Category: Blog

This week the government announced prices are going up by 3.8% a year before the VAT increase, excluding mortgages, or by 2.9% on its preferred measure of the CPI. Most commentators think that will rise again in January. Meanwhile the Council leaders announced there would be no pay increases this year. That means local government workers join the many industrial workers who had no pay rise last year, though it still will leave them better off than the many workers in the private sector who have been on short time, experiencing pay cuts.

In other words, this year, even before the Election, millions are contemplating a year in which their spending power falls by at least 2-3%. It takes special economic incompetence to deliver a fall in living standards on this scale.

Some months ago I forecast a big squeeze on living standards on this site. Labour immediately seized on my remarks and tried to make out I recommended it or wanted it. Let me make it clear again today. Like most MPs I want to see living standards rise. Unlike a majority of MPs, I recommend economic policies which could deliver that happy goal. Then, as now, I am predicting what will happen under Labour’s economic policies. They encouraged the private sector to live well beyond its means in the boom days. They presided over banks that lived well beyond their means. Now they are bloating the public borrowing, making the public sector live well beyond all our means. Even they at last recognise this cannot go on. After their booms come their busts.You cannot solve a crisis of over borrowing in the private sector by borrowing too much in the public sector.

I expect the plan was to try to keep things going until after the election – borrow all they could to see them through. Unfortunately for them the markets are running out of patience, putting interest rates up. The pound has fallen, so their money goes less far, as we learn today with the Foreign Office budget. And now, the Councils have been squeezed a bit so they are telling us the truth. If they are to avoid major redundancies, they have to offer no pay increase. Against a background of surging prices that means lower living standards.

The private sector, which was living well beyond its means, has been reining back hard on the debt. Individuals have been repaying credit card borrowings and cutting the mortgage where they can. New borrowing has been very restricted. It is now the public sector which has gone to extremes with the new borrowing. Yesterday we debated the Deficit and the government’s absurd Fiscal Responsibility Bill. I pointed out that the government has taken out a whopping mortgage for us all, which it has told us about,(gilts) but it has also taken out a second mortgage,(bank nationalisations) lots of hire purchase(leases) and maxed out on various credit cards ((PFI/PPP)without putting all those figures into the official borrowing stats they like to quote. Now we are into the final phase, the visit to the Pawn brokers. This week UK shareholders sold the rest of Cadburys which they still owned to a foreign buyer. There will be more of that to pay the bills we have run up not covered by our earnings. If we carry on importing our lifestyle from China, we have to find a way of paying off the debts we incur as we do so.

Many of Cadbury’s shareholders who will shortly vote to sell their company are overseas individuals and institutions. In this gobal world one group of overseas shareholders will sell to a new group of overseas shareholders. It is not quite as some present it. The Cadbury family ceased to own and control it years ago. As a major quoted company on an international stock market anyone can come along and buy shares.

Cadbury is currently led by an international management team. It is true the UK is well represented in that team. It is the senior managers who are keen to sell to the new overseas shareholders. The new shareholders will put in a different international management team, which will also include some British people in some of the important jobs.

Of course there is in me that same feeling as many share today. Why can’t we have great British brands, with products from good British factories, owned by British shareholders? Wouldn’t that be good? The answer to both, is Yes, we can and it would. No government, however, is going to stop British managers selling out if they wish, or stop international shareholders selling their shares for a good price, unless there is a competition policy reason to block the merger. Cadbury ceased to be a plucky British company years ago. Fewer than 10% of its employees work in the UK.

Will the UK factories survive? I hope so. The truth is that British managers and British shareholders have been known to close UK factories and switch produciton abroad when the figures show that is the right commercial thing to do. British ownership does not protect all UK jobs. Foreign ownership does not mean automatic closure. Nissan. Toyota and Honda have done much more for UK motor industry jobs than Britsh Leyland, Rover and the UK government did. Time will tell how much commitment to the UK Kraft will have. The workforce and the British government can make the future of the British factories more certain by their actions. It needs to be better made in Britain. The UK needs to have an attractive tax and regulatory system so people want to invest here.

Mr Blanchflower resigned from the Monetary Policy Committee. He now thinks it should be abolished because it did not agree with him whilst he was on it, and may soon disagree with him again.

Readers of this blog will know that I too have been constantly critical of the various calls the MPC have made, in the run up to the Crunch, during the Crunch and in the aftermath of the Crunch. The MPC was told to keep inflation around 2%. They allowed it to soar well above target, they forced it to slump well below target,.and now they are letting it surge well above target. It is not a good record.

The MPC are given the task of regulating the economic clock so it always gives steady and reliable time. Instead they speed it up too much when it is already running fast, and slow it down too much when it is already in danger of stopping. Mr Blanchflower is someone who favours speeeding the clock up. He recommends lower interest rates and loser money. He is trying to fight unemployment and recession, and thinks you can do that by printing money – if only. Inflation well over the target rate does not seem to worry him.

