Category: Blog

                Top rates of Income Tax:

United Arab Emirates        0%

Hong Kong                            15%

Singapore                              20%

USA                                          35%

Switzerland                           40% (including  cantonal tax)

Germany                                41%

UK                                             50%  (plus extra NI)

            The government’s big idea is localism. It is said to underlie their approach to planning, to education, to health and to local government. Properly done it can save us money by abolishing government at the centre. If implemented it would mean that the whole country is not cursed with the same centrally imposed mistakes. It still leaves scope for local mistakes. That should make Council elections more interesting and more worthwhile.

             Shadow Ministers usually believe in more localism. Ministers often end up taking more central powers. Ministers  have in  past governments  grown frustrated with the response of Councils, standing in the way of their wider vision. The public usually says it likes the idea of localism, but then puts up a barrage of complaints to Ministers and MPs if their area has less than the next or  makes mistakes the neighbours do not experience.To many localism in  health is a good idea. The postcode lottery over service standards which results is a bad idea.

            When we argued about these matters in opposition Shadow Ministers assured us they understood and would not intervene in local matters, even where they thought they were going wrong. Intellectually they grasped it. If government trusts local Councils and other public bodies to make decisions, it has to stand back if they do it badly. Local communities have to be told their redress is to sack the local accountable officials, not seek Ministerial interference.

             In practice this is all proving difficult for Ministers. In the case of planning many are worried that the planning policy is too pro developers and does not offer sufficient protection for greenfields. The official response says that the government is abolishing central targets demanding more building. Councils can settle these matters, and protect what they wish in their local plans. Fine. Why then did Inspectors overturn a local decision in my area recently, as the Council has a local plan and the local decision both reflected it and was popular with the public? If localism is to work Inspectors have to back off in such cases.

           In education there is little sign of localism working. A group in my area proposed a free school. They, and Councillors, asked me for details of how the scheme would work. The Education department  was unable to answer their sensible questions. However, the scheme was clearly centrally driven and required considerable paperwork to be submitted to the Secretary of State who takes the decision about whether to let this school go ahead or not.

             The local authority decided to review the catchment area of a popular school. After a long and difficult consultation process with plenty of opinions being expressed they came to a final decision. The Secretary of State then decided to overturn their decision when reviewing it, without himself coming to see the situation on the ground or even consulting the local Council Leader. If a Council cannot even decide school catchments, what can they decide?

              Localism requires revolution in Whitehall. It will only be delivered if the bureacratic armies currently overseeing and interfering are stood down and if vast swathes of regulation are cut down. If the government does not wish to do this, then it should tell us, and set out its central vision. Then we could turn our attention to cutting back the local bureaucracies instead.

            The US Treasury Secretary is joining the EU Finance Ministers to tell them to sort out their ramshackle currency. He has bought his place at the table, by pledging Fed money to European banks in trouble. The dollar fix deals for the moment with the dollar liquidity problem. It does not resolve the sovereign and banking solvency problems in the weaker cases.

          I see the UK also has dollars to offer. I trust the Chancellor, having bought his place at the table today, will demand something for the UK in return. Getting us out of all the arrangements for economic and financial governance would be a good start, but I doubt this will be raised.

                 On Wednesday the BBC asked me their usual economic questions. Have the cuts been too deep and too fast? Are the cuts now leading to slowdown in  the economy?

                It is quite difficult dealing with this. People who presume to comment and question on their favourite subject of public spending should at least read the numbers and try to understand the facts. I explained yet again, patiently, that current public spending was boosted by  £37 billion in the first year of the Coalition government, and is going up again this year. In perfect neo-Keynsian or Labour mode, every penny of this additional spending will be borrowed. Even allowing for inflation, the first year saw a real increase in current spending. So should the second year, if the government imposes the pay freeze it is talking about.

