Category: Blog

If you needed more evidence of Labour spin and their continuing influence on the media I invite you to consider the lop sided discussions of public spending cuts. There is just one relatively small departmental budget that is crawled over endlessly for spending cuts – that of defence. It just happens to be the only budget where this government has made some cuts, whilst all the others have soared.

In 1996-7 the UK spent £21.3 billion on defence and £85 billion on social security. This year the spending on defence will be around £35 billion whilst the spending on social security and tax credits will be £180 billion. So over the Labour years social security spending has risen by more than 110%, defence spending has gone up by 75%. Social security is now five times defence, whereas it was four times in 1996-7.

Anyone seriously wanting to control our deficit – or for that matter wanting UK people to have better lives with more jobs and higher incomes – would start with plans to get the costs of social security down. Labour in Opposition called it the cost of “economic failure”. Now in government, with the budget surging, they present such spending as evidence of caring and sharing. The truth is too much of the budget is offering people a substitute income for employment. We should do better.We have talked about this before and will do so again. We need to put the enterprise back into Great Britain, which means lower tax rates and less regulation. Then we could get more back to work and off social security.

Meanwhile over at defence the rows escalate. We are told we cannot do everything. The army wants more troops so it can fight future Afghan wars with more boots on the ground. The navy wants new carriers and support vessels. The airforce claims more heavy lift to support the army and more fighters with modern capability.The truth is we need all three. The second truth is no area of government spending can be exempt from pressure to do more for less, from the search for better ways to spend. The cuts I would like to see in the military budget are these. I would like fewer armchair Generals and shore based Admirals, and more officers leading active units. I would like to see better value for money procurement, and an efficiency drive in the large civilian administrative tail. I have set out before ways that we could use private finance to improve service housing and release cash.

I woudl also like us to get out of Afghanistan as soon as possible,. If any capability has to be cut, it should be the capability to invade Middle eastern countries where we have not been invited.

Yesterday we debated water in the Commons. Only the UK and the monopoly left overs from a nationalised industry could conspire to turn such a plentiful resource into something expensive and precious in short supply. Were we ever to have a couple of hot dry summers again doubtless the industry and its regulator would be out there again with hosepipe bans, exhortations for us to go around in dirty cars and requests for us to share a shower.

So I asked whether we could have some competition for retail water, as they now have for large quantities of industrial water. The latter policy has brought the price down as you would expect, whilst the regulated price of householder water has continued its inexorable rise. I am pleased to say I got an encouraging answer for a change. It is true it was from the Conservative spokeswoman rather than from the government, but we live in hope.

The Minister did agree with me that the best way to help those on low incomes afford their water was to cut the price. He, however, wanted to cut the price of water for those on the lowest incomes by increasing its price for everyone else. What we want is a policy to lower the price for all. Competition would probably take 20% off the water price, and create an industry keen to supply more and sell more. After all, most of the time there’s plenty of it about. So much so that the current authorities have difficulty in preventing it flooding all too many homes too often.

There is an undercurrent in present political life that says the rich must pay their way at a time of economic crisis. There are indeed still all too many socialists who wrongly think that if they just put the tax rates on the rich up the money will come pouring in and all our problems are solved. They do not see the queues to go to live in Switzerland, to relocate businesses abroad and to hire better tax lawyers and accountants to find ways round the higher tax rates.

I have a modest proposal for the Conservatives. They should go out on a policy that they intend to make the rich pay more tax. After all, in the 1980s, Tory tax policy led to the rich paying much more tax, and paying a much bigger proportion of total income tax raised. That Tory government did it by cutting tax rates. More rich stayed here. More rich came here. More rich paid more tax here. More ventured their money, created jobs and businesses and paid more tax. That is what we need to do again.

I also think we need to cut back on the large number of very highly paid people in the puiblic sector. It would be a welcome cut of public spending to thin out the public sector rich list, to get rid of the phoney bonuses and the fancy jobs. There are too many quangos and quango chiefs, too many mega salaries in low risk public corporations, too many overpaid public sector bankers.

So here’s a great Conservative policy for enterprise and for growth, for deficit reduction and for social justice – let’s soak and sack the rich in a way which will make us all more prosperous. Let’s do it by cutting tax rates and quangos.

The current political battle is over how soon we start to rein in the deficit. Labour says we must not do so too soon. Doing anything before the election is to them too soon. The Conservatives say start now and get on with it.

