Category: Blog

Just I have feared for months – and repeated first thing this morning: the pound and government bonds have been on the slide again. Today the pound has fallen below $1.50. The price for the government to borrow for ten years is now 4.1%, compared with the 3% when the problems intensified.

That’s the market’s verdict on what is going on. It’s making us all poorer. It is a warning to the government that the deficit is too big and it will undermine our economy more if left to run out of control.

As I keep explaining to journalists who ask me what is the importance of the AAA rating, it’s all a question of how much taxpayers have to pay in interest to be able to borrow for more government spending. The UK already has a different kind of AAA rating from Germany’s – we pay more to borrow. What matters is the interest rates paid, whether or not the rating agencies have adjusted, and whether they adjust before or after the market movements. So far the markets are making up their own mind regardless of the rating agencies.

Polls come and go. They often make little difference. Yesterday’s poll showing the gap down to 2% was one of those polls that is a news maker in its own right. People interested in politics have been talking about it ever since.

Let me make it clear to all Labour spin doctors and their friends in the media that I never make predictions of the result of an election where I am involved. If I am asked “Are you going to win?” I will always answer with a variant of “We want to win, we are trying hard to win, we will win if the electorate wishes” etc. To claim you are going to win can look arrogant or complacent. To suggest you might lose would be defeatist and downright stupid. It invites the question “Why are you bothering at all?”. Until the votes are cast no-one can be sure of the outcome. Polls are usually accurate reflections of the mood of people when polled, but people may be in a different mood come polling day or even when the next poll is taken.

Standing in the queue to pay for milk and newspapers yesterday morning in a local shop one person said to another without my intervention “If they lose the Conservatives only have themselves to thank for it”. That to me summed up so much of what has gone wrong in British politics in recent years. It summed up the them and us attitude, reflecting the mood that elecitons are to decide which politicians get which jobs. There was no thought that they are to decide what happens next, what policies will be followed, what the impact of politicians on your daily lives might be. Elections are for all the voters to be involved, to have their say, to wrestle with the issues as well as the personalities. Voters end up with the government they choose, so they need to accept some responsibility.

This poll raises a few crucial questions. Will other polls back it up? Will the public, seeing it, decide that after all they do not want five more years of a Brown led government? Will potential Conservative voters come to see that this is a real contest between two groups of politicians,Labour and Conservative, rather than an abstract referendum on the present Conservative leadership and their policies? Or will Mr Brown claim that the momentum is with him, and win over floating voters to the notion that we do need five more years of what we have been getting? Can he really persaude people that the falling living standards, rising taxes and huge debts are as good as it gets?

We also need to watch the markets. The government debt market, which helps decide how much we have to pay for the money we borrow, could react negatively if they think this government can be re-elected to carry on borrowing too much. The pound may also take a further knock, which makes us worse off as imports grow dearer.

It’s time for the two main parties to unveil their messages, draft their pledge cards and tell us their “narratives” for the election. Put simply, Labour are saying their storyline is “We saw you through the recession. Don’t let the Tories spoil it”, whilst the Conservatives are saying “We are in a huge mess of Labour’s making. The Conservatives will have to clear it up”.

Labour have come up with some slogan or high level phrase I cannot quite remember about fairness and justice. As far as I am concerned it is higher fares for all with Labour’s one size doesn’t fit all economic policy. The Conservatives have come up with “We can’t go on like this. It is time for a change”, and may be launching more of their headlines today and next week.

Beneath the headlines it has become fashionable to have a pledge card, with five or six specific promises or aims on it to “flesh out” the high level messages and the “narrative”. Mr Blair started all this for his successful 1997 campaign. Most people have forgotten the specifics, but may remember there were “modest” pledges to show Labour was now a moderate and sensible party. It is ironic that Labour’s biggest and most important pledge on those cards was “set tough rules for government spending and borrowing”, followed by “get 250,000 under 25 year olds off benefit and into work”. It all goes to show that some pledge cards are just for an election and not for the life of a government. Because they won, many in politicis today think you must have such pledges.

In 2005 Michael Howard lost. He ran the longest most disciplined and researched campaign the Conservatives had ever run. It revolved around five propositions, expressed in just ten words. I remember them so well, as for six months I did nothing else as a politician than try to find ways of getting them across memorably to audiences. They were “More police, controlled immigration, school discipline, cleaner hospitals, lower taxes”. If a strong simple message and complete party discipline won elecitons, we would have walked it. If saying what people wanted to hear won it, we should have won, as these were well researched propositions that were popular. So why didn’t they work?

Each one of these five had its different problems. “More police” just led Labour to say they had appointed more police, and would appoint more. It also left some voters apprehensive. If they had just been fined for doing 45 mph on an empty dual carriageway with a 40mph speed limit where they thought 50 was a more apppropriate limit they were not amused at the thought of more police with speed guns.

