Category: Blog

Throughout the long period of debate about the “cuts” prior to seeing how the extra cash amounts in the budgets for the next few years will be allocated, we have heard mainly about the defence and welfare budgets. There has been little attention paid to transport, the local government grant settlement, public sector housing, the European budget or agriculture and climate change. It is important if we are going to review all budgets fairly and sensibly to cut out waste and less desirable spending that these and other areas are not neglected.

Yesterday I wrote about the obvious scope for cutting the costs of social housing whilst delivering more and better results for those in search of a home. Today I invite readers’ views on the large subsidy programmes in place for railways. I will move on to farming and certain kinds of energy production over the next week.

The railways are mainly used by the better off. They attract very large subsidies relative to number of journeys conducted, combining this with high fares. There is some necessary price control in place given the substantial monopoly elements in their provision. Trains run with many empty seats on lots of off peak services, and run with people having to stand for long distances at popular times of day. They would seem to me to be a case where a combination of fare control and subsidy reduciton could act as a necessary stimulus to much more efficient working.

Network Rail fails to harness private capital to improve and develop its property estate rapidly and widely enough. I have tried over many years to get the owners of Wokingham Station and the surrounding land to set up a development which could transform the area, provide a new station and offer shopping and travel interchange facilities on railway land. Such a development would make them money. It is a modest scale example of missed opportunities in many places in the UK.

The train leasing and operating companies procure expensive foreign trains that are heavy and not very fuel efficient. These heavy trains cannot brake quickly and constrain use of the limited track available, leaving us with inadequate train services at peak times. The railway fails to maximise revenue when people would most like to use it, owing to capacity shortages.

The railway industry does not show much imagination in finding additional streams of revenue from its travellers and from passangers waiting for trains or using station car parks. A subsidy reduction programme might act as a stimulus to more enterprise and more efficiency. At many stations you cannot buy a morning paper or a cup of coffee, cannot have your car cleaned or serviced whilst away for the day, and cannot buy your supper on the way home at a shop on railway land. The retail offer on trains is also limited to a narrow range of eating and drinking items. Air travel offers a much wider range of additonal services to the traveller.

Twenty five years ago today Laura Ashley died.

She was in the great British tradition of designer entrepreneurs who create large businesses out of their taste, passion and drive. We need more of her like to help pull us out of recession, and to create the extra jobs our country needfs.

Josiah Wedgewood led the way with his ability to excel at innovation, design, marketing and new methods of production in his chosen industry.

You do not create them with more quangos, higher taxes or more regulations.

Yesterday I attended a meeting organised by the National Housing Federation where a number of public sector housing groups came to lobby MPs.

Their gloomy presentation was based on the usual precepts that state direction and control and more use of the state cheque book were the only possible answers to a problem. We were told that the cuts to Housing benefit, the removal of regional planning and housing targets and the level of public funding were all bad decisions which stood in the way of a good housing policy.

In the discussion which folllowed it was good to see some newly elected MPs cut through their two central propositions that all that was needed was more public cash and more central control to solve the problems. It was also good to have an old fashioned meeting about the issues with some disagreements and differing views in a Commons committee room, instead of the informal meetings with drinks or running buffets available that were so common in the Labour years. It emerged as we questioned the panel of presenters that:

1. Current new public sector housing provision costs more than it need do thanks to the rules and bureaucracy surrounding its procurement

2. There are substantial numbers of empty homes already owned by the public sector which need to be brought back into use

3. Subsidising people rather than houses makes more sense. If you subsidise houses people living in them may get better jobs and good incomes but you cannot withdraw the house subsidy.

4. There are problems with a small minority of tenants whose anti social behaviour disrupts neighbours. The Housing Association representatives complained about courts and legal enforcement standards

5. The current policy does not allow sensible incentives to be offered to people in social housing to encourage a move to smaller homes when their families have left home

6. New home building hit new lows during the easy spending Labour years, so even Labour did not in practise think they could build their way out of the problem.

I pointed out that around half of those living in rented accommodation would prefer to buy but cannot afford to do so. We need more pathways into home ownership, assisted by more shared ownership and easier purchase schemes.
The aim of housing policy should be to offer more people the choice and security which ownership brings. For all those approaching retirement it is especially important to lift the need to pay rent for the rest of their lives. The poorest of our society end up paying the most for their housing at the end of their lives when they can least afford it. We should look again at schemes like the proposals I put forward to help members of the armed services own a home whilst on Her Majesty’s service, so they have some housing equity when they leave the forces.

I know many of you think that UK house prices are still too high, thanks to the mortgage soaked credit binge that the government and Central Bank allowed or encouraged 2002-7. That is a topic we have debated often before. Today I want to concentrate on how much the government and its quangos should do, and what is best for social housing tenants.

