Category: Blog

The Chancellor’s devastating interview shows we need a Parliamentary statement on Monday to give us a completely new set of forecasts for the UK economy. Parliament should be in session to cross examine him over one of the biggest downward revisions to forecasts ever made by an incumbent Chancellor.

In March 2008 the Chancellor in his budget told the Commons the economy would grow by 1.75% to 2.25% in 2008, by 2.25% to 2.75% in 2009 and 2.5% to 3% in 2010. He said “My forecast shows the UK economy will continue to grow throughout this period of economic weakness”.

Today we learn that he now thinks the prospects are the worst for 60 years. That must mean, for example, a bigger fall in GDP than in 1979-81, when it fell by 1.76%. He also says now “It is going to be more profound and long lasting than people thought” which must mean he expects downturn next year as well as this. If just one year shows a drop of 2% (Chancellor’s implied new forecast) that means 4% less National Income, a loss of £60 billion compared to budget forecast. That also implies a loss of £24billion of tax revenue at the average 40% tax rate on the economy as a whole.

We have already had one quarter’s figures showing no growth compared with the reasonable growth the Chancellor was forecasting. He now tells us to expect a bad downturn, worse than any of the private sector forecasters are expecting.

This means more job losses, more increases in public spending to help people who lose their job, less tax revenue as the economy falls. The figures involved will be huge. There will be a vast black hole in the government’s accounts.

It is high time the government recalled Parliament, made an honest statement to the Commons, and produced some new figures. The rest of the country is now very worried by the situation. It is not good enough for MPs to be away for a further five weeks, and for the government to delay new figures until the Autumn Statement. Mr Darling’s careless language may be just that – but as it has been his only attempt to revise his optimistic March forecasts we have to take it seriously until he corrects the record again. The man who told us not to talk ourselves into recession has now conjured a far worse picture for us than any mainstream commentator!

The portrait of the Chancellor in the Guardian today by Decca Aitkenhead is devastating. Intended to lift the veil on the private man and to help him project his image and his message, the interview reveals a man completely out of his depth without a clue about the financial crisis swirling around him.

The first incomprehensible error is to give such an interview and to use it to make serious statements about the state of the economy. If Mr darling must show his human side and invite people to his holiday home has should stick to talking about the scenery and the marmalade. It is is not the right time or vehicle to adjust the nation’s view of how serious an economic crisis we are in. A few casual remarks about how conditions will be the “worst they’ve been in 60 years” will travel the world and lead to fundamental reappraisals of forecasts everywhere. There is no revision to the Treasury forecasts accompanying this statement. So we now know the Chancellor thinks the optimistic forecasts from HMT about growth prospects this year and next are a bunch of lies, but his forecast of a recession remains unquantified. If we take him seriously he is saying the Treasury have now to revise their forecast down to show big drop in GDP 2008-2009, bigger than the recession in 1974. Why couldn’t he make a proper statement from the Treasury accompanied by proper revised forecasts? I have felt for sometime waiting for the Autumn Statement before we get a revision to forecast is to wait too long. In this situation markets expect up to date information. They get it from companies, who have to tell us of worsened trading expectations, so why can’t we get it from the Treasury?

The second error is to reveal just how out of touch with the financial world this man is. He tells us the first he knew of the financial problems in money markets last summer was when he saw an FT article about the ECB pumping money into their money markets! He tells us he rang the office from Majorca, but of course did nothing. The rest of us were writing and worrying about the lack of liquidity all that August, telling the government to act. Clearly they were too busy holidaying. The next he knows is when back in Edinburgh and he spots a run on Northern Rock, which forces him to London! The rest of us were watching the grisly events around Northern Rock unfold before the run began. In such circumstances I would expect the Head of the tripartite regulatory structure to be getting daily reports on the situation, and to be using his grace and favour house in London to manage the crisis from there. The Guardian journalist did not seem to recognise just how serious this admission is.

