Category: Blog

 

  Happy New Year to all my readers. Thank you for your New Year resolutions.

             I have suggested the government  resolve to get inflation down (December 30th) and to make it more worthwhile to grow a business here (December 29th) in the UK. There is a third resolution that  I propose to them if they wish to have a successful year handling the economy. They must avoid all further involvement in the gathering Euro crisis.  

              The government gave themselves some room to avoid more invovement in bail outs when they stressed that the Republic of Ireland was a very special case as a near neighbour sharing a land frontier with us, with substantial banking connections. None of the other Euroland members meet the first of those criteria.

               The Euro countries need work outs more than they need bail outs. Indeed, forcing them into IMF/EU packages of future borrowings may make the problems worse, not better. The Republic of Ireland may express disapproval when the electors go to the polls. There could be trouble forming a government which simply accepts all the conditions imposed on the Irish loan and accepts the package as presented which will be a straightjacket for the Irish economy for many months to come.

                  Spain needs to buttress its banks quickly and convincingly. The EU itself found five groups of Cajas did not meet its unstressful stress texts last summer. The UK should not fall for the argument that because there are cross holdings with UK banks we have some duty to help in this process. Nor is it necessarily the right thing to do to refinance the Spanish state on special terms so it in turn can finance the banks. If there are problems with any Spanish banks continuing to own UK banking interests, then let them sell those to new private sector owners. Governments need to get away from thinking they must act as lenders or share buyers of last resort to banks in trouble. There need to be market based solutions. In the meantime the European Central Bank should continue to act as the lender of last resort to Euroland banks, as Euroland regulators tell us they are all solvent.

            Nor should the UK be dragged into any refinancing of a governement which has been overspending. There may need to be a third package for Greece, still struggling under the weight of debt and the deflationary policies forced on it by the last two ackages.

               2011 could bring the next phases of the Euro crisis. The bail outs of Greece and Ireland have not mended those troubled economies. They needed work outs, not bail outs. The UK government should make sure it is not part of any future bail out party. We cannot afford to dish out more of  the wrong medicine to failing Euro economies.

                     In the New Year in Ireland it may prove difficult forming a government in the new Parliament of MPs who want to follow the letter and word of the EU/IMF  bail out agreement. Adding cuts and  tax rises to tight money and an overvalued currency is  not a great formula for fixing a distressed economy. Greece too might find the going tough under its revised terms from this autumn. The Greek economy is not growing, under the EU/IMF cosh.

                    The UK government said that Ireland was a very special case. If the officials seek to argue that Spain has strong common bank holdings and substantial links through the financial sector, Ministers should respond that the Spanish owned banks in the UK are solvent businesses which the Spanish banks can sell to new owners in the private sector should need arise. There is no need for the UK to ride to the rescue, to help refinance European Central Bank loans to Spanish banks.

                            Nor does it make sense for heavily indebted and high borrowing UK to borrow yet more to lend on to overstretched Euro member states governments. Those of us who fought long and hard to keep the UK out of the Euro did so in part to avoid UK taxpayers having to go to the rescue of  states in the Union who overdid the borrowing. It makes no sense to behave as if we had joined when it comes to paying the bills for this ill judged scheme.

                 The UK’s government finances are still stretched. Taxpayers will not take kindly to any further extension of the UK’s credit to lend on to Euro governments. The UK can help Euroland sort itself out by not offering an easy palliative in the form of more loans. Somehow Euroland has to learn to live within its means, and grow its means to get closer to its amibitions. Lending more without putting in place a currency and a monetary policy that allows recovery is not the right answer. The ECB was keen to scramble out of some of its lending to Ireland. It did not necessarily result in a policy for the Republic that will guarantee economic success.

               The Uk has to concentrate hard on getting its own spending under control and its deficit down. It needs a stronger growth strategy, to take advantage of the freedom it has by not belonging to the Euro to set a competitive level of its currency and a sensible monetary policy. The freedom so far has helped a bit with the growth, but at the expense of higher inflation. It is going to be a difficult year ahead getting the balance right.

                As the PM says, the heavy lift to cut the deficit gets underway in 2011. Readers should remember that as total public spending goes up every year in cash terms this Parliament, the heavy lift takes place through more tax revenue. That’s why 2011 starts with a hike in VAT and  petrol duty, not with spending cuts.