              I do not dispute the economic slowdown. That is very clear from the numbers. The question the BBC should be asking, is why has there been such a slowdown when the government  has boosted spending, and is borrowing so much? The BBC interviewer politely implied I was talking nonsense about the figures, when he clearly had not read them himself. He could not handle the facts nor see they required a different question.

                 It is interesting to see how such a large fiscal stimulus achieves the opposite of what is planned. Last year the state borrowed an additional  10% of GDP for its own spending. This year very high levels of borrowing are continuing. The Chancellor’s second budget promised a larger fiscal stimulus than his first. Despite this – or because of it – growth has slowed right down.

                The reasons are simple to grasp. Every pound the state borrows to spend has to be taken from the private sector who lends it.The private sector can no longer spend that same pound.

                The private sector sees that the state cannot go on borrowing so massively for ever. Companies and individuals learn to expect tax increases to pay for the extra spending in the future. That damages confidence and puts them off spending and investing.

                    The extra spending has been  used in part by the state sector to fuel inflation. As public sector costs and wages  rise, so there is a further twist to the high inflation the UK suffers from. This helps cut private sector living standards and reduces discretionary money to spend.

                     So the fiscal stimulus, huge as it is, fails to deliver faster growth. It can become self defeating. The right response is not to increase the fiscal stimulus. If something does not work the first time, there is no reason to suppose it will work the second time if you do more of it.

                      The government are right to say they need to get the deficit down. They need to do much more  by increasing public sector efficiency and value for money. They also need to cut out quickly those parts of the public programmes that are less desirable or less essential.

                 The strategy always rested on private sector led growth. They need more of this, as we have been discussing in recent blogs. There was a large fall in public sector employment in the recent figures, but the state sector still employs more than 6 million people. The government needs to use natural wastage to cut numbers more. If the pay freeze disguises further pay rises, then fewer people can be afforded in the public sector.

                The Euro story is degenerating into farce. This week we were told the future of Greek debt and the wider European banking system was hanging by the thread of a phone call between the French, German and  Greek governments. Markets waited for these people to miraculously solve the problems of the Greek deficit, Italian borrowing, French banks and all the other issues that the Euro scheme has created.

                They were never going to do so. They could have found the answers to these problems at any point in the last decade if they had wanted to. Instead, in good times and bad, they chose to ignore the dangers and avoided  making decisions. They ducked the question of how they could stop countries free riding on the common currency and interest rate. They failed to discipline countries borrowing too much. They did not want to make the large cash transfers around the union in the way that is usual if you have a single currency. They did not even sort out what range of powers their Central Bank has, with German resignations over the policy of buying up bonds. Now they are torn over how many Euros to print, and how much money to tip into their damaged banks.

              The gap between what is needed for a successful single currency and what is offered is huge. The markets do not believe the EU political leaders. The people in the affected countries increasingly dislike the scheme. The weak countries are fed up with the austerity it delivers. The strong countries are fed up with the tax bills they will receive to pay for it. The Euro lacks economic credibilty and lacks democratic authority. It would be best to break it up before it does more damage.

            The phone call described the world as the leaders wish it to be – Greece in the Euro, Greece meeting all her obligations,  and the markets believing all is now right. Somoehow it does not feel like that. We still do not know how many sovereign bonds  the European Central Bank will be allowed to buy. We do not know how they will pay for all those bonds. We do not know how many new Euros they will be allowed to print. We do not know why the EU is demanding Eurobonds when Germany rules them out., We do not know how they intend to strengthen their commercial banks. We do not know how long it will take to implement all the July measures.

              In short, the single currency remains an orphan. There is no united single sovereign to love and protect it. There is no-one with enough power to make all the important decisions. The German government is at war with itself. Germany is in disagreement with other countries in the zone. The Commission is in disagreement with Germany.

          I have set out my big idea – a competitive banking industry with money available to lend for business growth, for individuals to buy homes, and for infrastructure projects paid for by the private sector.  It has had on the whole a positive response here. It could make say  a 5% or £75 billion difference to output by Year 4.

