Category: Blog

We now know the broad shape of the public spending decisions to be unveiled this week. They are:

Health spending – up in cash and real terms
Schools spending – up in cash and probably in real terms
Contributions to the EU – substantially up thanks to loss of part of the rebate
Overseas Aid – up in cash and real terms
Benefits spending – all benefits to be increased in line with inflation
Pensions – to be increased by more under a new system which includes an earnings link
Equitable Life holders – £1.5 billion of compensation not in previous budgets
Debt interest – up substantially, as this government plans to add £450 billion to the public debt over the five years of this Parliament.
Child Benefit – to be removed from people on c. £40,000 a year and above to save £1 billion a year after 2012-13.

This morning the BBC announced that schools spending was likely to go up. You could have read that here on this website, forecast at the beginning of the public spending process. Given the increases in overall cash spending it seemed very likely that Schools would join Health as a priority area for increases.

Instead of seeing it was bound to be given the overall figures, the BBC spent the morning on the Today programme asking what extra would be cut to make room for this surprising generosity. They never once considered that several areas of spending have to go up to use up the increases in total spending that have already been announced!

As we have seen, the government’s budget reduction strategy rests on growth in the economy to increase tax revenues. The Office of Budget responsibility forecasts growth of 2.3% in 2011, 2.8% in 2012, 2.9% in 2013, 2.7% in 2014 and 2.7% in 2015. These figures are all above the trend rate of growth the Office believes the Uk can sustain, and averages 2.7%.

When we published the Conservative Economic Policy Review we stated “Our economic study concludes that real national income per head may now only grow below 2% on averAge”. Subsequently the OBR has lowered the inherited official forecast of a 2.75% trend rate to just over 2%, closer to our view.

The Treasury and OBR may be right that the Uk can grow faster than its new lower trend rate for the next four years. It needs to in order to hit the target of an extra £176 billion a year of tax revenue by 2014-15 compared to last year. Higher VAT brings in £13 billion of that. The Treasury also thinks higher CGT will bring in £0.9 billion extra, but they may be disappointed once the flurry of extra tax from earlier this year is through the system.

So what should the government also be doing to make above trend growth more likely? What can they do to raise the trend rate again?

The UK needs a new generation of entrepreneurs. It also needs to tempt the older successful entrepreneurs back into buying and building businesses. That requires four things above all else. A favourable tax regime. Banks that work well and help finance new and growing ventures. Skilled and motivated people to work in the new businesses. A favourable climate for business, including good infrastructure and sensible regulations.

The sooner the governemnt gets the higher rate of Income Tax down from 50% the sooner it wil tempt more successful entrepreneurs and more foreign busiensses into job creation. The sooner it works out exactly where the Laffer curve peaks and where revenue is maximised on capital gains tax, the sooner it will send a better message to investors. I will look again at the banks tomorrow.

I hear yesterday the site was hijacked by a pharmaceutical offer. This was reported and corrected. It has happened again today.
The site provider tells me he will try to put in a permanent answer this week-end. Rest assured the hijacker has nothing to do with me.

Amidst all the debate about whether the government has culled enough quangos, and as we await news of how much money they will save from the changes, there are some welcome developments. The government does seem to be against spending our money on creating or sustaining public bodies whose task is to lobby the government.

In a Parliamentary democracy people already pay their money to have a voice. They each have an MP who can be their voice when they wish to make a point to governemnt. They are also invited to send in their views on particular issues as they arise, by governments who open consultations, issue Green and White Papers and make themselves available to listen to view points. Many MPs in the Commons specialise in particular subjects, acting as a further national voice for particular views and interest groups. Some people, charities and national organisations speak up for groups of people, or take up the cases of those who would find it difficult to do it for themselves.

I am glad to see the back of the Regional Development Agencies confirmed. I do not wish to see the South East re-create one by the back door – there should be some real savings from the abolition. I do not mourn the end of the Youth Jutsice Board, the Audit Commission or the Agricultural Wages Boards.

I also look forward to some of the mergers. Not only should they produce savings, but they should also function better. Merging the Office of Fair Trading with the Competition Commission should mean quicker results from enquiries, and the ending of what amounts to two enquiries on the same issue each time.

