Category: Blog

 

               On Thursday night I was asked to deliver a lecture on public policy to a  Cambridge University audience. I tackled two main issues, the successes and failures of UK economic policy 10980-2011, and  the topic of this blog.

              I argued that in a democracy where a Parliament or elected officials are sovereign, you cannot ever have a completely independent Central Bank.

              The UK’s experiment with  such a Bank began with the Brown reforms of 1997.  These took away from the Central Bank the crucial powers and duties of banking  regulation and government bond issuance. In return the Bank was granted some stronger powers to settle official interest rates without reference to the Chancellor of the Exchequer. The hollowed out Bank was far from independent. It was another example of how spin so dominates political dialogue, and how wrong it can be. The Chancellor had more power through the Office of Debt Management and the creation of the tripartite system of banking regulation with him at its head,than before the changes.

           Even in the one area where it appeared the Bank had greater independence, we discovered this did not apply when events dictated political intervention. The first important intervention came when the Chancellor changed the target, setting 2% on the CPI instead of 2.5% on the RPI. This loosened monetary policy, as the RPI target was tougher. It had the fortunate effect for the government of keeping interest rates lower for longer.

           The second override came when in the middle of the Credit Crunch Finance Ministers of major countries made a joint decision to cut rates in concerted action. The Bank of England obliged by convening a special meeting and duly cutting rates, but no-one can seriously believe that was their initiative unconnected to the political decision.

             The third came when the government was persuaded that the Bank needed to buy in bonds and print more money. There the Bank itself agreed that the Chancellor had to approve  the decision.

               Proponents on independent Central banks say the German Central Bank post 1945 is a great example of how well these independent Banks can work. For a long period it is true the German Bank set interest rates without political interference. There was a political consensus in Germany about the economic policy, and for many years it worked well. The politicians had no need to change the Bank or alter the arrangements.

             When the moment came that the politicians wanted to amalgamate the Ost mark with the DM, a crucial decision for the conduct of monetary policy, they overrode the advice of the Central Bank. They made the Bank do it earlier than they wished, and at a much higher exchange rate for the Ost mark than the Bank advised. That single decision did damage to German monetary policy. It  was the right political decision as the elected officials saw it.

                  Finally, the politicians decided to abolish the DM. The German Central Bank was independent and had as its main duty the maintenance of the internal and external value of the currency. They had to accept the political imperative to abolish it from under them.

             Do you still think the German Central Bank was independent?

             On some  occasions – as with the concerted interest rate reductions – the politicians had better judgement than the Banks. On others, as with the Ostmark-DM decision, the Bank made a better economic judgement but politics prevailed.

            There cannot be an independent central Bnak in a democracy. A Bank may be given a free run for a long period, to do as laid out by the politicians. If it disappoints, or if the requirements changes, the politicians will change the Bank.

 

               Parliament bared a few teeth yesterday. It passed its motion condemning the idea of votes for prisoners. There were many speeches against this proposal, and fewer in favour.

              The government reminded Parliament that the UK is bound by its signature on the Human Rights Convention. This falls to be adjudicated by the European Court of Human Rights. Government  Ministers did not vote, as they felt bound to observe the rules of the Court.

               We now have an interesting impasse. Ministers need to tell the Court that the High Court of Parliament does not agree with the ECHR’s ruling on this matter. There is a conflict of view and of jurisdiction. Mnay people in the Uk will think, whatever the legal position, that if the people and their MPs do not want something, they should not have to have it.

              A wise Court would reconsider. A wise government will scale back the proposals to implement the Court’s judgement and seek a position more people can accept. Some MPs yesterday were prepared to accept a compromise, some would like to carry it further and if necessary repudiate the Convention.

               Who knows what will happen next?  The government stepped aside and allowed a free vote. It now has to show that a vote in Parliament does count for something.  It may be possible to please both sides with a compromise. If not there will be further rows. On yesterday’s showing there is no majority in the House to implement the Court’s wishes, but I guess some MPs might change their minds if the government said it had to obey the Court after all.

