Category: Blog

 

              Reform have produced a sensible pamphlet entitled “Off balance” prior to the Budget. Unlike many commentaries about the last five years it agrees with this website that large errors made by Central Banks and Banking Regulators in leading western economies caused the violent boom and bust cycle. It was avoidable, if they had listened to those of us who warned against too much credit prior to 2007 (there were a lot of people worried about that) and to the few of us who warned of too little money  in 2008-9.

             The Reformers also sketch out a sensible agenda for the budget. They urge “more capitalism”, not less. They seek more competitive tax rates, less regulation, and more infrastructure investment based on market prices and market returns. It is an old recipe that could produce a decent dish.

             They explain how the UK ec0nomy started to decline, as measured by income per head relative to others, from 2005 onwards. As the public sector took more and more of our resource, as public spending and the deficit rose, even as we reached the top of an unsustainable boom, we were slipping back.  By 2009 our income per head was £12,869 lower than Norway, £7,128 lower than the USA and  £6,044 lower than Switzerland to name three of  the top four of the world.

                The pamphlet says that Labour attempts to narrow the regional gap failed. Despite money and time lavished on regional policies,  London  performed much more strongly than the North and West. London went from £22,136 of gross value added per head in 1999 to £34,200 in 2009, with its share of UK  GVA rising from 19.2% to 21.5%. They warn the government against any idea that it can grow the economy differently to move activity from south to north and from London elsewhere.

                 The government in drawing up its budget should heed this advice. They also need to understand that so far the squeeze has been on the private sector, not the public. The BBC/IFS figures over the week-end again confirmed a theme of this site. The losers since 2008 have been private sector employees.  There were 1 million job losses during the recession in the private sector, whilst public sector jobs expanded by 400,000. The private sector has taken the hit from high inflation, leaving people worse off as prices outstrip wage awards. Pensioners have lost out from low interest rates whilst mortgage holders have benefitted. No-one on median earnings has lost out from tax and benefit changes (excluding VAT), whilst those on higher incomes have been hit by tax and benefit changes.

                          Let us hope the Chancellor acknowledges this by cutting tax on fuel, and by further Income Tax cuts. Any relief of these pressures would be helpful for recovery. Meanwhile public spending  from the Coalition remians up 7% in cash terms so far, and on course to rise each year in cash terms from now until 2015. The cuts are the result of a failure to manage the public sector more effectively, and the result of decisions to boost some areas at a time of tighter budgets.

                   The Budget will probably  include cutting costs on business through deregulation,.Enterprise Zones and other initiaitives. In practice we will be waiting for the Vickers Report into banking, as that is likely to  have more impact than the budget.

                       The main figures for this government’s strategy for the  five years  (20014-15 compared to last Labour year) remain as below:

Total spending    plus £71 billion a year, 

 Total tax revenue   plus £176 billion a year,

 5 years additional state  borrowing £440 billion.

 The government has a target to cut the administrative overhead by 30% over the life of this Parliament. This is a demanding target, but one that can be hit. It will be easiest to do so, if full use is made of people leaving public service to retire or take jobs elsewhere. It’s cheaper and fairer than sacking people.

I have asked a series of questions to find out how effective this means of slimming the overhead is proving. So far, in the departments that have answered, they have lost around 4% of their staff numbers in an eight month period. This suggests the overall annual rate of  leavers is 6%. What is surprising is they have replaced half of these, meaning that the overall numbers are only down around 2%. If they are to hit the 30% target, they need to get better at avoiding replacement. If the post is essential then they need to promote from within, and remove some other post as a result.

You can view a slide of the complete data here – Civil Service Employment by Department.18.03.11.

 

                   It is worrying to hear that Gaddafi has moved his troops and tanks into urban areas before UN forces can take action against him, but not surprising. The offer of a cease fire was evidence that he will play to the gallery, and exploit what he sees as the West’s weakness. He despises the rule of law and the idea that civilians should not be injured by military action.

                The West has the fire power to ground his jets. They have the capability to destroy his army from the air if it is on the move in open ground between settlements. It does not have the power without forces on the ground to ferret him out of urban areas, or to tackle his military when it is hunkered down or within settled communities. Delay has prevented early success.

