Category: Blog

 

            Yesterday the government reported that its additional borrowing in May amounted to £17.4 billion, £1.1 billion less than in May the previous year. 

            In the first two months of 2011-12 total borrowing reached  an additional £27.4 billion, compared to £25.9 billion in the same period the previous year.

            Total national debt as a proportion of National Income ( excluding the bank debt, PFI, PPP and pension deficits)  hit 60.6% compared to 53.8% a year earlier.

              These borrowing figures confirm the pattern in the Red Book and regularly reported  on this site. Public spending  is still rising overall. Public debt is not yet at an alarming level in relation to the size of the economy, but the government does have to tackle pension liabilities and state owned  banks as the totals are much higher than the stated narrow public debt figures.

              It is difficult looking at these figures to claim that overall the government is cutting spending too much. If fiscal stimuli worked the UK economy should be picking up speed, as this still represents a huge fiscal stimulus. The fact that we have had a flat performance for the last six months shows there is no automatic boost from borrowing more by the state.

             The markets do believe the Uk government will curb its deficit, and this belief has allowed the Bank to keep interest rates low so the government  can carry on borrowing on affordable terms. The numbers tell us that the government will have to get tougher from here to bring the monthly increases in borrowing down from current levels. This remains essential to keeping the confidence of markets.

           As recent events in Greece have shown, a country with high borrowing that is not under control and coming down can end up with very high interest rates indeed. This in turn becomes self defeating, as more and more of the tax revenue goes on paying the interest on all the debt. The tax revenues this year are rising strongly as planned following the tax increases. Spending is also still rising  above the forecast rate of increase.

 

             Today we debate the Scotland Bill.  Both Labour and Conservative front benches support the Union and believe granting more powers of self government to Scotland and its Parliament is the way to preserve the Union. The SNP see the opportunity to demand more powers for the time being, whilst seeking to use the devolved Parliament as a platform and stepping stone for full independence.

             The SNP sees it as heads they win, tails the Union loses. If they gain the extra powers and use them sensibly, they may be able to persuade enough people in Scotland that self government works well. If  sufficient powers are refused, they have an injustice to carry into a referendum on independence.

               All main political parties agree that any decision on Scottish independence should be settled by votes of people in Scotland alone. I would be interested in hearing from readers

1. Should the people of the rest of the UK have any say in the independence of Scotland?

2. Should there be any financial consequences from Scotland gaining more independence to make her own decisions within the Union settlement?

3. Should Scotland have more powers to raise her own taxation?

4. Do you support the Union or do you think it is time for break-up as the SNP suggest?

 

I was interested to learn that talks are now underway with the Taliban in Afghanistan. That implies Obama is at last thinking of getting more American troops back home. It probably means we too can be thinking of getting our troops back.

As someone who has argued for many months that we need to get out, I will pleased when we know that at last we will do that. It was always the case that there needed to  be a political settlement, and a withdrawal by foreign troops, if Afghanistan is to have any kind of stable future.

We also need an exit strategy from Libya. The immediate humanitarian mission has been accomplished,as sanctioned by the UN. Pushing too hard to kill Gaddafi and the rest of the army high command could result in more civilian deaths. This is not what the UN resolution had in mind. The UN forces need to be careful, as intervening from the skies in a civil war on the ground in urban areas is not an easy task, requiring huge patience and precision.

The good news this spring has been the emergence of some genuinely democratic movements in Arab countries, coming from within. The west can encourage and support these movements without having recourse to arms on the ground. More importantly it can make it more difficult for dictators by its diplomatic and trade responses to them.

The west needs to be careful not to compromise democratic Arab movements, and not to make it more difficult for them to recruit local support through clumsy association with the west. When it comes to intervening in Arab lands, less is better. I look forward to British troops coming home.

 

The Euro is now into the phase of its development where people will ask ” Where is the democratic accountability? How does the Euro scheme secure the consent of people under it?”

We have witnessed elections in Ireland and Portugal. In both cases the public threw out a government associated with economic failure. In both cases they had to elect an alternative signed up to the agreed EU/Euro policy organised by the outgoing government. The personnel of the government changed,  but the essential features of the economic policy could not. The new government was told to stick to the terms of the loans, to submit their figures to the EU and the IMF, to seek to hit all the agreed targets. The role of the government is to explain the ways of the international bodies to their people and to tell them to agree to it.