Cleaner hospitals invited people to ask “How?”. All three main parties said they wanted cleaner hospitals. It was difficult persuading people that any lack of hygiene was all Labour’s fault, and that the Conservatives would clean it up.

School discipline again was common ground with all parties claiming to favour it. There needed to be a convincing phrase as to how discipline would be improved with a change of government.

Lower taxes would have been very popular. The Shadow Cabinet only agreed a package of tax cuts late in the day on the eve of the election. Then the leadership delayed its publication, and changed it, announcing the new package after the election had started. It did not leave enough time to get over the three propositions within the package or even to put them in most personal candidate leaflets.

Controlled immigration was the one which generated most controversy. Labour seized on it and tried to make it a negative. Some to this day think it was a misjudgement to spend so much effort on it, taking away from other messages. Others think it was the one which did work, showing that you have to be controversial to get heard. The leadership did not seek to weight it more, but with Labour criticism it developed a life of its own.

Polling after the election showed that voters generally had not picked up on any of the propositions, other than immigration, where a significant minority had heard and remembered the message.

What should we learn from this? Probably that the main message and the mood created by a party is more important than the pledge card, and that trying too hard to get a pledge card across is not time well spent. People want a sense of direction, an understanding of what a politicial party thinks the problems and the oppportunities are and how they will make judgements once in office. Blair’s pledge card was not remembered for its detail. It served to reinforce the message he wanted, that Labour was Tory lite and would not take risks with the economy. What a pity they did not stick to it. The Conservative 2005 pledge card was diverse and did not reinforce any central message about how a Conservative government would run the country, so it did not cut through with the voters. By all means have a pledge card, but ensure it is there to back up the main point or direction.

Today David Cameron will set out the general direction he wants us to go in. His central message will rightly be that this country is crying out for change. His specifics will support that message. His school discipline policy, for example, will show how it will be achieved. The sense of direction is what matters most. If we carry on as we are under the present government it’s a lifetime of debt and more debt for anyone staying in this country to pay the bills.

I think we need some fresh language to get over the significance of the state debt crisis to more people in the UK.

There is no state money. State borrowing is taxpayer borrowing. State debt is the taxpayers’ debt. Every time the government tell us the government will borrow more, that means you and I have to accept responsibility for more debt. Everyone concerned about the level of public indebtedness could help by calling it taxpayer debt.

Individuals know that if you run up too big a debt on your credit card or take out too big a mortgage you have to cut your spending. It’s no good saying you will simply borrow more money to pay the interest on the money you have already borrowed. That way it’s a slippery slope to bankruptcy. You can’t go on borrowing more in the hope you will win the lottery or that suddenly the government will offer you one of their super quango six figure salary jobs which would make the debt affordable. You have to be realistic about your prospects and your means.

So it is when we act together as taxpayers. Only dreaming politicians think that the Uk will one day win the lottery or be offered a big bung by the international community to keep it going. The rest of us know that everything the government borrrows and spends on our behalf is going to have to be repaid one day with interest. We will all have to work harder and longer to repay Gordon’s debts, because they are our debts.

The figures show that families and companies are reining in their spending and reducing their debts. They know they overdid the collective overdraft in the good years, and are now making the necessary adjustments. They are spending less and saving more. It is especially galling for all concerned that at the same time as the private sector is learning to live within its means, the government is busily placing us all at risk by taking on more debt than we can afford. Why did they learn nothing from the private sector debt crisis? Why do they want to do the same again with public debt?

Taxpayers soon have a chance to rise up and make their views known. All should remember there is no state money and state debt. Only taxpayers have money, and the state will want more of it.

There is considerable anger about the pay and bonuses being paid by the state owned banks, especially where they remain in loss overall. Labour say they believe in fairness and justice. Where is the justice in high pay and bonuses for senior employees in state aided concerns, when that aid has to be paid for by people with far less income than these executives?

I believe in good pay and bonuses for success. I would have no issue with bonuses accruing to good performers within state aided banks, if they were only to be paid these bonuses in cash if and when we the taxpayers have got all our money back with a profit.

The current bank defence to high pay is that most of this relates to investment banking divisions which are profitable. In that case, sell them off, so they flourish in the private sector. There they can pay what they like, as long as they do not come back to the taxpayer for any support. If these state owned banks sold their investment banking divisions it would produce a good capital receipt, which would then allow these banks to pay a special dividend to taxpayers, or return capital to taxpayers.

Whilst they are about it they should do the same with overseas banks in their groups. Why on earth did British taxpayers have to bail out investment and foreign banks in the first place, instead of lending them money short term as lender of last resort if needed and helping them find a market solution? Why do we go on owning them, when we need our money back and they are profitable?

The state aided banks are behaving like typical old nationalised industries. They get taxpayer support, they make large losses overall, and they put up their costs and pay because they do not have to take the tough action any private sector business would have to take in their loss making position. That’s why so many people are angry about what is going on.

