Category: Blog

The UK is an island of coal set in a sea of oil and gas – if I am allowed a little hyperbole and the odd long word this morning. It has taken a unique ability to make a mess that we end up importing large quantities of gas, worrying about the recent surge in world oil and gas prices, and worrying about our own security of supply.

We extract less oil, gas and coal than we could for a variety of reasons. Most of them relate to actions and inactions of the government.

The main reason we are getting less oil and gas out than our geography would suggest is taxation. The government has tweaked and changed the oil tax system in a number of ways, all designed to take more money from the industry. The politics of this are good. Oil companies are assumed to be too big , too powerful and too profitable, so hitting them in the pocket book can be popular. Many people don’t see it is happening, more don’t care if it is, and some positively welcome it. It would be an unusual politician whom went on TV or radio to argue for higher oil company profits or lower oil company taxes, at a time when the stated nominal profits are large.

However, to understand the shortfall of oil and gas production we do need to understand the nature and purpose of oil company (or for that matter any company’s) profits. The oil companies are in the main very large companies that have invested huge sums of money. They need large sums in profits to justify and remunerate these investments, and to pay dividends to our pensions and savings funds who are the main owners of these companies. More importantly, these companies have the opportunity to invest in a wide range of risky new ventures around the world. At any given time there are more projects than there are people, cash and machines to undertake them. The oil companies have to choose, and they will choose those projects and territories where the opportunity to make a good after tax return seems best. High taxes, or unstable taxation regimes where the changes are always upwards, put oil companies off investing.

The North Sea province is relatively mature – that means the easy finds have been made. It is getting dearer and dearer to find new oil and gas though there is doubtless n new oil and gas to be found. It is also getting dearer to get more of what has been found out of the ground. Oil companies leave some of the crude in the wells, as it is do difficult to bring it to the surface. The UK could make it more worthwhile to find more fields and exploit existing ones more fully by cutting tax rates. It might not reduce the revenue much or at all once the new schemes are brought on stream.

The problems with coal are different. It is difficult to get planning permission for opencast coal mining as it is not much fun living near an opencast mine. There is still a belief deep down in traditional Labour that the only mine that counts is a nationalised deep mine with miners travelling to the face on conveyors. There is also a modern ambivalence about how much coal we want to burn, with indecision about the clean coal technology which is going to be needed to bring coal back as a serious part of our energy supply.

The government should look again at the road blocks to bringing out more coal and more oil, and gas. Many of us do not look forward to increasing dependence on the Middle east and Russia, and would rather spend some money on the technology and exploitation of domestic resources, than get dragged into yet more difficult politics in dangerous countries.

Nowhere has the government let us down more than in the area of power generation. We have falling to bits Britain on the roads and at the power socket. We have carried on trading on our old nuclear power stations in the hope that something will turn up. We have added a few windmills, and trusted to consultation documents and the promise of a great nuclear debate to keep us warm in future years. I guess the strategy is to let us burn all those consultation documents on open fires as the power winds down as nuclear stations are retired on days when the wind is not blowing.

It’s strange that the government has been so remiss in this area. It does not take much public money after all – most power stations can be run without public subsidy, and those that need subsidy can obtain it by charging consumers overall a higher price, distributing the proceeds in the way the government demands. The industry needs permissions – health and safety permits, planning permissions and the rest. It also needs guidance on the government’s view on how much money should be spent on moving to a lower carbon model and how the excess cost is going to paid for. That’s not asking much, you might think, but so far it has eluded DTI and BERR Secretaries of State.

The UK needs to replace more than a quarter of its current capacity in nuclear and coal with more modern plant and possibly with different fuels. It also needs to add a bit to give a better safety margin in an economy where rapid inward migration is raising demand, and here increasing reliance at the margin on wind power will require more stand by plant for calm days. The government is indicating that it wishes to replace nuclear with nuclear – otherwise the carbon output rises if the industry substitutes modern coal or gas stations.