Greece is a bit further along the path of an EU/IMF recovery programme. So far there is precious little recovery on offer to the Greek people. There are riots on the streets. The politicians are having trouble putting in place a government that is stable and convincing. The rebellious people know they are not dealing with a government that has any power to change things for the better. They revolt nonetheless, making the position worse, and putting off foreign capital and investment which their country needs. Their government lacks the will or the voice to persuade them to behave otherwise. The government is unable to convince them or many of the politicians that the present plan is the right one and it is going to work.

Eurostates have too much government, with government from both the EU and the member states level. In times of crisis they do not have accountable government. The national government gets the blame, but says it does not have the powers to change things for the better. The EU has the power, but does not have the direct engagement with the electors to persuade them it is doing the right thing.

In “Just Say No” I listed ten errors in a common economic policy. They included

“You cannot have a single economic policy  without a single budget

There isn’t one exchange rate that is right for London (Athens) and Lisbon (Berlin).

There isn’t one interest rate that is right for Manchester ( Corfu) and  Marseilles.

There is no single political system to take decisions and explain them to electors”

At the time of our debates to stay outside the Euro people concentrated on the first three. In some ways the fourth was the more important.  Euroland will now pay a high price in lost jobs, angry people and possible political disarray for the failure to grasp that a single currency needs a sovereign to take the crucial decisions and explain them to people who think that sovereign has a right to govern them.

 

          The UK has 2.9 active armed services personnel per 1000 people in the country. Greece has 14.6 active service personnel per 1000 people. The Uk is busily cutting its armed service numbers to get its deficit down. Greece is seeking bail out loans from the rest of us to pay the wages of their armed forces.  Is this a sensible approach?

 

            UK governments have a weakness for bail outs which often  don’t work.

              Years ago the bail outs went to distressed nationalised industries. Regularly the great state owned companies found they could not live within the often generous totals of money the Treasury offered them. The managements became adept at working out how to force the hand of successive governments. They demanded more money and threatened unfortunate consequences if it was not forthcoming. It was usually granted. The performance of these big industries fell further and further behind the world’s best. The customers got a bad deal and the taxpayers got a bad deal. Many of the employees lost their jobs.

             In 2007-8 some of  the banks became state pensioners. Governments  in panic foolishly decided to prop up banks that were too large or which had failed business models. Instead of forcing them to sell assets, slim down, cut costs, and take other action appropriate to their errors, they were transferred in all their imperfections into taxpayer ownership. The UK government  should have protected UK depositors but not whole banks. We are still paying the price for this.

          Now in 2010-11 government is helping bail out whole countries that have made a mess of running their affairs. In some cases, like Ireland, the state needs a bail out so it in turn can afford to pay for the bail out of its banks. Governments which thought that transferring damaged assets from banks to governments would solve the problem, now find it is difficult even for the state in some cases to afford the losses. In other cases European states need bail outs because they are in the wrong currency at the wrong exchange rate. Greece cannot compete as an economy and provide all the jobs its citizens need because it is locked into the Euro at too high a rate. In  consequence it needs to pay much more out in unemployment benefit and the like. Now it wants others to lend it the money.

             The message is bail outs do not work. You need to solve the underlying problem. In the case of the nationalised industries they needed to concentrate on winning more business and raising their efficiency. They now do this in the private sector without recourse to public subsidy.  In the case of the banks they need to sell off businesses and assets they cannot afford and cut their costs. Public ownership has delayed this necessary process of adjustment, allowing them to continue with high salaries and ownership of too much. Now governments are in the queue to be let off having to make some sensible but tough decisions.

           If a country is in the Euro and is not competitive it needs to leave the Euro or cut its costs drastically. If a country is spending too much it needs to cut its spending. If a country cannot grow in the Euro it may have to leave. If a country is being placed at risk by supporting too many large banks, it needs to work on an accelerated programme of asset sales, cost cutting and reorganisation of the banks.

                  Always seek to resolve the udnerlying problem. Bails outs may buy you a few months. You end up with the same problem, and even more debt to pay off.

