Category: Blog

Dear EU shareholder and citizen,

              I am writing to reassure you that all is going well with our great European project. We have agreed plans to expand our spending for next year, and are busy working on a future budget strategy which will ensure continuous growth in our activities for the decade ahead. I am sure you all agree that after the huge success and popularity of the Common Agricultural and Fisheries policies the peoples of the EU are keen to do more together through our Brussels head office and central staff.

             We are especially pleased with the long term progress made with our own currency department, managing  the Euro. So popular is this that we have a queue of territories wishing to sign up to enjoy the advantages of it. Even our UK subsidiary, which has been reluctant in the past, has recently signed a document which their local Works Council says  confirms the long run intention of all territories to join.

            There have been some problems in the press with territories that have borrowed too much in local subsidiaries. I must stress to their CEOs that this is contrary to company policy and we will be taking further measures to control such behaviour in the future. We are currently drawing up a new Stability and Growth Pact to set out limits to each subsidiaries borrowing. We will also be adding better surveillance of all their business policies, and adding penalties for those who do not follow the company’s recommended approach. I am sure all local and regional managements will come to  appreciate the need for a common approach, as one subsidiary does not like having its cashflow diverted to pay the bills of another.

               We are concerned about our Greek subsidiary. We have issued a stern warning that they must spend less, until they build up their revenue more. It would not be good for the comnpany’s image if they failed to meet all their interest bills and repayments. We are very pleased with the way our Irish subsidiary is undertaking its third round of spending cuts to get its own excess borrowing under control. It is an example to all those subsidiaries with disappointing trading results in recent years.

              I am pleased to report that the new management in the Uk subsidiary is settling in very well, and seem to be keen on collaborative working.  They have willingly agreed to EU GMB taking more responsibility for their customer discipline policies and legal matters, have agreed to an expansion of the role of our external representation functions, and are enthusiaists for the new  borrowing and economic disciplinary framework. This has come as a wonderful  surprise. I think it shows the wisdom of our approach to the recruitment of new management. We have allowed   the anti company factions full rein to run their own candidates for management who never succeed in winning, to make sure no new management is appointed with full power to take an anti company line. We are hopeful that we can help them reform the whole system, to modernise it to one where it is unlikely ever again that an anti company management could be elected. The new Deputy CEO for the UK is a strong company supporter and is important to our future in this territory.

             We have been watching the antics of  US  Inc who have developed a passion for printing more money as a way out of their trading difficulties. I wish to confirm that this is not our company’s policy. We may of course need to give a wider range of powers and policies to our banking department so they can compete in an increasingly sophisticated world of money and finance, but this is entirely different to the wanton printing of dollars being undertaken by US Inc. Buying in bonds the way we do it will not be inflationary, I can assure you.

Yours sincerely

Chairman

 

               It’s been a bad few days for some European government bonds. New alarms in the market have arisen, as investors fear that some countries may have to reschedule or reduce payments to bondholders.

                 Germany can borrow ten year money for around 2.4%. Greece has to pay nearer 11.5%, and Ireland more than 8%, following recent market movements.  Portugal’s rate is around 6.9%.

                  The losses on these Irish and Greek  bonds in recent days may be a headache to some European banks, who own these bonds. It is certainly a headache for the countries concerned. As they come back to tap the markets for more money, so they will find the interest bill surges again, squeezing out more desirable forms of public spending. I notice that commentators who were sceptical of the UK’s government insistence that the deficit needed to be tackled have gone very quiet about the plight of the oevrborrowing Euroland members, now suffering from the cost of too much debt.

                The European Central Bank itself is not very happy about the situation. They have offered some support by buying up some of these government bonds, to try to stablise prices and limit the interest rate increases. So far it has not worked. There would need to be a much more concerted effort, doubtless paid for by  the  now usual process of the Central Bank creating the money to pay for the bonds. This in turn would weaken the Euro and make the weaker countries a bit more competitive, at least in the short term, intensifying the race to the bottom in currency markets. Alternatively the stronger  Euro member states would have to go to the rescue of the troubled states more whole heartedly, offering grants, cheap loans and other subsidies to tide them over whilst they try to adjust their spending and their economies.

             The problem for the peripheral Euroland economies is now most serious. Without economic growth they cannot get out of their debt trap easily, if at all. All the time they have to cut and cut again, and all the time they have to accept the exchnage rate that the stronger countries think appropriate, the recovery is further delayed.  There will be more stresses and strains ahead. There will be tension between the ECB and the stronger member states. I suspect the ECB will emerge with a wider range of powers, and will become the engine for trying to fine tune the running crises in the heavily borrowed countries.

