Category: Blog

Many Labour MPs have found the answer – windfall taxes. They are proposing a veritable blizzard of these windfall taxes – one for the oil companies, one for the electricity utilities, and yet another for the banks! It leaves the sane asking “What then was the question?”

Would windfall taxes bring down inflationary price pressures? No, not by one penny. Indeed, if the companies they want to tax have real market power as they suppose, they would put their prices up to help pay the tax!

Would windfall taxes make the government popular? Unlikely, as people are fed up with not having enough money in their own pockets – lining the governments pockets some more is not going to make them feel better off.

Would windfall profits improve the efficiency of the sectors paying the taxes? Of course not. It would be more likely to lead to delay or cancellation of some capital investment that could make them more efficient or raise capacity.

Could windfall taxes be routed directly to those who have been losing out under this government? Yes, they could , but that doesn’t look likely. If they used them to pay for the restoration of the 10p tax band that could help a little, but it would still leave us with more damage to business. The government seems resolute in not wanting the cancel its Income Tax hike from the last budget.The banks need more capital, not less. Taxing them more delays the day when they have enough capital to lend on a sensible scale to lift the economy.

Would windfall taxes cheer the left of the Labour party because it would be bashing shareholders, pension funds and savers? Would it be another good hit at the managing and saving classes? Yes, undoubtedly.

Windfall taxes would be great news for the Conservatives, as it would confirm Labour had lost the plot, but bad news for the country.

The government has stuck to its idiot view of house prices – it believes they reflect whether enough new houses are being built or not. All the time house prices were rising they told us it was because we were not building enough. They used the rise in prices as an excuse to demand the concreting over of the South-East, against the wishes of many electors whom they attacked as Nimbys.

Now house prices are plunging, on the same logic, the government should be saying it shows too many houses are being built. They should be welcoming the savage cuts they have forced onto the housebuilding industry by their boom/bust credit policies, as that should be the right response to too many houses, visible in the falling prices. They should be scaling back their demands for more construction, which look more and more ludicrous by the day as we watch the housebuilding industry in free fall close down site after site.

Instead, on the BBC this morning prominence was given to a forecast from the National Housing Federation that house prices will rise by 25% over the next five years, and by more in the South-East. This forecast is out of line with the typical forecast of further falls in 2008 and 2009 leading to a substantial drop in house prices, followed by a slow and moderate recovery. The BBC presumably gave it airtime, and on most mentions did not juxtapose it with the gloomier consensus forecasts, because they want to help the government talk the market up. If only it were that easy.

House prices are likely to fall further because the mortgage market has dried up, and because the Treasury and Bank are keeping conditions tight by running off the Northern Rock book and by their approach to interest rates.

I am going to ask some questions of how that forecast was arrived at, and ask Ministers to explain the inconsistencies of their appraoch to housing forecasts and price changes. The government comes across as ignorant of what really makes house prices go up and down, out of control of the money markets and therefore the mortgage markets, but still as determined as ever to force more houses onto the South East than voters want. They should instead reckon on many months of little new building activity and falling prices.

Most politicians naturally assume public spending is good and more public spending is better. They implicitly assume that you can buy votes with other people’s money. This belief has underpinned the long upwards movement in public spending of the last hundred years, punctuated only by the odd financial crisis forcing retrenchment (e.g. 1976) or by the occasional political period of calculated “austerity” ( e.g. 1981-3, 1997-2001) when spending has grown less fast than the economy.

It is strange politicians believe this, as there is plenty of evidence that big areas of public spending achieve the opposite effect to that desired by the politicians. The last few weeks have shown how spending or promising to spend huge sums to repair the damage of the 10p tax cut, to create jobs in Scottish ship yards, and to win votes in the Commons have not brought any joy or new support for the unpopular government writing the cheques.

There are fundamental reasons why a lot of public spending is unpopular. Public spending takes five main forms:

1. Granting money back to you.
2. Granting money to others.
3. Spending on the delivery of public services you might use.
4. Spending money on the delivery of public services you dont use.
5. Spending money on government itself.

