Category: Blog

 

        How silly of me not to realise we could simply create £75 billion to sort out our problems.  Now we are told we can, maybe we should ask what we should do with the new money?

It seems such a pity just to go on buying government bonds with it. After all, taxpayers have £199 billion of them in the Bank already. They are not a lot of fun, and do not seem to do a lot of good. Once you have  got some, having more does not add a lot.

We could, for example, give every man, woman and child  in the country £1250 each to spend as they like. They could use it to pay off the credit card debt, or meet the tax bills on their petrol. It would help with the Council  Tax and the VAT. As the main problem over the last year has been the drop in  consumer spending, this would offer a way of boosting it. Funny how the authorities never want the punters to have any of the new money.

Or we could use the £75 billion to recapitalise the state owned banks. They could write off  their losses for that, and have a load of new capital to lend. That too could do a lot to promote recovery.

We could decide to spend it on a big capital programme. It would buy plenty of roads, railway capacity, energy supply and broadband access. We could all be given free shares in the projects and companies established with the money.

Or the government could just use the money to pay its bills direct, instead of going through the mechanics of buying in old government loans, and then issuing new ones to pay for the excess of spending over income.

 Come to think of it, why don’t we always pay for public expenditure like that? Why do we go through the painful process of demanding tax revenue from people, when you could just print some more tenners? Is there a snag the MPC haven’t spotted yet? Why pause at £275 billion?

The Bank will have a nice tidy income from the gilts it buys in. The government could simply cancel all the bonds the Bank owns, to get its interest bill down. Come to think of it, why stop at just £275 billion for doing that? The more you   buy in and cancel , the less interest you have to pay.That would monetise the lot, and should prevent the deflation the Bank must fear.

Why do so many spoil sports and jeremiahs write in to this site to say this is a bad idea?  Does the Bank think there are any   limits to electronic money?

We are owed a proper explanation from the Bank of why they think printing money when inflation is already 5.2% is a good idea.  Just telling us yet again that inflation will fall and that we are in the midst of the worst crisis ever is not a sufficient argument for actions that savers will fear.

Maybe the Bank does  worry that the banking problems remain acute. If so, the right approach is to seek actions to create strong banks out of the weak banks that currently spook the system. We need honest money.

In the UK there is no substitute for sorting out RBS.

 

 

            The MPC meets today. We hear they might authorise more money printing today, or warm us up for more next month. (They announced £75 billion more QE -ed)

            They have clearly long since abandoned their Statutory duty to control inflation. They regularly report inflation at more than twice the target level on the CPI, which is well below in turn the RPI which is the rate more of us experience. They do nothing to bring it down.

             Apparently the MPC has redefined its own remit to do something about slow growth in incomes and output rather than control prices. The more they seem to follow this new idea, the more the UK economy slows. Growth now seems to suffer from the same MPC blight that has afflicted inflation.

              The problem the MPC should grasp is that the main cause of the economy slowing is the high inflation they have allowed. Last year people’s real incomes fell, leading to a fall in private sector consumption. The main cause of the fall was the inroad made into people’s personal budgets by the big rises in the prices of essentials like energy, and the tax increaes to help pay for the large public sector.

               The MPC’s interest rate strategy has cut the living standards of the prudent by slashing interest rates on savings. It has cut the value of everyone’s income, owing to the inflation. It allows the governemnt to borrow at very low rates at the expense of everyone else. Small and medium sized enterprises and individuals do not borrow at anything like the low interest rates we hear about as the MPC’s great success.

                 If they print more there is a danger of a weaker pound and more price rises. If they keep interest rates low they continue to punish the saver. The MPC follows a policy of public sector good, private sector bad. Their policy is not supporting the idea of a private sector led recovery. We need more cash and credit in the private sector, and more success in curbing infation.

                       Honest money should be part of the recovery package. Honest money would mean some new banks with enough share capital to lend money to decent new projects in the private sector. These could begin with the new cost efficient  energy provision we need to start to bring energy prices down again.

 

          Yesterday there were new figures for the year to June 2011. They showed overall growth had slowed to just 0.1% in the last quarter of that year. They also showed that public spending had gone up by 1.3% in real terms over the twelve months.

           When I first revealed the big cash increases in spending for 2010-11 and 2011-12 in the successive Red Books published by the Coalition, many ignored it, some argued that I needed to look at real terms and not cash, and some went on to assert there would be real terms cuts. I could not see how total current spending could be said to be falling in real terms, given the scale of the cash increases. Nor this year is it possible to see how the 3.8% cash increase should translate into a real reduction, as this year is meant to see a freeze on pay and better public sector  buying.  The official confirmation yesterday that real terms public spending has been growing is a welcome shaft of light which will doubtless be ignored by most commentators.