The government says ending the large deficit “early” would jeopardise the recovery. Yet their own figures shows that the UK has been the last out of recession and has the most feeble recovery of all despite receiving such a collosal “fiscal stimulus” and monetary boost. Indeed, over the last five years the government has nearly doubled the money supply, and doubled the national debt, only to achieve absolutely no growth in the UK economy. Who does believe on that evidence that their stimuli bring growth? The 1981 and the 1992 recessions ended when the government took action to cut the deficit.

If you look at what the public are doing, they believe the way to tackle excess debt is to pay some of it off. The private sector, families and businesses, were too deeply in debt in the boom. They are busily paying it off or reducing it at the moment. They do not think the best strategy is to go on borrowing more to “borrow themselves out of the crisis”. So why on earth does the government think it can defy gravity and borrow its way out of its own debt crisis? As Greece has shown in the last week, markets can extract a large price on any government that thinks it can get away with huge borrowings. First they make the debt very expensive, then they refuse to lend as much as the compulsive borrower wants.

Conservatives need to explain to people that when we are told the public debt is increasing and this is a good thing, that debt is our debt. As a French King once said “L’etat, c’est moi” . We have to remind our government that we are the public and the public debt is unfortunately ours. We are the state and we will be made to pay the interest and then repay the capital. They need to say that previous recessions only ended when the government stopped overspending and left some money for the rest of the economy to use.

Commonsense says when you are this deeply in debt you need to stop borrowing. It also tells you that the way to do that is to limit your spending. You can have too many five a day officers and Chief Executives of quangos. So bring on the economies before we all drown in a sea of debt.

States so often behave badly. They pick fights or provoke each other. They often boss or abuse their citizens. If they were people we would get fed up with them, send them to coventry, seek to change them or even put them in detention.

The next few years are likely to see a continuing struggle between the USA and China. Mr Obama’s “new” jaw jaw rather than war war approach to dealing with the world neighbours has broken down in the sands of Afghanistan, and is now having a bad time along the Great Wall of China. This week-end there is sabre rattling over Taiwan. Mr Obama intends to sell them lots of armaments for “defensive” purposes. China sees such an act as one of provocation, as she thinks Taiwan is part of greater China and does not want more military hardware in the way of her ultimate “settlement” of the Taiwanese issue. The USA needs to export more whilst also still needing to borrow too much money from the Chinese. China cannot afford to overreach herself and lose face at this sensitive time in her climb to world significance.

I have always thought that one of the most important moments in the evolution of China as the other great power of the world will be the moment when China demands Taiwan. If she tries too soon the USA could well rush to Taiwan’s defence. If China judges it correctly and has prepared the ground the USA will back off and we will know there are two super powers in the world. Meanwhile many in Taiwan will be seeking to keep the USA strong and on side.

I don’t think this week-end’s sabre rattling is the start of the denouement of this long running issue. I expect China to complain, impose sanctions, cool relations but not to force any military action. The oral spat is unpleasant but I hope and expect it will not bring the world to the brink of disaster. It is important that Mr Obama is very clear about his intentions, as indecisiveness or hints of a change of position could be dangerous in such a situaiton. Mr Obama needs to remember he does still run the only world superpower when it comes to the ability to project force beyond the homeland, even if he does need to borrow a lot of money from China to pay for it all.

This week markets took fright at the mountain of money Greece wants to borrow to pay its government bills. It needs to borrow about the same relative to its National Income as the UK. The markets have pushed the price of Greek government bonds down, so Greece now has to pay twice as much interest as Germany to borrow the same number of Euros for ten years.

Greece cannot devalue within the Euro. The UK has already knocked one fifth off the amount it has to repay foreigners who lent it cash by devaluing by a fifth over the last couple of years. Greece is saddled with paying back Euros, which have been more stable against the strong currencies of the lending nations. There are five possible options for Greece from here:

1. Leave the Euro and devalue. That cuts the amount of real money they would need to pay back, would make their exports more competitive and their imports dearer, leading to a shift from consuming too much at home to working harder for foreigners abroad. They would still need to cut their deficit by cutting spending, as they would still need to borrow to pay some of the bills and they would no longer be able to offer Euros for repayment.

2. Stay in the Euro and accept the discipline of the club. They are meant to keep borrowing down to 3% of their income. Instead it has soared to 12.7%. They could cut their spending substantially, restoring confidence and limiting the amount they need to borrow.

3. The strong countries within the Euro zone could lend them the money they want to borrow on better terms than the market, or give them grants to see them through this bad patch. London sends grants and loans to Liverpool so they can stay in the same currency union, so why shouldn’t Munich send cash to Athens, say some single currency single Europe exponents.