 

           I have been reading the lengthy documents on EU Economic Governance which the Uk administration invites Parliament  to take note of . I do not think I can in any way  support them.

           The sheer audacity and ambition of them makes clear that many in the EU are now driving hard to complete an economic and moneatry union.  The sheaf of Parliamentary papers begins with the statement  “The main elements of the EU’s common economic policies are the Economic and Monetary Union, with the eventual aim that all member states will adopt the Euro, and the Stability and Growth Pact.”

             The documents refer to the excessive deficit procedure under Article  126 of the latest Treaty, and the power to use the right  to grant financial assiatnce to a member state  facing ” severe difficulties caused by natural disasters or exceptional circumstances beyond its control”.  To this is now added the Special Purpose Vehicle for mutual Eurozone support.

                The economic surveillance goes well beyond deficits to  include a “scoreboard of competitiveness indicators, including productivity, labour costs, employment, productivity, current accounts, foreign assets and real exchange rates”. Recommendations are the constructed for each member state based on how well or badly they are doing according to EU judgement.

                “The Government believes there is some merit in the idea of the “EU semester”, which would allow the EU to consider each Member state’s fiscal position at the same time as analysing its performance on structural reform issues… this would also allow all Member states to be given recommendations under the Stability and Growth Pact at the same time of year”

                    The UK is exempted from the sanctions and enforcement measures, but is still part of this big increase in economic surveillance and common policy making. If it is all as harmless and unimportant as the governemnt says, why don’t we just exempt ourselves from the whole thing, and demand powers back in return for any assent to a new Treaty?

 

             Melissa Kite in yesterday’s Sunday Telegraph revealed that the much vaunted Freedom Bill has been scaled down and transferred to the Home Office, as suggested on this site recently. She went to Liberal Democrat sources, who told her that Mr Clegg does not want to sift through the mountains of suggestions that came into the Cabinet Office website when they launched their consultation. I thought that was what we were paying his salary to do.

            I find it difficult to understand why Mr Clegg should be so reluctant.  When he set up the site he spoke well about the need to listen to the public and adopt their best ideas for remodelling government. The public exceeded expectations, inundating him with proposals. He should welcome that, and enjoy selecting the best for the first Freedom Bill.

              The Home Office has not ruled out incorporating ideas from other departments in their Bill, but it sounds as if the whole exercise has been scaled back to just make it a civil liberties Bill. Meanwhile, when it comes to excessive burdens on business, we are back in study mode. The governemnt is  consulting widely yet again over what if anything to deregulate. If the government is trying to sandbag deregulation then consulting  big business again  is the best way to do that, as big business nearly always confirms it can handle existing regulations, seeing them as a useful barrier to new and more competitive entrants to the market. Most small business is too busy minding the shop to spend time answering endless government consultations which might not lead anywhere. How many more do we have to go through before the government repeals anythigng that costs busienss a lot and delivers little? They are spoilt for choice. I trust Parliament will have plenty to say about this on Thursday.

 

               On Thursday I will be leading a one day debate in the Commons on the UK economy and economic growth. This is possible owing to the excellent reform that gives a Backbench Committee the right to allocate debates for one day a week. I asked for this wide ranging debate on what is needed to encourage decent growth and was granted it.

              In the run up to the debate I will highlight some of the issues I expect to arise and some which I will be tackling in my opening speech.

              The first requirement should be honest money. For twenty five years now I have found myself in dispute with the ill judged stance of the Bank of England, which has lurched from boom to bust and from boom to bust again. In the late 1980s I wrote and argued against joining the Exchange Rate Mechanism,  saying that joining would lead to boom or bust. We subsequently joined, and had both boom and bust as a result. It did huge damage to the UK economy, and plunged  the Conservative party into a 13 year political wilderness. People rightly objected to the high interest rates and the recession which ERM membership brought about.

               In the middle 200s I found myself arguing with the Conservative front bench about the wisdom of backing the so called independent Bank of England. I thought the MPC was likely to lurch from boom to bust. They did so in a way surpassing even my wildest fears, creating the conditions for the most extreme credit bubble I have ever seen followed by the worst financial crisis since 1929-32.

               Today I find myself arguing against more quantitative easing. The direct creation of money is an extreme measure for extreme conditions. If prices are falling or are in danger of falling, if there is a lot of unused capacity and if the money supply is falling there can be a case for money creation once interest rates have been depressed to near zero.

               The current situation is very different. RPI inflation is 4.6% and has been around 5% for some time. CPI inflation has been above target for most of the last five years and remains so. Much manaufacturing capacity is now back in use, following a violent shake out in 2008-9. There is evidence of inflationary increases in input costs,with many commodity prices and oil leaping up from the lows of 2008-9. Money growth has resumed.