               This week the government announced its intention to put through a Statutory Instrument approving £9.4 billion pounds of new capital for the IMF. The draft SI is a very short document, pledging 9.416 billion SDRs. The document does not explain to MPs that one SDR is about the same value as one pound sterling. We are awaiting news of how and when this matter will be considered. The government does have to allow a debate and a vote, though it may opt to do that in committee rather than on the floor of the House.

              Doubtless when we get to the debate we will be told that this is contingent capital, that the IMF lends it and expects to get it back. We will be reminded that the UK is obliged to fulfill her international obligations as a full member of the IMF.

             I have two main worries with this proposal. The first is I object very strongly to the IMF becoming the cash machine of last resort for the failing Euro. We could easily lose substantial sums through this activity. The IMF has been lending to Euro countries at a little over 5% when the market says they should be paying twice that. Many in the markets think Greece will have to renege on its debts one way or another.

               The second is, this is not a good time to ask us for more money. The UK  government is rightly fighting the battle of the bulge on its own borrowing habits. Having to borrow more to lend to ailing Euroland economies through the IMF is not helpful to the UK programme of debt and risk reduction in the national accounts.

               Loans made to Ireland at around 5% are now worth substantially less if you marked them to market prices- at least a third off.  Money lent to Greece at 5% ish is now worth well under half the amount lent, if you wanted to sell the loan on. When governments take on markets they often lose. The danger is governments simply take the risk onto the taxpayers shoulders. The risk does not vanish.

               Our approach to demands to contribute under IMF and EU programmes should be different. I am not suggesting that we leave the IMF. I am proposing that we lobby other countries and the management, to get agreement that trying a further bail out for single currency casualties is not a good idea. The IMF was not set up to bail out rich countries that have made a major policy mistake. They should advise any such countries seeking money from them to leave the Euro or take other appropriate action to put right the source of the error. The IMF does not need so much new capital if it avoids future Euro bail outs.

            Within the EU our stance should be strong and determined. As a non Euro member we should make no contribution whatsoever to Euro bail outs. That requires renegotiating the Darling pledge – so be it. It would be a very good issue to dig in over. Euroland needs UK support to allow it to integrate as much as it has to. The price for our agreement should be less power over the Uk, and none of our money for the Eurozone.

 

               There are two answers to the cruel questions  posed to Greece by the single currency and the Euro wars. The simple and best one would be for Greece – and a few others – to leave the Euro, re-establish their own currencies, devalue and price themselves back into work.  This remains unlikely, given the huge political capital invested in the Euro scheme.

                  The second is for the Euro zone to press on with the creation of a country called Europe – the UK and other non Euro members would opt out of all the necessary new powers and preferably some of the existing ones as well . The core members of the Eurozone would then have to subsidise and underwrite the weaker areas within the new country, as any other sovereign state does for its poorer areas. Areas with low incomes and high unemployment within the sterling currency union cannot devalue, so they receive sustantial cash transfers from the more prosperous and more fully employed areas. That is what has to happen to make the Euro work.

             When I wrote two books to urge the UK not to join the Euro, I thought a Euro issued in too many EU countries would do a lot of economic damage. We had seen the dry run for the Euro in the form of the Exchange Rate Mechanism. It wasn’t just the UK that was forced out. The ERM was the single currency you could leave before the damage became permanent. The single currency is the ERM without an exit, which is why it was always going to be so damaging.

            The UK should tell both the IMF and the EU that we are not putting a penny more into the failing Euro countries. They do not need more debt. They need a resolution of the fundamental flaws of the Euro scheme. It’s double or quits time. Either German and French taxpayers accept their obligation to subsidise Greece, or Greece has to leave. It also means the EU(euro section) needs to develop its rapidly emerging control over Euro member economies even faster. If rich areas in the zone have to subsidise poorer areas, they will expect control over the budgets and borrowings they have to subsidise.