Why doesn’t the government get on with it, and make more rapid progress? Why is there still so much delay in agreeing what is needed with the industry and granting the necessary approvals? Do we really have to wait two years for the new planning system to be introduced before a planning application for a new power station can be considered? Is this yet another device to push these decisions beyond the next Election, so the current Secretary of State knows he is free of the obligation, and the government as a whole will probably be off the hook? Or is this the unintended consequence of a well intentioned idea? Either way, it makes it more likely we will be rationed or short of power before the end of the decade.

This is perhaps the easiest of all the capacity bottlenecks and shortfalls to remedy. Decisions now on the carbon regime, the approved technologies and the sites for new stations would lead to a major new building programme. The UK could then look forward to a future with enough power.

Over the Labour years car ownership has proved ever more popular. Thanks to global competition and new technology cars have got better and better, and the cheaper ones more affordable relative to incomes. People value the flexibility and freedom the car brings them. The car is never late for them but they can be late for the car. The car goes from home to where they want to go, rather than from one difficult to reach station to another difficult to reach station in the centre of a congested town. The car can take all their luggage and their friends and family. They can play the music of their choice or listen to the radio programme of their choice whilst travelling. It’s too good a package for the railways to counter for most journeys, and there are so few spare railway slots and seats at peak hours anyway.

Labour set out to get people out of the car. Aggressive policies were designed to limit the amount of effective road space in towns and cities, to control speed, and to remove capacity from highways by new signals and other controls. We were all urged to leave the car at home and take the train or the bus. Livingstone excelled at these brutal anti motorist policies, introducing the policy of only the rich should be allowed to drive in London with his £8 (formerly£5) a day charge for anyone determined to use the car. Despite all the exhortation, despite the restriction of road space and capacity, and despite record subsidies to the railways, the use of cars and roads went up and up.

After a few years of building no new roads, the government relented. They at last began to grasp the simple arithmetic. As only 6% of our journeys are by rail, if you expand rail by 50% (a task they failed to achieve) that only deals with one year’s growth in overall travel demand. The rest of the growth over the ten years goes by road. Every time you have the wrong kind of snow or engineering works on the line, the good old road system just has to take the strain of extra demand.

The truth is that after a decade of underinvestment the UK is short of transport capacity of all kinds. Yesterday we looked at ways of stimulating much more rail investment. Let us assume government does this and let us assume it works – two big ifs. Even so we will need much more road capacity.

In the Economic Policy Report we proposed a short term and a longer term programme to create more road capacity. The short term programme can be easy and relatively cheap. It means reversing the worst of the clumsy restrictions imposed on the existing highway network that are getting in the way of the smooth flow of traffic at busy times of day. Out should go the all red traffic light sequences for traffic introduced at some crucial junctions (e.g. Victoria Street in London), and the ultra short green light phases (Trafalgar Square London). Where possible junctions should be widened to allow the segregation of slow moving right turning traffic form traffic going straight on or turning left. Artificial chicanes should be taken out and two lane running restored on wider main routes where this has been cut back to one. Bridges and tunnels should be introduced at larger city junctions where main route traffic could be allowed to flow unimpeded across the junction on a continuous basis by such investment.

For the longer term we need to improve the main routes, removing bottlenecks and increasing the number of lanes. The government has done a little of this on the M25 western sections with some success. We need to complete the dualling of the A303 to the west country, of the A3 to the channel ports of Portsmouth and Southampton, and the A27 south cost highway. We need more capacity on the M25, the A12, The A14, and the main M ways 1-6. Where there are competing routes we recommended offering a franchise on one of the routes to the private sector. In return for charging a toll for using the route the private contractor would be required to increase the capacity by road widening. If tolls are introduced on any scale other road charges and taxes would be reduced proportionately. Indeed the government could in the short term generate cash for the taxpayer by selling franchises for specified routes and time periods. The proceeds could be sued to repay public sector debt, and motoring taxes reduced by the amount of the interest on the debt saved.