 

                    On Wednesday morning’s Today programme there was one of those most revealing moments that shows the underlying bias or assumptions behind so much of the journalism. The presenter was faced with the story that Northern Ireland’s water utility had let the public down, unable to deliver water by pipe into many homes following a run of burst pipes. The first unstated  reaction seemed to be to think it was a privatised utility, which would allow the usual condemnation of privatisation, and lead to cries of stronger regulation and extra taxes. He paused with doubt in his voice and asked on air for confirmation that it was still a nationalised utility. Once that was confirmed he mused that there was nothing you could do about that. The normal diet of threats and menaces suuitable for a private sector business was left unspoken. He  went off instead in  the BBC public sector direction, to suggest the problem was probably based on insufficient investment or public spending in the past. Rarely do they think that perhaps a part of the public sector could be badly managed or wasteful.

            Let me make it clear again, I do not belong to the school of thought which says all private sector institutions are good and all public sector ones are bad. I just get frustrated by meeting so many many who think the opposite, seeing the pursuit of profit by enterprise as wrong in principle and bound to lead to bad results. They are usually  hurrying to their  competitive supermarket to buy their food in their private sector  produced high quality car where every moving part was made by a profit maximising company.

              I dislike monopoloy, whether it be in the private or public sectors. It is monopoly that normally lurks behind poor service or high price. The performance of privatised Heathrow this winter did not delight me, any more than the performance of nationalised Northern Ireland Water. Both are monopolies of a kind. Heathrow still seems to have occasional  monopoly style thoughts based on the relative size and position of the airport.

             I dislike poor peformers amongst private sector companies, as well as amongst nationalised service providers. The private sector ones worry me less for two reasons. Most of them are not monopolies so I can go elsewhere. The private sector has an easier way of closing down poor performers – they run out of customers and money. State sector ones worry me more. I often cannot avoid using them as they have a monopoly. The more mistakes they make, the more I and other taxpayers and customers have to pay for them.

              The BBC should look more seriously at the plight of Northern Ireland Water.  No sensible person can say Northern Ireland has been short of public money in the last decade. Spending per head is well above the rest of the UK and has grown strongly. How can a nationalised monopoly end up unable to supply its customers with a basic service?

               The government needs to introduce competitive pressures wherever possible to public sector  trading services where customers pay for the service at the point of use. Competition is the best way to keep businesses honest and to keep prices down.

 

               The government’s first resolution for 2011 should be to get inflation down.

                The government’s own budgets show it cannot afford all the inflation it is assuming. 10 departments of the government show increases in spending in published plans  over the five years of this government, but only four show increases after adjusting for forecast inflation. Overall spending (current and capital) goes up by £44 billion a year over the four years, but this is presented as a cut owing to expected price and wage increases. Current spending will be £93 billion a year higher than in the last Labour year in 2014-15, yet this requires cuts.

               For individuals and families inflation is also a bane. If you have saved or have been prudent, you see the value of your money falling by almost 5% a year at the current level of RPI inflation. 5%  halves its value every twelve years. Current low levels of interest rates, and the withdrawal of inflation linked National Savings products, leaves you no easy or reliable way of protecting the value of your savings.

                   Government should look again at the public spending figures and admit they cannot afford the inflation built into the numbers. They seem to be assuming a little under 10%  inflation over the four years 2011-15.  That’s another ten per cent on public spending they need to raise from us in taxes, and a ten percent on spending which does not yield any improvements in services. It’s ten per cent despite the policy of a wage freeze for part of the period, and the policy of buying better throughout the four years.

                    So what could the government do to bring inflation down? It could let the Bank of England know it is not best pleased with their poor performance on inflation so far. It could show that it regards inflation as public enemy number one. The Bank could put interest rates up a bit to signal its intention to take curbing price increases seriously, and to stop any further devaluation of the pound which is the source of much of our inflation. It could work more closely with public sector managers to plan for a low or no inflation world where the public sector can do more for less because some  wages and prices are not always leaping up in the way they have in recent years.

            Higher public sector pay should come from improved efficiency and be a reward for  excellence and achievement. That type of pay award is self financing. Lower costs of purchase should not be difficult to achieve across the public sector, given the poor record of much public procurement in recent years. Better procurement may well entail inviting in a new range of suppliers to add more competitive edge and to help more emerging UK businesses who have found selling to the public sector difficult, given the scale and the complexity of many of the contracts on offer.

           The government’s aim is to rebalance the economy. It wants more saving and investment, and less consumption and borrowing. That requires a better reward for savers in the form of a real return on low risk savings. Taking control of inflation more seriously is central to achieving that shift. It will also help deliver more for less in the heavily indebted public sector.

Cash increases by department, 2014-15 compared to 2010-11

Health     £11.1 billion

Education   £3.1 billion

Defence    £0.4 billion

International Aid     £3.1 billion

Work and Pensions   £0.8 billion

Scotland    £0.6 billion

Wales   £0.2 billion

Northern Ireland    £0.2 billion

Cabinet Office    £0.1 billion

Intelligence   £0.1 billion

Reserve   £0.5 billion

 

         The government today announces new ways to encourage charitable giving. Part of its Big Society message is to promote more generosity by individuals and companies.

