Category: Blog

 

                Yesterday the Bank of England revised their growth forecast downwards. They are not always wrong. Commodity markets had their second sharp sell off in a fortnight, as world investors recognised the impact of tightening money in the emerging markets and looked forward to the ending of the second phase of quantitative easing in the USA.

                   On cue, we had a debate  about  the government’s economic and financial plans last night in the Commons. It was one of those events wrapped in cross party agreement. It was to launch the government’s charter for independent assessment of our economic prospects by the Office of Budget Responsibility. These days politians happily sign up to giving things to experts and others  to do.

                   I wish the Office of Budget Responsibility every success in forecasting the economy. Their figures underpin not just the public debate  but also government policy to steer the economy and determine the size and role of the public sector. I did , however, point out that just because a body is independent of government does not guarantee it will  b e right in its forecasts. We have had a so called independent Bank of England for more than a decade, but we have also had a long period of inflation well above its target and many missed inflation forecasts from this body. The Office of Budget Respoonsibility itself had to revise its growth forecast down in March this year, revising a forecast which was just a few months old.

                  These two independent official forecasters, the Bank and the OBR, need to get inflation and growth correct as they are crucial to the government’s strategy. If the Bank could get inflation right and the OBR growth, they would help a lot in the two key areas that matter most to the strategy. The government’s whole fiscal strategy, its deficit cutting programme, rests on forecasts of rising and then sustained growth. If the growth disappoints the deficit will be larger and the country will have to borrow even bigger additional sums than the £480 billion pencilled in for the five year period of this Parliament. My advice to the TReasury is not to assume the OBR growth forecast is as low as it could be. The world background is deteriorating for growth. Growth could disappoint again. Controlling spending with a view to an undershoot in the less important and sensitive areas would be a sensible precaution against the possility that revenues will fall short of the OBR estimate.

 

                    Yesterday it was M r Huhne’s turn to launch extensive legislation to the Commons,  He choose to produce a Bill with many pages on the Green Deal, and a bit at the end on guarateeing supply of energy.

                     I was mainly interested in how the government plans to keep the lights on. I asked how many new power stations had been approved in his first year, and how many additional stations he hoped to approve and get into build this year. I was told I had to wait until the autumn for an answer. I just  hope decisions about the new power stations we need are being made more rapdily than the questions are being answered.

                     Other colleagues concentrated on the Green Deal, which was the intention of the Minister given the balance of his speech and the proportions of the Bill. The Green Deal is one of those friendly ideas that has many mothers and fathers. We included proposals to make it easier for people to insulate their homes in the Economic Policy Review. The Conservative Manifesto included such a proposal. Labour and Lib Dems were also working on similar ideas.

                         We have long agreed about the outlines of the policy. Homeowners and tenants  will be able to borrow money to make their homes more fuel efficient from their power provider. The power provider will get the loan money back over time out of the savings made on the bill from greater fuel efficiency. No public money is involved.

                               What we wanted to k now yesterday was how the detail would work. Will you be able to buy double glazing? The Minister did not know. What would be the implied rate of interest on the loan? The  Minister did not know. How would it work is people wanted a warmer home after the improvements were made, so there were no big savings on the bill? The Minister did not supply the detail. He did confirm that the debt rested with the property when you sold it or moved on.

                                    The Minister told us the important  detail would come later in secondary legislation. It left some of us wondering why we carry on legislating in this way, where the important things get left out of the Bill. If the Green Deal is going to work we need answers soons on how much money, how much it costs, what it can buy, and how we can avoid the bureaucracy of the scheme swallowing the savings.

 

               At the end of last week a wide ranging discussion about how to tackle the Greek debt crisis again led to German speculation that Greece was about to leave the Euro zone. The EU authorities moved quickly to deny that strongly.