We are in great need of more capacity on our highway networks. It is putting business off the UK, and putting more hassle into our lives as the daily inadequacies of the network hold us up. It is also the opposite of green as more and more hours are spent by more and more vehicles in traffic jams with engines running.

Rail is the Cinderella who came to the ball, but made such a mess of her attendance. Labour spent the first few years in office praising the results of privatisation. It turned the industry round from decline to rising use, seeing good growth in both freight and passengers. A couple of bad crashes, producing a safety record only slightly better than the nationalised industry, persuaded the government for no good reason to nationalise the track company, which led to a colossal surge in the cost of renewing and maintaining track, slowed the industry down through all the speed restrictions they needed to impose, and disrupted timetables. Now we are getting used to a semi nationalised industry which is not responsive to the needs of passengers and is dreadfully short of capacity at peak times and on popular routes.

The industry is mesmerised by speed. It is a strange paradox of this government that they see speed as an evil on the roads, and are constantly trying to slow cars and lorries down with ever more restrictions and controls. At the same time they have a boys own enthusiasm for ever faster trains , despite the evidence that trains are much less stable at high speeds given the small shiny surfaces of wheel and track that try to stay in contact with each other. Building high speed train networks in the UK is going to b e expensive, slow and difficult. To make high speed trains as safe as possible requires dedicated straight flat track beds with good overnight maintenance. The higher speed the more the wear and tear on the track, increasing geometrically with the speed. In a crowded island with an army of nimbys close to any project it is not going to be easy finding the space and moving enough earth to make a straight flat track bed. In Japan the fast trains there run along a flat straight coastal strip close to big centres of population on tracks dedicated to them and maintained overnight. That is ideal geography and engineering for such a system in the UK the government has tried to introduce faster trains on a mixed use railway, with timetabling and maintenance problems as you try to insert high speed running in with all the rest, and run freight trains overnight on the same track.

What we need in a more practical spirit is more capacity for both commuter travel and heavy freight. In both these areas the railway has natural advantage. In both cases adaptation of what we already have can provide the bulk of what we need. The freight industry needs to build more links to the main railway into the leading ports, industrial parks and freight handling facilities. Marshalling needs to be improved, and longer and heavier trains permitted to get the maximum fuel saving out of railway running compared to lorry freight.

The commuter railway is hamstrung by the current technology. The UK’s emphasis on heavy trains means restricting the number of trains to 24 an hour of the mainline, as it takes so long to accelerate and break using steel on steel technology. There need to be long gaps between trains that take more than mile to stop from top speed. The railway does now accept it needs to introduce lighter weight trains which brake and speed up more rapidly to increase the hourly capacity. It could also think of some other method than dropping sand on the track to increase commuter train adhesion to improve braking and acceleration. Road traffic has long found rubber provides the best answer. Allowing almost bumper to bumper running at commuter speeds every morning.

If we could get the railways to take more the strain of freight and commuters it would serve us well, and improve our total transport fuel efficiency no end. Much of this investment in new vehicles can be private investment, as current investment is.

The water industry was the Cinderella of the privatisations. Telecoms received strong competitive challenges in two tranches, on and after privatisation, producing a large number of new providers and suppliers. Electricity and gas had much of their monopoly broken, and they were in strong competition with each other. Even railways were made to compete through franchise awards to run the trains, and through different leasing and owning companies. Water alone saw the main regional monopolies survive intact, with the predictable consequences – the two worst characteristics of the nationalised industry, shortage and higher prices, partially survived the change of regime. Regulation and shareholder pressure did something to improve both areas, but not enough.

The first step the government should take stimulate new investment is to break the monopoly. If the industry is as advertised a natural monopoly removing the legal monopoly will make no difference. If, as seems obvious, it is not a natural monopoly, new entrants will come in to challenge the current returns and high prices of the incumbents, and offer a lower cost model of water supply and dirty water removal. New entrants will seek to tap into borehole water in the many parts of the country where the water table is rising. They might offer to desalinate sea water, or to use river water where there is sufficient to allow further extraction.