           We need to examine carefully the government’s statistical way of calculating so called real terms spending changes. There seems to be a temptation to expect substantial inflation of public sector costs. This needs to be questioned at a time of self advertised pay restraint, and given the need to make rapid strides in productivity after a very disappointing decade for efficiency improvement. Having an intelligent economic discussion of how to fix the UK is not made easy by a refusal of most commentators and politicians to work from the actual figures.

           I have been asked to comment on David Cameron’s speech. I thought it effectvely got over some messages. He is right to say this is a debt crisis, and you cannot get out of a debt crisis by borrowing too much. He  wanted to inject some optimism, and did so by saying the UK can do it, can make it, can bring on a recovery. He spoke well on the topic of public sector pension reform, with passion on the need to end educational apartheid between the public and private sectors, and with sincerity about the important contributions some public sector employees have made.

            I would have liked a clearer steer on how the UK will respond to the gathering Euro storm. I was also interested in his statements on public debt. He attacked Labour for spending £428 billion more than they had available in tax revenues. Some of that was recklessly borrowed in the good times.  He did not remind us that the Coalition’s current plans are to borrow another £480 billion in five years. These figures are likely to be revised upwards in  the autumn in the light of weaker growth.

 

                  It is important that in all the arguments about paying off the credit card the impression is not left that the government is now paying off the nation’s credit card. This particular piece of well used plastic is about to be flexed and flexed again. It is important people are told that. This is no slash and burn government when it comes to public spending. This is a government still borrowing large sums, knowing that it has to keep the markets on board with its deficit reduction trajectory and with the credit worthiness of the country. The economy is not slowing owing to a lack of fiscal stimulus.

 

 

           I took the train to Manchester. I had pre booked a heavily discounted first class ticket months ago.  My outbound ticket cost £59, and my return ticket a very reasonable £34.50.

          The Monday morning train was scheduled to depart at 9.00 and arrive at 11.07. It did leave on time, but half way into the journey we were advised that the train had to divert, and would arrive half an hour late. My previous journey  to Manchester, going on the first train in the morning from Euston, was more than half an hour late owing to late departure through the absence of train crew.  Surveys show that the thing that matters most to passengers, including me, is punctuality. We can plan our days if the trains run to time. We are much  less concerned about major investment to lop twenty minutes off the journey time, than we are about not suffering a 30 minute delay to a stated time.

           There were just 8 people in a 42 seater carriage on Monday morning, despite the Conservative conference potentially boosting trade. I asked one of the staff about the low level of use. He replied that this Monday was busier than usual, and assured me there were some more people in other carriages. I could see through the glass door panels that the adjacent coaches also had a substantial number of empty seats.

            The train I came back on was the last train on that day. It meant leaving Manchester at an early 21.25. Train schedules do not allow you to go to an evening event or have dinner at normal times, and return to London. That train did exactly what it said on the ticket. They even managed to provide  a white bread sandwich, a cake, and a cup of tea within the £34.50 price, for all those of us who had not yet eaten. There were just 10 people in the carriage.

            What do I conclude? Once again  I have seen no evidence of a shortage of train capacity on the London-Manchester railway. One way to increase capacity and to encourage more business would be to run later trains as well. Punctuality is the key to persuading more of us to use the trains more of the time. We need to fill the existing seats more, before worrying about a whole new railway.

 

PS: MPs do pay for their own travel and accommodation for party conferences. I think that is right. I suspect the taxpayer pays for the travel and accommodation of all the public sector lobbyists, BBC reps etc

 

            Fear at last stalks Whitehall on EU issues. We hear that they are crisis gaming what to do if Euroland plunges rapidly towards more integration. Officials seem to see this as some kind of threat rather than an opportunity for the UK. They are worried that the UK will be excluded from meetings which have an impact on the single market. They seem to worry lest our “partners” use new EU powers to damage UK trade with the continent.

                 It has been blindingly obvious to some  of us for years that the single market project was more about centralising government and less about  free trade.  Continental politicians used the promise of more trade access to markets as the carrot to lead an ever reluctant and slow UK into more laws and binding government  arrangements. The issue before the UK now is not what  will some future more centralised EU do to damage  UK trade, but what can the present government do to stop the damage already done, and about to  be done, in the name of more centralised regulation and taxation?

                 The UK establishment needs to bury its own misleading rhetoric about the importance of EU trade. Our trade in services is primarily conducted with the rest of the world, thriving most in common law and english speaking jurisdictions. Most of the inward investment into the UK comes from outside the EU. Only in physical goods trade is the EU more important, and even there it is only around 40% after adjusting for the entrepot effects.