           The government is looking at several ideas, according to the press. They do see that lower taxes might make a difference. However, they feel boxed in, both by the size of the deficit, and by the worries of some Liberal Democrats who like high taxes. The 50% rate may not be cut soon, and the report from the Treasury on whether it loses revenue or not may be inconclusive.

           They might decide to invent an entrepreneur’s relief for new business start ups, perhaps with a limited life. One of the stumbling blocks the Treasury will see  is how to stop people transferring existing business into new companies to take advantage. It might just be CGT, or it could also include an Income Tax break.

           They could extend the number of Enterprise Zones, and increase the area covered. They could offer bigger concessions within each Enterprise Zone.

           They might consider switching some revenue expenditure into capital expenditure. If they could economise more on day to day running costs, they could free some spending for larger projects which might help stimulate UK competitiveness.

            They will probably look again at their deregulation programme, and consider introducing more items. Deregulation is the tax cut that does not cost the Treasury money, as it cuts the costs of doing business.

               Whilst all these improvements would be welcome, and would make a modest difference, all of these taken together are  not going to make much difference to the UK growth rate.

                It is possible the Bank will embark in due course on another round of quantitative easing. I have expressed some misgivings about this in a previous blog, which have mirrored the concerns of many readers.

                  Tax cuts across the board on income and enterprise would make more of a difference. A larger deregulatory programme would help. Giving to the whole country some of  the advantages that Enterprise Zones enjoy would speed it up a bit.

                     I fear UK policy making is stuck in a mode which does not come up with ideas large enough to shift the big economic problems the government has inherited.

           More than 100 Conservative MPs attended the meeting yesterday. There seemed to be general agreement that we need a new and different relationship with the  single currency area/country emerging on the continent. Expect to see and hear  more from this group led by George Eustice.

            The Budget book of June 2010 said UK GDP would rise from £1.4 trillion in 2009-10 to £1.8 trillion in 2014-15.  This includes 13% real growth, plus some inflation.

             Taxes would increase from £480 billion to £ 656 billion.

             Let’s leave out the inflation  and just concentrate on the real growth. If instead of 13% we have 10%, a medium growth result,  GDP would be around £50 billion lower in 2014-15 than planned. Tax revenues would be at least £20 bilion lower.

              Let us assume a slow growth result. If the UK economy now has a trend rate of say 1.4%( as we advised before and after the election in the Conservative economic policy review) that only yields 7.2% growth over five years. This would mean around £100 billion lower GDP by 2014-15 and around £40 billion less in tax revenues.

           It would be wise to run the UK public sector on the assumption that growth has been impaired by the excesses of the 2004-7 period and by the broken banking system. It is easy to spend more if you are too pessimistic, but much more difficult to spend less if you are too optimstic.

             The government is now looking at ways of accelerating growth. Tomorrow I will look at their list for consideration – small tax reductions or holidays for new businesses, deregulation, and more capital spending. Some of these ideas are helpful, but they will not b e on the scale needed. The new banks idea is capable of making a difference, as it addresses the shortage of cash for demand and investment in the private sector which lies behind the slow growth we currently see.

             If they create 3 new banks raising £5 billion of new capital each, they could lend say 5% of GDP over a period, as the banking multipliers worked through the economy, allowing for more modest multiples in a tougher regulatory environment.

    Today is the day when the relatively new George Eustice group meets in the Commons to discuss how we can reverse the constant movement to ever closer union. Contrary to the press adverts for it, it will not just be a meeting of Eurosceptics elected for the first time in 2010. All are invited, to pool our votes and voices in a common cause.

    The government is aware of the growing disquiet about the steady drift towards more EU power. Some of us have voted No or abstained as the government has gone along with various new EU initiaitives, opted in to various Criminal Justice measures, contributed to some of the Euroland bailouts and supported a European budget higher again this year than last. Other Conservative MPs have complained in private to their whips that they did not want to be voting the way the government recommended, and are looking for some good news on the EU front to offset the votes they wished they hadn’t cast.