Water is no more a natural monopoly than oil or gas production. Each of those businesses needs pipes and tankers to get the product from where it is fouond naturally to the market. They need to refine or purify their raw material;. Water suppliers need to pipe or transport water form where they can collect it or abstract it, to the customers, cleaning on route to the necessary standard.

A competitive water industry might not wish to supply all water to a uniformly high standard for drinking, but may supply cheaper water for gardens or loo flushing. It might propose collecting more water at or close to the user’s own home for lower grade uses. It might supply water to industry without the drinking water additives some water companies put in on a take it or leave basis. A competitive industry is unlikely to tell people to use less water in hot summer periods, or cut people from certain uses altogether. In summary a competitive industry would be more obliging and more flexible in meeting customer requirements.

The government should also make it clear permits will be forthcoming to put in extra reservoir capacity where needed. There is a need for several more reservoirs in southern and eastern England. It is important work starts on these soon. Even if the government is sufficiently gutless to want to keep the monopolies, it could insist through the regulator that the companies aim to meet demand rather than artificially restricting it. This should be enough to trigger the investment schemes needed. Water is not a scarce resource, and it is the ultimate renewable. You cannot destroy it, it merely returns through the water cycle. As this is the case we should sotp all this nonsense about husbanding the resource and using less, and concentrate on finding ways to route around another 1% of the copious rainfall our country experiences to customers through the pipe, borehole and river system.

Over the course of the next week I am going to look in turn at the main areas of infrastructure, where the UK and especially southern England are badly provided . This is a good time to be considering substantial new investment in transport, water, communications, and energy. The construction industry is going to be short of orders, prices will become keener as a result, whilst even in this Credit Crunch there are substantial funds available from Infrastructure funds and banks for this type of investment.

The last eleven years have seen little progress in making the substantial new investments we need. Many road projects were cancelled when the new government arrived in power. With the exception of the completion of the Midlands relief toll motorway, proof that toll roads can be successfully built and financed as supplementary routes in the UK, there is little to show for this long period. It is the same story on the railways. Massive sums have gone into rail, but so much of it has been spent on consultants, advisers, repairs and remedial work, and little on new track or capacity enhancing facilities. The period has seen the completion of the Cross Channel rail link and a revamped St Pancras Station as exceptions to this rule of maximum spend for no gain.

In energy there has been a deathly silence. The Conservatives initiated the “dash for gas” as the newly privatised industry decided building more fuel inefficient and dirty coal fired power stations was a bad idea. The UK made its one decisive move to a lower carbon economy through this change of fuel for power generation, which has enabled the country to hit its Kyoto targets. Over the last decade little has happened. The nuclear stations have got that much older and closer to the point where they have to close as they exceed their design lives, whilst we have been treated to successive Energy consultation documents and the promise of a grand debate on new nuclear.

The water industry has remained a monopoly for all but the largest users, and has seen a drought of new provision leading to hosepipe bans and reduced supplies as if it were still nationalised. The regulators have allowed the industry to push through substantial price rises, exploiting the monopoly position. The South and east of the country are short of water capacity.

Only in telecommunications has there been an explosion of new capacity, as a more competitive industry has responded to the demand for much more capacity to handle the internet, increased demands for mobile telephony,. And new services ranging from data transmission through security to entertainment downloads. Even here there has been some difficulty in generating the extra line capacity needed to ensure all have access to good internet service, thanks to the strong market position enjoyed still by BT in controlling the local loop and the local exchange network. Mobile networks have expanded dramatically under the impetus of full competition and strong user demand.

The UK as a result of the missing decade of network investment is short of capacity of all kinds for running a twenty first century economy with substantial inward immigration increasing demand as well. The next few years of slowdown or worse present an ideal opportunity to start to remedy these defects. I will set out thought son what the government and the private sector can do in the months ahead to rectify the shortages.