               Given that leaving the Euro and devaluing is not an option contemplated in EU circles, they are left with two other options. The first is to give or lend more money to Greece, in the hope that this will allow Greece to sort out her finances so that in due course she can carry on without access to extra EU money.  The second is to find a way of allowing Greece to renege on part of her debt or to delay its repayment. The first route entails EU taxpayers paying more to keep Greece going. The second course involves bondholders, savers and banks who have lent Greece money,   giving her relief at their expense. 

             Both of these approaches are based on a heroic assumpiton that this time round tiding Greece over for a bit longer would make all the difference, and she will then miraculously sort out her deficit after a long period when it simply got worse. It was this assumption that was behind the Spring 2010 EU loans to Greece.They were you may remember going to draw a line under the Euro debt crisis and solve the problems. This assumption was beind the agreement to extend the length of the loans in the autumn of 2010 when the package was renegotiated for the first time. Now it falls to be renegotiated yet again.

              The truth is this model of financing a country and keeping it tied into the Euro system does not work. It threatens losses for the banking system of the whole Euro area, as European banks have been told by regulators to own more sovereign debt of Euroland countries. It is this very debt, thought to be a high class safe asset, that now is being buffetted by the markets and may not be repaid in full on time in the case of the weakest countries.

              The UK should make it clear that any new Greek package is a matter for the Euroland zone alone, and should not allow general EU money to be used to perpetuate a myth that  fiddling around with the terms and size of the borrowing is the answer to this problem. The answer for Greece is an economic policy that delivers growth, and more realistic levels of state spending.

          We read that France is not keen to be more generous on the loans, whilet Germany seems to think tougher conditions on the very loans Greece wishes to relax would do the job for the third time of asking. There are limits to how long they can carry on trying to muddle through. The markets are not impressed, because they know the weaker countries of Euroland have to grow faster, generate more tax revenue, and cut spending sensibly. These countries need a work out, not a bail out. Being in  the Euro makes their recovery more difficult. Having weak players  in the Euro also  makes the position of the stronger members of the Euro weaker. The richer countries will have to pay more of the bills of the weaker members if they are to keep everyone in  the currency.

 

        I have dealt before on this site with the extensive  account of planned NHS reform in the Conservative Green Papers and Manifesto issued before the last General Election. I have also quoted from the detailed Coalition policy document issued under the joint signatures of Mr Cameron and Mr Clegg last summer, showing how they both signed up to extensive reform.

            As we are still hearing that these plans are secret Conservative ones foisted on the Lib Dems it is time to remind people that extensive NHS reform was also proposed in the Lib Dems 2010 Manifesto, which said nothing about ending privatisation or ending the Labour cuts to management. Many of the Lib Dem reform proposals are included in  the joint proposals in the White Paper and enacted by the Commons in  the Bill, with the full support of the Lib Dem whips.

            Their Manifesto said they wanted cuts to bureaucracy and management.

“Cut the size of the Department of Health by half, abolish unnecessary quangos such as Connecting for Health, and cut the  budgets of the rest, scrap Strategic Health Authorities and seek to limit the pay of top NHS managers so that  none are paid more than the PM”

              They favoured the type of devolution of power to front line staff also proposed by Mr Lansley and incorporated in the reforms:

“Sharply reducing centralised targets and bureaucracy….Putting front line staff in charge of their ward or unit budget,   and  allowing staff to establish employee trusts giving them real involvement and say over how their service is run”

They sought extensive administrative chanegs, including  the abolition  of PCTs and their replacement by locally  elected Health Boards.

They did not recommend the abolition of private involvement or contracting out, but did favour more contracting out to employee buy outs and the  third sector.  “Giving local health boards the freedom to commission services for local people from a range of different types of provider”.

          The so called Lansley reforms are a true amalgamation of two radical manifesto packages  promising substantial NHS reform. Both wanted to cut centralised and bureacratic costs, both wanted to strengthen the front line, both wanted more employee mutuals and co-ops to replace directly employed staff and both wanted budget delegation to GPs and hospital ward management.

           Have the Lib Dems now changed their minds or have they forgotten their Manifesto and their support for the White Paper and the Bill in the Commons?

