Category: Blog

Last night in the Commons the new government brought forward proposals to create a better and stronger Parliament.

There will be a September sitting, so the government does not go from July to October without Parliament to ask awkward questions. The Commons will have a backbench Business Committee with time to allocate as we see fit, which amounts to the equivalent of around one sitting day a week. In due course there will be a House Business committee, to co-ordinate backbench time and debates chosen by backbenchers with government time and debates.

The last Parliament did not meet often enough, and too much of its agenda was chosen for it by the government and supported by use of the Labour majority. This Parliament will meet more and have more freedom to debate the things that matter most to the country and the issues that the government may find inconvenient to discuss. The last government introduced “topical” debates on a Thursday which were often just the spin theme of the week for the PM. These debates often proved unpopular even with the majority that sustained them, and increased the House’s frustration at the inability to choose subjects that the vocal and often substantial minority wanted to debate.

The Office for Budget Responsibility produced a new and much lower forecast for growth. Out has gone the old government’s heady and unrealistic trend rate of growth of 2.75%. In has come the new age of austerity 2.1% long term rate. The OBR does think the next three years will see a trend of 2.25% growth, with it falling off after that. That means they are not expecting much of a recovery from the big slump of 2008-9. They clearly do not believe the Bank of England’s view that there is loads of spare capacity just waiting for orders for the economy to take off. They have come closer to my view that the trend rate of growth is now below 2%, compared to the post war average of 2.5%.

The OBR also said that the structural or underlying budget deficit is higher than Labour said. They did, however, lower the total deficit forecast for each of the next four years. This change depended on two moves to less caution in the figures. They have firstly decided more VAT will be collected as a proportion of the amounts owing than in recent past experience, and they chose to use the middle of their growth forecast rather than the bottom of the range used in the previous deficit estimate. They also believe that the sharp drop in the budget deficit compared with forecast in the last three months of 2009-10 came mainly from a sustainable increase in Income Tax receipts. They dismiss the idea that most or all of the increase was a one off from people and companies bringing forward income and bonuses ahead of the higher rate of tax for 2010-11. I wonder if they are right.

They do not produce a full and true balance sheet. They do point out there are £770 billion of unfunded public sector pension liabilities on out of date 2008 figures. The true position must be well in excess of £1 trillion by now. They come up with quite low figures for the off balance sheet liabilities through PFI and PPP, and duck giving a true view of the banking liabilities.

On spending, they reveal that on unchanged policies net pension payments surge from £4 billion in 2010-11 to £9.4 billion in 2014-15. EU net contributions rocket from £3.1 billion in 2008-9 to £10.3 billion by 2014-15, the price of Mr Blair’s bad negotiating. Social security goes up from £169.3 billion in 2010-11 to £192.1 billion by 2014-15, and debt interest from £42.1 billion in 2010-11 to £67.2 billion in 2014-15. These are some of the figures the new government has to seek to curb and control.

We now know what Labour thought the answer was to this problem. Over the thirteen years of left of centre government the maximum tax take was in 2007-8, when taxes took 36.4% of all our incomes or GDP. This compared with the Conservative high of 38.2% in 1982-3 when the then Conservative government was tackling the large inherited debt from the previous Labour government, and with the 31.8% low the Conservatives got it down to at a later date. Labour inherited 34% and always charged more than that in their thirteen years.

This is why the new government is right to say we have to cut spending. Spending is running near to 50% of GDP. It needs to be realistic in relation to possible tax levels which are more than 10% of GDP lower. Why should we think suddenly the UK economy can sustain taxes of more than 40% of GDP when no previous government in the last 40 years has thought that possible? Who would stay to pay them? Who would carry on working hard and risking and investing more in such a climate? It’s a very competitive world economy, and our main economic competitors already have income taxes and capital taxes well below ours.