               The public spending figures show how important control of costs, wages and prices are. In an era of low cash increases in total spending each year it is even more important to keep down inflationary increases to maximise what the money can buy. As we import around one third of what we buy keeping the pound up is crucial to avoid more imported inflation.

               The first task of the government must be to go forward to honest money. The MPC needs the Chancellor’s permission to print more. He should make it clear his permission will not be forthcoming in this climate. The UK needs to be weaned off inflationary shots of extra money.

We are lucky today to have a copy of Dame Lucy’s reply to Dr Spendlove:

Dr Roy Spendlove

Division for Miscellaneous Projects

Whitehall SW1

Dear Roy,

             Thank you for your letter. You seem to be doing excellent work to ensure full compliance with best practice and world procurement standards. I do think you are right to wish to introduce real terms adjustments into your appraisal of past apparent cost overruns on projects. I am glad to say Whitehall thinking has pressed on rapidly in the last few months in this very area.

          Firstly, you should study carefully the improved presentation we adopted for total current public spending. As you know, some outside commentators  have foolishly suggested the overall apparent cash increase of 15% or £92.5 billion a year is the significant figure over the five years. Ministers have been right to equate this to 25% cuts, taking year 5 compared to year1 and adjusting it for public sector forecast inflation and concentrating on DEL spending rather than AME spending. They were also right to exclude the ring fenced areas of Health, EU,  Overseas Aid and Pensions. Leaving in areas of spending that are going up as a result of policy decisions would clearly distort the overall figures, especially when they are large areas.  I think we may have underdone the inflation factor, but we had to allow for a possible pay freeze in years 2 and 3.  We also assume, of course, that the pay freeze relates only to rates and will still permit seniority and responsibility enhancements to avoid the bad effect on morale of an actual  cash freeze in  pay. We may also need to tweak the bonus system for presentational reasons, but keep it to reflect all the extra stress and work the cuts impose.

          Secondly, you are right that capital projects have their own extra inflationary pressures. I like your idea of linking the true price to  SDRs to get away from the weaker pound. Linking to gold might be even more helpful and realistic, given the recent performance of the gold price as a true store of value in a world of depreciating paper currencies. Ministers might like a gold base, as some outside might unfairly remember the previous government’s gold sales, but that of course is not a proper consideration for us and should not be used in emails or public  correspondence.

          I think it most important that you include the Contingency allocation in the base cost, as that was always there to allow for the very drift you are concerned about. It may also be necessary to adjust Contingencies upwards. Indeed I would ask your Division to review all Contingencies retrospectively and suggest to Ministers upgrading them all to avoid future embarrassment. I am sure no Minister in this climate would want to report a cost overrun to Parliament, and with the new transparency rules the overruns may be clearer sooner should they occur.

          I will be shortly sending out further guidance to all departments on Quangos. As you know there has been some suggestion we have too many. I do not think we should fight this notion. There is a lot to be said for assimilating more of them into Whitehall. It will give us more direct control, and will allow more flexibility over job titles and remuneration levels than we have been used to in the core service. We should willingly help implement a policy of fewer quangos whilst ensuring the much good work they do is retained. I hope improving our grip over quangos will also allow more of the honours that were kept for quango Chairmen to be available for hard working senior officials who have undertaken to do this work. It will also make it easier to justify pay comparable to private sector levels for tasks that previously were performed by quango heads. We should tell Minsiters to claim that the aim of the reform is improved accountability, which we can deliver to our own special standards through taking possession of the information.

            I think you also study the rear end loading of some of the cuts in public spending. There are some which we advised against which ended up in the 2013-15 period in the final figures. I have always found that past governments become less keen on fiscal stringency the closer an election comes. I strongly suggest that anything you need to sacrifice should be surrendered for the outer years of the five year plan. That will leave Ministers more time to come to see the advantges of what we do and how we do it in good time before any irreparable damage is done.

           I am finding that this new approach is very helpful insofar as I have much less to do recruiting more people for additional quangos. I fear you are right we will need more translators for our Overseas Aid and Trade strategy. I will see if I can spare a few people to work out a proposal for a new capital projects tender translation service to support your excellent work.

          You should also remember that the EU is our friend and longstop. There is usually a Directive or Council requirement to cover most of the things we need to do and keep. We are under a duty to report non compliance to Brussels for enforcement. You should of course warn Ministers when they are in danger of straying outside their permitted area of decision that there could be infraction proceedings. I think you should anyway check the question of tender documentation with UKREP to make sure we have not slipped up and to stress to Ministers the very real constraints we work under.