           Over the last seven days we have had a flurry of Eurosceptic grandstanding from the government. They tabled a debate on a criminal justice measure where they did use the opt out, to try to highlight a good decision that did not really need Parliamentary approval. They licensed William Hague to remind us that in an ideal world they want powers back, but of course this is not an ideal world as it is a Coalition. They remind us constantly that they will not be joining Euroland members when it comes to taking more economic powers to the centre, though they do not show us the small print of the measures.

            The truth is such words are not enough. In the same week the government yet again categorically rules out any kind of referendum on European matters, and repeated that it is not going to demand powers back anytime soon. Mr Hague has spent most of the last year declining to talk about the EU, and facilitating further moves towards an  EU foreign policy. Today’s meeting needs to set out clearly that the EU is in crisis and is about to embark on another major step towards closer union as part of the Euro fix. This is the perfect time for the UK to allow them to do so in return for lossening our ties to this failing economic bloc.

        The UK economy is not going to grow strongly unless and until the banks are mended. Many of our troubles today stem from the failure of regulation and bad banking in 2004-7 which got some of  the banks into an extreme financial position. This was compounded by the decision to nationalise or subsidise them without forcing changes upon them.

           The weakened banks are now under a regulatory cosh to improve their balance sheets. They are told they must have more cash and capital to back up a given quantity of lending.  They are doing so not by raising more capital but by lending less. This constrains recovery.

          I am not advocating a debt soaked dash for growth to repeat the mistakes of 2004-7. I do not want to see a further surge in house prices and crazy mortgages. I would like to see enough credit around to finance larger infrastructure projects from broadband to tollroads, from new power stations to better water supply and flood protection. I would like to see sufficient credit available on reasonable terms for small and medium sized enterprises needing to expand, to buy capital equipment or to meet sensible working capital needs. I would like to see a decent supply of mortgage finance to pay for homes for a new generation of first time buyers. This is not going to miraculously happen by doing nothing. Nor is it likely to come about with another bout of Quantitative easing.

              I suggest the government creates three new UK High Street general purpose banks out of the assets it holds through RBS. Each bank should be given assets and liabilities from RBS, an initial number of branches and staff. These new banks should then be floated on the Stock Exchange. At the time of the float they should raise say £5 billion each in new capital. Their remit should be to provide excellent competitive banking facilities to businesses and individuals in the UK. They could be called RBS, Nat West and Coutts, if you wanted to keep current brands and some  of the  existing identities. You could call them  Tom, Dick and Harry, or any other new name for a new brand. I would want them to be pioneers of better customer service , persuading people that banks can be good allies and service providers to reasonable customers.

             The remaining RBS Group  could start out again by setting up a replacement UK clearing bank network if it wished. It might need to be called a new name if the RBS brand and name had been sold as part of the break up. The government could still hold on to its shares in the overseas and investment banks that are the rest of the RBS Group if it wished, in the hope that one day the management will get the shares into profit. Or it could press on with the piecemeal disposal or wind up of all the remaining  overseas and investment banking assets. The important thing is that three new clearing banks with balance sheets that allow them to expand their UK lending would have emerged from the broken shell of RBS.

               These banks could lend on more than the £15 billion of new capital they had raised. They could lend a sum of money that would have a visible and benefical impact on the UK economy. This would be better than QEII. It would provide a market tested stimulus, financing projects that the three new  smaller bankruptable banks thought were worth backing.

             The public might also feel better about banks if the main one which went so badly wrong were made to pay the price by facing full break up. Minority shareholders might fare as well or better by break up compared to  holding on to the current congomerate. If there were any legal and political fuss about the position of minority shareholders  a buy back option for them could be part of the scheme.