The third error is still thinking Labour’s main problem is presentational. “We patently have not been able to tell people what we are for”. Labour’s problem is not presentational. We all know what Labour is for. It is for an ever bigger public sector, it is for more and more spin doctors and presentational gimmicks, it is for more government advertising, it is for keeping them in power, it is for higher taxes and higher benefits, it is for an ever bigger money go round with Peter paying Peter via the intermediary of the government, it is for incompetence at managing the financial affairs of the money markets and the public accounts, it is for massive borrowing. The issue is not the public’s lack of understanding of Labour, but Labour’s inability to deliver the fairer society and the stronger economy they promised.

Knowing our Chancellor had “no idea” of the severity of the crisis facing them until recently is not going to help build confidence. Knowing that he knows the public is “pissed off” with Labour undermines his position further, as the choice of language is not what we expect of a senior figure. There is still a deafening silence on what Labour is actually going to do about the falling house market and the mortgage famine, still a silence over when and if they are going to exert some discipline on the public accounts, still confusion over how they are going to sort out the muddle in the money markets and the problems with banking. The botched nationalisation of the Rock has made their position so difficult. It is eating cash the government and taxpayer cannot afford, whilst having to throttle back its lending and sack many of its staff because it is in the public sector. Returning it to the private sector at almost any price would help to tackle the mortgage crisis, and save the public money.

Readers of this site will know I have long been advocating that the Bank of England cuts interest rates and concentrates on fighting recession. Inflation will fall next year anyway. This has proved contentious with some of my readers. I ask them, how much more evidence do you need of slowdown, how much bigger a fall in property prices, how much more of a squeeze on incomes and lending before you accept that conditions are disinflationary, even recessionary?

Yesterday I was delighted and amazed to read the words of David Blanchflower, Monetary Policy Committee member. He delivered an extraordinary broadside against his own Committee. He accused the Bank of relying on “wishful thinking” in its forecasts, and condemned the whole monetary policy as “misguided”. He agrees that next year inflation will fall, and states “18 months down the road and inflation is going to plummet like a rock”. In a now famous remark he said “ To sit and worry about inflation expectations and what is going to happen to those, rather than worry about the fact that the economy is going to go into recession seems to be misguided”.

Of course, under the requirements set down by the government to the MPC, they are required just to worry about inflation expectations. Their remit prevents them from considering the impact of their actions on the real economy, unless that has an impact on inflation. For years we have been fed the soundbite that the UK has an independent Central Bank and that is a guarantee of economic stability. The truth is we do not have an independent Bank, and the actions of the MPC have helped destabilise the economy. They kept money too loose allowing a credit binge, and they are now keeping money too tight, assisting a Credit Crunch. They have been aided in this by pro cyclical regulation of the banks – too loose on the way up, too tight on the way down – and by a government which does not seem to understand money markets.

We will now see many of those who have spent the last few years praising the mythical independent Bank demanding a change in its government remit. The truth is that in a democracy if any institution or group of actors gets things wrong and inflicts economic misery on the public, their roles, jobs and remit will be debated and changed. No quango or Bank stays “independent” for long if its actions do not please. The politicians have to respond to the popular anger about failure or mistakes. The government will have to look at adding a requirement to the MPC to consider its impact on the real economy, just as the Fed has to in the USA. In the last quarter the USA produced annualised growth of 3.3% (where are all those pundits who told us the US is in recession now?) whilst the UK slowed to a standstill and Euroland fell. The USA has a Central Bank that has to work with the government to influence the level of economic activity as well as prices. Euroland and the UK have central banks which just concentrate on inflation, and manage to get that wrong.

Perhaps the most important thing David Blanchflower said was “We need to actually get ahead of the game and it appears that we are now behind”. Exactly. It is as if all those clever economists have forgotten one of the basic things they teach their students – there are leads and lags in economic policy. Changing interest rates has a delayed effect, as it takes time for all rates to adjust and for banks and borrowers to adjust their behaviours to the new levels. Many people have protection from higher mortgage rates for a period. Larger companies can use interest rate futures to protect themselves for months ahead. Many people and companies have a bit of money for a rainy day, but not enough for a rainy year.