              What is Parliament for, if it is not to judge just these kind of issues, and for MPs to face their electors and justify the votes they cast?

             Had Mrs Main’s amendment been put I suspect Parliament would also have voted to refuse  any compensation to prisoners denied the vote. After all, prisoners lose other human rights by being in prison – the right to free association, and the right to come and go as they please, but not even the ECHR thinks they deserve compoensation for losing those human rights.

 

               I do not have strong views on votes for prisoners. I have received practically no comments on the subject from  my constituents. I do want more civil liberties restored, but votes for prisoners was not on my list.

              I do have very strong views on the need for Parliament to re establish its sovereignty. The government’s EU  Bill to reassert Parliament’s ultimate right to decide on behalf of the British people will only have meaning if Parliament does assert its rights in defined cases where others seek to limit its jurisdiction or constrain its decisions. I have been waiting for a long time for there to be a Parliamentary majority to assert a different view from that of an unelected international institution, as these international agreements and institutions increasingly govern us.

                Ideally the first reassertion of sovereignty would have come in a dispute with the EU. Instead, today, it comes in  the form of a likely conflict between the majority view of Parliament, and the view of the European Court of Human Rights, a body established under a non EU Treaty. I have to make decisions based on  the world as it turns out, not as I would like it to be. I will therefore vote against the decision of the ECHR.  

                Cabinet Ministers and Shadow Cabinet Ministers will abstain. They believe the UK has to meet its legal obligations under the Treaty, as interpreted by the European Court of Human Rights. Parliament is likely to say it wishes to interpret the human rights UK citizens should enjoy, and to do so in a different way from  the Court. If the ECHR does not like our decision, so be it. If Parliament cannot decide these matters for itself, then it is no longer sovereign.

               I have also supported an amendment to the motion which makes clear that UK courts should not award compensation to prisoners for their loss of voting rights. I hope this amendment is called, and recommend to colleagues they should vote for that as well as the main motion.

 

             The business world is making a bad fist of presenting its case. We are back in the usual territory. The public mood says profits are bad. Senior business people are fat cats. Bonuses are wicked forbidden  fruit. Oil companies are making huge profits out of high prices. Banks are beyond the pale.

              There are, of course examples of corporate greed. The private sector has some bad companies that let down customers and staff.  I have no time for bail outs of banks by taxpayers, but then I was the one MP who recommended a different course of action to tackle the Credit Crunch at the time that would have avoided equity bail outs. I want the governemnt to get our money back by selling the banks and their assets as soon as possible.

              Let us look at a couple of figures we have been given recently. We have been told that Shell made $20 billion of profit last year. We have learned that banks will have to pay an annual £2.5 billion levy on the size of their balance sheets and been told by some this is not enough.

                Oil company reporting  is bizarre. They mainly report the net income. They never tell us how much tax they pay in total on all the oil and product they handle.  Shell’s $20 billion sounds large. Deep down in the figures you can discover that their turnover was a huge $368 billion last year. They admit to paying $20 billion of taxes, yet if you added up all the oil taxes concealed in their turnover figure it would come out as a much higher figure.

                  Producing net profits of under 6% of turnover is what they need to pay the bills for new wells, for new equipement and the other capital items they require to carry on in business. It is hardly excessive.  The role of profit is not merely to reward the risk takers, the shareholders. It is also to pay for the future jobs and investments needed by the business.

                    The true story of £1.30 a litre petrol is the 80p a litre the UK government takes in tax. The Oil companies should announce, when they announce their profits, the far larger sums they have collected for the world’s governments. It would give a sense of perspective.

                          The banks are to pay an extra £2.5billion of tax a year  based on the size of their balance sheets. Some suggest they should pay more than this. Let us suppose they had their way and the government doubled the tax it has announced. If we assume around one third of this is tax that will have to be paid by RBS and LLoyds/HBOS, where the taxpayer is a  large shareholder, we will see that we are partly taxing ourselves. As the aim should be to sell these banks back to the private sector as soon as possible, the tax will lower the price we get for these assets. As profitable banks sell at around 12 times earnings, taking another  £800 million off the earnings of the two we own would lower their total business value by around £10 billion. The current tax is already in the price of the shares, which remains low compared to their pre Credit Crunch levels. Taxing banks more  is popular, but from the taxpayers’ point of view it is not all win win.