I have only written once on the topic of the Labour leadership. At the time David M was the clear front runner. I suggested brother Ed would come from behind and overtake him. Apparently today that is now Labour’s majority view. You read it here first.

The Governor of the Bank of England today becomes a politician. We are told in advance of his audience hearing that he will offer to protect the public from the banks. That is not what I want to hear.

The Governor is the senior unelected official in economic policy. He and his institution are responsible for interest rates and the rate of inflation. He should read the cycle well, and report and defend his actions on monetary policy as required. He should also act in private as an honest and fearless adviser to the Chancellor, the senior elected official, who has overall responsibility for economic policy, and who has the power to change the Bank and its functions.

I want to hear today from the Governor answers to the following questions:

1. Why did the Bank so misread the cycle 2005-9? Why did it encourage or allow dramatic overheating, when the smell of scorching was powerful enough for outsiders to notice it? Why did the Bank then lurch to freeze the monetary and banking system, so we had many banks in trouble? Why couldn’t the bank feel the icy blast in 2007-8 which brought down Northern Rock and undermined others? Why did they ignore the strong advice some of us gave to ease money markets earlier to avoid the worst of the crash?

2. Why is inflation still at 4.7% (RPI) and 3.1% CPI when the target rate is 2% on the CPI? Why has it been persistently above target for so many months? Why have Bank of England forecasts of inflation been too optimistic?

3. How can we have confidence that the Bank is now reading the cycle better? Does the Governor think now is a good time to demand more cash, capital and caution from the banks? Could it be that the economy still needs a more generous approach to money and bank credit to help it out of the deep hole recent policy forced it into?

4. Why does the Governor think sovereign debt is a risk free asset class for banks to hold, and why do the authorities now demand that banks hold so much more sovereign debt? Could this store up trouble for the future, especially where banks buy sovereign debt in Euroland countries with poor balance sheets?

The Bank of England wrongly advised a previous Conservative government to go into the Exchange Rate Mechanism, which did damage to jobs, prosperity and enterprise. The Bank of England set wrong interest rates in the boom and in the early bust 2005-9, making the task of the last Labour government that much more difficult.

The new government trusts the Bank and is giving it large new powers. The Bank and the Bank alone now can lead and regulate the banks and the monetary system. We need a full statement from the Governor on how he and his colleagues will carry out these new responsibilities. We need to know they have learned from past errors. Grandstanding at the expense of the banks he is regulating is not a good idea.

We need to believe the Bank will this time listen to their criticis, instead of drawing on a narow group of economists who all agree they are right and end up with a slump and 5% inflation at the same time.

The public reports of strong arguments over welfare reform need some examination.

The welfare budget is different from most other government budgets for one good reason. Parts of it are “demand led” – if more people need unemployment or disability benefits they need to be paid. Other departmental budgets can be settled a year or more in advance, as you should know how many people you are going to employ and what you will pay them, and know roughly what your bill for bought in goods and services will be. So the arguments about the welfare budget are subject to the caveat that we could end up spending a lot less or a lot more , depending on demand.

In another sense it is also different. All sensible people want the welfare budget to fall sharply for the right reasons. We want more people to get jobs so they do not need unemployed benefits. We want fewer people to be in need of disability or long term sickness benefit. We would like pensioners to retire with savings and good second pensions.

So the argument about welfare reform is what magic combination of rules and spending would help get more people off welfare into work. What incentives would encourage more people to make provision for their future? Solving it requires low taxes on saving and working as well as fair but realistic benefit rules.

Both the Treasury and Work and Pensions have good points in their arguments. DWP says they need to spend to save. If, for example, they pay more by way of in work benefit to make it more worthwhile to work, we might find more people took jobs and saved the state some money overall. If they could adjust benefits so that it was always more worthwhile to work than to stay at home we might make better inroads into the 5 million plus of working age living on benefits entirely.

The Treasury replies by saying the problem with spend to save is the spend is certain and comes first. The saving may not materialise. They might prefer the Clinton approach – the way to make it more worthwhile to work is to do what Clinton did and withdraw benefits from people who can get a job so they have no choice but to take it.

In the UK we combine a progressive tax system with a progressive means tested benefit system. This results in people at the lower end of the income scale facing high combined rates of tax and benefit withdrawal. All the time we have means tested benefits there is a choice between two ways of handling the problem which are less than ideal. Either you have a few people facing very high combined tax and benefit withdrawal rates, or you have a lot of people facing quite high combined rates. If you withdraw means tested benefits quickly it means a high rate and fewer people.

This is ground for natural compromise. The Treasury can bring to the agreement proposals which toughen the regime for anyone who could get a job or is offered a job. DWP can bring proposals which make it more worthwhile for more people to work rather than staying on full benefit. The spend to save element of the package could be tightly monitored, week by week, to ensure savings do materialise. If they do not the formula shouild be amended or the system changed.