The headline figures tell you losses have been reduced, and the investment bank has made some money. The full statement also reveals:

The bank’s balance sheet has been cut. Gross assets are down by almost £700 billion to £1522 billion. The bank wishes to make a further reduction, taking off probably around £300 billion more.

Net tangible equity, which was stated as 73.8 pence per share in December 2008, has fallen to 51.3 pence in December 2009.

Operating expenses are up from £13.5 billion to £14.954 billion.

The non core operating loss is up from £11.3 billion to £14.6 billion. The total operating loss is down slightly from £6.9 billion to £6.2 billion. Insurance claims are up. Impairment losses on both the core and non core businesses are up (that’s allowances for bad debts etc).

The new Tier One Capital ratio is up to 11% from 5.9%, so the bank is now financially much stronger thanks to the slimming of the balance sheet and the new capital injected.

The questions to ask include:

1. Why have operating expenses risen so much when the bank is being slimmed? Are the bonus arrangements really appropriate given the overall loss making nature of the bank?

2. What action is being taken to control impairment losses?

3. What action is being taken to improve the insurance divisions results?

4. If the aim is to reduce a bank with a £2.2 trillion balance sheet to a bank with around a £1.2 trillion balance sheet, what impact will that have on the value of the shares?

5. Couldn’t more of the risk reduction and balance sheet slimming be done by selling businesses from within the Group?

The government missed a big opportunity to impose controls on cash bonuses before the Group is profitable overall when it failed to make that a condition of the new capital. Surely the best way to motivate new staff being recruited, or existing staff when renegotiating contracts, is to give them incentives geared to the realisation of profits for taxpayers?

Money is still easy for the public sector. For all the talk of cuts, tight and tough public spending conditions and the need to rein in, the monetary easing has all been concentrated on providing huge sums of borrowed money for the public sector at interest rates below the rate the market would normally charge without the Bank’s interventions. For all the talk, there is no evidence yet beyond the reductions in allowable expenses for MPs and a few cuts for Higher Education that the public sector has truly got the message that it has to do more with less. Today’s announcement of “low” Council tax rises comes at the price of a further substantial increase in grant funding for Councils. Only some Councils are pressing on with business style changes to raise productivity and efficiency. Those that have done this well already have actually cut the Council tax, or managed without an increase for more than one year.

Meanwhile money is still very short and expensive for many businesses. The private sector has completely transformed its behaviour. In 2006-7 some individuals were taking out large mortgages and many businesses were taking out large loans during the last wild fling of the private sector credit boom. Today companies are repaying debts, husbanding profit and cashflow, keeping stocks low, and cancelling capital projects. Individuals are not moving home, not buying the first house, or moving up the housing ladder in anything like the numbers of three years ago. Some are paying off credit card debts and saving more. In 2006 the private sector had a small overall deficit of 0.6% of GDP. The surplus in 2009 was 10% of GDP, and is likely to be at least that again this year.

Banking regulators seem to want to perpetuate this hot and cold world. They have set regulations which mean the private sector has to keep on generating surpluses and repaying debts, to get the bank balance sheets back into the much more prudent shape the regulators belatedly want. Meanwhile the authorities say they might do some more quantitative easing if there is a threat of much dearer money for public borrowing.

This lop sided economy is not going to deliver a strong sustainable recovery. It is only a matter of time before markets impose stiff penalties on a government which is persisting in borrowing too much. The Uk needs a strong and growing private sector to get out of this mess. Curent banking policy, tax policy and the public sector deficit prevent this. All the time the public sector runs such a huge deficit, the private sector has to save more to offset it and finance it. Later on the private sector will be squeezed again by the higher taxes to pay for the excess debts. We need to change policy before it becomes a vicious circle we cannot easily break.

The Uk government now has to pay 1% (100 basis points) more than the German government to borrow ten year money. Today the Bank of England Governor said they might need to do some more quantitative easing. I guess that is an attempt to stop the rot with markets forcing rises in UK interest rates.

The pound is also around $1.54, a further erosion of value in recent weeks.

There are interesting debates going on within the main parties over how they should approach the last few weeks before a General Election. Should they try to appeal to floating voters, seeking to win over the least convinced voters from the other main party and trying to squeeze the Liberal Democrats, or should they seek to please and buttress their core supporters, to make sure they all vote? Do traditional Labour and Conservative voters mean it when they say they might vote for a fringe party that cannot win a single seat, or might stay at home if their party does not do more to please them? Would talking about their concerns make it impossible to win over the floaters needed to secure a majority?