Today the government is announcing one of its spending increases – £7 billion extra over four years for education. I expect when we see the total schools’ budgets we will see they will avoid cuts this Parliament.

We should also expect to see increases in the Health budget, as promised. The pensions budget will rise more quickly than before, now pensions are linked to wages not just prices. Maybe overall the whole welfare budget will rise as benefits go up with prices. The debt interest budget will of course rise as the country carries on borrowing more and more. This week we learnt that the EU budget is planned to rise by 5.5% unless the UK government can get that changed. The Overseas aid budget will increase.

Other commentators are coming round to my view that total current spending will rise every year this Parliament in cash terms, and may rise in real terms if the Bank gets inflation under control as it is obliged to do. As the largest programmes of Welfare, Health and Education are seeing increases it is not surprising that overall there will be an increase.

The latest work by the CPS pursues this theme. They add capital spending in to the totals, which does reduce the growth rate as capital spending is being cut quite heavily.

Today I read that the Adam Smith Institute has come up with £90 billion of possible asset sales for the government. A bigger asset sales programme would be a good idea. The receipts would reduce the amount the government had to borrow, and therefore reduce the rate of increase in the amount spent on debt interest. It would also be a good idea to get the taxpayer out of the risky business of banking, and get our money back from past taxpayer support operations.

Three things slow down moderation for any contribution.

1. Adding a link to a site I do not know.

Quite often the link does not work on my computer , so it takes time to find it and see what it says, or I may not be able to track it down. Whilst I cannot accept responsibility for other sites, I do not wish to advertise any site which may be putting out unsuitable material. Nor do I wish to put up something other readers cannot track down either. It is helpful to readers of this site to summarise briefly the point you have learnt from another site. If you are putting in Bank of England/government/leading newspaper reference as a source that’s fine.

2. Making personal remarks about people or institutions, or types of people.

These may be funny or appropriate, but they can also cause lots of trouble if the person or institution concerned objects and has not been shown the criticism first.

3. Going on at great length – if I am busy I just post the short ones to keep it ticking over. I do value thoughtful longer ones and get round to them as soon as I can.

Yesterday afternoon and evening Conservative MPs massed in the Commons to complain that at a time when all the talk is of cuts the EU budget marches onwards and upwards. Most Labour MPs had gone home or found other things to do. Their Spokeswoman was unable to tell us whether Labour MEPs would seek to vote the generous budget down or not in the European Parliament where we could do with their help.

It was an impressive display. No MP rose to support the European budget. The overwhelming sense of the session was that Conservative MPs want cuts in the EU budget. MPs understand that this budget proceeds by a combination of European Parliament votes and Council of Ministers votes, and knows that means the Uk needs to find allies to cut the budget.

To strengthen the negotiating Ministers hand 42 of us voted for an amendment asking for cuts, and all others who spoke said the same thing. Many others abstained or voted against the amendment under protest. Surely other EU countries can see the point. If France is making cuts that already have caused riots on the streets, if Greece, Portugal, Ireland and Spain are cutting items that are valued by their electorates, why won’t they agree with the UK that there are much easier cuts to be had in the European budget?

It’s a sobering thought that all 143 billion euros of next year’s EU budget will have to be borrowed by the member states who pay for it. Why on earth do they want to do that?

It’s also infuriating that the increase in the UK’s contributions thanks to Blair’s surrender of part of our rebate willl be twice the level of savings from the Child Benefit cut.

We need a change of approach to the banks, tax rates on savings and earning which optimise revenues, a different approach to managing and explaining public spending, and a more upbeat message from the government.

Today I wish to concentrate on what fascinates and preoccupies modern politicians the most – the message. The Coaliton government was right to get over the point that the UK’s debt is too large and growing too fast. They were right to stress the need for more rapid and purposeful attempts to cut the deficit, the rate of debt increase. They have brought long term government borrowing rates down, which is good news.

That is now achieved. The UK does not today stand on the brink of a Greek crisis, as markets are currently persuaded that the government will bring their finances back under control and the deficit will be financed without too much strain.