 

                 The government is mired in criticisms from the public sector. Only the state, they claim, can care for us. Only the traditional public sector  can look after our woods, educate our children and provide us with health care. Any attempt at reform will make things worse, they say.

                They are attacking the idea of the Big Society. The Big Society is an umbrella idea that reminds us that caring can come from charities, families and the private sector as well as from the state. It seeks to harness voluntary activity and the private sector as well as public cash to improve our society and look after those who need help and support. It wishes to harness voluntary and private sector effort to look after our environment and provide a range of services.

                Now we are reminded  that some charities are very dependent on public sector grants. Many Councils have found it easier to cut the money they give to charities than to cut their own overhead costs, leading to a campaign against the cuts from a surprising source.

              We are back to the view that only public sector cash works, and the only caring that counts comes from public money. We see this in the battle of the budgets over Free schools, where the core public sector complains should any education money be given to state financed schools on the new model. We see it with Councils who prefer to spend on themselves rather than let charities and others do it for them. We see it in the opposition to health reforms where critics do not want doctors spending  NHS money to provide free treatment by buying in services from the private sector. We see it in the opposition to charitable trusts looking after heritage forests, where apparently only the Forestry Commission can be trusted to keep the trees and allow us to walk by them.

            None of these attitudes are healthy. They all get in the way of doing things better. They get in the way of bringing down the public deficit without undermining important public services. They are based on the public sector paradox. People who often are very critical of politicians and bureaucrats, and who regularly condemn their approach, their attitudes and their incompetence, want politicians and bureaucrats to run more and more of their lives.

             The government  knows  that if  charities and other institutions do not want to take on running a heritage forest, and if the public remain opposed to its transfer, they cannot force it. The Big Society runs on the voluntary principle. The government can offer, and allow a decade to local groups and charities to see if they want to own their local wood. It is a permissive policy, not a threat.

 

                 The opponents of Free schools are complaining that the government has allocated £50 million of capital to such schools. They are seeking to suggest that the government will end up spending much more than £50 million. Is this true, and does it matter?

                  The government has ruled out allowing for profit companies to set up and run Free schools. They have not followed the Swedish model, where for profit companies play a big part. This does mean that UK Free schools are likely to need capital support from taxpayers, as well as all revenue costs being paid for out of the education budget. Fully privatised schools could absorb the capital costs financed from private sources, whilst still delivering free places to state financed pupils. Free schools in the UK are not a privatised model.

                   There are four kinds of capital spending possible to create and sustain a free school. The first is the school could buy an old school or other suitable property from the public sector. If the government gives it a grant to do this there need  be  no increase in total public spending, as the money is used to reward the public sector vendor. In a normal case a local education authority receives money from the free school, so the cash impact on the public sector is neutral.

                  The second is a Free school could buy a suitable property from the private sector. If the government gives it the money to do so, there will be an increase in public spending. If the Free school is to provide places that the state sector would oltherwise have to supply by building a new school or expanding an old one, then there is no increase to total spending, but a redistribution of it. If the Free school provides extra places to offer more choice in the local area, then there is an increase to public spending.

                        The third is the Free school could spend capital on refurbishment or improvement of an exisiting property. This is also an increase in public spending, but it might be a replacement project for such improvement by an LEA school.

                       The fourth is a Free school might build a new building. This is also an increase in public spending, but it too could be a replacement project for a similar project in theLEA sector where extra places are needed.

                       Critics should think a little more before sounding off. If Free schools provide better value in the construction, refurbishment and provision of school buildings, then taxpayers overall will benefit. If Free schools merely provide some places that would otherwise be provided by LEA schools, there should be no increase in spending, and maybe a saving from doing it in a less bureaucratic way. If the idea is to increase the number of surplus places to provide more choice, then there could  be some increment to public sector capital costs, in the interests of offering more choice.