The result of Mr Budd’s likely revisions to our forecasts today will be to raise the deficit by lowering the forecasts of future tax revenue from slower growth. If slow growth is our problem – as I believe it is – the correct response is to cut the tax rates on saving, investing, working and creating jobs, not to increase them. Just as the England football team needs strikers to score more goals as well as a goalkeeper to make more saves, so the UK economy needs a bigger tax base as well as less public spending. We need better Treasury control of the spending, and a better private sector performance to bring the money in.

Alan Budd’s job at the Office of Budget Responsibility is to inject realism into the inherited forecasts from Mr Darling’s Treasury.

He inherits some racy forecasts for economic growth. The last government thought the UK economy would sprint to growth of 3-3.5% next year, and stay above 3% for the following two years. The average of independent forecasters think 2.1% is likely in 2011, followed by 2.4% in 2012 and 2.7% in 2013.

There’s a difference in the impact on the government deficit. If the economy grows by 1% more next year that will generate around £6 billion of extra tax revenue, and save maybe £1.5 billion of unemployment and other costs. If the following year the economy grows by another extra 1% roughly the same favourable improvements occurs, taking the cumulative total to £15 billion. Go on like that for long and you will be talking serious money.

Turn it round, and it means that the new government may have to say the prospective deficit in 2011 will be several billions higher, and the 2012 one worse still compared with the current forecast.

When I wrote the Economic Policy Review I commissioned a paper which looked at the long term growth rate of the UK economy. Labour had recently hiked it to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away. It is true there is a big downturn to recover from, but it seems very unlikely that the long term rate of growth is anything like 2.75%, which in turn makes it unlikely we can enjoy three years of growth above 3%.
The only thing that could change that is aggressively to set out to make the UK the best place for jobs and business in the developed world by following pro enterprise tax and regulatory policies.

Yesterday I was asked to speak to a ruling group of Councillors – not in Wokingham. They wanted my advice on how to cut their budget more.

I asked if they had imposed a staff freeze to take advantage of natural wastage. They said they had, but then confessed that in the case of the last four posts that had become empty they had allowed the officers to fill from outside recruitment. They need to say “No” to any such requests. If the post is essential, recruit from within.

I asked if they had closed off the temporary staff and consultancy routes that some Council officers to use to thwart staff number controls. They were hazy about that. They need to terminate temp and consultancy contracts wherever possible.

I asked if they had forced a de-stock on supplies. They had not. They should impose immediate restrictions on ordering and purchasing, until they are satisfied stocks have been brought down and cash freed.

They confirmed that their staff turnover is still running at 5.7% leaving every year, so it gives plenty of scope to cut costs and improve exisiting staff members prospects of promotion.

I was pleased to learn this morning that at the MOD new officials are being brought in as bosses with the remit of controlling defence procurement costs. There are cuts I want to see in the defence budget. The sooner we get out of Afghanistan the better. We cannot afford a war in our current financial plight. We could also bring the army home from Germany. The army is overstetched, so why not leave continental European defence to the European continentals. We need to concentrate on home islands defence, maritime and expeditionary. If we withdraw from Afghanistan and from Germany we could run with a smaller army for a bit by recrutiing fewer new people whilst we rebuild our financial strength.

I have been sifting through CVs and application letters. Many of the applicants have come from the 20 something generation. Many of these young people have never held a full time job paying a sensible rate of pay. They have moved from temporary post to Job experience, from volunteer to Intern. They have found the job market of the last couple of years hostile. It is one of the tragedies of the Credit Crunch and the boom bust policies of the last decade that many of them are now languishing without a sound start to their working careers.

Many of the ones I have been reading about have degrees. They send in CVs which start with similar paragraphs that they have been taught to write. They usually claim to be excellent at team working, brilliant communicators,and to offer good leadership. They are all highly motivated, enthusiastic, pro-active with strong organisational and problem solving skills. The rest of the CV sometimes belies the standard phrases of the opening. Some are unable to write a sentence. There are usually spelling and typing errors – understandable in the rush of everyday communication but glaring in a considered and formal document like a CV. One example produced the following second sentence to the application: ” I fill the experience I have gained in past employment will put me in good persian for this role” . Often through no fault of their own a person who sounds as if they should at the very least be a senior executive has never held a more senior position than that of Intern or helper in the local cafe.