Yours

Lucy

Dame Lucy Doolittle

Director

The following correspondence has come into my hands. I am sure it is meant to be confidential, so please be careful with it. If we do not publish it, there might be more where it came from. It appears to be internal correspondence amongst senior officials in  government departments  I cannot trace .

Dame Lucy Doolittle,

Director,

Unit for co-ordinating cross cutting initiatives and partnerships

Whitehall SW1

Dear Lucy,

            I was relieved to hear your Unit has survived the reorganisations. I had feared that as its title seemed redolent of the last government you might be a casualty. I understand you successfully deployed the arguments that you will be needed for a bit to wind up old cross cutting initiatives and to supervise the reorganisations, spreading best practice. I suspect new Ministers will soon come to see how handy cross cutting is as a means of blurring responsibilities and creating a sense of joined up government. Your unit, after all, has launched a thousand press releases on its own.

                I need your assistance  for our Division of Miscellaneous Projects. So far we are OK. We have pointed out that capital spending is a necessary part of any economic growth strategy. We were greatly helped by the decision to increase transport capital spending compared with the previous government’s figures. We have been able to argue that as capital overall is not taking such a big hit it would be a false economy to wind up a Division which has so much general expertise at project management.

               However, we are getting some probing questions about past performance over cost and timing. As you will be aware, special factors in recent projects displaced the original understated  budgets and optimistic timetables. We were of course asked to bid low to ensure they passed the Treasury tests, and to set tight deadlines to meet media requirements.  I wondered if you had done any work on best practice for Ministerial submissions to adjust base costs and original timetables for more realistic figures without having to say these were errors or upward revisions? What is latest thinking on real cost bases, price escalators and raw material adjustment factors, for example? Should we introduce a devaluation of the pound factor and say the original estimate was based on sterling translated to an SDR equivalence, given how much of Special Project materials and work is imported these days? That way we could add back in the devaluation of the pound. Wasn’t it always clear that timetables did not include reaching the final tollgate on the project when it was up and running, but were internal and partial targets for norm referencing complex projects?

             We also need policy guidance on overseas procurement. We do of course comply with the full range of EU requirements, and have explained to new Ministers that these in themselves increase costs. There is, however, a trickier issue about advertising for a main contractor outside the European Area and the European Journal space as well. What do you think the new government would say if our new procurement for better value scheme which we are working on resulted in substantial procurement from Emerging Market contractors? The scheme is already 170 pages long and will entail some increase in bidding costs as we seek full compliance with global standards  in the documentation and auction process. We need to decide how many languages each tender invitation should appear in, and may need to hire some additional language speakers to complete each set of documents. It is most important not to discriminate against smaller countries with less well known languages. We will of course keep the Overseas  Aid and Trade people fully informed of progress. We do wish to support the new government’s India and China trade initiatives.

                I did think the recent senior businessman  review was most helpful. The conclusions in favour of more centralised purchase and decision taking are just what we need. I have started work on how we might co-ordinate the buying from all departments better, and am designing suitable forms and procurement requests for everything from paper clips to vehicles. I will make sure I give full weight to security issues in the light of the recent dreadful ink cartridge discoveries.

Yours

Roy

Dr Roy Spendlove

Deputy Secretary

Division for Miscellaneous Projects

Whitehall SW1

One of the promises of Conservatives in Opposition was to remove needless or burdensome regulations, to allow more people to set up and grow businesses.Such general promises are always popular, and many in business feel they do have to spend too much time and money on compliance with regulations which do not help them be safer, better or more honest.

I drew up a set of policies before the 2001 election as Shadow DTI Secretary. I did it again for Michael Howard as his Shadow Deregulation Secretary, a post created to stress the importance of the task  by giving it a seperate voice around the table. I did it again for David Cameron as part of the Economic Policy Review. Indeed, that single chapter swamped much else in the report, as the media thought it more interesting than the advice on general economic policy,  transport, education and training, energy or pensions.

Alan Duncan undertook another review as Shadow DTI Secretary in the last Parliament. He concluded with a number of proposals to set up procedures in government to cut down the burden.

The Coalition government  said  it too was committed to deregulation. It announced a Freedom Bill, which some of us thought would include deregulatory proposals to help the economy as well as measures to restore lost civil liberties. I sent the proposals from the Economic Policy Review to the Deputy Prime Minister, but have since learnt that his Bill is being transposed into a Home Office civil liberties Bill only. Meanwhile Nick Hurd is busily consulting on what could be done by way of deregulation. This week David Young has been asked to review the topic again from the perspective of small business.