            On Monday when this issue was first raised on the Today programme no Minister was available to deal with the criticisms. Ministers will have to learn that the way to push through their reforms is to be diligent in explaining and persuading at every opportunity.

 

                   It seems likely that the economic recovery will resume this quarter, after the poor figures for Quarter 4 2010. Manufacturing continues to advance. The latest service sector surveys show improvement in January.

                   Growth is, however, likely to remain relatively slow overall, thanks to the impact of rapid inflation on people’s spending power and consumption. Savers still get a raw deal and so have little to spend. This recovery has to make headway against the backdrop of large increases in the tax burden hitting private sector demand. It has to occur despite the need of the private sector to reduce its debt and the public sector to cut the rate of increase in its borrowings.

                     This week the Monetary Policy Committee have to think again about why price rises have been so fast and persistent. They need to revisit their stance at the end of last year that this was nothing to do with them, and take some responsibility for the inflation they have encouraged by their attitude to rates and the value of the pound. This month we might see them have a better debate about whether they should do something or not, but it seems likely the Governor’s view that rates should stay down will prevail again.

                     Meanwhile, the  spin that the public sector cuts will be deep and difficult is having its impact on public sector employees.  On the overall figures there is no need to have any compulsory redundancies. Yet on the doorsteps I meet public sector employees from a range of areas who are genuinely worried about their jobs, as they expect their bosses to cut jobs instead of taking other action to reduce costs and achieve more for less. It seems that many public sector managers either do not understand how to use natural wastage as the best way to cut employee costs, or who want to make a point by pushing through redundancies. It is an expensive and an unpleasant way of cutting the costs, which could be achieved in a  much simpler and less damaging way.

              To promote and speed up the economy, the government needs to come up with a Growth package of measures soon.

 

                Amidst all the discussion of British values yesterday, and during the maybe democratic revolutions in  the Middle East, we should ask ourselves about the underlying theories and values of the UK establishment.

               Sometimes those who argue strongly for toleration and civil liberties are the ones who are harshest in seeking to censor or silence people of differing views. In the UK over the last couple of decades there have been several Establishment assumptions which you question at your peril. A  successful and open democracy is one where there should be healthy scepticism about the assumptions and theories behind public policy.

                 In the late 1980s the political and business establishment all believed that the Exchange Rate Mechanism was the right way to run our economy. It was disastrous. Those few of us who kept up the argument against were pilloried as beyond polite society and commonsense. The ERM ers  dared to say they were creating a “golden scenario” when they plunged us into boom and bust.

              In the last 13 years the Establishment has told us that an independent Bank of England would  give us low inflation and economic stability. Instead, that too has given us boom and bust on an even bigger scale, and now has delivered high inflation by western standards as well. Still many hold to the conventional wisdom, and few see that you cannot have a truly independent Central Bank in a democracy. As has happened at least twice recently, the elected officials will override when needs must. ( Ministers effectively set lower interest rates in the slump, and changed the inflation target)

              The Establishment believes in global warming theory. Anyone who dares ask questions or seeks to test the underpinnings of this theory is treated to intellectual abuse. The growing dislike of some of the policy consequences and the unwillingness of the Establishment to argue its case for the theory backed up by data creates tension between governed and governors.

           Eurosceptics have grown used to being treated badly by large sections of the UK establishment, which has for a long time wished to blend the UK into the EU against the instincts of many voters. The British media, as opposed to the press, has been reluctant to provide a reasoned and sustained critique of EU government in the way it allows for UK government, shielding the EU from proper criticism and analysis of its waste and error.

            These and other commanding ideas need to be properly  exposed to challenge and criticism for us to have a vibrant democracy.

 

            Let me surprise my readers. I think one of the best things the left has done over the last couple of decades is persuade  more people in the UK that racism is unacceptable. The UK is a more tolerant and better place today.