Probably because they send out so many applications, many fail to adapt their CV and application email to the post concerned. They do not think themselves into the job. They are usually still living at home with their parents, and will have trouble finding affordable accommodation for jobs in central London. Too many rejections can make them both fatalistic and very willing to adjust to what the potential employer wants. A few years ago anyone seeking work with an MP wanted to be the researcher/speech writer/Chief of Staff. Now more understand that dealing with the follow up to case work, pursuing the dialogue of the deaf with quangoland and helping with the endless demands of the new regulatory culture can be more useful for the MP who knows his own mind.

The current jobs market is not healthy. The way young people are trained to present themselves does not always help them. Too many of them present the tutor’s package, rather than telling prospective employers who they are, what they are good at and what they want to do.

The last government’s recipe for recovery was wrong. It combined excess public spending and borrowing with monetary tightness for everyone else.

The new government needs to change this formula – we need better controlled public borrowing combined with easier money to allow a private sector recovery. The latest money supply figures show money is still too tight. Business surveys show too many firms still cannot get credit, and those who can are paying more than 5% for the money they do borrow.

We need to change bank regulation and monetary policy urgently. The government has started to move on excessive puiblic borrowing. It also needs to move on the feeble private sector recovery, which is the result of current money policies.

Dear America,

I am writing to say how much all of us in the UK are grieving for the damage being done to livelihoods, wildlife and the environment by the oil spill in the Gulf. We understand your anger, fear and sense of helplessness as the oil gushes into the ocean and nears your shores. Rest assured none of us here in the Uk wanted this and all wish strongly that the companies concerned can soon cap the well fully and start to restore normal conditions. None of this is the result of actions or inactions by the British people or government. The spill resulted from activity by global and US companies in the Gulf under supervision and regulation by the US authorities.

I understand your President keeps referring to British Petroleum, as if the Uk was seeking some kind of macabre revenge for the long ago War of Independence which you won rightly and magificently. We share no such feeling. Let me explain. The company concerned is BP. It is a global multinational, with more of its employees and assets in the USA than in the UK. It has global shareholders, with as much of its stock owned by American individuals and Pension funds as owned by British interests. Many of its Directors and senior managers are American. One of its principal forerunners was British Petroleum, but it has changed and grown out of all recognition since those days. It has been a large operator in the USA for many years and has been a pioneer of oil exploration in new and hostile territories to seek to meet US demand for petroleum products. In the Gulf it was using an American drilling company and American service companies to seek oil in very deep water.

I am sure BP is doing all it can to stop the flow and clean up the mess. It needs to do so for your sake and for its own sake, as its own profits and prospects will be much improved as soon as it has succeeded in closing down the well and then in cleaning up the spill. I am sure it is fully motivated to do so. It will not take more hostile action by US government to get it to achieve this. The US government should remember that if it moves unfairly against BP shareholders it is moving unfairly against many US holders as well as against foreign holders. US shareholders will be no keener on losing their dividends than overseas holders.

There does need to be a proper investigation into what went wrong and then decisions can be made about what actions companies and the regulators should take to make such a disaster less likely in the future. Before we know what each of the relevant companies did and who was responsible for what error or misjudgement, it would be unwise to rush to take action against any of the participants in this tragedy. BP itself has not sought to avoid responsibility, nor should it. BP was,not, however, alone in this bad accident.

Like you I just want to see the oil flow controlled and the final clean up begin. Before that is dealt with the rest is just words, or actions that could make it more difficult.