Spending money on giving you money back is the most popular of these. It does ,however, lead some of us to ask why take the money off us in the first place? It means we are worse off than if the government did not take the money and then give it back, as two expensive lots of officials are involved in taxing us and giving us benefits. It also means our freedom is limited to some extent, as you usually have to live in a particular way to qualify for the money back.

Granting money to others can be very unpopular with those who have to pay the bills. Whilst most of us are happy to pay tax so that badly disabled people can receive an income and receive some comforts for their condition, many are not happy to subsidise the neighbour they think could as well get a job and pay tax as they are doing. MPs receive many emails and letters from people complaining that the benefit system is too generous to some. This phenomenon is even more common in the company sector. I remember as a Minister at BERR (DTI as it then was) how many letters we used to receive from companies complaining that we were subsidising their competitors with grant aid that seemed to them unfair. Only a minority of companies receive grants, leaving the majority cross that they have to pay more tax to pay for the grants to the others.

Spending on the delivery of services you use is usually popular. Most people want to know there are enough nurses and doctors in the local A and E in case they have an accident. Parents always want their local school to get plenty of money. It is not the same for services people never use. Some single people or people beyond the age of parenthood do complain about education spending, healthy people sometimes complain about health costs, and many people complain about the costs of quangos supplying services we could well live without. Who wants regional government in England, or more planning consultation documents where the replies will be ignored?

The most unpopular form of spending is spending on government itself. The fascination with the expenses regimes and salaries of Ministers, MPs, quango chiefs and local authority chief executives in recent months is a symptom of a growing frustration. People think the costs of government are out of control, and need to be cut.

This government has allowed people to become very sceptical of how much if any of the additional spending will get through to services they want to use, or will end up back in their pockets. People feel they are getting a rotten deal on public spending because they feel too much is going on government itself, or on transfer payments to people and companies that should not receive it, or on waste within public services that are needed.

People feel overtaxed because they are overtaxed. A government that still thinks all public spending is popular and that we need more of it understands neither the public nor the nature of public spending. Just as some people are jealous of high pay in the free enterprise sector, so many are now jealous of the winners from the government spending lottery, which favours those at the top of the bureaucracy and quangocracy.

When a party is as down and out as Labour is today it is conventional for them to debate whether they should now concentrate on salvaging something by pandering to the core vote, or drive decisively to middle Britain and ignore the many party cries for a more traditional approach. It is only fitting that Labour should now agonise over this, as they have spun for years that the Tories can only do well if they ignore their core and position in the centre ground.

I do not believe in the conventional descriptions of UK politics based on a left-right analysis. Some of the defining issues no longer fit in such a geometric pattern. Euroscepticism is not a monopoly of the right, and is held passionately as well by the Benn wing of the Labour movement. Pulling out of the EU was after all Labour policy in the 1980s. Wishing to restore our civil liberties is a passion of many of us Conservatives today, but there are other Conservatives who hold more authoritarian views, whilst many in Labour hate their government’s attack on our liberties. The left tries to make out that only they would pay large sums into our schools and hospitals, yet both main parties believe in free treatment and free school places and accept that requires substantial and increasing sums of public spending on them. The new divisions are Eurosceptic versus Euroenthusiast, and freedom loving versus turning to the state to seek a greater sense of security and direction in private lives.

Mr Brown will be unable to learn any lesson from recent electoral reversals that requires getting powers back from Brussels, or requires allowing us greater freedom. He is too hooked onto the Euroenthusiast agenda of more power to the centre, and too persuaded that he needs to take more control over our lives to fight his own miserable version of the “war” on terror. He will need to look elsewhere for policies that might chime with an increasingly sceptical electorate.

In the economic sphere there is a clearer distinction between Conservative and Labour, and between Blairism and old Labour. It is here the battle will be fought for the sole of Brown’s Labour. Is he truly a Blairite moderniser, as he sometimes spins, or is he an unreconstructed tax and spend socialist, as his actions since 2001 indicate? Will becoming even more of a tax and spend socialist help win back the core vote, or does he need to become less of a tax and spend socialist to win back some “centre” votes?