The present high inflation reflects mistakes of the MPC and others a year or two ago. There is nothing the MPC can do in the short term about that. The issue is what are conditions going to be like a year or two ahead? Most commentators agree they will reflect the current squeeze. It is difficult to see inflation staying high against such a background, and strange to see a government and a Bank so keen to intensify the squeeze by most of their actions. The rest of the MPC need to join David Blanchflower, by trying to project themselves into the future. Most of them seem to be at best living in the present, if not stuck in the past. Applying a second load of bolts to the stable door after the horse has bolted won’t bring it back. The issue is how we get a new horse into the stable in times of slowdown or worse.

I remain strongly of the view that the US has got its policy response right to the Credit Crunch, and the UK is still getting it wrong. It will not be easy for the US authorities to chart a successful course, given the magnitude of the mistakes made on the way up. They still have to contend with a very weak banking sector, with more bad news still to come, and with a very weak property market, which adds to the banking weakness. So much lending is secured against property, so falling property prices undermines old loans and puts people off making new ones. The Fed’s slashing of interest rates helped, but it cannot get all the market rates down in line with its rates, because the banks are short of cash and reluctant to lend. There will be some excitement about a change of President, and the two main candidates seem to be lining up to continue fiscal stimulus to assist low interest rates, with the emphasis on tax cuts to alleviate the squeeze on personal incomes. All that means the US is better placed than Europe.

Meanwhile Euroland remains mesmerised by inflation despite the obvious evidence that the slowdown has now hit Germany as well as Italy and Iberia. Destocking is adding to the woes of companies, as they fight to become more liquid against a backdrop of declining turnover. The UK is going for a huge fiscal stimulus based on increased public spending with revenues falling from the downturn. The fact that the government sector is as overborrowed as the private sector before entering the downturn leaves it in a weak position, at the mercy of the markets. The pound is now falling against the dollar, having devalued against the Euro, increasing the cut in living standards.

(Previous blogs on this topic on www.johnredwood.com include
“Halve interest rates and cut wasteful spending” 18.7.8
“The lies about the EU economy” 14.8.8
“The Bank of England is fighting the wrong dragon ” 9.8.8
“An inflationary or inflammatory letter?” 17.6.8
“Why have the government and the Bank of England failed us on inflation?” 17.5.8)

The Taxpayers Alliance today have published another good piece of work pointing out just how much extra tax the government collects in the name of greenery, over and above the calculations of the cost of CO2 and pollution.

Others have worked out just how much more than the cost of road provision motorists have to pay. Whilst bus and train operators are allowed tax concessions on track use and fuel purchased, motorists and lorry owners have to pay tax after tax to use the public highway and burn fuel.

The public worked this out for themselves a long time ago. All the polls show that a majority of people have thought for a long time that the green argument is used by many politicians as another excuse to raise more money in tax so they have more of other people’s money to play with. Nor is this the only misleading spin and ill thought through policy we experience daily from this government.

Let us look at some of the other green contradictions we get from this administration.

They tell us that travel by car or plane is bad for the environment because these vehicles emit carbon dioxide. They tell us trains and buses are good for the environment, perhaps because these vehicles also emit carbon dioxide! They never truthfully tell us that all vehicles with diesel, mains electric or petrol engines emit carbon dioxide when the power is burned or generated. You need to do a proper audit of each journey someone undertakes to find out which is the greener way of travelling. Sometimes it is greener by car than by train or bus, depending on where you are going and how many other people are going there too. You need to consider the energy burned to get you to and from the train station as well as the per person energy used by the train. If you want to go from the village of Little Known to the village of Lesser Used in the Marsh at 11 pm it would not be economic or green to lay on a bus just for you.

We are told that travel by car could be made greener and safer if we limit the speed of cars on good roads. So we have to drive cars that would be quite capable of travelling at 80 or 90 miles an hour on a motorway at a maximum of 70. Meanwhile we are told that trains are better if they travel at 125 miles an hour, whilst the government subsidies the industry to spend a fortune on trying to achieve speeds of 150-175 miles an hour, in the knowledge that anything that gets in the way of trains travelling at that speed does not have a chance of survival. Trains cannot be steered round an obstacle on the track, whereas a high speed car has a chance of steering round an unforeseen obstacle on a motorway. The government strengthens its arguments for slower running cars by saying they then burn less fuel per mile travelled. Why doesn’t the same rule apply to a train?