                       Government needs to grasp that as we are in heavy deficit on the goods trade with the EU there is more at risk for them than for us. I do not think we should take seriously any threat which boils down to Germany refusing to sell us  more BMWs.  The World Trade Organisation also gives us  various guarantees about access to continental markets, whatever the EU tries to do. Non EU members manage to trade with the EU without belonging to the legislative club.

                         The UK is vulnerable by virtue of being in the current EU structure. It is vulnerable to regulations and directives which do especial damage to sectors the UK is strong in, like finance. We are vulnerable to general anti enterprise laws which the EU specialises in. If being a member on current terms entails  having to fight endless rearguard actions against taxes and regulations designed to make business in our finance sector more difficult, we need a change of relationship. If our much heralded industrial revivial encounters uncompetitive energy prices owing to EU regulation we need to change things.

              That is why I made my modest proposal that in this crisis the UK allows Euroland to press on to single economic government in return for having an opt out from anything we do not like, past or future. If even this modest proposal is too much for the government, they may find the more radical option of seeking  to pull out altogether gains more support in the country (currently 29%), widening the divide between people and politicians on this most funadamental of matters. The polling shows there is a strong majority for much less EU interference in our lives. Many more people in the UK want a relationship which enhances trade and freedom. They do not like what they see as the gloom gathers over Euroland. If Euroland seriously thinks the UK should pay more of the bills for the Euro’s failure, they may merely succeed in radicalising the UK against them.

The Uk establishment needs to wake up to the reality that the EU is doing damage to the Uk economy by many of its rules and taxes. They need to grasp that we do not need to accept the current level of interference, let alone sign up for more, just so France and Germany can carry on selling us things.

Some of us have been urging a UK clause when the Euroland members go ahead with their proposed change to Article 136 of the Treaty to allow a Stability Mechanism. We regard this as a big change, involving the Commission, and would like a change of the UK’s arrangements at the same time. The government sees the Treaty amendment as an advance for the UK, as the planned ESM will replace the EFSF and EFSM, so removing  future risk of the Uk having to help with Euro area bail outs after 2013. For this reason they do not seem willing at the moment to demand more in return for consent to this Treaty Amendment, which was agreed in principle on 25 March 2011.

           The dire situation is underlined today. We learn of another sovereign bond downgrade for Italy. Greece is on strike. It is unlikely that more strikes will persuade the Germans to send more money to Greece. The strikes will simply make the problems worse, cutting Greek output and tax revenues further. They are striking against themselves. Finance Ministers are working on plans to support Euroland banks, but the weaker sovereigns have limits on what they can afford.  David Cameron is right that the way out of a debt crisis is to borrow less, not more. The UK public sector has to speed its work in this area as well.

 

 

           Whilst we were meeting in Manchester to debate the economy, world markets took another beating. There was alarm about delays to getting the Greek deficit under control. There were fears that the next tranche of money to Greece would not be made available. There were worries about a Belgian bank.

          There were different worries in the USA about banks and airlines. The inter bank markets remain frozen. Fear stalks the financial world.

         UK policy towards Euroland should not be based on some idea that we have a duty to help bail it out, or that is in our interest to spend our money on trying to shield them from the consequences of their ill gotten scheme. Instead our policy should be motivated by two main concerns. The first is everything this government does should be to to curb the UK deficit. We do not have money to spare for a single currency in search of a sovereign, with wayward members who borrow too much. The second is to limit the UK’s risk to the likely losses and dangers now emanating from the continent.

          To cut our risks the Uk should

1. Rule out a tax on UK financial institutions to help pay for Euro mistakes, whatever the attempted legal base, argument and what others might want to do

2. Get rid of all at risk Euro area sovereign bonds held by government owned banks and olther direct holdings using public money. The ECB is buying them so let them increase their collection.

3. Manage Euroland banking risk cautiously. UK taxpayers cannot afford losses through our government owned parts of the banking system in banks that get into difficulties, or through banking bond haircuts 

4.Refuse any more money into Euro bail out schemes, whatever the legal base or route

5.Urge the IMF to regard financing members of the Euro zone as a Euro area matter, not as suitable candidates for IMF money

              The Chancellor rightly says you cannot cure a debt crisis by borrowing more. This should underpin UK policy towards the Euro area. The UK is going to have to live with a slow growth Euroland at best, and something worse if they do not soon come up with a serious fix of their problems. The UK needs to turn its goods exporters eastwards, to emerging economies with money to spend.