Blairites believe that public services should be opened up to more competition and choice. They believe that whilst delivering free medical care and free school places remains important, this can be done more effectively through a range of providers, some of them in the private or charitable sectors. They see the inefficiencies, poor quality and high cost of some monopoly state provision. Socialists believe that these services must be supplied in a uniform way by state employees through a monopoly service, and persuade themselves that any problems of quantity or quality simply reflect a lack of “funding”.

Gordon Brown has elements of both in his thinking. In his statements he tells us the Blairite reforms carry on. He claims to favour a wider range of different types of school, and wants private treatment centres hired by the NHS to provide specialist facilities. However, as Chancellor he was often the roadblock to reform, and as Prime Minister for all the fine words there is not a lot of evidence of major reform on the ground. He increased spending massively to test out the old Labour proposition that there was nothing wrong with monopoly state services that large injections of cash could not put right. Now in power at Number 10 he faces the conundrum of what do you do when the public services are still not good enough and you have run out of money?

The irony of the PM’s position is clear. He will continue to speak as a moderniser but will operate as a traditional high spend socialist. The one thing he is likely to conclude from the bruising rows of the last few months is he should drop all moves to higher taxes, and just borrow and borrow and borrow. The left has largely given up on the idea that taxes on people should be raised – after all the left somewhat belatedly joined Conservatives in complaining about the last income tax hike. Trade Unionists will have another go at taxing energy companies, just as oil prices start to subside. The demand will be popular, but the Chancellor if he goes there will probably end up making another mess and become impaled on an increasingly international and vociferous business lobby capable of shifting profits and domiciles quite quickly if he goes too far.

All this leaves Gordon Brown to do as he will see it is to spend more and more on Labour areas and Labour causes. This will make the economic position worse. Years of high spending on the inner cities, and years of skewing spending to the north and west away from the more prosperous south and east has failed to narrow the gap. Over the last eleven years the more they have spent in the public sector the bigger the regional gap has grown. This will not deter them.

Heaping more public spending on will delay the interest rate cuts the UK economy needs to revive its housing sector. Spending more in the public sector will intensify the squeeze on the private sector and lead to more job losses there. It will reveal to all who still do not get it that Gordon Brown is very much a high spend socialist. It will also bring his government down. It’s the economy stupid. More public spending is not the way to fix it.

If he wants to revive his political fortunes he does need to get a grip on the public sector, and reduce the squeeze on the private by cutting taxes and interest rates.

In the last three months on this site you have responded most to the following topics:

David Davis
English Votes for English issues
English Democrats
The Irish referendum on the EU
Inflation
The battle of the Somme
European army
Modernising Conservatism and Anglicanism
Motoring taxes
MPs pay

(Top ten in order of number of responses per item)

Labour’s loss of Glasgow East has come after the start of the long Parliamentary recess. It means John Mason will have to wait eleven weeks before he can take his seat, eleven weeks before he can say anything in Parliament about why he won and why the electors of Glasgow are so fed up with Labour. It also means Gordon Brown is spared analysis and hysteria about the result around the tea room tables in the Commons. His MPs are already well dispersed and some no doubt busy with other things.

As one who had thought the polls and pundits would be right in predicting a very narrow Labour victory, it does make a difference that they could not even cling on to their 3rd safest seat in Scotland. The turn out was respectable for a by election – some Labour voters were angry enough to go to the polls and vote for a different party.
Labour in the form of Mr Alexander tells us they “will learn the lessons”. We heard that after Crewe and after Henley as well, in the measured tones of an undertaker addressing the bereaved family.