          The trouble is the past government did so much to nationalise good causes and charitable activity. With marginal tax rates of 52% on the high paid, a growing Overseas Aid budget, a strictly bureaucratic and highly regulated charitable sector and a media based rather than a good works based culture in some charitable fields there is a lot to change if the government is serious about wishing to transfer more of this work from public sector to charities.

          If the government wants instead the extra charitable giving to be on top of the higher taxes and expanded public sector it will find that difficult to achieve at a time of squeezed living standards.

 

              I went to the sales yesterday in my local area. On item after item there was label which said “Made in China”. A few said something different – “Made in India”  or “Made in Indonesia”  or “Made in Korea”.

               For just six pounds I was offered a reduced set of Christmas lights. They were in an attractive large box. Each light was mounted in  an artificial flower, a poinsettia. One of the forty was a fuse bulb. It came with a 13 amp plug for Uk circuits fitted as standard, and with two spare bulbs, 1.5m of cable to the wall and 4 metres of cable for the set as a whole.

                How can they do it for such a price? That product requires the assembly of flowers, cable, plug, bulbs and bulb holders, all to be mounted on a stiff card and placed in a box. It is then  sent half way round the world in a container ship, sent by lorry to a shop, and finally retailed to the public. The English on the box was fine, and the product betrays considerable knowledge of the UK market at Christmas.

                 In case after case the Chinese product is well designed, appropriate for the shop and the market, of good quality and very price competitive.  It gives me a sense of unreality to see the collosal Chinese industrial achievement on most shelves of our stores, and to realise how much capacity we have given up here in the UK to make things for ourselves.

                       This is just one small and not necessarily the most impressive example of great value from China. It is further evidence that we can import our lifestyle from China,  and borrow the money as a nation to do so. As we hear enthusiaism for the retail boom post Christmas used as evidence of our recovery, we should show a little humility. It may be good news for our retailers, and good news for consumers who still have the money to buy these goods. It is not going to create a large number of jobs in the UK making the things we want to buy.

                    The government has made much of its intention to rebalance the economy, and to shift activity into manufacturing. That will require bolder policies on taxation and regulation than are currently on offer. It will require French and German style skill by government to buy home made products within EU rules. It will also need to relieve the squeeze on the private sector which is programmed to get worse given the trajectory for higher public spending and tax revenues set out in the Budget forecasts.

                     More jobs and more enterprise require more realistic tax rates, which could boost revenues as growth accelerates. A  52% marginal income  tax rate on the successful, 28% capital gains tax, and  an extra 1% on both Employer and Employee National Insurance is not a winning package to promote more industrial risk taking in a very competitive world.

 

            The government has said it will allow voters to petition the Cabinet Office website, and arrange for Parliamentary debate of the most popular petitions. Some of my correspondents seem to think this will allow a referendum on the EU, or permit the public to legislate for popular causes which Parliament itself has in the past been unwilling to take up. I suggest the public does not get too full of expectations.

             Let us take a relatively easy case. It is quite likely that the public by a large majority think that UK contributions to  the EU budget should be cut long before domestic programmes that voters value should be cut. Let us suppose a petition to this effect gained a large number of signatures. There might then be another debate on the topic of the EU budget, though the governemnt could say that it has already been debated so there is no need.

               The last time this matter came up only 42 of us voted against the EU budget, on the grounds that it was too wasteful and expensive. All three main political parties advised their MPs to vote for it, and most did. There is no reason to suppose that an on line petition will get Labour or the Lib Dems to change their support for the EU budget. Even more sceptical Conservative Ministers are likely to argue that they cannot reopen the budget with their partners on the continent.

                 Let us take the issue of a referendum on the EU. Before the General Election and before the ratification of the Lisbon Treaty Labour was against any referendum, the Conservatives favoured one on Lisbon, and the Lib Dems said it would be better to have one on in or out of the EU. The Conservatives announced before the Election they no longer thought a referendum possible once Lisbon was ratified.  After the election the Lib Dems backed away from an In/Out referendum.

                 If a large number of people request a referendum, it does not change the votes in the Commons. Unless one of the two main parties officially comes out in favour of a referendum on the EU issue, there will definitely  not be the votes in the Commons to pass a Referendum Bill. If only Labour supported a referendum it would require a lot of rebels from the government side. If the referendum proposal is to attract official Conservative support it effectively has to be agreed with the Lib Dems as Coalition partners.

                 If by any unforeseen chance of  Parliamentary arithmetic a Referendum Bill on In/Out was passed, all three political parties would probably campaign together to promote staying in. They might succeed in securing a Yes vote, as they did in 1975. I speak as one who voted No in 1975, because the Treaty of Rome always said it was about creating  big European level government and not just about a common market. It also made clear the UK would be sent a big bill for it all, though Margaret Thatcher did renegotiate that in our favour.

