Category: Blog

 

            A favourite nursery song gives topical Labour  advice to Ministers:

“If you go out in the woods today,

You’re sure of a big surprise.

If you go out in the woods today

You’d better go in disguise”

          I am a tree hugger. I like trees. I love looking out at a wooded vista. I think trees planted in towns and cities take some of the severity off the urban landscape. I favour keeping woods and trees where possible.

          I also understand the strong feeling  we share, that some of the great woods are part of our common inheritance. They date back to times when commonland offered poorer citizens the chance of augmenting their incomes. As a boy I picked bluebells and primroses from commonland woods in the spring, and took home blackberries for a pie in the autumn. In our new regulated world I would not dare do those things today.

          I do not have that same strong sense of national ownership and enjoyment with some Forestry Commission Plantations. The Forestry Commission was the body which in various places cut down old deciduous mixed woods, and replaced them with carefully farmed conifer plantations. If I ever venture onto Forestry Commission land I keep to the authorised footpath or bridleway. I would expect some official to pop out of a concealed hut somewhere and fine me if I stooped  to pick a wild flower or wandered off the approved track. I might end up being  accused of crushing  underfoot some protected beetle or fungus which an expensive consultancy study had revealed.

                I am a convinced tree saver, but I am also an economic realist. There are occasions when Planning authorities need to grant development permissions which entail cutting down some trees to make space for new homes or factories. In such cases it is good if the Council requires the developer to place at least an equal number of new trees in appropriate places in the development to replace those lost. Such development should not take place in heritage forests, which are already protected by planning law and other special designations in many cases.

                 Listening to the wild debate in the Commons on Wednesday I despaired of any rational approach to this problem. So many seem to think private sector trees are not as beautiful or useful as public sector trees. Others wrongly think every private owner of trees harbours the desire to cut them all down and build, or intends  to block all rights of way and close all car parks in and near the woods.  Thinking the worst of all such people, they also think the law is not strong enough to enforce the clear public wish that all rights of access should be preserved where Forestry Commission woods are transferred on lease to private managers.

                  I think we need our heritage and amenity woods, and should expand them as this government says it wishes to do. We also need more commercial woods, run with profit and growth in mind. We import far too much of our timber. The Forestry Commission has left us very reliant on imports for most of our needs. Harnessing more private capital and management might help bring about a larger and more successful timber industry in the UK.

Adapting the old song

“If you go out in the woods today

You’re sure of a big surprise

If you go out in the woods today

You’ll find them full of lies”

 

               Roughly half of all the money spent is in the public sector, and half in the private sector.  Around one fifth of all the public money spent is borrowed.  The other fourth fifths comes from taxing the private sector.

                Most people now agree we cannot carry on borrowing at the rate we are to pay for all that extra public spending. There are two choices on how to stop the borrowing. The first would be to cut spending. The second is to take more tax from the private sector.

               The Coalition government has ruled out cutting the amount we actually spend on the public sector – indeed, they want it to go up a little over the next five years. This is presented as cuts, because it entails cutting  previous plans to increase spending. In a few areas it entails actual cash cuts, and in more areas cuts after allowing for general inflation. Bad management or politically inspired  management will ensure there are some unpopular cuts in some areas. In other preferred programmes like overseas aid, EU contributions, health and pensions it entails real increases. In an area like Health because the increases will be much smaller than the service is used to, there could well be tensions.

           That means that all the reduction of the deficit is planned to come from increased tax revenue. Some is going to come from increased tax rates. The government has put in place or confirmed higher rates of Income Tax, VAT, fuel duty and others, and has lowered Income Tax thresholds for higher rate tax. The bulk of the required increased tax revenue is forecast to come from the proceeds of growth.

               This simple arithmetic will dictate the politics of the next few years. The squeeze will be most intense on the private sector, as it struggles to find all that extra tax revenue and faces those higher tax bills. Nonetheless the public sector will feel hard done by, as the contrast with the spend and borrow more years will be sharp.

               All rests on growth. If the economy starts growing at above its trend rate of growth and sustains that until 2015 the strategy will succeed. If  growth continues to disappoint, and it turns out the government has not done enough even to recreate the old trend rate of growth that was so damaged by the experiences of the last few years, the deficit will stay obstinately high. Getting to an above average rate of growth with badly regulated banks and with a rising tax burden is not going to be easy.

              The sad truth is we all have to take a hit as the country stops living 10% beyond its means. The current plan is the private sector takes more of the hit. That’s why the Governor of the Bank of England made such a gloomy speech about real incomes last week. If the private sector hit is too big the recovery will be weakened.