Ministers and officials in air conditioned and poorly insulated offices tell the rest of us we need to improve the insulation of our homes, and lecture us to turn out unused lights and turn off appliances at rest. How often do you see a Minister or senior official turn out a light when leaving a room where the taxpayer is paying the electricity bill? Who turns their computers and screens off when they go for a break at work in the public sector? I find people at home are much more motivated than the public sector to use energy wisely, because we are paying our own bills. That’s why I have been drawing attention through Parliamentary Questions to the need for better performance from the government itself at saving us money by raising its game on energy efficiency.

I heard this morning that UK house prices are now down by more than 10% so far this year. I listened in vain for a government Minister to come on to claim success from their policy. For years Ministers have told us we needed to make houses more affordable. They have become mighty shy now their policy of starving the Money markets of cash last summer and nationalising the UK’s most aggressive lending bank, Northern Rock, is delivering lower house prices with a vengeance.

Could it be that they have at last worked out that lower house prices do not automaticallly make houses more affordable, if there are too few mrotgages to buy them with? Could it be that at last they understand there is one thing worse than house prices soaring, and that is house prices falling? Aren’t we owed some explanation of their latest thinking, and some comments on where they want to take the mortgage market next? After all, they now own and manage one of the largest mortgage banks, and intervene regularly in the money markets, so much of this is down to their efforts.

We should be told by the government how much further they intend to let house prices fall before taking the necessary money and mortgage action to stabilise them. We should be told whether they think that the shortage of housing they identified in previous years has now corrected, given the lack of buyers for new homes. Does that make them want to alter their targets for new house construction, as they think new home starts determine house prices?

Commercial property has already fallen by more than 20%, twice the fall so far in houses. There is more and more empty space available as developers finish building projects in progress. As migrants from overseas return home in search of jobs elsewhere, and as people staying here give up on trying to find a mortgage for a better home, we should expect further falls in residential property prices. There will be more repossessions as people struggle to pay the mortgages they already have, forcing more properties onto the market.

No more boom and bust? That does not seem such a clever soundbite now ownership of Northern Rock and clumsy mismanagement of financial regulation and the money markets has made the UK government into an architect of bust in the property market, presiding over the collapse of the mrotgage book of one of our bigger mortgage lenders at a time of general mortgage shortage. And how does Vince Cable now think about the outcome of nationalising Northern Rock, having acted as the government’s spinner to win over fashionable opinion to such an ill judged course? Is he happy with the collapse of house prices, the shortage of mortgages and the redundancies at the Rock?

The West has aroused the Russian bear through its contradictory actions over Kosovo and Georgia. Russia now sees the West as asserting its power too far, recognises the West is now overstretched in the east, and thinks the West is becoming too intrusive close to Russia’s borders.

I wish to stress that I like most Westerners condemn the invasion of Georgia and the military actions taken by Russia in the Georgian war. I also disagreed with some of the actions taken by the EU and the USA during the Yugoslav wars, which are an important part of the background to Russia’s attitudes today. The West is in danger of reaping what it has sown.

Now the bear has awoken we need to analyse carefully what are the legitimate and illegitimate aims of Russia, and how might it use its growing military and economic power? We need to think before we speak, and plan and act before we commit ourselves too deeply, beyond the range and strength of our power.

The irony of the present situation will not be lost on the Russians. The West is paying Russia to re-arm, thanks to the failure of the UK, the US and other western governments to take the necessary action to cut dependence on imported oil and gas from parts of the world that are unstable or unfriendly. The more oil and gas we buy from Russia at these new higher prices, the more missiles they can finance and the more tanks they can manufacture. The first thing the West should do, if it wishes to strengthen its hand vis a vis Russia, is take urgent action to cut its dependence on imported fuel. I have set out before some of the steps the UK should be taking now to do this.