It has always been the case that parties have tended to try to woo the floaters “in the middle” of politics, taking their natural supporters somewhat for granted. Modern pollsters and strategists are right about this. It was also the case, however, that winning parties always tried to change the salience of issues in ways which favoured them, which in part could cut against wooing the “centre ground”. When Conservatives won they usually stressed the importance of the economy, taxation, immigration, Europe, defence, issues where they traditionally had a good lead in the polls. Labour usually stressed public services, especially health and education, and support for minorities, where they often were ahead, even during periods of Conservative government. Blair’s strategy in 1997 when he won was to stress the Labour areas of public service as his main theme, whilst trying to neutralise the economy issue by promising to stick with Conservative spending plans and Conservative income tax levels. Margaret Thatcher won on turning round the economy, allied to a strong message on national security.

My sense of the current public mood is that there is no longer a large group of floating voters in the middle who can be attracted to vote for whichever of the main parties is the most “moderate”. Many more people today think abstention or fringe party voting is an option for them. Fewer think it their civic duty to vote, and fewer want directly to help make the main decision about whether to have a Labour or Conservative government, as they say they do not like either. Many more people are single issue people, strongly preoccuupied by one important matter and judging all political parties by a standard of purity on that issue that no broad coalition party capable of forming a government is likely to match.

In the past, for all the love bombing of the centre, after party cross dressing and all the polling, the approach to the economy has often been the crucial tie breaker. It has been difficult to win an election if a party is widely distrusted on the economy. This election will be, above all else, an election about the economy. I think the two main parties have no choice but to slug it out on that central raft of issues. The economy as an issue encompasses public spending and debt, inflation, taxes, returns for savers, mortgages and house prices, jobs and the business environment.

The public sense that we face a serious debt crisis. Worse still, private sector workers are well into the sharp decline in their living standards which low wage growth and high inflation are now delivering. Public service workers are about to experience the same thing, as the government starts to squeeze public sector pay. There needs to be more debate and more enlightenment for the public on when and how the deficit has to be cut, when and how inflation is brought down, when and how living standards start to rise again, when and how Uk manufacturing can be turned round, when and how our balance of payments is in surplus, when and how the public sector can deliver more for less.

Labour will argue that more borrowing and more money printing is the way to go “to see us through” recession. Conservatives will argue that you cannot have a sustainable recovery without controlling the deficit. So far the markets have been hinting at problems ahead, with a further slide in the pound against the dollar and a further rise in the cost of government borrowing. If the Conservatives are to seal the deal they need to reinforce their messages that we are in a serious mess and they can show us a way out of it. If Labour is to steal the deal they need to explain how they can avoid going the way of Ireland and Greece, and how they are going to get some balance back into a very lop sided and public sector heavy economy.

Put on your tin hats. You can expect there to be a lot of flak flying over the question of character. The anti bullying charity will be put under media pressure to produce evidence or back down. Supporters of Gordon Brown will claim he is much misunderstood. There will be lots of heat but probably not much extra light as the various sides slug it out in the studios.

To me the more important question than the question of character is the question of judgement. One person’s sterling virtue seen in a leader can be another person’s weakness or undesirable trait. A character people love one day – like the widespread appreciation of Mr Blair in 1997 – can become a very different set of feelings for many ten years later. The change of mood is often affecrted by judgements or decisions leading figures make. Mr Blair’s Iraqi war changed the way people saw him. Mr Woods, the golfer, is seen differently today than a year ago because people have learnt something more about how he lived his life.

In the case of a Prime Minister the thing that matters most to most of us is what judgements he comes to, what decisions he takes that shape our country’s destiny. The public can live with a PM who turns most normal Parliamentary questions into an invitation to try to put down political opponents, if all the main calls he is making are correct. If he gets it wrong it grates more that he does not try to answer. The public can live with a man who either keeps himself to himself, or is very open about his background and family life – if he is getting the decisions right it doesn’t matter much which of the two approaches he adopts.Inconsistency on these issues can annoy if the country is not performing well.

So the questions to ask about our current PM remain the same today as before the current story about relations in Number 10. They include

1. Why did he tax pension funds, and why are so few private sector funds now open for new members?

2. Why did he sell gold at the bottom of the market?

3. Why did he get so little improved service for all the billions he gave to public services in the last ten years?

4. Why did he allow such a huge build up of public debt before the Crunch?

5. Why did he approve the Basel bank regulations and the decisions of his new Regulator, which encouraged banks to overextend their balance sheets?

6. Why has he presided over a higher rate of inflation than target on average? Why did he change the inflation target to CPI from the commonly used RPI?

7. Why did he put so much money at risk in state supported banks, when there were cheaper options available to get us through the crisis?

8. Why has he allowed large banking bonuses to be paid by state subsidised banks?

9. Why has the balance of payments been so weak on his watch?

10. Why has manufacturing output fallen under Labour? Why has the UK economy grown so little since 1997?

11. Why did the UK economy stay in recession for longer than other major economies , and why is it so far making such a weak recovery, if all the actions the PM took were right?