Today the challenge is to reassure savers, investors, companies and job creators that the economy will grow sufficiently to make new investment and job creation worthwhile. The task to is to show that the UK is truly open for business. That means welcoming expansion of banks and business consultancies as well as steel works and car plants. It means countering the idea that public spending is about to be slashed by 25% when the figures show otherwise.

This morning I heard some new forecast that 500,000 jobs will be lost in the private sector as well as 500,000 in the public sector as a result of the “cuts”. There was no counter to this, no explanation that in any healthy growing economy jobs are lost as well as gained, no-one asking how many new jobs would be created on the other side of the account. There was no-one saying that even this forecast did not imply 1 million people were about to be made redundant.

The government’s strategy depends crucially on growth. Their deficit reduction rests on the assumption that tax revenue will be £176 billion a year higher in 2014-15 than it was last year. For that to come true the government needs to send a positive message to enterprise that the public spending controls will be introduced and exercised sensibly, and that job creation and risk taking will be rewarded, not taxed away.

The public debate in recent weeks has been all about how to cut fair shares of a cake which is too small. We need to spend more time helping bake a bigger cake, and less time squabbling over the crumbs of the old one.

Yesterday a couple of Thames Valley public services came to Westminster to tell MPs about the state of their finances and the issues facing their services. Naturally both were apprehensive about possible cuts, and neither are yet well informed about the future they face. Local MPs are keen to help, as none of us wish to see cuts to valued local services.

One of the services told us their financial position had not been helped by experiencing increases of just 0.5% in each of the last two years. I asked if this was a real increase, after allowing for price increases, or a cash increase. They hesitated and then said it was a cash increase. It seemed very mean, and surprising given the large increases in public spending generally over the last two years.

When I got back to my office I looked at their wesbite. It contained some annual spending figures.These showed that this service had spent 5.1% more in 2009-10 than in the previous year, and planned to spend an additonal 2.7% this year, taking the two year cash increase to 8%.

The second service said it had experienced 14% cuts this year, but I could not find any figures that illuminated this on the relevant website.

I am not going to name the services, as I wish to help them. Their imprecision over past budgets I think tells us something about the style of public sector management allowed or fostered by the last government and the way the debate has been conducted in recent years over public spending. There is much confusion over whether budgets are being talked about in terms of cash or so called real terms. Different bases are adopted for real terms budgets. Some simply add on an amount needed to match the CPI or RPI, others have their own inflation indices which may be higher than stated national inflation.

I am trying to get more of my colleagues to look at actual figures, and to concentrate on how much cash each service has. It is difficult to make fair comparison and judgements between services, or to understand how much service they should be able to deliver, if different services use different price and year bases for their figures. Next year the government plans for the public sector to spend £651 billion on current service expenditure ( up £50 billion on the last Labour year)- surely we can get something worth having for that?

I have been asked by a contributor to the site to tell you about the state of the local police budget. The two services yesterday did not include the police. From their website the police budget was £418 million in 2008-9, combining revenue and captial spending, £433 million in 2009-10, and planned at £451 million this year. The cash increases are below RPI inflation.

My answer to those who ask should the UK enter another phase of money printing or quantitative easing is a simple “No”.

The £200 billion of the last government’s programme is still in the system. It has caused some inflation, by helping drive the pound down against other currencies. This has led to dearer imports and some dometic price rises. It will lead to more inflation, if the monetary transmission mechanism of the commercial banks is repaired sufficiently.

So far most of the created money has stayed in the public sector. It has not been used by commercial banks to gear up their balance sheets, lending more out to the private sector on the back of the newly created money. They have effectively been forced to buy government debt with it. They have £150 billion deposited with the Bank of England. If the authorities get round to allowing the commercial banks to expand their balance sheets again, the large amounts of narrow or high powered money released into the system would permit a rapid build up of lending and rekindle inflationary pressures domestically.

To date the government has decided to tax the size of a bank’s balance sheet, whilst the banking Regulator has been demanding higher levels of cash and capital.These interventions limit the ability of the banks to multiply the new money through the system. If the authorities want a stronger recovery they will have to allow the banks to lend more. If they do this they need to be careful about the amount of extra money they have created, and stand ready to withdraw some of it as soon as things start to heat up too quickly.