The second thing the West should do is think through its position more clearly on whether it should help defend all existing borders of states or not. It has been normal in the post 1945 world to attempt to defend existing states borders, buttressed by the UN. It required UN agreement and action to ratify changes in states borders. That changed with the recognition of Kosovo, opposed by Russia, a UN Security Council member with a veto.

This doctrine is also in conflict with another Western doctrine, the self determination of peoples. Under this doctrine, if a dominant majority in a substantial region of a larger country wish to secede and form their own state, they should be allowed to do so following referendum and legal process. This is, for example, the view of the Scottish Nationalists over how they should take control of their country, and the growing view of many English nationalists who want a vote on the independence of England from the UK and the EU. It is a view that the US set out as a war aim in the 1940s, seeking to liberate European countries from German control, and favoured by the US when supporting the removal of colonial powers from Africa. Czechoslovakia was allowed to split in two when the popular wishes were so clear.

In the modern complex world we live in there should be no reliance on one of these doctrines to the exclusion of the other. Sometimes they will be in conflict, and decisions need to be made. In practise each case has to be settled on its merits. The judgement will be better if it is supported by more countries, including all the important global and regional powers who can help maintain the peace around whichever decision is made. I incline more to favouring self determination, but accept there may be occasions when that cannot work. There have to be some limits to it to avoid a constant state of flux and an endless movement to ever smaller states.

So how should the West respond to Russia? Today the West needs to understand why Russia is so alarmed by NATO’s current stance, and to understand how there is no acceptable military option for the West to dominate in Georgia and to determine borders so close to Russia. In other words, we need to talk to Russia, and to discuss the issue of splinter regions from Georgia. We need to discuss the whole architecture of states around Russia’s western and southern border, to avoid committing NATO to maintain borders we cannot in practise enforce at an acceptable military cost, and to allay Russian fears to make Russian military action less likely. We need to see how big the disagreements are and to assess if any other state apart from Georgia is in danger of a Russian invasion. So far the West has not won over enough independent world opinion to strengthen its hand in negotiation with Russia.

At the same time we need to strengthen NATO and the Western economies, so we are less dependent on Russian fuel and more capable of acting if Russia pushes too far and uses her military in even more unacceptable ways.

The USA has been the world’s only superpower for a couple of decades. It has got lazy about using its power and enforcing its will. Only asymmetrical warfare and terrorist attacks have challenged it for years. Now US power is coming up against other important powers in China, Russia and the Middle East that it would be unwise to attack head on. Worse still, the US is in danger of creating too many different enemies and threats, fighting a live war in the Middle East, a cold war with Russia, and engaged in a superpower struggle of various kinds with China, primarily in the economic sphere in the first instance. There are flash points in all of these relationships – in each border state near Russia that the US guarantees, in Taiwan, in Iran and Iraq. Even the world’s superpower has to be careful not to overstretch. It is dangerous to create so many opponents who might one day help each other against their common enemy. The US needs to ask itself what are its long term interests? How many of them can it pursue backed with effective military force? The EU needs to stop posturing as a major player when its words can be inflammatory and when it lacks the military capacity to enforce. I am not recommending it has military capacity – I am recommending it should remember its limitations. The UK needs to look to its economy first – it is now so weak it cannot afford its current defence commitments properly, and is vulnerable thanks to the lack of a cogent energy policy. We need some strategy rather than more foreign policy spin.

David Milliband is playing a dangerous game. His visit to Ukraine and his support for places close to the Russian border is a further incitement of Russia, without the force to back up the position he is setting out. He comes across as a boy cold warrior without weapons, playing with fire in a part of the world he understands but dimly. Maybe he is still planning his first cabinet, and too distracted by the slow collapse of the government he represents to do the homework he needs to do to understand the world of the Caucasus.

He has chosen the weakest and worst of all the possible responses to the ill judged Georgian adventure and the unacceptable Russian invasion. He has decided to talk tough and act weakly. What we need is a proper analysis of the problem, and longer term measures to rebuild the UK’s strength – and the strength of our Western allies – before presuming to dictate to Russia things we cannot control. How does he think the UK can guarantee the independence of all the states clustered near the Russian frontier? Does he understand why the West’s actions in encouraging and recognising an independent Kosovo have been seen by Russia as a green light to supporting independent states out of Georgia’s regions?