Yours sincerely

John Redwood

I have been told by journalists that the IFS are putting it about that taper relief for CGT is not a good idea. Mr Chote, their Director, wrote an article in the Sunday Times backing the “Liberal/Lawson” view against taper relief. The IFS is a registered charity employing 46 staff (in 2008 – the last date for which they have published accounts) in receipt of a substantial grant from the Economic and Social Policy Research Council and with a membership, conference and publications income. They say their aim is to offer “objectivity and impartiality” in their approach to economic and tax issues, and to avoid party political argument. So let’s look objectively at the evidence they present on this sensitive political issue.

Mr Chote helpfully published the government figures for CGT receipts from 1978-9 to the present day. These figures are most revealing. They show that CGT was raising more than £4 billion prior to Nigel Lawson’s introduction of the 40% rate and bringing it into line with Income Tax. The year of the introduction saw a surge in revenues, followed by a long slump (1991-8) when revenues fell back below £3 billion and stayed there until 1998-9 when Gordon Brown introduced taper relief. Revenues rose back over £4 billion in 2000-1, only to be interrupted by the market crash of the early noughties.

His chart usefully shows that over the last 30 years in the UK CGT revenues have been at their lowest under the 40% regime and at their highest under the 18% regime. It shows that taper relief helped increase the revenue and income tax alignment helped depress the revenue.

Perhaps Mr Chote would like to recognise that my proposal of 40% CGT for one year gains, 30% for 2 year gains, 20% for 3 year gains and 10% for 4 year plus gains would be fairer and offer higher revenue than 40% on all gains. It would also meet the stated intentions of the Coalition agreement.

Yesterday I was invited to talk to a seminar of public sector executives and some Public Affairs executives of larger companies about the change in the relationship between the individual and the state they could expect from the new government.

I said the word that unites Lib Dems and Conservatives is liberty. We want to give voters back more of their freedoms, and start to demolish the surveillance society, the authoritarian state, the bossy Whitehall knows best inheritance from Labour.

I said they should not feel threatened by this, but liberated themseleves. After years of top down decisions and directions, the public sector would be asked to change and improve through the inititiative and enterprise of its own local leaders. Some might want to set up companies, not for profits, charities or social enterprises to do what the state currently does, only cheaper and better. Some may see ways to do what the state currently does that raise quality and cut costs. It would be difficult to do so little for so much as we do at present. Bright and energetic public sector executives should welcome the coming staff freezes, as that offers them accelerated promotion. Good leaders should see that now their wish to transform and improve their service will be welcomed.

One good example of new thinking is the approach to waste management and recycling. Out go top down targets, bin surveillance, lectures, rules and fines. In will come consumer promotion and reward schemes. The Tesco model works, the dreary hectoring government model does not. If government wants to encourage more recycling, then make it worth people’s while. Then the word will spread and attitudes will change, so recycling becomes natural and a good thing to do. We changed from leaded petrol to unleaded with a tax cut on unleaded – it made it relatively fast and painless.

Today Mr Willetts is raising the issue of how we can have more and better Higher Education without a bigger bill for taxpayers. The issue of how many places to offer in HE is simply resolved.Universities should offer places to all who can reach a suitable standard at A level to mean they can get something out of a University course. Students need to show basic skills, levels of achievement in higher study and an aptitude for self motivated study to do well at university.

The issue of keeping cost down can be tackled in no small measure by looking at the issue of where you go to university. Most people in England live near to a university. They could go to the local one, and save all the rent costs of living away from home. They may also enjoy free or subsidised food by continuing to live at home. If cost is the obstacle to attendance, then keep the living costs down.

Some will want to go to a more distant univeristy because the far away one offers a higher quality course or is a more prestigious institution. Some may wish to go to a far away university because they want to live away from home. For the first category we need to encourage and support more bursary and scholarship schemes for students from lower income families. Higher income families will often support their children to leave home anyway. For the second category that is a life choice which may require and be worth a higher student loan.