 

                  Yesterday the Minister for Europe told the Commons that the EU is going our way. He believes that EU Ministers generally now understand that too much law and regulation is holding back enterprise and job creation across the continent. He looks forward to a rosy future, where the advantages of a common market outweigh the disadvantages of all that EU regulation, as the EU awakens from its lawmaking nightmares and grows up believing in freedom.

              I disagreed with him. Even if more ministers do now think as he says, they have not told their officials, or if they have told their officials, the officials have no intention of implementing their views. The EU is in regulatory and lawmaking overdrive. The pace and volume of financial servioe and banking regulation is  ferocious. The new work on economic governance and surveillance is intrusive. The criminal justice bandwaggon rolls on.

             I had a bad day yesterday. In the morning I was required for one of many Statutory Instrument Committees. Most detailed UK law now takes the form of a Statutory Instrument. The Act of Parliament which we spend a lot of time over is usually lacking detail. The detail, the things that really bite, comes in  the SIs which follow. These only get a maximum of 90 minutes debate. There can be a single vote on a take it or leave it basis. There is no opportunity to amend or improve.

               Yesterday 18 MPs were invited to approve 67 pages of regulation called  “The Investment Bank Special Administration Regulations 2011” and  three pages of “The Investment Bank (Amendment of definition) Order 2011”. Most MPs like new regulations, so  there was no question of the Opposition opposing these.  One backbench Conservative member, Adfam Afriyie, asked good questions about why suppliers to bankrupt Investment banks under these new regulations would  be required to carry on supplying  if the Adminsitrator told them to. The Opposition asked a few intelliegent questions. After 37 minutes another 70 pages of regulation was safely on the Statute book.

         Was I happy with it?  No I wasn’t.  Why didn’t I take them through the regulation with a fine tootth comb? Because there was no point. The SI could not be amended, and was clearly going to pass. When I have done so in the past nothing has been changed or improved.

                These particular regulations are not that harmful, as I doubt they will ever be used. There is no immediate prospect of an Investment bank needing Administration. The Minister told us that the EU was currently crawling all over this field. Doutbless in a year or two we will need to approve a new SI which matches the EU’s requirements in  this area. In the meantime, this Regulation was made out to give the FSA cosniderable duties in the event of a financially challenged Investment Bank. That too will have to change soon when the FSA is abolished and the Bank of England is left as sole regulator in this area. The Bank  may have second thoughts as it gets into its stride.

                  This SI like many of the modern breed confers very wide ranging powers. A bank can be put into special adminsitration for the old fashioned  reason that it is “unable to pay its debts”. I t can also now  be put into administration  because it is “fair” to do so, or because it is “expedient in the public interest to do so”.

                      Parliament needs a new way of handling this rash of law. Some of us are pressing for SIs to be subject to amendment and proper debate. Until they are, regulating is just too easy. Too many EU politicians are in love with it.  You will rarely read about any of this voluminous lawmaking in the papers or hear anyone criticise it on the BBC. Individual regulations have many parents and few critics. In many cases regulations fail to enforce their stated purpose, and in the worst cases do the opposite of what they wish to achieve.

 

                  My two grandfathers were working class. They both lived in rented accommodation, and earned their living from a skilled trade. They both spent teenage years in the trenches in France fighting for their country.   One, a farrier, had to become a labourer for the electricity company when horse shoeing went out of fashion. The other did move in later life from carpentry and shop fitting to a clerical job in an office. 

                In the 50s and 60s when I was a  child working class attitudes were straightforward. The families did not want to accept charity. It was the father’s task to find and keep a job to pay the rent and the food bills. There was a pride in self help, and in the dignity of labour. A man defined himself by what he did, by his position in life. As the welfare state developed, people were happy to take universal benefits like free health care and the old age pension. They saw these as entitlements, paid for by their National Insurance stamp.  They saw means tested benefits as a kind of state charity they would rather avoid. One grandfather supported the Unions and Labour, the other I think voted Liberal. Neither wanted to talk religion or politics. Both were Church of England, and had imbibed a moral sense from the Christian message. Both liked the NHS, protecting them from the unaffordable doctor’s bills.

             Labour’s history was bound up with seeking to understand and represent such families. Conservatives made a fight of it, often securing the support of working people who thought Conservatives would manage the money and the economy better, which was in everyone’s  interest. The two main parties accounted for the lion’s share of the vote. People on low incomes were called poor. There was an implied distinction in many people’s language between the deserving poor – the disabled or otherwise unfortunate – and the idle poor who simply did not have a sufficient work ethic to do what everyone else did.