4. There could be a deal. Germany and her friends within the Euro zone could agree a package, where Greece cuts her deficit by spending cuts and then is eligible for some grants, loans or subsidies to make up the rest.

5. They could all decide to do nothing. Greece would have to pay more to borrow internationally, and would gradually have to take action to curb the deficit. Otherwise the interest rate she had to pay might become so penal the markets forced a crisis, requiring action under one of the four options above.

I think Option one, leaving the Euro, is unlikely. Greece is keen to stay in, probably hoping for protection from her own folly by belonging to the larger club, and hoping against hope for more loans and subsidies from within. Whilst some in Germany and France might see going back to a core Euro as an attractive and more stable option, the overall balance of opinion in the EU is likely to want to keep Greece in. If Greece left, the positions of Spain, Portugal and some others would also be in question. It could lead to a messy unravelling of the wider Euro project.

I suspect Option 5 is also running out of room, as the markets are close now to forcing action to correct the deficit or to force a bail out for Greece.

I would think Germany unlikely to simply offer to fund the excessive Greek deficit. It would be an open invitation to all the other ill disciplined Euro members to run up big debts and ask the centre for easy money to pay the bills. It would also start to place too much strain on Germany herself, as Germany is not without her own economic problems.

So that leaves the two options of tackling the deficit herself or doing so with European help and assistance for meeting various targets.

The whole saga shows the folly of premature currency union without proper arragements in place for transfer payments and common fiscal policy. The Euro is becoming a system to try to impose discplined policies on the periphery, as Ireland, Greece, Spain, Portugal and even Italy have to keep reining in their excesses to live within the Euro scheme. Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.

Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets. The Euro is not the frree lunch some members thought it was going to be. It does not give a right to badly run countries to borrow at German rates of interest. You cannot run a single currency successfully unless you first create a single country and gain acceptance for the fiscal and other economic policies from all the voters of the enlarged area. The fact that we kept the UK out of it will mean the Euro is spared the bigger crisis of containing within it a large unruly subject with very different economic characteristics from the rest. It has also spared us in the UK major steps on the road to being subsumed into a European country.I helped oppose the Euro for the UK as a believer in an independent Britain, but one of the arguments I used was our actions would also spare the Euro a massive problem.

All past European currency unions have failed. All past attempts to create a large country or bloc of countries out of smaller European states have also ultimately failed. The plight of Greece a small chapter in the stpry of this latest project. If Germany and France are serious about a country called Europe they need to come up with deal quickly to keep Greece in on tolerable terms to both sides. If they are not, the sore will fester and the markes will dictate answers. Watch this space, and expect some messy compromises.

This morning Mr Blair returns to the centre stage of British politics. It is not a triumphant return. It is the return Mr Brown dreads. It is cross examination day over the Iraq war.

The 2005 election haunted Labour with their Iraq war. Anti war Labour candidates put up. The dislike of the war was one of the main reasons Labour’s vote slumped so low. Mr Blair was lucky, because the Conservatives were still unable to take advantage of Labour’s misery, and some Conservatives were keen supporters of the same war. A sullen electorate stayed at home in large numbers.

Many Labour strategists thought that was an end to it. When Mr Blair left office, they hoped the Iraq war left office with him. It was never going to be that simple. After all, Mr Brown was in the room when the decision was taken, and he had to pay the bills for the hostilities.

I read recently a Labour inspired comment that Mrs Thatcher would never have allowed a similar enquiry into her conduct over the Falklands. That is clutching at a straw that is well broken. The Conservative government did hold an enquiry into the Falklands war. That war was a popular, legal and just war. No-one queried its justice as it was designed to liberate people from an aggressor. It was legal under international law, as a country had been violated by another and sought intervention to free it. The hopes and good will of most of the country sailed with the Task Force.

The Brown/Blair war in Iraq was very different. It was never popular. Many people thought it unjust, intervening in an overseas country because the government did not like its Leader. Some thought it illegal, including we now learn a couple of senior lawyers at the Foreign Office.

So what can we hope to learn from Mr Blair’s appearance? I think the Enquiry should concentrate on three main lines of questioning.

The first would be to tease out the legal position. Parliament was always told the government had clear advice that it was legal. We need to know how many lawyers within government held a different view, how hard fought it was, and why the legal advice changed in the government’s favour at the last minute.

The second would be to find out why Mr Blair was so keen on going to war. Why was Parliament told there was an immediate and worrying threat from Iraq’s weapons of mass destruction when it appears there were no such weapons? When did regime change become the purpose? Why did the UK decide to change this particualr unpleasant regime by force, but not other regimes it disliked?