 

           The last few weeks have heard the airwaves and the election platforms resound with discussion of the cuts. I feel it is time just to remind all involved in the crucial debate over trying to get our deficit down what the government’s planned numbers show.

              In June 2010 the new Coalition government pledged to increase current public spending from £600 billion in the last Labour year to £693 billion in 2014-15. They planned to borrow an additional £451 billion over five years, on top of the large inherited debt. Whilst this meant reducing the growth in Labour’s future spending  plans, it was not a severe proposal given the dire financial circumstances of the country.

             In March 2011 the second Coalition budget raised planned 2014-15 current spending to £695 billion, and planned to increase total spending over the four years up to and including  2014-15 by £34 billion compared to the June 2010 plans. I saw no comment at the time of the budget on this relaxation.  It means additional public borrowing of £485 billion over the five years.

           The plan to reduce the deficit rests heavily on the assumption that the government will collect £171 billion more in tax in 2014-15 that Labour collected in its last year.This in turn rests on the forecast that the economy will grow at 2.9% in 2013-14  and again in 2014-15.

             Most commentators write about the strategy saying it is risky because it cuts public spending too far and too fast. As the figures show, there is a risk that revenues will not grow as quickly as forecast. Given the large amount that has to be borrowed even if everything goes according to plan, we need to remember the risks on the other side of the argument.

 

              I send my congratulations today to all the newly elected Councils on the two Unitaries in my constituency. I know how hard candidates worked to secure election, and I wish them well looking after the interests of their and my constituents now elected. I would also like to thank all the volunteers of all parties, and the candidates from the losing parties. They too are crucial to offering our voters choice, and to making a democratic event out of the local elections.

 

I do dislike the fashionable explanation for Lib Dem unpopularity, that they are the government’s human shield for unpopular measures.

Their poor performance in the latest local elections is largely  down to two words “tuition fees”.  This single policy has so far proved the most unpopular of all the government’s measures, and has generated the strongest protests. This was not a Conservative policy which the Lib Dems were made to sign up to. This was a  policy designed by Dr Cable on the back of the Browne Report, commissioned by the outgoing Labour government. It damaged Lib Dems because they had promised the opposite before the election and had made it such a  big issue.

In previous elections Conservatives had campaigned against tuition fees and opposed Labour’s introduction. In 2010 Conservatives  decided we could not find the money for their abolition, given the obvious hole in the public finances. We said we would study the Browne Report and come forward with proposals, but we knew abolition of fees was unaffordable. They might have to go up. Lib Dems made tuition fees a high profile issue of their campaign, and challenged many Conservative candidates to defend Labour’s fees when they were promising their abolition.

When the Coalition formed Lib Dems sensibly negotiated the right to sit out a new higher education policy and to abstain should we need to vote for higher fees. So far so good. Yet Dr Cable, on receipt of the Browne Report, decided to come up with his own scheme for much higher fees and then to recommend that Lib Dems voted for it in the Commons.

 

Conservatives did not make him do that. Many of us were very surprised he did. Some of us lobbied him on aspects of the scheme. I was worried about access to eduction and lobbied for more generous access funds. I was also worried about the high initial costs to the taxpayer in the form of higher borrowing to meet the demand for loans, as I thought the idea of changing the financial arrangements was to lower the  burden on the public accounts, not increase it. I favoured a more gradual approach.

 

The main point is this. There was no group of Conservatives designing the tuition fee scheme, no group pressing for it. It was not Conservative policy. The tuition fee scheme was designed by Dr Cable, and pressed by him. Conservatives went along with it, often reluctantly. We were breaking no promise to electors by doing so, as we had left open at the election how HE would be paid for.

Lib Dems are not the Conservatives’ shield on this measure. They were full partners who choose to design this part of the government’s policy. Conservatives did not come into the government with a series of unpopular policies which we wanted help in making palatable. Both parties have a difficult job to do to clear up the inherited financial mess, and they just need to get on with collaborative working with that in mind.