          I am glad the Chancellor recognised yesterday a bank lending and credit problem in the UK private sector. I will comment another day on the options, and why fixing the private sector banks is preferable to a state bank.

                   Yesterday I spoke at the Adam Smith meeting on a growth strategy, on the Euro and the UK economy at the book launch, and on controlling public spending at the CPS meeting, so I was not able to moderate posts. As always short posts that do not make contentious and personal allegations get posted quicker.  Avoiding references to unknown websites also helps.

 

Apologists of our membership of the EU always like to minimise the budget costs to the UK. They do this by telling us how small the net contributions are, and by ignoring the huge administration and compliance costs that fall on UK government and companies.

My colleague Bernard Jenkin has been digging the figures out with the help of the Commons library. The EU budget is large, getting larger and ought to be diminished.

Years	UK’s gross contribution	UK abatement (Thatcher’s rebate less Blair’s give-away)	Cash budget cost to UK
2011-12	£16.1bn	£2.8bn	£13.3bn
2012-13	£16.4bn	£3.6bn	£12.8bn
2013-14	£17.6bn	£4.0bn	£13.6bn
2014-15	£18.6bn	£4.3bn	£14.3bn

The EU  preaches that member states have to cut spending and cut their borrowing. At the same time the EU increases its spending and demands more money from us to pay for it. When considering the cost of EU membership we should always look at the gross contribution less rebate, as this is the true cash cost. That is the amount of tax we have to raise to pay for the EU. We should also add in a much larger annual sum for the costs of UK administration and compliance of all the rules, regulations and programmes required by the EU.

I am glad the Chancellor confirms today a freeze on Council Tax for next year, at the cost of £800 million. Commentators ask where this money comes from. The answer is easy – it will all be borrowed. It is needed because total spending keeps going up. That’s why some of us would rather pay for the freeze on Council Tax by deferring increases in overseas aid, or by spending less on the EU.

 

  As this subject seems to have broken out amongst spin doctors and media commentators, fuelled in part by Mr Tyrie’s comments,  it is time to dust it down again.

There are five main runners:

1. Spend and borrow more in the public sector – the even larger fiscal stimulus. I dismissed this idea in previous posts. It is dangerous and unlikely to work. It is usually urged by people who do not understand that the Coalition government is spending more and borrowing huge sums. The last budget increased forecast borrowing by £34 billion up to 2014-15 compared to the July 2010 budget, but this big “boost”  has led to a downward revision of growth forecasts.

2. Another bout of traditional quantitative easing. This would depress the pound more, fuelling yet more inflation. This in turn would cut consumers’ spending power further, depressing demand. Government debt would stay at high prices for a bit longer, creating and prolonging a bubble which one day has to be deflated. It is unlikely to make the favourable impact on living standards and growth its advocates hope.

3. A supply side revolution. The government could cut tax rates on success and enterprise, and reduce the costs of regulation, offering a timely stimulus to business. This would help, but seems unlikely to come from the current government, given the Lib Dem influences. Mr Osborne has expressly ruled out tax cuts for three years, whilst ruling in cash spending increases throughout the plan period.

4. A state bank for small and medium sized enterprise. Some seem to be flirting with QE in a new style. The idea would be to print money and push it out to the private sector in the form of loans from a development bank or the like which the state owned. I dislike this idea, as I fear the state would be a poor judge of good ideas and prospects, and land us with yet more bad debts.

5. Capitalise new banks created from within the state banking sector with private sector money. If three banks, say, were set up, and each had £5 billion of new private capital raised from the markets, these banks could lend multiples of the £15 billion to worthwhile prospects. This could provide a welcome and private sector funded stimulus. This is the best idea.

            Recent figures from the government showed that total spending keeps rising, and revenues are  below estimate. The UK borrowed another  £15.9 billion in August this year, up from £14 billion in August 2010. April to August saw total additional  borrowing of  £51.5 billion compared to £55.3 billion the previous year for the same period.  This leaves the deficit reduction programme a little behind where it was planned to be on OBR figures.  It is difficult to grasp how people can  present this as overall cuts, or cutting too much too quickly.  The increases in total spending do of course conceal some individual programme cuts as well as many increases.

           Just for the record, total current public spending rose by £31.9 bn or 5.3% in the first year of this government, and is planned to rise by a further £23.9 bn or 3.8% this  year. The last budget increased planned spending for the  following year by  £5.1 billion compared to the July 2010 Coalition budget. This increase and the accompanying large increases in borrowing over the four year period was presented as a “neutral” budget. The government plans to borrow an additional £485 billion over the planned  five years of this Parliament. This is called a tight fiscal policy.