You can overstudy a topic. If all are agreed  that we have too many rules and regulations, if all accept that many of these rules do not deliver what they promise or even do the opposite, the task ahead is to repeal and amend to cut the burden and improve the effectiveness where  regulation is needed.

In the Economic Policy Review we presented 33 specific areas and measures where we thought repeal and amendment could cut costs and improve effectiveness where needed. The  working party which studied the issue in more detail made 65 specific proposals for repeal, amendment and improved process.

Doubtless the government  will have good reason  not to adopt all these. However, the work was done and the list is long. It contains enough ideas that should be acceptable to a government keen on enterprise to make up its first Deregulation Bill. The sooner it does so, the better. If it wants a strong private sector led recovery it needs to make it easier for business as soon as possible. As we said at the time of the launch, deregulatory cost reductions are as good as a tax cut for business, without losing the state revenue. They may even cut the state’s costs as well.

The good news is that those proposals which required action from the Local Government Department have been pursued with alacrity. We argued for the removal of the Best Value regime, the Comprehensive Performance Assessments, regional targets and planning, and Home Information packs. They are doing this.

Ministers should not spend more time consulting business about the general question of what should we deregulate. Exisiting businesses can handle existing regulations and often see them as allies to keep others out of a market. They should move straight to proposals, and consult on those concerning the implementation.

 

             The tea party movement had to explain to the Republicans as well as to the Democrats that a government  can spend and borrow too  much, and print too much money. If you do those things to excess, far from  having a more prosperous economy and a fairer society you have an economic crisis. Greece, Iceland and Ireland have shown us variants of that.

           Now of course the Washington politicians will get to work. Both sides will claim to be co-operating, but they are divided by such a fundamentally different view of what makes a successful economy. They are split over what kind of people Americans are, and what kind of society they wish to live in.

          Tea party Congressmen and women will find it difficult to turn round both major parties, or win votes for smaller government and lower taxes given the huge inertia of traditional politics. Democrats will still want to defend their cherished programmes and fight their overseas wars. Some Republicans will be in  the long tradition of bigger Republican government.  It is good to know there will at least and at last be voices in Washignton that want less spending as well as lower taxes, something that has eluded both Bush and Obama. The bail out boys have been in charge for years and have made a mess.

 

              This week’s main economic  event will not be the US elections, but the decision of the Fed to print more dollars. In expectation of more electronic greenbacks government  borrowing rates have been driven lower, assets generally have risen a bit in price, and money has flowed strongly into the emerging market economies of the world. Today’s US quantitative easing – or the prospect of it – seems to do more to speed the growth of China, Brazil and India than it does  back home.

                Money growth is expanding a bit anyway in both the US and the UK. The banks are less distressed than a year ago. They have made some profits, paid off some debts and reduced the size of their liabilities. Both economies are still digesting the large sums printed in QEI. In the US it has not yet proved inflationary, partly because a lot of it has not been lent on to the private sector, and partly because high levels of unemployed labour and excess property and capital is keeping domestic prices down. In the UK QEI did add to the high inflation we have, as it drove the pound down further, adding to imported inflation.

             There is a case that  neither the US nor the Uk should carry on with their money printing policies. There is arguably enough high powered money around. Instead the authorities need to allow a sensible amount of it to be lent on to the private sector, to pay for the next round of infrastructure, R and D and capital investment we need. Company profits and cashflows are much stronger in both countries now, making business lending a better risk again.  

                   The authorities claim to be relaxed about the prospects for inflation. Many others are not. Many are buying inflation linked bonds on tiny or even negative real yields. Others are buying gold and commodities. Emerging market economies are keeping controls in place to prevent large inflows of money or are thinking of erecting barriers.  They have to raise interest rates to control their inflations, whilst at the same time not wanting to make it more attractive for people to deposit hot money with them.

                  Quantitative easing is  in danger of not helping the adjustments the world economy needs. It needs the west to borrow, spend and print less, and export, save and invest more. It needs to east to save and export less, and spend and import more. If the US decides to print too much it could drive the dollar lower and exacerbate the rows over currency rates with China and the other emerging markets. The US might find that even their economy in the end suffers inflationary consequences from too much money printing. That is a nice call for them to make.

                       Meanwhile,I am sure  the Uk should not be considering any more quatitative easing. We have quite enough inflation to be getting on with. Our open economy is very vulnerable to imported inflation as soon as the authorities let the pound slide. Money supply is expanding anyway. We do need more investment capital including  bank financed capital, but that is a story about regulation and bank management, not about the need to buy government bonds with created money.

                      The Uk needs a supply side revolution to power faster growth. That is not abour printing more money, but following pro enterprise policies. We will return to  these soon.