         If   The Prime Minister’s speech is to succeed, it needs to be seen as a call for strong moderate British values to unite a nation. We condemn extremism of all types – we should dislike the religious and political fanatics who think their creed is the only right one to be pursued by violent or dishonest means, but we should also dislike those who think there is a single or pure British way which they wish to enforce.  The values I most admire in Britian are the values of tolerant democracy.

           We do need to appreciate a common history and a common inheritance. Of course I feel proud of the conventional sucesses of our island story. 1588 and the defeat of the Spanish Armada, Trafalgar and Waterloo in 1805 and 1815, and Berlin in 1945 were proud moments. They have something in common. England, then the UK, stood against the tyranny of a dominant continental power. In1588 they fought for the right of the English nation to choose its own religion and government, and for the right of the Dutch to be independent of Spanish rule. In the 1800s  they fought to prevent France determining the government and rules of much of Europe and enforcing her decisions by military power. In 1945 we were a crucial part of an alliance against fascism and ugly anti semitism.

             I also feel proud of the bigger story, the progress of Britain as a pioneer of democracy and human rights. The landmarks in this journey include Catholic Emancipation, the abolition of slavery, the invitation of Jews into civil and political life, the enfranchisement of working men and women, and the wider ownership movement of the twentieth century. No-one who studies British history and who wants to help promote the best of our values can deny there have been murkier times and attitudes in our past that had to be vanquished by the  brave. Catholics were oppressed for many years, and there were bad cases of extremist violence by some Catholic groups. The UK exploited the profits of the slave trade, before better judgement led to its end. There was a long period of anti semitism in Britain, finally ended by a nation that had to confront the horrors of extreme anti semitism in 1940s Germany.

               So what is the essence of Britishness, what are the UK principles that we should believe in and enforce. I think they are these:

We believe in tolerant democracy.

We believe that we settle our differences  by  wrestling words and votes, not arms and bullets

We believe that the majority has the right to prevail, but it does not have the right to oppress the minorities

We believe that the minorities have the right to free expression and the quiet enjoyment of their differences. They do not have the right to resort to violence or illegal means to try to get their way

We do not believe that any creed or ideology has sole right to lord over us all, but we do believe we all have the right to our creed and ideology to enjoy without upsetting others

The sovereign principles are those of tolerant democracy, the best way to try to live in harmony, to settle disputes, and reach some common purpose.

 

          I was sent an interesting email this week. It came from someone who knows how the changes at a particular  quango are going. It makes worrying reading.

          The bottom line is that spending goes up in the short term in order to achieve a closure of a quango and the transfer of duties elsewhere. 14 administrative  staff lose their jobs, but 7 new management grade staff are recruited, along with three adminstrative staff hired in another location. As a result the early years costs include redundancy and pension payments that more than wipe out the small staff  savings.

          The public sector ought to have a huge advantage. It can offer continuity of employment, in return for asking flexibility about duties. The traditional civil service regularly switches people within a given department from one area to something very different. Sometimes staff are switched between departments, as recently happened over the change of Competition responsibilities between Culture and BIS.

           The same should apply to quangoland. Taxpayers do not want to be paying redundancy payments, and then  hiring fees within a similar organisaiton owing to organisational changes. The main mechanism for bringing public spending under control should be cutting recruitment. As people leave, others from within the public sector should be offered promotion if the job is essential or the post should be abolished and any valuable part of the work reassigned.

        The Cabinet Office needs to get a grip. We do not want big reorganisational costs with the cost savings delayed for several years or never materialising.

       The remorseless langauge of cuts reflects three differing realities. In some cases new budgets are tough and require actual cuts that are not popular. In other cases, like this one, the cuts themselves are expensive, leading to worrying redundancy payments and special pension contrbutions. In a third set of cases the cuts are political, as a bad public sector management wants to make a point by doing something damaging. I read in some places that I do not think there are any cuts. As I always point out, there are indeed cuts, despite public spending going up every year for 5 years in cash terms.