 

          I was astonished by a letter I received this week from Theresa Villiers, railway Minister. It seemed to say welcome to the EUSR, as Bob would write. It invited me as an MP to make all sorts of representations at various periods over the next two and half years, as the heavily nationalised and subsidised  railway industry moves towards a detailed “Delivery Plan”. This new plan is scheduled for 31 March 2014. Perhaps they hope that the long delays in the schedule mean it will eventually arrive on time.

             They have published this week their draft “Initial Industry Plan” for railway “Control Period CP5”. Maybe you missed the previous versions for other control periods, but you do need to know about this one! They are, of course, after a load of your money. Even allowing for all the efficiency gains and “cuts” being demanded by Ministers, the industry comfortably expects  just under £3billion of annual subsidy in 2014-15, after years of higher levels of subsidy in the meantime.

               You will be pleased to know that this Initial Plan “will inform the development of the Government’s High Level Output Specification (HLOS) and Statement of Funds available (SoFa)(sic).”  This leads us seamlessly and easily into the “Periodic Review Process 2013”, another useful bureaucratic siding, which will make possible “the definition of possible CP5 enhancements”. I think that means they are looking to increase spending in due course.

           All this work will be overseen by the “Planning Oversight Group”. This is not given the mnemonic POG, though the ever active Office of Rail Regulator is affectionately known throughout as ORR. All these bodies crawling through the interstices of the plan will of course be governed by the money down the  sofa, as it will be the money that determines it.

          Not to put too much gloss on it, we are told that “our current expectation is that the HLOS (remember that? – see above) will set outputs to be achieved, rather than listing the improvements needed to deliver them”. Just to make sure that all bureaucratic bases have been covered two HLOSs (sic) will be drawn up . We will remain in the dark about which specific new projects have the green light.

           Readers will be delighted to know that after a further summer holiday all this work will lead directly to the Network Rail Strategic Business Plan.  Following more  consultations on the June 2013 “Draft determination”, we will get to our intermediate station, the Final determination, by 1 April 2014. There’s a bold timetable for you.

             On 31 March 2014, we will be the proud possessors of a Detailed delivery Plan.

            I am amazed that an intelligent Minister put her name to this nonsense. No wonder the railways lose a fortune, if that is the way they proceed to try to make a few decisions about their capital spending priorities and how they should control their costs.

               The IIP does contain some revealing  facts that have slipped in. Their climate bar chart shows they regard 6 winters since 2002-3 as abnormally cold. They tell us they put 3 million tonnes of CO2 into the atmosphere each year. They claim that their travellers put out 53 g of CO2 for  every mile travelled, compared to 148 g by bus travellers and 127 g by car travellers.  Their fuel costs are quite low because they of course get a special deal on  fuel duties. They do not count this as part of their subsidy.

              The plans show that if all goes well Network Rail will have a massive £30 billion of net debt by 2014-15.  If we are lucky it will  have added under £20 billion to the national debt for its subsidy payments 2010-2015.  As the Transport Secretary has himself pointed out, high speed inter city travel is mainly used by the better off, who will benefit from this largesse.

            When it comes to railway spending, different rules seem to apply. The railways will be important contributors to continuing large public sector deficits, as they speed to ever larger borrowings secured against the promise of future subsidies from taxpayers. We will look at how you could run a bigger and better railway with less subsidy in a future post.

 

 

          Mr Hague repeated his old burning building speech and explained things about the EU he does not like. As Foreign Secretary there is one very simple question for him. What is he doing about it? Why wont he get on with renegotiating the UK position? Most UK electors want a trade agreement but do not want to be bossed around by a high spending legislature poking its nose into our domestic affairs.

    At least Mr Grayling and Mr Duncan Smith intend to make a fight of the latest EU power grab. The UK has accepted the free movement of workers, allowing large numbers of EU migrants to come in to do jobs. The EU now claims the free movement of workers includes the free movement of benefit tourists. They want to stop us excluding  people from entry into the UK who want to live on benefits rather than work incomes. They think we should pay them if they turn up.

           This is an especially provocative EU interpretation of EU law. At a time when the government rightly wishes to cut the number of people on benefit and reduce the welfare bill, the last thing we need is a whole load more unemployed people turning up from the continent and claiming benefits here. Ministers will go through EU legal processes, and let’s hope they win. However, this issue is so fundamental, the UK government should simply say “No”.

            It’s bad enough the EU pushing its own budget up and sending us a disproportionate part of the bill at a time when we need to cut less desirable spending. It’s even worse that they now want to push our domestic budgets up through some strange interpretation of the free movement of workers.