On Tuesday I was sounded out by a senior representative of a continental government over the position the UK will adopt towards EU issues, in the event of a Conservative majority in Parliament after the next election. Given the large number of misunderstandings or wishful thinking on the part of several continental governments, I thought it a good idea to set out in a more public forum the position, to try to clear up some of the misunderstandings.I list beneath nine misunderstandings put to me during the course of the meeting.

1. “Presumably David Cameron will not fulfil his promise to withdraw Conservative MEPs from the European People’s party grouping, as that would entail loss of influence etc”

On the contrary, David is determined that all official Conservative candidates in the next European election will stand on a ticket which precludes membership of any federalist grouping including the EPP. The only reason existing MEPs have not withdrawn is they promised to belong to the EPP before the last election. He will keep his word to the party, and our candidates will keep their word to the electorate if elected.

2. “We assume the Conservatives will go along with the European project and with the Lisbon settlement – the UK has always in the past joined in, albeit reluctantly and late.”

It would be unwise to make such an assumption this time. When Margaret Thatcher came to power she did want to complete the Single market, and when Tony Blair came to power he did want to give the EU more powers over social and employment policy. The modern Conservatives have no wish to grant any more power to the EU. Moreover, we have voted against Nice, Amsterdam and Lisbon because we disagree fundamentally with them, and expect powers back. As William Hague has said, we cannot leave matters as they are if Lisbon has been ratified by all countries.

3. “What can the UK do if Lisbon has not been ratified by all countries?”

An incoming government can keep its pledge to give the people a referendum. If they vote No to Lisbon the government will repeal the legislation and the Treaty is dead.

4. “ Isn’t the UK business community strongly pro the EU, so doesn’t that mean any new government will in practise have to go along with EU plans?”

That is a typical continental misunderstanding of elite versus popular opinion and the relative importance of the two. It is probably the case that senior corporate managers of EU multinationals like Unilever are well disposed to EU integration. If you poll UK managers and executives as a whole they are likely to be as Eurosceptic as the rest of the population. Entrepreneurs are likely to be against higher taxes and more bureaucracy, whether it comes from London or from Brussels.

5. “Surely the UK government will just accept what has gone before as it will want to have influence over the EU”

We will be happy to reach common agreement with other countries on matters of common concern if that is possible, but we have no wish to use the system to force other countries to do things they do not want to do, any more than we want to be told what to do by a majority vote we have lost. We are seeking to run the government of the UK better – we do not harbour ambitions to try to run Germany or France by proxy through the EU.

6. “Isn’t the UK worried that it might lose jobs and investment if it does not go along with the majority”

No. We believe companies in neighbouring countries will continue to invest and trade in the UK all the time it makes business sense to do so. The WTO trade rules also prevent retaliatory action, were any member state thinking of such a course. We do not believe our neighbours would wish to behave like that, especially as they sell us so much more than we sell them.

7. “Won’t the UK join the Euro in due course, once a few more years have passed showing it is a success?”

No, we have won the battle to save the pound. If Blair could not persuade the British people to vote for it during his period of popularity, it is not going to happen. An incoming Conservative government will be against joining the Euro in principle, so it would be foolish of the EU to raise it during any Conservative government’s period in office.

8. “ The UK should understand that Lisbon marks the end of changing the institutional arrangements”

We don’t believe that. Every enlargement to date has been accompanied by the transfer of further powers to the EU. The EU is already working on ways of strengthening the Common foreign and security policy and common defence. David Cameron has ruled out contributing to a common European army.

9. “The UK has to show some flexibility to be a good European. After all France has to show flexibility on defence in return for the Common Agricultural policy. Germany allowed a wider range of countries into the Euro than might have been sensible to show willing over European political union”

The continent has to understand that the UK electorate does not want to be part of a political union. We want CAP reform, as it means dear food whilst penalising developing countries.

10 When I asked “Now the EU has extra powers, what is it going to do with them?” Will it do anything that we might like – cutting regulation and lowering taxes for example – there was no real reply

It seemed to come as a surprise to people who do see the whole thing in terms of constantly changing the architecture to give the EU more power, without communicating the purpose or vision behind taking those powers. It seems to be a case of “We need these powers because we need them because we need them”.