The MPC remit is to control inflation. They have failed to do this. They need to think again about why they have got it so wrong, and try to do better in the future. Who are they kidding with their current 0.5% interest rate? Have they not noticed that everyone else has to use much higher rates than their recommended rate, and even the government now has to pay a lot more for most of its money.

Yesterday the Conservative leadership used a general constitutional Bill to seek a mandatory referendum on any transfer of power from the UK to the EU.

Despite telling us there are no further transfers of power planned, the government opposed such a sensible and necessary measure, reminding us of the way they renegd on their peldge to hold one on Lisbon. They voted us down again.

Let it not be said Conseravtives are afraid to talk about the EU, or secretly want to see more Treaties and more powers transferred. The pity is a good debate was kept off the airwaves. Presumably Labour would not welcome the public being told that yet again they have voted against the public’s involvement in how they are governed.

In the snows of Massachusetts, usually good terrain for Democrats, Mr Obama’s candidate for the Senate suffered a resounding defeat.

The losing candidate and the winning Republican Senator agreed about the cause. The expensive and contentious Obama health plans were the Democrats undoing. This was allied to Obama’s “two wars”, in the words of the Democratic candidate.

The defeat and the Republican revival were entirely predictable. Too many professional politicians think it makes them popular to spend more of other people’s money, and put their electors more and more into collective debt. Yesterday voters showed the tide is turning.

If Obama were astute he would change course before damaging mid term elections. I fear he will grind on with more of the same. His failure even to close Guantanamo as promised will become a symbol of his more general failures. Bill Clinton dumped Hilary’s expensive health care plan when he ran into political trouble with it. I suspect Mr Obama with Hilary as his assistant will think differently. Expect nasty politics as they try to deliver the plan.

December’s inflation figure was as bad as I feared – and that’s before the force of higher VAT kicks in in January.
The Consumer Price Index, the government’s preferred measure, rose by 2.9%, just a whisker below the level where the Bank of England has to write a letter of apology and explanation to the Chancellor. The Retail Price Index (including mortgages) rose to 2.4%, whilst the RPI excluding housing hit an alarming 3.8%.

The Monetary Policy Committee has a lot of explaining to do. Why were they still worrying about falling prices during 2009 when they were helping unleash this fast rise in prices? Why couldn’t they see the impact of the devaluation of sterling on prices, and the impact of easy money on asset and commodity prices?

As I feared, they have lurched too far again for the third time. Between 2005 and 2007 they kept rates too low, encouraged easy credit and set up the loan bubble. Between 2007 and the end of 2008 they set rates which were too high, presided over a massive contraction of credit and helped bring the economy from boom to bust. Now in 2009-10 they have again set rates that are too low and backed them up with massive quantitative easing. No wonder inflation has gone up.

Their defence will be twofold. They say inflation will come down again after a further rise in the first quarter of this year. That is likely to be true unless there is another devaluation and a further difficult surge in the price of commodities and fuel. They argue that without their expansionary action there could have been a worse recession.

They still need to explain why the UK has been the slowest of the major economies out of recession, given the huge monetary stiumulus. They also need to explain why they did not concentrate on inflation, as they have got it wrong one way or another throughout the last four years. It was easy to see it was going to lift off, yet they took no action to stop it. Maybe the decisions to slash rates and print money owed much to the government. Maybe the MPC felt they could not get in the way of a government determined to borrow lots of money at very low interest rates prior to an election. Perhaps they think our current inflation is a price worth paying for harmony with the Treasury and Number 10.

Yesterday in the Commons the Opposition parties were able to highlight the government’s policy of collecting and retaining in a central database the DNA of many innocent people.

The government, of course, was impervious to the pleas that for once they might do something to uphold or restore civil liberties. Where have they put the old principle that someone is innocent until proven guilty?

One of the most unpleasant suprises about this governemnt was just how authoritarian they are. Few would have predicted that a newly elected Labour government would want to weaken the idea of jury trial, issue everyone with ID cards, hold personal data in huge quantities on central records, and build up a DNA library of many people in the country by interviewing them in connection with a crime they did not commit and were not prosecuted for committing.

This government’s idea of security has included sending an armoured car to police the M25 near Heathrow, placing a stunning array of new physical barriers around public buildings, putting gates, guards and guns on many entrances and inventing a large array of new crimes including thought crimes. Many of these measures have been neither effective nor proportionate.

It is not easy establishing a perfect balance between the ancient liberties of people in a free society, and at the same time taking sensible steps to prevent terrorism or violent crimes against free people. Of course there need to be some checks and good intelliegence to help keep us safe. This government has just gone too far in acting against the many, instead of successfully targetting the few who are more likely to seek to subvert a free society by violent means.

I was interested to see in the week-end press the story that the IPCC, the UN’s climate change specialists, is about to remove its forecast that the glaciers of the Himalayas will melt away by 2035. There is a new caution afoot about global warming predictions, in the wake of the controversy about Mr Gore’s forecast that the Arctic sea ice could disappear in a few years.

There was also a story saying the BBC is going to look at other weather forecasters than the Met office, after their run of predicting much warmer weather than we have been experiencing. I doubt if in the end the Met will pay a contractual price for their BBQ summer and mild winter, but watch this space.