           We now look at things very differently. The erosion of the old class language and arguments is good news. We have moved from discussing poverty to discussing deprivation or disadvantage. We have moved from the poor  to the benefit class. We have changed from a country where most think means tested benefits are to be avoided if at all possible, to where many think means tested benefits are a right, and a necessary means of correcting some  of  the social injustice manifest  in income inequalities.

         I have no wish to put the clock back. Much is better today.Not least, we are a much richer society, and can afford to be more generous to neighbours who do not have well paid jobs. Many families who were working class in the 50s became middle class in the 60s, 70s and 80s. Many more attained clerical and executive jobs and the pay and  lifestyles that go with them. Men and women with skills were able to form their own small businesses, and many prospered as they bought their own home, joined the golf club and sent their children to university.   However, if welfare reform is to work one old idea does need to be strengthened. It is simply that all who can work should work, to pay their own bills.

        The recent employment figures show that the private sector has been generating a good number of new jobs over the last year – more than 300,000. They also show that two thirds of these were taken by recent migrants into our country, leaving many people who were born here out of work. We need to ask why this is so. We need to switch more people from benefit class to employment.  The welfare reforms need to ensure that the severely disabled and otherwise unfortunate are generously treated – something we can now afford – whilst there should be strong incentives for the rest to take the jobs that the economy is now creating.

 

             A little while ago I argued on this site that the squeeze is and will be tougher on the private sector this winter and well into 2011 than the squeeze on the public sector. Indeed, overall the 7%  increase in public spending  under this government so far compared to a year earlier shows there has not yet been any squeeze on the public sector. This does not of course prevent individual cuts and hard done by areas, resulting from poor management or from the allocation of the extra cash. Nor does it prevent much talk about future cuts, as public sector managers try to find ways to get more money out of government or Councils.

           The Governor of the Bank of England has now highlighted the other side of the case I was making – the intensity and duration of the squeeze on private sector incomes.  The increases in Income Tax, CGT, National Insurance, VAT, and fuel duty always meant the private sector was going to take a big cut in spending power  as its  share of the deficit reduction. This has been made worse by the rapid rise in inflation, with big increases in fuel prices which in turn extracts more tax revenue and by the large increases in various pullic sector fees and charges like rail fares.

         The public debate has spent too much time talking about the spending reductions, implying they hit the economy at the end of last year and caused the poor GDP figures, when they haven’t begun, and ignored the squeeze on family incomes. The government needs to take action to cut the public sector’s contribution to the squeeze. It could begin by introducing the fuel price stabiliser, much in need at a time of instability in the Middle East again. It needs to bring inflation back under control by following a more successful money and banking policy.

           To get enterprise growing, creating the many new jobs we need and welfare reform requires, we need tax cuts. The Chancellor should be dusting down plans to get the UK back into shape as a competitive place for business and investment. Recent years of tax increases has left us struggling, losing capital, talent and companies that could make a difference.

 

                     In the 1980s and 1990s, especially around the time of the fall of the Berlin Wall, the world lived through a series of notable democratic revolutions. People threw off the communist or dictatorial yoke, by refusing any longer to obey their governments. In most cases the regimes fell quickly and with mercifully few fatalities. Many of the countries that went through this process have settled down to political parties, free elections and greater civil liberties.

                     This week-end we have been witnessing high drama on the streets of the major Egyptian cities. This follows hard on the heels of something similar in Tunisia. Where the government resists violence occurs. The commentators and experts in that part of the world seem surprised it is happening, and are very unsure of what will happen next.

                      It is difficult to see that the Egyptian President can continue in office. The crowd wants him out,  and he has lost control of the cities. The bungled attempt to impose a curfew failed. The crude intervention to stop people using mobile phones and other modern technology to direct the rebellion is failing. The proposal that they could have new Ministers of his choosing to solve the problem will not convince many. There are limits to what tanks and armed troops can do against a protest as large and determined as this one seems to be.

                   There are two crucial questions for all our futures. Will this spread to other countries? And will it result in a more liberal civil and political society, or some other form of tyranny?

                     There could well be more of this, as other oppositions in  other countries study what the Tunisians and Egyptians have done. The experts are at a loss as to what might emerge in its place. As we have seen in other Middle East countries where democracy has been imposed by new forces after western military intervention, it is unlikely a country can go straight to a western style party based democracy with a good range of civil liberties. Nor, on a brighter note, is it possible to see how any new arrangement and government can impose the same degree of control as in the past, now there is so much anarchic new technology available to the young and energetic populations of countries like Egypt.