I doubt that very much. To those who say the problem is Gordon Brown – his appearance, his tone of voice, his approach to people – I say he has changed himself a lot. He can now tie his tie tidily, he sports a much better hair cut, he has bought some new suits, and has adopted a much softer and less aggressive tone of voice. I was pleasantly surprised by the way he responded to my last question to him in the House on Tuesday. Instead of asking him a question as I often do to seek to move the debate on, I asked him a highly political question. I asked if he was intending to persuade Obama he was wrong to both want early withdrawal from Iraq and to want more troops and more commitment to Afghanistan, in contradiction to present US/UK policy. He responded in a measured and thoughtful tone, and answered half the issue I put to him. He has changed a lot and become more Prime Ministerial, accepting people’s right to put difficult issues before him. He understood that it would not be good to allow a rift to open up between himself and Obama, but he also has to stay loyal to the current UK/US line.

The problem is not Gordon Brown today. The problem is the mess Blair/Brown made of the economy in the period 2001-2006. The problem is the inflation they have unleashed, and the sharp slowdown they have now generated. That is why I do not think Labour have begun to learn the lessons, because they still cling to the view that the problem is of foreign origin, and that the UK is well placed to deal with it. As readers of this site will know, I concur with neither of those premises.

If they really wish to show they have learned the lessons of Crewe, of Henley and of Glasgow, or for that matter of the last local and mayoral elections, they would take action to alleviate our pain. Just reciting the mantra they “understand how difficult things are” whilst blaming foreigners at every turn will not do. Jetting off to lecture the Saudis about the price of oil, whilst ignoring the EU over the price of food will not do.

They should take action including the following:

1. Impose a staff freeze on the public sector staff (other than teachers, nurses, doctors, police and troops and other important front line personnel). Stop the flood of spending on computers, consultancies, new logos, spin doctors, and all the other paraphernalia of the quango state. Get public spending under control.
2. Cut fuel duty so oil taxation is back on budget, helping cut inflation.
3. Cut interest rates to 2.5%
4. Reduce taxation on new exploration and development of oil and gas in the UK
5. Cut the Corporation Tax rate to attract more business to the UK
6. Announce decisions on privately financed infrastructure projects in energy, transport and water to offer work to the hard pressed construction industry.
7. Speed CAP reform to allow more agricultural activity in the UK and to give us full access to world markets for food.

If they did this theywould tackle the twin evils of inflation and slow down. They might offer people some hope that their family bills will come under some control, and offer those who fear job losses that the government wants to limit the fall in the economy. I see no signs of them doing much of this anytime soon. I have to conclude they still do not get it, as they mouth their soundbites about a foreign crisis and tell us they share our pain on their six figure Ministerial salaries.

It was fitting that warmonger Obama should make his speech in front of the Siegessaule. This ugly monument to Prussian militarism was moved to its current place and enlarged by the Nazis at the end of the 1930s. The Goddess of Victory sports wings, as if from the Imperial Habsburg eagle. They formed the backdrop to Obama’s message that the American eagle now needs German military support for its wars in Afghanistan and into Pakistan.

It was typical of the Europeans that they welcomed this man on an electoral mission as if he were a cross between a peacenik and a pop star after the warlike Bush years. They were with their media taken in by the show, and failed to listen to the substance. In a way the speech was a studied slight to Germany, as it was clearly intended for American eyes and ears, not for those patiently listening beneath the Victory column. It was understandably critical of the lack of German support for NATO in Afghanistan to impress the Republicans back home, on the basis that the alliance is committed to this long and difficult war, but it is mainly American and British troops who are dying there. It set out to show Americans that the Senator can draw a crowd of seemingly friendly Europeans, after the Bush years of tension with the leftwards inclining chattering classes of the EU.

To me it revealed how Obama will not be a force for change , despite the promises. He came over as a cynical politician speaking above an audience so his spin doctors could project him in the way they choose to the folks back home. He made it clear he is as committed to war in the Middle East as Bush, and wishes to draw more troops and more countries into the conflict. There was no statement of war aims, no understanding of how they might win, no recognition that trying to contain a terrorist movement by occupying successive countries where they might hide is not necessarily to way to stop them. In short there was no new thinking, and no hint that lessons had been learned.