Global warming theorists do need to produce credible forecasts we can monitor and which turn out to be accurate, if they wish to win over the sceptical to their viewpoint.

This week-end’s further details from the bunker that is Number 10 comes as no surprise to those of us who have studied the evolution of Cabinet, Prime Ministerial and official government in the last couple of decades. We can readily appreciate the picture of a Number 10 frantically issuing orders for a yet more initiatives and press releases, only to discover that little or nothing happens because they have not engaged the official machine and have not carried with them the relevant departments. You can feel the machinery straining against the politicisation, trivialisation and prostitution to the media schedules of so much of what they are asked to do.

I will remember the Labour years as years of hope dashed against the reality of incompetence. They tested to destruction two propositions. The first was that if politicians and their personal advisers took control of the old civil service information machinery they could write the newspapers and dictate to the 7 by 24 media the stories they wanted. Instead, as the gap between what they said and what was happening grew, the media became more critical, even downright hostile, despite all the spending on more and better spin doctors. They found out that they cannot fool all the people all the time, or even a majority of the people for most of the time, try as hard as they did. They just assumed the reality of government actions and experience would follow the optimstic press releases, without Ministers actively engaging day by day to persuade, shape, influence and control the output of their wayward, large complex and fast growing departments.

The second propositioin was that if they just hurled money at any problem, a largely unsupervised civil service would know how to spend it, and would fulfil their high level wishes. Equality would be furthered, child poverty abolished, inequality between schools and areas reduced or eliminated, the main public services transformed in quality and output by splashing the cash. If only. Once again, they have proven that if Ministers fail to engage with day to day management, to cajole, encourage, thank, reprove, and direct the spending of the money, it will not be well spent. Worse still, if Ministers just tell their departments to spend large sums before a year end, it is no wonder so much of it is wasted as officials seek to do their masters bidding without being able to spend it on things that might make a positive difference. To Labour, spending money is more important than outcomes. Efficiency has been a largely forgotten word.

So now ,according to sources close, we have a small group in Number 10 thinking up class warrior strategies, not trusting senior Cabinet colleagues or their departments, and trying to run so much from the centre without engaging the rest of government. This week-end Lord Mandelson seems to have both influence and interest again, so the Prime Minister has lurched towards posing as the friend of the middle classes, the very same people he was taxing and fighting so recently.No wonder Whitehall is bemused, or writing them off. To get the best out of the civil service Ministers have to have a clear sense of direction, to articulate it consistently and strongly,. and to check the important detail emerging from their departments to ensure it is contributing to the wider good and the strategic aims. There is little sign of any of that at the moment.

The government’s losing streak when punting with taxpayers money continues. We are sitting on massive losses in our RBS and LLoyds shareholdings. The sale of gold cost us a fortune. More recently the government bonds the Bank of England have bought have also fallen in value. They are now giving us an £8 billion capital loss.

The government first bought LLoyds Bank shares for 122.6p They are 57p today, under half the governent’s initial purchase price. The government’s average purchase price is 74p after the rights issue shares it bought more cheaply. The government paid 65.5p for its main shareholding in RBS. Those shares today are worth just 37p. That means they have lost more than £12 billion on the two main banks they bought into. Coupled with the bonds, that makes around a £20 billion loss.

Why did they act so foolishly? They say the bonds will bring other benefits. So far that just means higher bank profits and higher banker bonuses, with the private sector banks seeming to be much better at it than the ones the taxpayers own shares in. They point out they have had some income on the bonds, but when all the interest payments have to be borrowed as well that is small comfort for the taxpayer who is picking up the tab.

The nub of their argument to justify all this ruinously expensive interventions is it was necessary to “save the world” or rescue the banks. This was never true. They should have lent on tough terms for short periods, to give the banks a breathing space to raise the extra capital they needed. They could have done so by selling assets, cutting loan books, cutting costs especially of employment and attracting in new investors. Instead the government let them off the hook, inviting RBS and LLoyds to carry on with their bad old ways of charging too much, paying too much to their top employees and failing to compete in a way which helps the small enterprise sector in the UK.

Within the two large banks the taxpayer owns are a host of smaller banks waiting to get out. RBS owns Nat West, Royal Bank of Scotland, Ulster Bank, Coutts, Williams and Glynn and Drummonds. Lloyds own HBOS, and TSB. There’s nine banking licences, banking names and banking brands that could service the High Streets and help the entrepreneurs on their own once more. Why on earth don’t they get on with splitting up these unsuccesful monoliths? Why don’t they see the urgent need for smaller more innovative banks that could do a better job servicing the UK loan and financial service markets?

That could also be the way to get the taxpayers money back more quickly. It would certainly be the way to cut the ridiculously high pay and bonuses of the top executives of these organisations. They can only claim these mega salaries because their banks are so large. The Competition authorities guided by the government made a mistake in allowing these mega banks to be created through merger. They should at least have the courtesy to help put it right, by demanding their break up whilst they are still largely state owned.