 

Letter to Dr Roy Spendlove,

Miscellaneous Projects

Dear Roy,

               I am writing to ask you to accept a revised remit and title for your Division. The Coalition government as you know is dedicated to deficit reduction and to managing the public sector better.  Ministers are worried there will not be enough special projects to keep your Unit as busy as before. I have pointed out that there are two very large computerisation programmes at the Revenue and DWP that could go wrong, and have reminded them of their wish to see large projects like Crossrail and HS2 pursued actively. They are nonetheless concerned that your Division might not add value as they wish. They do wish to abolish it.

               Ministers have agreed that we do need a Division that supervises transition to smaller and more effective government, as they put it. They see the Revenue and Welfare computer systems as part of that process as we seek to bring all private and public sector payroll and benefits under a single central system and control. I have suggested we call such a divison the Division for transition to smarter government. Ministers have provisionally  accepted my advice, and would agree  that you should head it. Whilst they wish the new Head to go through a process of identifying what staff are needed, they have not ruled out using members of your existing team. I suggest you do the best you can, and  recommend that you do not increase the total numbers in the first instance. If subsequently as I fear the workload goes up we can sort that out when we alert Ministers to the good news that we are making progress with their transition agenda but will need extra  resource to do so.

           My own Unit has successfully transformed from the Unit for coordinating cross cutting initiatives and partnerships  to the Unit for greater efficiency, quality and resource control. We have taken over a couple of quangos, so we have the extra staff we need for the very demanding workload. Your new Division will continue to report to me. I will need a Deputy or two to help me handle the extra reporting from the new people.

           In urging you to accept this change I would stress that I do understand worries about the public spending settlements and direction of travel. However, to encourage you to take the role, I would also point out that Ministers have grown into office well and are reasonable when you explain the facts of public sector life to them. The civil service has had a particularly fine week this week. We have helped the government change and tone down its health proposals. We have explained to them the force of EU law on recycling, and helped them drop expensive proposals for restoring weekly bin collections. We have reassured them of the need to support the work on bails out for Greece in the EU and IMF. They understand the UK does need to put more money into the IMF so it can help Euro area economies at risk.  I think they started to show real maturity when they dropped their forest proposals. The Archbishop has been helpful in reminding them of the alternative view to their own. The first year of the government after all the debate did see a 5.1% increase in current spending in cash terms. We will continue to urge Ministers to be more realistic about spending levels for future years. It is difficult to believe they will keep cash spending increases to below 2% in the two years prior to an election.

     As you will appreciate, this is a personal letter so I am sending it by a different route. I would appreciate it if you would treat it as such.

Yours

Lucy Doolittle

Director,

Unit for greater efficiency, quality and resource control.

 

                We hear this morning that the Chancellor intends to take action to prevent a future government bail out of banks. He will have many supporters for his aim.

                 We learn that his chosen method is to require the large banks to ring fence their UK domestic deposit taking and lending activities. The Regulators could watch their solvency and liquidity more easily, and  ask for them  to be spun off if other parts of a bank get into financial trouble. The implication is there would be no bail out for the rest, if the trading, investment banking and overseas banking got into trouble. 

                 As the one MP  who advised the last government not to bail out the large conglomerate banks I have no problem with that. I then argued that they should have forced the banks in trouble to sell off their investment and overseas banking arms, and lent sufficient cash to the smaller domestic banks against what security they could take so depositors did not lose out. It appears that we are now moving to such a solution for any such future disaster.

                   The Chancellor should also remember that the last crash reflected bad central banking and regulation. We do not need primarily to change the commercial banks, but to change the way we regulate, conmtrol and act as a lender of last resort. The last crisis resulted from being too lax in 2005-7 and being too tight in 2007-8. It flowed from wrong interest rates, wrong cash and capital ratios, and above all  from leaving money markets starved of money at a crucial time which was bound to bring certain banks down. The speech should talk to the authorities as well as to the commercial banks if it going to address the big issue.

               Public money should not be put at risk by buying shares in damaged banks. No bank should be too big to fail. In  2008 they could have insisted on asset sales, cost cutting and other means of generating cash to avoid the need to put taxpayers at risk. The Coalition government should move quickly to return the banks to the private sector, as we have discusssed before. Livinjg wills for large banks is part of the answer.  Better central banking is the other part.

              The  Chancellor could also up date us on how his growth strategy is going, and what he thinks of the squeeze the current inflation rate is causing.