Many in the German audience heard the bit they wanted to hear – withdrawal from Iraq – whilst ignoring the rest of the message – the war goes on elsewhere as if nothing had changed. To those of us who think the whole war on terror was misconceived, this was not the message of change we wanted. This was another politician from the age of spin who may be good at that, but who has nothing new to offer that will help the world he claims to love. I felt all that was lacking was a cue for the American eagle to join him beneath the Golden Goddess of war, and for the Pentagon endorsements to roll as the film came to an end.

Senator Obama is travelling to demonstrate he is a great international statesman in the making. The more he travels the more compromises he has to make, and the more hollow will seem his message of wonderful change.

Today in Berlin he has allowed himself to be billed to speak in front of the Victory Column or Siegessaule, a monument to Prussian militarism and their prowess in defeating European neighbours. It is not a wise backdrop for someone who wishes to send a message of peaceful change after the two Middle East wars of the Bush years.

More importantly, the message is no longer one of negotiate peace and withdraw American troops from far flung foreign lands. The pollsters and positioners that cluster around the big Obama cheque book have persuaded him to be tender and tough at the same time – tender on Iraq, tough on Afghanistan. They have even managed to persuade him of the Pentagon’s wish to widen the Afghan war to include the border lands of Pakistan, where terrorist now congregate beyond the reach of most American fire power. Just as Democrat Clinton became bomber Clinton under the advice of the Pentagon, reining bombs in many places in pursuance of US policy aims, so peacenik Obama is morphing rapidly into warrior Obama seeking to intensify the conflict in Afghanistan. The UK may still be in love with Obama because he is not Bush, but it is time as he approaches our shores to be more critical.

I liked his message of change and wrote favourably of his new approach to fund raising – asking for small sums from many rather than seeking big sums from the few – when he first appeared on the political radar. I thought he would do well and might go all the way to victory. I said at the time I did not think I would like his policies, although people ignored that and billed my piece as meaning Redwood wanted an Obama Presidency. I was predicting success, not backing him. I liked his use of words, his ability to reach out, and his ability to forge a new coalition of support – it was great politics. As I feared, what he is now offering should he come to power is altogether more disagreeable.

I have three charges against Obama the realist, three bones to pick with Obama the wannabe statesman. The first is I do not think he has shown a full understanding of the complexities of Middle Eastern politics. He is in danger of being neither effective peacenik nor effective warmonger, now he wants to widen the Afghan war but retreat from the Iraqi one. He has not explained how he would handle the relationship with Pakistan, and was uncomfortable in Israel. If he is unsure of the extent of his war aims and limited by positioning in how he can pursue them, it does not augur well. He will come to learn that Iraq, Afghanistan and Pakistan are all linked – succeed it making it too hot for the terrorists in one of those, and they move to another base.

The second is his possible protectionism. His supporters often say he did not mean his protectionist sentiments, and would knuckle down like the Republican Presidents before him to try to make a success of the World Trade Talks and the latest round of reducing barriers to trade. If that is so, why can’t he bring himself to make the case for free trade? If he wants to remain new and fresh, he needs to be honest. If, on the other hand, he means what he says about protection, he will help make the world a poorer place.

The third is his likely support for higher taxes. His critics claim his social security taxes will mean a hike in the marginal rate of tax on higher incomes to 50% in the USA. That would be bad for business and bad for the USA as a place for business investment. If he is going to be yet another tax and spend Democrat it means he has not learned the lesson of Bill Clinton, who in his first term was fiscally more conservative to the benefit of the US and the world economies.

After high spend tax cutting Bush we need someone who will control spending and squeeze the size of government. The world needs a President who offers policies that encourage economic recovery. The fascinating political duel that has unfolded so far does not seem to have thrown up a candidate capable of doing what it takes to speed and broaden economic recovery. Both McCain and Obama favour more overseas expeditions by US forces, and both seemed wedded to high levels of spending. Both are concentrating more on the war on terror than the war on recession and Credit Crunch. There are probably more votes in the latter.