I always knew the former Chancellor was no good at economics. Whilst most people were busily repeating Labour spin about his genius at running the economy, I was critical of the way he trashed the Bank of England and taxed the pension funds to death at the beginning, disagreed with the huge surge of public spending, borrowing and credit in the middle, and disliked the stealth taxes, the nationalisation of Northern Rock and endless changes to the figures that followed. He is now reaping what he sowed. Far from having the best placed economy to handle the downturn we have one of the weakest.

I did always think, however, he was a very shrewd politician. He after all was a colossus in a party of minnows – so much so that none of the pygmies around him dared to offer their party a choice when he finally saw off Blair. Gordon Brown was in many ways the arch spinner of the Blair era, and the Brown era was ushered in with a welter of new spin. So confident was the new regime that they even spun that they did not spin, knowing that spin had been discredited. The endless rows and disputes of the Blair/Brown years ended with the departure of Blair. It looked as if the new era would be one of iron discipline and message control.

The last few days show a complete breakdown in political discipline. Miliband’s recipe for a better government was bound to be seen as a leadership bid by a media hungry to take the leadership story on. Journalists are clearly being fed many stories by Labour MPs and briefers about leadership uncertainty. Harriet Harman’s people must have briefed she would be the first woman in Number 10 since Margaret Thatcher, in charge for a week of Gordon’s holidays. That too was bound to lead to unhelpful speculation, and looked bizarre when someone counter briefed that the PM himself was still in charge from the beach. Friends of Jack Straw have been busy denying he is putting himself about at this sensitive time. We read that maybe 10 junior Minsiters are ready to resign to destabilise things further, and that Alan Johnson is wanted to help put the “message” across. You would need to be some snakeoil salesman to sell to the public the current toxic mix of higher taxes,more public waste, higher borrowing, and a sharp squeeze on everyone’s income to pay for some of the public excess.

Last year an eager Prime Minister used the first excuse to return to mind the shop, cancelling the holiday. He could easily have spared more time away. This year he has been persuaded to take three weeks off. That is a very long time in the hothouse atmosphere his colleagues are creating. There is the danger that the political “narrative” as Labour like to call it will have been wrenched so far away from the one the PM wants by the time he does get back that it will be difficult for him to turn it around. Last year he took too short a holiday. This year he may end up taking too long a holiday.

As there are phones in Southwold he would be well advised to use them to get a grip. He needs to assert his authority over Miliband, Harman, Johnson and the rest as quickly as possible. He needs to supply some sense of direction to the country as awell as to his party.

Over the Brown years the Chancellor/PM has applied an iron law to the Opposition – they must speak no tax cuts and no spending increases. If they venture either Labour reserves the right to list the worst kind of spending cuts to “pay” for them, as no “unfunded” spending increases and tax cuts are allowed.

Gordon Brown has ignored this rule himself, increasing spending massively (often on the wrong things) by increasing borrowing. He has from time to time tried to pay for the increased spending through tax increases, but these are usually unpopular and recently have derailed him This has led to a series of spectacular partial reversals of budget policy (10 p compensation package, cancellation of prospective fuel duty increase, review of VED increase, partial climbdown on CGT etc).

Today we learn of the final irony – he is considering, according to the briefing, a package of unfunded tax reductions!

As if we needed more government debt. Government debt is simply taxation deferred, where we the taxpayers not only have to repay the debt with taxes, but have to pay interest on it as well.
It can make sense for governments to borrow during a downswing or period of slow growth, but isn’t this government already doing that to excess thanks to their mismanagement of the economy and the cycle?

If Gordon at the eleventh hour is looking for some tax cuts they should at least be funded out of reductions in much hated spending, like all the spending on regional government in England, the ID cards computer and the apparatus of his surveillance society.