 

               Something important happened yesterday, whilst UK politicians were preoccupied with arguments over marginal changes to Council budgets. Commodity prices experienced sharp falls. Silver is down by around one third in a few days, and oil fell 10% in a day. Metals and agricultural commodities have also weakened.

              These price falls will take some of the inflationary pressure out of the world economy. They are both bad news and good news. The bad news is they show that markets fear the world economy will slow again. The ending of US money printing next month, allied with the  monetary squeezes the emerging market countries have had to impose to tackle dollar led inflation, are very likely to lead to slower growth in 20112. The US economy may be strong in the second half of 2011 on the back of this year’s printed dollars and tax cuts, but may slow next year. China, India and the rest should slow next year as their higher interest rates and bank controls have their impact.

              So what is the good news? The good news is that inflation should come down. This could start to relieve the squeeze on real incomes in the UK and elsewhere. It could also mean that China and other leading emerging economies could be closer to ending their monetary squeeze, as the impact of higher food and commodity prices on their own inflation starts to abate.

 

             Last night’s elections reminded us just how overgoverned the UK has become, with elections to so many layers of government  and with so many posts on offer. The results were much as expected. The pundits had expected the SNP to do well at Labour’s expense in Scotland and for the Lib Dems to lose ground generally.

             I found numerous electors expressing concern about the continuing size of the deficit and the continuing high levels of spending, as well as some others querying particular spending decisions of local Councils where they did not like cuts. I was given plenty of examples of spending the public would like cut, and some frustration at the high level of taxes now needed to pay for all the overgovernment. The argument is not as one sided and as “cuts” oriented as some in the media would have us believe.

 

              There are two central claims from the pro AV campaign that are misleading. I have shown why I do not believe   their claim that AV would make holders of “safe seats” more accountable – and all the implied nonsense that politics under AV would be transformed, with more responsive and well behaved MPs.

             Today I wish to explain why their claim that every MP under AV would have the support of more than 50% of the electorate and this would be fairer can also be false in certain circumstances.

             Let us take a three way marginal, the type of seat where AV could make a real difference to the outcome. Let us suppose the result of counting first preference votes was

Conservative   38%

Lib Dem 32%

Labour   30%

                 This is the the type of seat the Lib dems reckon should fall to them under AV. They think that when Labour second preferences are brought into play, many more Labour voters will back them than the Conservatives. In this case they hope say two thirds of the Labour voters vote Lib Dem and one third vote Conservative when they get their second vote to determine the election. This would make the final result

Lib Dem 52%

Conservative 48%

            However, there is a snag with this thinking. Labour voters may not be as keen on Lib Dems relative to the Conservatives as the Lib Dems hope. It could be the case that in such a seat many Labour voters decide they have no wish to express a second preference between the other two parties which they do not like. As opponents of the Coalition they may not be that keen on Lib Dems either. So we might have a situation where only half the Labour voters expressed a second preference. Let us suppose that 15% vote again through their second preference, and that 11% back the Lib Dems and 4% the Conservatives. The final result could then be

Conservative 42%

Lib Dem 43%

People not expressing second preference 15%

        In this circumstance AV would reverse the first past the post result, but would not give the winner 50% even though  Labour voters had the chance to vote twice .

             It is difficult to see why this way of counting votes and allowing second votes is either fair or gives a better result than the original First Past the Post one person one vote.

              The case I have described would be quite common under an AV system. There would of course, also be elections under AV where the second votes of BNP,UKIP, Green and Independent candidate voters could determine which of the three main parties wins without needing to redistribute the votes of one of the three main UK parties. These are  the cases which have attracted more attention than the three way marginal.

           I do not believe voters will want to make such a change. On the many doorsteps I have visited to talk about this and local matters there has been a strong view that it is better to stick with what we have. Conservatives feel that strongly. Even some Lib Dem voters tell me they want a truly proportional system, and they do not like AV especially as it could produce even larger Parliamentary majorities for leading parties.