 

           At your suggestion, I am inviting your contributions for New Year resolutions. You might  like to share your own. You might also like to propose suitable resolutions for the three party leaders, Messrs Cameron, Miliband and Clegg.

 

            Backing down over a £13 million cut in a grant to a charity giving books to young children is not going to make much difference to our public spending position. The government plans to spend around £700 billilon this year.

             The government’s friends will say it shows wisdom and flexibility. A  not very well judged cut attracted substantial opposition, so the administration has reversed it to avoid hassle in a well meant political gesture. The government’s critics may say it shows a lack of determination to control spending, following on a similar reversal over school sport money.

               The problem for the government is that it follows hard on the heels of the November public spending and borrowing figures. I reported here the record  borrowing, shortly after reissuing more ideas to curb spending. I showed how public spending was running more than 5% up on a year earlier, if you take the amount so far this financial year. Some of you pointed out that November monthly spending was more than 10% higher than the same  montha year ago. 

                   The government persuaded the markets and the wider world that it was cutting public spending, by the use of language talking about  25% cuts. As explained here, they were never planning to actually cut overall public spending in cash terms. If the high spending and borrowing numbers become too high they could face trouble with the markets, and be forced into higher interest rates and a bigger squeeze on the private sector to pay the public sector bills. Some of us urged them to go for lower total public spending figures this year, to make a bigger reduction in this year’s deficit. I did not urge overall cuts, but a lower rate of cash  increase, as I felt their public spending levels pose a risk to the wider economy and the recovery.

            If you wish to control public spending you do have to engage with the public sector lobbies and change the terms of the debate. If slower growth in spending is called a cut, you have problems selling your policy to the wider public. The more ominous noises for the government are now coming in the NHS. There the government decided on a ring fence to avoid all “real terms” as well as cash cuts. Despite that, warning noises are emerging that the NHS will not be able to manage on a very small real terms increase.

             Under the old rules of how to play the public spending game some of the figures for valued services are very tight in future years. As the government’s appetite to battle over public spending is likely to diminish the nearer to a General Election it gets, it makes it even more sensible to choose some battles on public spending today that it is prepared to fight, and dig in and win them. All that the state does currently is not affordable.  Choices have to be made. The government needs to change the way the public debate about increases and cuts is fought, and choose more areas where it is prepared to see spending actually reduced in cash terms. Failure to control public spending could leave us at the mercy of market movements that damage our overall standard of living.

 

This is today’s blog  for www.johnredwood.com which technical  problems  stopped me posting. I apologise to readers for the delay. I can also now catch up with contributions – I have been unable to ac cess the moderator’s pages.

             I am glad the Conservatives and Lib Dems formed a stable government in May. This country needs a government that can tackle the deficit and straighten out our damaged economy and finances. I thought an agreement  by the Lib Dems to vote for  supply and confidence, and other policies which they liked  would have suited both parties better, but the Leaders decided they wanted to agree more. This decision has led to Lib Dem difficulties with student finance, defending a scheme their own Minister proposed.

             I have not been surprised by the comments of Lib Dems  caught out by creative journalists, apart from Mr Cable’s unprofessional and embarrassing remarks about a media bid. I am all in favour of more open discussion within government. It has always been a myth that Cabinet colleagues agree and think the same when a government is formed by a single party. It is likely to entail even more disagreement when two parties sit round the same governing table. Knowing a bit more about the arguments and disagreements can be  healthy, not disruptive.

             One of the things I do not like is the “new narrative” that Lib Dems have come into the government to bridle the instincts of Conservatives. This story line entails allowing Lib Dems to claim credit for all the nice things that Happen. As a Conservative I have campaigned long and hard for less income tax on the lower paid. I do not take kindly to being told we only have it thanks to Lib dems. As a Conservative I helped oppose the erosion of our civil liberties under Labour, and look forward to their restoration under this government. Again, there is no Lib Dem monopoly over civil liberties. The Conservative party wanted to spend more  per pupil on educating those from the poorest and least privileged backgrounds. The pupil premium was not just a Lib Dem wish.

               The main disagreements between the parties have always revolved around  Europe and the attitude towards enterprise and success. Many Conservatives will judge the Coalition by how well it changes the endless drift towards more EU government and bureaucracy. Conservatives also want to see success rewarded and enterprise praised. It is in these areas there will be real inter party disagreements – not over lower taxes for the lower incomes, or over the restoration of liberty.

 

          I trust you have better things to do than blog today. A very happy Christmas to all my readers. I’m off to cook the turkey.