The Parliamentary recess is a symbol and a symptom of the overmanned and under achieving public sector. Some of my Labour colleagues will tell you that MPs have to work very hard in the recess – they have to catch up with all the constituency business which the pressure of a Westminster session puts on hold. Don’t you believe them. Any efficient MP can manage the constituency visits, cases and correspondence whilst also appearing regularly in Parliament. August and the first half of September are not ideal times for visits in the constituency. In my case there is no District General hospital within my boundaries, the schools are on summer holiday, and many businesses over August will be short of staff as they take their well deserved summer breaks. It is easier to keep up to date than to allow a backlog to develop that needs clearing in the recess.

I do plan to take some time off in August, but I think it is quite wrong that I am shut out from my main place of work and prevented from carrying out my main duties from July 22nd until October 6th! That’s a massive 11 weeks. Why does the government want to keep Parliament out of action for so long?

Doubtless they see it as a chance to have some respite from questions, criticisms and debates which highlight mistakes and problems. As from yesterday MPs are prevented from tabling a subject for debate, from asking oral questions of Ministers in Question Times, from tabling questions for written answer, from tabling EDMs and signing them, from participating in a committee, from asking a Minister a question during a debate or making points in a debate. We will have eleven weeks with no Ministerial statements to Parliament explaining what they are doing or reporting on errors and difficulties, no time to examine the secondary legislation they will still be drafting and pushing through, and no time to raise matters of public concern.

For the government it is a chance to dominate the media by using their spin doctors each day to pump out a story or a stunt, uninterrupted by criticism or an alternative agenda from Parliament.

At the very least there should be a session at the start of September before the main political conferences. This need not be a legislative session, as we have quite enough new primary legislation and do not wish to encourage more. It could combine Question Times to Ministers, with Ministerial statements, and adjournment debates on topics that the government and the Opposition wish to raise. There need not be any votes, so MPs who wish to be away can stay on their fact finding travels or whatever else they are doing, whilst those of us who wish to hold the government to account have a Parliament in which to do it. Whilst we are about it, why not abolish the main conferences, which are outdated ideas, and ask each party to go over to a couple of long week-end conferences each year so people with jobs can attend without having to take a week’s holiday, and MPs could continue to do their job at Westminster.

Westminster is overstaffed and underemployed. It should meet more often to provide better value for money. It is entirely representative of Labour’s wasteful public sector.

Whilst the politicians in the USA are thinking of legislating to stop speculators in commodities, and MPs in the UK are busily enquiring into whether there has been speculation in commodity markets or not, the real world has moved on apace. The share prices of commodity producers are indicating falls in energy and some commodity prices, oil has tumbled more than 10% in a few days, and some metal prices are in retreat. As so often, the politicians are busy talking about shutting stable doors long after the race horses have bolted.

No-one can be sure this is the decisive turn we have been waiting for in commodity and energy prices, but it has been likely for a few weeks that some of the froth will now go out of these markets. The news background for final demand for energy and raw materials is grim, with Asia tightening to squeeze high inflation out of the system, and with the West still in the iron grip of a Credit Crunch with a weakened banking system. If commodity prices are ever going to come down, now would be as good a time as any. It is most unusual for the price of anything to surge ever upwards in a straight line.

I have written before on how there is speculation and investment in commodities as well as higher overall demand from Asia, and explained how this could depart as quickly as it arrived. I find it odd that anyone could think otherwise, or think it worth spending time debating it. Once speculators and nervous investors see prices falling, some will decide not to hang around and will add to the selling pressure.

It is good news today to learn that there is strong price competition on the forecourts lowering the prices of petrol and diesel at last, after several months of ever rising prices. It reinforces my message to the Bank of England – fight recession, inflation will subside as and when these prices come down. The markets which have made it so difficult for muddled Central Bankers in recent months are at least temporarily coming to their aid. Let’s hope, like drowning men and women, the Monetary Policy Committee members grab this lifeline now it’s being thrown to them. They should cut interest rates without delay.

(Please note this expression of opinion is not investment advice)