                   The ability of government to keep the peace and to keep authority is always a difficult task, even in well organised and stable democracies. Our approach in the west is to say to people you may not like what the government is doing, but you have freedom to campaign peacefully against it, and to work away to dislodge the government at the next election. Where states allow neither of these pressure valves, they are vulnerable to street riots, as we now see again.

                     Elected governments can also experience difficulties in maintaining authority, where they misjudge the mood or make serious mistakes. The Irish government has just been brought down by the pressure of public opinion. The interesting question there is what happens if the Irish people decide to elect a new government or group of parties that do not  accept the EU loan settlement the old government is just pushing through? Then there will be a test of how much democracy an EU member state in special measures still enjoys.

 

            One of the interesting features of the poor GDP figures for the last three months of 2010 was they occurred at a time of rapid increases in overall public spending. Total current spending is up around 7% on the previous year, and in November was up by a double figure percentage increase compared to November 2009.

            Those who think the only thing wrong with the UK economy is too little public spending under the Coalition government need to answer why output fell when spending was so buoyant. No sensible analyst can claim that the problem with the UK economy in recent years has been too little public spending or borrowing.

            They could learn from the poor experiences of Greece and Ireland, that if a state spends and borrows too much it can trigger much higher borrowing costs, a loss of confidence, and  less economic output, not more. They could see from Japan that continuous injections of more public  spending and borrowing over a 20 year period can fail to raise the growth rate, ending as it did this week in yet another sovereign debt downgrade.

             Let us take a very  simple model of the   economy. There are 4 people in the private sector on £20,000 a year each. There is one person in the public sector, on £15,000 after taxes . There is one person unemployed, on £10,000 of benefits paying little tax.

              The private sector people and their employer pay overall 40% in taxes. So they get to spend £48,000 from their income, and the state receives £32,000 from them. The state spends £25,000 on its own employee and unemployed person, and another £17,000 on other bought in goods and services. It pays for this with the  £32,000 of tax from the private sector and £10,000 of borrowings.

              Some say we would all be  better off if the state hired the unemployed person.  Let us suppose it could do so for £14,000 a year net of taxes. The figures would then become:

State spending  on employment £29,000

State spending on bought in services  £17,000

This would require an increase of £4000 in state borrowing, or a 40% increase  from the already extremely high levels. This would take the state well into territory likely to lead to a financing crisis.

Alternatively the state could add say £2000 to the borrowing and £2000 to taxation.  This would then cut private sector incomes by an further £2000, reducing demand and offsetting some of the  demand increases from the extra income in the public sector. Meanwhile the private sector faces having to pay off another £2000 of debt, and in the meantime has to pay interest on it. This will have confidence and spending effects.

As we have seen, there are limits to how far a country can go in extending additional public sector employment on borrowing before there is a collapse as seen recently in various European countries. When a state is at its borrowing limits, it does not add to economic activity to borrow more – it can tip the economy over into worse performance, as in Ireland and Greece.  Even if the state can borrow more, it does not add all the extra spending to output, owing to the impact of the extra spending, borrowing and taxation on the private sector. If the private sector faces tax rises, or expects later tax rises to pay off the borrowing, the effect of the extra spending is offset to a greater or lesser extent. If a country is already setting uncompetitive tax rates it can lose more of its taxable business base quite quickly. THis country badly needs more private sector jobs. That’s why there have to be limits to the rate of growth of public spending and outstanding state debts.

 

            I like trees. They are an important part of our landscape, especially the native deciduous varieties. They may shed their leaves, causing trouble to the nationalised railway, but they are at their most magnificent in the autumn when they change colour.

           I look out at home at trees in my neighbours’ gardens. I suspect my neighbours like trees as well. I have never had any trouble with a neighbour wanting to cut them down. I now discover that these trees, shock horror, are private sector trees. Private sector trees, according to all so many active campaigners, are not the same as public sector trees. They are either not so attractive, or they will be cut down as soon as possible to be replaced by an office block.

         The misleading  and over the top campaign against the sale  of some  Forestry Commission land reflects the worst of UK public sector debate. Some run pictures of heritage woodlands that are in the public sector, and imply these are threatened with closure to the public or with development. The only problem with all this propaganda is the government has stated very clearly that no heritage woodland will be sold. The government is not trying to get money for the bits of the  New Forest or the Forest of Dean that the state does still own.

         The campaigners do not put up pictures of the plantations of conifers which make up an important part of the Forestry Commission land which the state might sell. Nor do they point out that the government is only proposing to sell a long lease, so the private sector can farm these trees more efficiently and supply the state with much needed cash in the meantime.