The news from Cuba, a socialist country, is bleak. A much smaller population than the UK’s has to shed 500,000 jobs in a hurry, because they have run out of money. Cuba is one of those places where state planning and a proportionately much larger public sector has kept the country poor. Now there is a day of reckoning.

If UK Trade Unionists are alarmed by forecast public sector job losses they should show their solidarity with Cuba, which has a real problem to complain about. Yesterday some UK Trade Union leaders condemned UK cuts that have not been decided, let alone announced. They studiously avoided debating how the modest cash rises each year in current public spending could be used to offer good public services, without cutting anything that matters. Partnership and productivity would be two good words to bring management and workforce around the public sector table.

Some public sector Union leaders want to use the “cuts” to trigger a massive Union campaign allied to strikes. When a public sector union goes on strike it is striking against itself and the public. Strikes usually make things worse all round. Strikes encourage people to find other ways of doing what ever the strikers used to do. Strikes usually result in more job losses, not fewer.

Whilst Union leaders and their active supporters are the main cause of strikes, some managements by their words and deeds give them help or cause. It is most important that the current government should not make it easy for the militants by using provocative or inaccurate language. Strikes this winter in public services are not a good idea for any of us.

The Unions say they will be running campaigns against 25% and 40% cuts. In a world where health spending will rise in real terms, and where I suspect education health spending will also be protected, there should be no cuts of 25% or 40% in anythign that matters. Overall, with spending rising by 15% in cash terms over 5 years, the question the government should be asking is a simnple one – can we use the extra 15% to maintain service levels and improve quality, or is all the 15% and more going to disappear in rising costs and inefficiencies?

A sensible management, armed with 15% more cash would seek to persuade the workforce that this settlement is fair, and can be accommodated without compulsory redundancies and with some pay improvements based perhaps on improved productivity. If the officials managing these services instead play political games and roll out long lists of provocative “cuts” which in the end will not be made, morale in the services will be damaged and the militants assisted.

It is a good test of senior officials to see if they have understood the mantra, “Do more for less”. The overall cash spending plans are generous in the circumstances. The endless rows about excessive or inappropriate cuts are far from helpful to anyone, causing some to worry about their jobs and others grasping the opportunity to go back to the old politics of the parade of the bleeding stumps. Surely the new politics of the Coalition can rise above this? Starting by setting out the true figures for increased current spending would help.

The agreement at Basel will require banks in due course to have safer levels of capital.

There were two main problems with the proposals. The first is requiring a sudden surge in new capital now might just delay or slow recovery, as the easiest way for banks to meet the requirements is to lend less. The Basel answer is to delay the introduction of the new demands by up to eight years.

The second is the new rules require banks to hold more government loans or sovereign debt, at a time when the quality of sovereign debt in some countries is being questioned for good reasons. Governments may like the idea of banks having to lend them money, but it only delays crisis and painful adjustment in countries that are borrowing too much. It does not solve their underlying problem.

Basel will also encourage the shift of some financial activities into non banks. Do not expect too much from Basel. It has not guranteed an end to crises! Meanwhile, watch out for another bout of Euro blues, as the numbers within the weaker countries of the Euro zone still look worrying.

Let me say something unpopular. The UK should drop the anti banker rhetoric. The sport of banker bashing may have come in handy for unpopular politicians facing their own crisis of probity, but time has moved on. Banking is a most important part of the UK economy. London and the Uk benefits from acting as host to some the world’s largest banks. They generate jobs and incomes which circulate in the UK. Banks may contain poor directors and managers who make bad mistakes. They may pay some of their people too much – rather like football and parts of the media. They may not serve us as well as we wish – like the parts of government. Nonetheless we are better off with them, warts and all, than if they left.

Some of the banks criticis take the view that they will always be around, so why not have another free hit. I would not be so sure. Change is mighty rapid in today’s world. Industry has been hollowed out to the East very quickly in recent years.There are many global centres working away to dislodge some of London’s biggest and finest. As the weight of world trade , world wealth and world activity gravitates more to the East there will be a natural pull for banks to set up their headquarters there as well. London and the UK are engaged in a fight to keep or grow what we have.

It is true that there were excesses in Investment banking in recent years. These were made possible by monetary authorities pursuing very easy money policies, and by Regulators who seemed relaxed about the excess until late in the day. The Vickers Review needs to examine how cash and capital controls could be used counter cyclically, to prevent excess when markets are doing well, and to help stave off disaster when markets are doing badly.Success in creating better regulation, sensitive to the market cycle, would be good for the future of London.

Above all the Review should see that we still have something to be proud of in the City. You do not see Germany bashing motor manufacturing, its core activity, nor France complaining about the problems the drinks industry can create. The UK has done enough self flagellation.