                  The US says it wants regime change. The UN says it wants to protect civilians. The UN’s aim may not be possible without regime change, but the Resolution limits the means to achieve it. The West is in danger of being dragged into a conflict where the weaker combattant can exploit the procedures of the West to his advantage. The UN Coalition needs to find other means to disrupt the dictator and help undermine his position from within.  It would also be welcome to hear and see a bigger role for the Arab supporters of the UN action.

               I wonder why Italy is not flying her jets to take the action from the air? Italy is after all a member of NATO, the UN and the EU. Italy  has air bases close to Libya. Instead the UK is flying jets on a 3000 mile round trip with in flight  refuelling. Isn’t it time other members of the Coalition did their bit?

I awoke to the BBC revealing some of the details from 1979-80 from the Thatcher archive. As always, and as then, the talk was about the cuts not working. If they cared to look back at the figures, they would see that in her first year in office Margaret Thatcher’s government put through a huge increase in public spending, honouring commitments to very large pay awards throughout the public sector. Strangely the awards were the “Clegg awards”. From memory cash public spending rose by almost one quarter.  Controlling growth in public spending (“the cuts”) started properly in the 1981 budget.  Even these so called “cuts” meant public spending in the public sector’s preferred “real terms” continued to grow by more than the growth of the economy for the first four years of  her Premiership. In the second half of her term stronger economic growth cut welfare and benefit spending as more people went to work. Over her term as a whole public spending grew by 1.1% a year in real terms.  The government’s popularity nosedived in the first couple of years when spending was still surging. Economic recovery and recovery in popularity occurred after the 1981 budget, once control over spending and borrowing was asserted.

Japan makes seven times as many cars as the UK.  China produces fifty seven times more steel than the UK. Neither China nor Japan have a carbon tax or price for carbon in their energy costs.

The UK used to be the workshop of the world. It was famed for its ships and steel, its cars and domestic goods. Continuous decline under governments of all three main political parties since 1945 have left us with a much smaller industrial sector, and with a much much smaller industry relative to China, India, Japan, Germany and the USA.

It is true we still have some good companies and good technology. The UK pharmaceutical industry is strong, as is aerospace and defence engineering. We have a great base in performance cars and some component technology in autos, and some individual good car  plants for major overseas manufacturers. When we want to buy trains, nuclear power stations or many consumer durables we usually today turn to imports.

The government says it wants to drive a revival of manufacturing. This is a very popular policy around the country. The left wing politicians and commentators who dislike big business,  usually genuflect in favour of more industry. Even the keen green campaigners within the major parties consent to the idea that we ought to make more cars, planes and domestic appliances here,  though all these things take energy to make and burn energy to use.

This is where, however, these same commentators and lobbyists can talk with forked tongue. They tell us we should make more things, yet they also want us to hit ever more exacting targets for carbon dioxide emissions. The simplest way to get our emissions down is to make less here and import more from abroad. That does not help the world picture but it hits the domestic targets.

Much of industry requires using large quantities of energy, to transform earths into metals, and to shape metals into products. Steel and aluminium manufacture requires huge quantities of energy. Process plants making glass or cement require large amounts of energy. Even assembly plants need subtantial raw energy as they are heavily automated. Petrochemical processes to make and shape plastics also require large inputs of heat.

Soon the government has to set a carbon price. This is central to decisions people will then make about which technology to adopt for the many new electricity power stations we are going to need. We have to replace the coal stations that will close thanks to the EU Emissions legislation  come 2015, and to replace ageing nuclear stations near the end of their design lives. Set the carbon price high, and it will tip it more in the direction of renewables.

But if the government sets it too high it will also mean the end to dreams of the Uk restoring a stronger position in basic industry. A high carbon price means we will have to  import  our steel, our aluminium, even our cars and our fridges, washing machines and cookers.  Energy costs are bigger than labour costs in some of these energy intensive activities. It’s not an easy choice for this government. It will be a test of  what matters more  – UK industry and jobs, or UK CO2 targets?