How can he belong to a government which set up a Scottish Parliament which now wants a vote on Scottish independence, and yet argue that people should not be allowed to change their states if they wish? He is muddled on self determination and how you redraw Europe’s borders. Apparently what is allowed in Kosovo is not allowed elsewhere. Time to do some reading and thinking, Mr Milliband, before putting your foot in it again.

Today the government’s favourite think tank is being given air time to tell us how important migrants are to our economy. It is true that in the boom time migrants often came here to do jobs others were unwilling to do. The government made the labour market much less flexible for people born here, through its new labour laws, and its tax and benefit regime. The evidence of that is there to see in the 5 million people of working age who do not have a job. It offset this inflexibility to some extent by inviting in large numbers of migrant and temporary workers. That was better than leaving the economy ossified , but not as good as making the UK labour market strong enough and flexibile enough to get many more people back to work or into work for the first time.

Now we are entering a very unpleasant downturn, brought on by government waste and overborrowing, as well as by the loose monetary policy of past years and the overborrowing in the private sector, the market will partly adjust by some migrants going elsewhere where there are better job opportunities.Nonetheless, there will be all too many job losses, and some rise in overall unemployment, as the economic winter sets in. The inward migrantion kept wages down at a time of boom, and will offset some of the job losses in times of downturn, but not all of them.

What will the government do to show it is tackling the problems of joblessness and income squeeze? It will spend and spend, as it still does not realise governemnt over spending is much of the reason why the UK is in such a poor position to correct the excesses of past years of easy money.It will offer one off help this winter with fuel bills and maybe with food bills. It will seek to augment people’s income in the short term by borrowing more money which the same people will have to help repay with interest in later years! At a time when people struggle to get a mortgage or afford a mortgage to buy themselves a home we will all be forced to help pay for a collective mortgage to offer sops to people faced with a struggle to pay the family bills.What we need is a governemnt which can deliver much more for less, and eave us more of our own money to pay the bills.

The government should be more cautious. Offering benefits rather than tax cuts is an expensive and complicated way of easing the squeeze, involving too sets of extra officials to collect the money in and then dish it out. Doing it all on borrowing risks the ultimate wrath of the markets. This autumn the government will have to come out with revised figures, showing just how much above its own budget its current spending now is, and revealing just how much worse both spending and revenue looks in the months ahead thanks to much slower growth than forecast. If the government is honest in its figures it will help, but the figures will be bad. If it understates them it will undermine market confidence even more, as markets are getting ready for a lot of red ink in the government’s budget. The more red ink there is, the worse the downturn and the longer will recovery be delayed.

I am busy this week-end but will do the responses tomorrow. Apologies for the slight delay in service.

It’s typical that at a time when the issue is Why is the government spending so much more and borrowing so much more than it forecast some should want the issue to be Tory spending plans.

The issue today must be How can this government get a grip on the public finances? It wrongly thinks spending borrowing and wasting more is the right approach, when it will make the squeeze and the Credit Crunch worse.

My comment to the Sunday Telegrpah said that the Tories should not yet produce spending and taxing plans, because the rate of deterioration in public finances is so huge and we cannot be sure yet just how bad an possible inheritance will be come 2010. Instead we must highlight the large black hole in the governent’s own numbers, and urge them to take corrective aciton – not by cutting nurses and doctors, teachers and police, but by stopping so much waste and needless bureaucracy. Above all they need to stop the losses at Northern Rock and return it to the private sector so it can make mortgage advances again.

There will be a crisis in public finances if the government carries on at its present rate of overspend and overborrowing. It is crowding out an already emaciated private sector, and intensifying the squeeze on incomes. It will leave the government as both unpopular and incompetent.The first thing they should do is place a recruitment freeze on more burearcrats, as we are groaning under the weight of their salaries and pensions.This country is one of the worst placed to tackle the global imbalances, because it has such a top heavy government with so little being achieved for all the money spent.