaks is never going to bring in enough revenue for this high spending state. It is merely going to produce an ever bigger and more complex tax code. It creates more division and bitterness within the society,as groups squabble over whether everyone is paying enough tax. The richest are the ones who can afford to leave altogether, or who can rearrange their affairs to avoid tax legally whatever the regime.

          How many EU laws and decisions does it take before people admit we no longer are self governing?  This was the central question I asked during the recent Parliamentary debate. Law by law, Directive by Directive, decision by decision, our democracy is being taken away.

            Of course Parliament remains sovereign for the one single reason – it could always repeal or amend  the 1972 European Communities Act. The day  that option becomes impossible or too remote for anyone serious to contemplate, then we have to accept that sovereignty has passed from our islands to Brussels. An In/Out referndum promised by a party that could win a General Election keeps that idea very much alive as an option.

           This same process of democratic erosion and centralisation has affected the other member states as well as the UK. Why is it only the UK that worries about it? There are a variety of reaons.

           On Thursday evening I was on a panel answering questions about the EU economies  and the Euro. The Moderator when asking the first question characterised it as one needing a European to answer first. She passed it to the Dutchman on the panel, saying he was European. It was as revealing as the moment as when I was asked if I had visited Europe recently by someone who thought I was too Eurosceptic. Even the most Euroenthusiast of UK citizens do not automatically see themselves as Europeans. They see Dutch, German and French people as Europeans, but not us Brits. The EEC was sold as a trade agreement, and so it remains in many British minds. It is not a warm feeeling in most British hearts.

          UK history is different from the history of so many continental countries. Invasion and occupation by Italians and French was two millenia and one millenium ago. In more recent history the Uk has defended her liberties and defeated continental aggressors, be they Spanish, French or German. As a result we do not fear the large neighbours as so many EU countries do. We also think that post 1945 the main powers on the continent are peace loving, and well behaved thanks to NATO and the US powerful watch. We do not think another western European war is at all possible, with or without the EU.

            The keenest members of the EU are the poorer countries. They join to get their living standards up closer to the rest. They join to benefit from subsidies and transfers to them from the richer countries. It is a transfer or subsidy union. They welcome EU laws, because they anticipate the EU law will be better and more consistent than the law codes they were used to under Russian tyranny or the rule of the Generals.

             The UK has to pay many of the bills for the subsidies, so the subsidy union is not popular here. The UK has plenty of laws of its own, and knows it can always change governments and lawmakers if it does not like its domestic laws. It sees EU interference in the lawmaking process as undemocratic and annoying.

             The UK is a gobally engaged island. It is a dynamic place that grasps the huge changes that the rise of Asia and the dominance of the internet are causing. It means we will always have a different view of the EU from the rest. It also means we will not join their monetary, fiscal and political union. We do need a new relationship as soon  as  possible.

The latest forecast for the UK economy thinks there will be growth of around 6% for this Parliament, compared to the 13.2% the OBR forecast in June 2010. They attribute the worse performance largely to the weakness of the European economies, and slower growth world wide.

As a result of the slow down, they now forecast tax revenues some £50bn a year lower in 2014-15 than their June 2010 forecast. I have long argued that the forecast big surge in revenues looked problematic, especially given the higher rates. The Chancellor confirmed with some arresting figures in his Statement that the 50p tax band has cost the Revenue £7bn of tax income, as rich people have gone elsewhere to earn.

Total additional borrowing for the five years now comes out at £565 bn, not such a bad figure as feared. It is lower thanks to the large savings on interest payments, now amounting to savings of over £30 billion over the planned period. This compares with original forecasts of £451 billion extra borrowing this Parliament in the June 2010 figures. The extra borrowing has been brought on by loss of revenue. The higher spending forecast in 2010 is staying close to the original budgets.

Future growth rates depends crucially on changes in credit and money in the private sector over the next year or so, and over demand levels which will be affected by inflation. The future growth rate will be strongly influenced by progress in mending or bypassing the commercial banks. I will keep you posted of progress.

The best boost the Chancellor could give to the UK economy would be cheaper energy.

Uk energy is too dear for much of industry. As a result more goods are made abroad where it is cheaper, rather than here. More energy intensive industry is contemplating closing plants, or putting its new investment elsewhere. The government says it wants more manufacturing in the UK. It needs cheaper energy to encourage it.

UK energy is also too dear for consumers. As we experience a succession of cold winters, people need some relief from dear energy so they can keep warm at home and still have some money left over for discretionary spending. Cheaper energy would provide a boost to spending and therefore to jobs. It would come as welcome relief especially to people on lower incomes who see too much of their money gobbled up by energy bills.

The Chancellor needs to persuade the Energy secretary, Mr Davey. We want more exploitation of the UK’s gas and oil reserves. It will take more gas fired power stations. It means allowing shale gas recovery. it means a tax regime for our energy reserves that promotes more production.

Maybe Mr Osborne is now able and willing to do this. He should say “Drill Davey, drill”.