The United Nations has late in the day decided to stand up to the Libyan dictator. Their task would have been easier if they had acted when David Cameron first raised the issue.

Under the remit the coalition of the willing that forms to carry out the task could keep Libya’s jets from bombing their own country. They could also damage his army when on the move across open country by air to ground bombing. It might well be possible to stop his further ruthless progress. If they could use this power to force negotiations that might help. Without troops on the ground they cannot easily reverse the regimes gains to date.

I wish them well. I want to see Arab countries with perhaps the assistance of France and Italy undertake this task. They are the  neighbours  with the planes to do the job and the airfields nearby.

As readers will know, when public spending is rising by £90 billion a year over five years, it is difficult to see why so many think the main adjustment to deal with our overspending is being made by the public sector. The truth is, that so far all the adjustment has been made by the private sector.

In 2008-9 the private sector lost 1 million jobs. The recession was deep. Many companies had to shed labour on a large scale in order to survive. The sudden lurch to too little money after years of excessive credit knocked the stuffing out of them, and in many cases halved demand for their products during the destocking period. Labour appointed 400,000 extra people to the public sector at the same time.

During the recession many in the private sector who kept their jobs lost their bonuses, and some even experienced pay cuts. Many had to forego the annual pay increase. Meanwhile, in the public sector, wages and salaries kept on upwards with annual increases.

In the last year it is true there has been a small decrease in public sector employment at a time when job growth has picked up in the private sector. Public sector wages have continued this year to grow more quickly than private sector pay.

At the same time as prospects in the private sector start to improve, the public sector has decided to increase tax rates and the tax take substanially to try to limit its own deficit. We have seen big increases in VAT, Income Tax, National Insurance and petrol tax revenue, accompanied by increases in rates. So far deficit reduction has meant squeezing the private sector more through tax, rather than cutting levels of spending.

There has to be some limit placed on how much the government does squeeze the private sector. The surge in world commodity prices on the back of the last government’s devaluation of sterling has intensified the squeeze on real wages, as price increases have leapt ahead of pay awards.

The budget needs to call a halt to the tax and inflation squeeze on the private sector. So far too much of the adjustment has fallen on the private sector’s shoulders. As the plan is to raise so  much more tax from the private sector in the next four years, it is important to cut the rates and relax the squeeze. It will only be through growth that the private sector can generate as much tax as the public sector wants. It is only by setting realistic tax rates that we will get the growth.

 

              The Euro crisis has not been resolved. It is a rolling crisis, a series of accidents and market falls, often made worse by rows around the Council of Ministers table or by unfortunate and diverse spin from member states governments.

              This week Portugal and the markets have returned to the issue of how that country will finance itself in future. Portugal has to pay more than twice as much as Germany to borrow money. This week her credit status was downgraded again. The Opposition in Portugal do not agree with the latest austerity programme. Many are worried that more cuts, more tax rises, and no final resolution of the borrowing problem leaves the Portuguese economy weak and unable to grow itself out of trouble.

            Last night the UK Parliament was asked to approve a motion to “take note of draft European Council decision EUCO 33/10 (to amend Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism of Member states whose currency is the Euro)…”

               The goverment wished to assure that the UK would not be part of the bail out mechanism after 2013, and had to go along with these changes to help Euroland buttress its position. Some of us have asked before that the UK government use their need for our assent to this Treaty change to get some powers back for the UK. We also want clear language which gets us out of all obligations to help bail out Euro memebr states in trouble, now as well as after 2013.

                We were not offered such an approach by the government, so we were not able to back the government’s motion. The Oppositon, of course, did not wish to vote against the government, so there was never any chance of Parliament turning this all down. An amendment which Bill Cash drafted which I supported was not allowed for debate and the vote has been postponed.

               Euroland is rushing towards stronger economic governance, and to some relaxtion of the purse strings so the stronger member states do bail out or support the weaker. The EU wants to press ahead with tax harmonisation, and tougher controls over budget deficits for Euro members. That all makes sense for those who share a currency, but none of this should apply to the UK who wisely kept out.