           Nor do they point out that where the public currently has rights of access and enjoyment of the farmed forest in state hands, all such rights will continue as part of the private sector’s contract. They suggest the private contractors might prefer to grow houses or offices instead of trees, without ever pausing to answer the question why would local Councils suddenly grant planning permission for such activity? The sales of leases do not come with revised planning permissions. And why should someone want to develop, if the state gets it all back at the end of the lease period for nothing?

             The only trees that have been cut down or threatened in my locality have not been destroyed by private sector demand. They were parts of a woodland owned by the National trust, where the owners decided they did not  like the trees and wanted a different landscape, or a beautiful old oak  tree that stood in the way of a highway  development the Council wished to push through. The nationalised railway has also done its bit by hacking back natural growth along the railway line.

               Campaigners should try reading the facts before they launch their campaigns. The Coalition proposals on the Forestry Commission are very mild and sensible. Private sector trees can be just as attractive as public sector ones.  You can walk through private sector woods on public footpaths and bridleways, just as much as through public sector woods.

             This week’s politics have been dominated by the economy. The GDP figures will lead to further measures to promote growth, and to much more debate about where we are heading. Meanwhile, business on the floor of the Commons has been dominated by the government’s EU Bill.

              The Bill was meant as reassurance to Eurosceptics. It aims to reassert UK Parliamentary sovereignty. It does so by pointing out in law that the EU only has powers in the UK thanks to Acts of Parliament. It offers a “referendum lock”, binding this and future governments to hold a referendum if certain future transfers of power are desired  by the UK government and the EU.

                The debates have been remarkable for the absence of any Liberal Democrat or front bench Labour federalist making a case for more EU power, or even justifying convincingly the amount of EU power there already is. Eurosceptics have made all the running, tabling all the amendments, making all the suggestions for improvement and strengthening the law, and winning all the arguments. Sometimes it is the Minister who makes the Eurosceptic case. Often it is an active Conservative backbencher who does so, urging Ministers to go further. In one important case over a possible future transfer of criminal justice powers, Ministers have agreed to improve the Bill following such backbench pressure.

                  However, the cruel logic of the arithmetic reminds us daily that the British people elected a pro EU Parliament. Whenever Eurosceptic Conservatives push their proposals to a vote to increase Parliament’s grip over the EU or to widen the number of issues which would require a referendum, they are heavily defeated as Labour and Liberal Democrats have no wish to make any such changes to the Bill. UKIP, of course, makes no contribution whatsoever to these important matters, as there is no single UKIP member elected to do so. UKIP will just criticise from outside that none of this is sufficient. What we need is votes inside, and only Conservatives can supply those.

 

                  Yesterday I agreed with much of the Governor’s analysis in his speech. He was right to stress that the high inflation we are experiencing has come from increases in the prices we have to pay for commodities and energy, all imported. He is right, as I have been pointing out, that the big squeeze so far has been not on the public sector but on living standards, as prices have risen faster than wages. He is right, at last, to recognise that inflation will get worse before it gets better, and right to warn living standards will have another bad year. He is right to support cutting the deficit as a necessary part of recovery.

                    Where he and the Monetary Policy Committee are wrong is to say there is nothing they can do about this imported inflation. They fail to ask themselves why Germany and the US do not have an inflation problem, when they too have to buy energy and commodities on world markets. The UK is different for one very simple reason – the Uk has had a bigger devaluation.

                      Let’s take a simple case. The price of oil is around $90 a barrel. That is well up from the lows of 2009, but well down from the high of 2008 of over $140. If we  were  still at $2 to the £1, a barrel would cost us £45. Instead, at around $1.5 to the £1 , a barrel of oil costs us £60. A 25% devaluation against a fairly weak dollar costs us an extra 33% on the price of a barrel of oil.

                       Yesterday’s speech by the Governor led directly to a 2 cent fall in the value of the pound, or a fall of 1.25%. That means more inflation on all those imports as we pay the price. The reason the pound fell was the markets realised that on the back of the Governor’s speech there would be no early increase in interest rates.

                         If we devalue more we will make ourselves poorer. We need to curb inflation and end devaluation. At the same time we do need a growth strategy, which incldues regulating the banks in a way which allows or makes them contribute to recovery by sensible lending for needed projects. That is why I have long advocated that the Bank needs to regulate banks as well as interest rates and money, so it can have a policy which both promotes growth and curbs inflation.  Briefing that a higher official short term rate stops the recovery is silly. Anyone in the private sector could tell the Bank that the official rate has little impact on lending rates which are much higher, though it does help penalise savers.