Meanwhile, the Conservatives will wisely stick to Prudence, and prepare themselves for the shock of just how bad the budget deficit is going to be by this time next year. Does no-one in government care at all about the surge in government borrowing? Do they think the markets will just let them get on with it, without extracting a price?

Can the government rescue the mortgage market? This question is being asked today by the government’s own adviser, as if the mortgage market can be sorted out in some kind of a vacuum, detached from the rest of the banking sector.

I can understand that the government wants to stabilise house prices, and fancies that making more mortgage finance available might do that. It is proof that not even the government believes its theory that the rate of new housebuilding determines house prices, for if it did believe that it would be delighted that not many houses will be built this year, and would be urging the cancellation of even more new build projects to stop the price fall.

Meanwhile over at the Bank of England they are less concerned that house prices are going down than that the prices of energy, food and other essentials are going up. They could take action to make more mortgage money available, by cutting interest rates to stimulate mortgage demand, but they fear that might lead to more money being borrowed to push up the prices of other things. The FSA could help stimulate the supply of mortgages by relaxing their requirements for the amount of capital a bank needs to sustain any given level of lending, but that too is unfashionable just after a period when banks lent too much without the capital backing the Regulator now thinks they need.

There is no evidence of any “joined up” thinking between government, Bank. FSA and the banking sector about what to do. The Bank and Treasury have lurched away from their view of last summer that banks had to sort themselves out, and it served them right if they had to rein back. They have not arrived at a new consensus on how loose or tight they now want monetary policy to be. There are some home truths the government needs to grasp before it makes more foolish statements about the mortgage market:

1. The mortgage market cannot be detached from other types of lending to people and companies. Many mortgages are advanced by banks who also lend for other purposes. Their ability to lend overall is constrained by the amount of capital they have and by the Regulators’ rules on how much capital they need to have for any level of lending. If the government wishes to solve the mortgage famine it needs to solve the banking problem generally.
2. House prices are still high relative to incomes , following a period of massive credit expansion which the Treasury and Bank together encouraged by their low interest rate easy money policies of 2001-6. This was also fuelled by the Regulators effectively encouraging off balance sheet ways of financing mortgages. On the government’s analysis and view that houses are not “affordable” it might prove necessary for there to be a sharp fall in house prices before the market starts to function as the government wishes, as people are being squeezed generally so they cannot afford to trade up or to buy a first home at current prices.
3. Keeping interest rates up also prevents housing recovery. Banks look at how easy it is for someone to afford a mortgage on their income. A mortgage at 8% is twice as dear as one at 4%, and so is ruled out for many people on modest incomes.
4. The nationalised Northern Rock is damaging the mortgage market, as a major lender is unable to increase its mortgage book – indeed it is having to run it down to repay government borrowings, and cannot compete strongly owing to Competition rules over state aids. Selling that bank on would help the market.
5. The government needs to accept that it cannot keep house prices up, stimulate more mortgage lending, cut inflation and place a windfall tax on the banks all at the same time. These different aims pull in different directions. Its first moves have to be to encourage the recapitalisation of the banks so they have the balance sheet strength to lend more – the government itself needs to concentrate on finding a solution to Northern Rock, so that bank can lend more. Windfall taxes are incompatible with this aim. In the meantime it has to accept that houses prices on most forecasts will fall more this year and next. The sooner they do so, the sooner homes will appear more affordable. The authorities could cut interest rates to lessen the extent of the fall needed to price people back into mortgages and homes.

Current policy is incoherent. Interest rate policy is encouraging house price falls. Banking regulation is restraining new advances after a long period of allowing lending growth. Housebuilding and planning policy is trying to encourage further price falls. Attacking banks for being too careless in their lending as the Chancellor did last year encourages a more restrictive attitude towards lending.

What do the government want? Perhaps they should decide that first, then they have to bend every policy instrument to that aim. They never did answer my question about how far they think house prices need to fall to be “affordable”, yet they have gone on about how they are not affordable. Muddle over that is at the heart of their problem.