 

               It now appears that the armies in Middle Eastern countries determine the future of governments. Brave popular uprisings have forced governments out in Tunisia and Egypt, where the armies declined to support the incumbents. In Libya it looks as if the rebels are now losing, as the dictator seems to have command of enough mililtary might to crush them horribly.

               For once the USA has decided it does not wish to use its might to intervene, to prevent the Libyan reassertion of brutal power. Libya is in the EU’s back yard.  Italy and France have the military means to intervene to help the rebels, but have decided not to.

                I think intervention is fraught with difficulty, and could end up killing too many of the people they migtht like to help. I understand their reluctance. The various conditions set included UN support, which was never likely to be forthcoming.

                  It tells us something about the modern world. The USA now has to take more account of the emerging power of China, and  is having second thoughts about the rersults of its past interventions in Iraq and Afghanistan. The European countries do not think as one, and find inaction easier to agree than action. It is a better time to  be a dictator as a result. The world does not like its US policeman when he does take action, but misses him when he’s not around.  Middle Eastern countries do have armies prepared to meddle in politics. Their leadership and loyalty of the troops is now what decides the future of governors.

                 So far it looks as if Bahrain and Saudi do control their military machines, and are using them to keep order. Saudi has made clear it intends to help Gulf states governments, where they were not prepared to help the Libyan regime.

 

                Mr Huhne has brought out a publication entitled  “Carbon Plan”. In it he says:

“Climate change is one of the greatest threats to both UK and global security and prosperity…..without action to curb emissions there is a very high risk of global warming well beyond 2 degress relative to pre-industrial times.” This he thinks will lead to melting of ice sheets (presumably land based),and a major sea level rise.

          His paper contains a global average temperature table for the last 160 years. This shows that it was getting colder from the 1870s to the 1910s, and in the 1940s to the 1950s. The rest of those decades it was getting warmer. There is no explanation of why for almost half the time during the long period of industrialisation chosen, it should have been getting colder.

            Selling global warming antidotes is made more difficult by the succession of two cool wet summers and two cold snowy winters. I appreciate the  theorists will write in and tell me this is just weather, but we have had a lot of weather recently.

            Mr Huhne not only believes that global warming is caused by excess CO2, and that this comes from human activity, but he also believes that the one response we should make is to cut a portion of the 2% of man made CO2 emissions that come from the UK.  He proposes a £110 billion investment in new low carbon electricity generation, substantial increases in energy efficiency investment in homes and commercial premises, and the development of electric vehicles.

                He forecasts that over the six years 2009-2015 the Uk could create an extra 100,000 jobs in green activities. This was a lower figure than I was expecting him to claim. He anticipates the electricity generation investment flowing from a high floor price for carbon, feed in tariffs, back up capacity for windmills and other intermittent ways of generation, and an overall limit on how much carbon dioxide any generating plant can give off.

                  As Mr Huhne acknowledges, this is a global problem, and the UK’s contribution to the output of CO2 is modest. One way for the UK to get her output down to the tough target levels Mr Huhne wishes would be to cut back on energy intensive activities like cement manufacture, steel making, glass making, aluminium smelting and process industry in general. Unfortunately,  if our demand for these goods was merely satisfied by imports rather than home production there would no reduction overall in CO2, and we would be the poorer for it.

                That is why Mr Huhne needs to consider very carefully what price he is going to set for his floor price or carbon tax level. If the UK sets it much higher than elsewhere, we will merely lose our industry without cutting overall world output of CO2.  The government’s general  policy is to build up manufacturing, to welcome more industry. Industry is energy intensive. If we are successful in building up industry  it will make hitting the CO2 and energy targets that much more difficult. If the UK sets too high  aprice for carbon and therefore for power, it will make it very difficult to attract new industry, and difficult even to keep all the energy intensive activities we still have. Energy intensive industry spends more on energy than on wages. It is a very important cost. The UK is in danger of becoming uncompetitive on its energy prices.

I am all in favour of better deals to make it worthwhile for people to save energy. I am also strongly in favour of getting on with putting in the extra and replacement electricity capacity we need, and with making the Uk more energy self sufficient in a politically unstable world.