The third would be to ask why there was apparently so little intelligent planning for what was to happen once the war had been won. Why did they make such bllunders in handling Iraq after they had won?

Davos is a time for overpaid bankers and consultants to rub shoulders with the senior regulators and government officials who determine the rules for their money making games. Once again, just like last year, regulation will be a big topic of conversation.

Governments will be saying they want more of it. They will argue their favourite syllogism – Our purpose is regulation. Regulation has just failed. Therefore we need more regulation. Big businesses will be saying – Our businesses agree we need lots of regulation. We can live with all the regulation we currently have. If you impose any more the money making machines could break down. Both these stances are idiotic.

There will also be a delicious dance over the canapes. The politicians wil be seeking opportunities to cash in on the rich vein of public anger about bankers, polishing soundbites on how they too like President Obama will be tough on bankers and the causes of bankers. The bankers and consultants will be responding off the record saying that they cannot take too much pain, tactlessly saying that they are in a vicious squeeze already which means no remuneration over £1million until things have calmed down a bit.

The truth is there were both market failures and regulatory failures to create the Great Crash. Competitive markets work, rewarding the successful and customer friendly and weeding out the unsuccessful. The banking market is not a properly competitive market. In the UK the Competition authorities were asleep at the wheel or ordered by the government to turn a blind eye to the competition failures. They allowed mega banks to emerge, when they should have blocked the takeovers and insisted on more competition. We need to make the elaborate competition machinery work properly. That does not require more law or more regulators. It just requires a few senior regulators in the current structure to break up over large banks and to prevent new mega banks emerging from anti competitive mergers.

Most people agree there does need to be some addtional regulation on banks and other deposit taking institutions besides enforcing a competitive market. We need the reassurance that the banks will be able to pay our money back. That requires regulation of cash and capital. Again, that is already part of the present system. There are plenty of highly paid people who are meant to do that. The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets.

Large companies like all present regulation because it keeps competitors out. They have spent the money on complying with it, and don’t want that changed. Just because the regulators and the large companies agree does not mean we should. The truth is much current regulation is a waste of money, an anti competitive practise, a nonsense which does not keep our money safe. If Davos wanted to do somehting that actually helped get us back to stronger growth it needs to do three simple things:

One: Assert the need for more banks and a much stronger enforcement of competition policy. The UK could pledge to create half a dozen new banks out of the two it currently owns
Two: provide simple counter cyclical rules on cash and capital to ensure we have better endowed banks in future
Three : Prune the other regulations, so more businesses can start up in competition against the established players.

Bolting on more rules to a system which does not work is a bad idea. Failing to create a competitive banking market means business as usual.

The government keeps telling us borrowing more, spending more and printing more boosts the economy. They should look at the figures and ask themselves Where has all the stimulus gone? The figures are amazing.

Since 2005 the government has doubled central government borrowing (on its own understated figures ) from £469 billion to £922 billion – an injection of £452 billion.

Since 2004-5 money supply (M4) has surged from £1,212 billion (£1.2tn) to £2,100bn (£2.1 tn) – it has also almost doubled. Notes and coin have gone up from £42 billion to £55 billion.

And what has happened to real output? It is almost the same in Q4 2009 as it was in Q3 2005! No growth at all for 5 years.

So where did all the stimulus go? Much of the public borrowing went on inefficiencies and on imports. Some of the extra money went into price inflation, and some is just circulating less rapidly now, given the poor state of the banks and the new regulatory toughness.

The government needs to go back to the drawing board on whether these sorts of stimuli work. If they had studied Japan over the last twenty years they could have seen for themselves that huge boosts to public spending and public borrowing just put the state more into debt but did not lift the growth rate. It could have saved us a lot of money and false hopes.

13 years of Labour goverment has produced even greater income inequalities. The Labour response is likely to include new tortures for people who work hard, try to get on in the world, who aspire for themselves and their children.

What we need are policies which raise the sights and motivate the energies of the many. The way to reduce inequality – and to make most people better off – is to encourage and foster, not to regulate and tax in a fit of jealous anger that some have still succeeded.

We need an enterprise package to make it easier to set up and run your own business, a small business package so more small businesses can expand and take on more labour, and a shake up of some schools and training Colleges so more obtain worthwhile qualifications.

I have been interested in the wide range of responses to my piece on prisons. It is right that many burglars and petty thieves are never caught, so prison does not act as a great deterrent. It is also right that some of the thieves who are caught are not up to holding down a normal job, especially those on drugs. We do need to do more work on getting people off drugs, on getting them into a condition where they can do something useful and earn an honest living. Some will need to go to prison to do that.