Tariff day

The US has done plenty of homework to prepare for “Liberation Day”. Their doomsday book of tariffs and trade frictions produces long lists of extra costs and charges imposed on US exports. The EU has a particularly long list. With foods it combines high tariffs with bans and elaborate regulations to make it more difficult for US farmers and food companies.

The UK still has a lot of these barriers from its EU days, though it has sensibly taken tariffs off 20% of all product lines into UK to give our consumers more choice and lower prices. The UK could and should go further.

The UK imposes a digital tax on US digital companies. It bans some US food products altogether. It charges four times as much on a US car import than they charge on our car exports. The UK is wrongly planning the big carbon border tax or tariff.

We still do not know if President Trump just plans to use tariffs to arm wrestle our trade barriers down to a fair and lower level. That makes sense and if well executed reductions by both sides are achieved ,  boosting  prosperity and lower prices.The UK government was wrong not to table an early tariff free draft Agreement with the US.  Sometimes President Trump says he wants to impose high general tariffs as a source of revenue. That hits both the exporters and the US consumers facing higher prices for imports. He would need to cut other taxes to offset the impact  of a high tariff tax rise on US households.

Retaliating by imposing high tariffs ourselves would  increase the damage. It would be yet another tax on UK consumers. The EU threats of retaliation is not going to stop the US imposing tariffs on them.

 

Migration and small boats

The new government said they had the answer to illegal migration. They would smash the people smuggling gangs. 9 months on we have record levels of small boat arrivals.

They ditched the Rwanda scheme just as it was beginning to work. Ireland had started to complain they were getting too many migrants as new arrivals did not want to be transferred to Rwanda. Other European countries are now deciding they need an offshore centre to send people to as they seek to cut numbers.

Both the last government and this one have been giving large  sums to France to enforce their laws against illegal and dangerous boat trips. We are told this has stopped about half the attempted crossings. As they usually let the illegals stay where they were to make another attempt on another day it does not deter. Belgium does a much better job stopping illegal crossings from their beaches.

So the UK government needs to tell France we are not going to carry on paying for such a poor result. With drones, cameras, tip offs and the rest more boats can be stopped. More police work across Europe could prevent the movement and storage of boats for illegal use.

It would also help if any migrants that were smuggled through were immediately sent somewhere else. Offering them free hotel accommodation and likely eventual permission to stay is a big draw. France, a safe country, does not make  such an offer when these  migrants cross the border  into that country.

Time for the government to change policy to one which works, as they agree people should not come illegally, get a  free hotel and send large bills to UK taxpayers.

 

Will housebuilding boost growth?

After exchanges between the government and OBR they settled for a compromise. The government was credited with an expansion of housebuilding up to 2029 adding 0.2% to growth, whilst accepting they would not build 1.5 million homes this Parliament as promised.

All the debate has been about solving a housing shortage and dear housing by building more, not by reducing demand. If the government carries on with an additional 750,000 legal and illegal migrants a year or anything like that they will need most or all the new homes just to house the new arrivals.The last  government did tighten conditions for legals before leaving office so that  should have some effect, but the new government is putting up the numbers of  illegals and not  showing signs yet of wanting to clamp legal numbers or make sure legal entrants leave when a limited time visa expires.

The government wrongly thinks the shortfall in build rate compared to migrant rate is about planning permissions. There are plenty of unused permits to build homes available. The  shortfall  in build rates is because homes are too dear and mortgage rates and rents too high, limiting  effective demand. The construction sector lacks sufficient trained staff and sufficient plant to build many more. Housing Associations have limited money to invest in additional homes

The OBR thinks house prices will go up over the next few years, keeping them too dear for many people who would like a home of their own, The government needs to reduce the large movement of people  wanting subsidised or free accommodation from the state so we can price young people back into the market to buy their first home.

 

Privatisation with more competition added – the 1990s

 

 

The electricity industry was better handled. Power generation was split into two main companies, National Power and Power Gen where shares were sold. Nuclear power resided in a third company. A National Grid company was established. 12 regional electricity companies were also sold. The generating system was competitive, with companies having to bid in their power availability. The grid drew power from the next cheapest as demand rose. Privatisation confirmed the dash for gas, as the industry gave up on new large coal fired power stations. Thermal efficiency was much greater and burning gas was much cleaner, providing a good cheaper supply of energy and a big environmental leap forward.

  

Electricity privatisation
 
By the time the government got to electricity privatisation the idea of competition was more firmly embedded in plans. The generating side was split into three companies with nuclear forming a fourth that was difficult to sell given the long term liabilities over decommissioning. The regional distribution boards were sold as regional monopolies. It was decided to stagger the introduction of full competition and choice for customers, starting with the largest in 1990 and reaching the retail customers by 1998. We moved from monopoly to consumers being able to choose a supplier in a competitive market. 
 
In a 2000 study of the first decade of privatisation Preetum Domah and Michael Pollitt concluded that consumers paid £4. 2 bn less than under nationalisation, with good price falls coming in the second half of the 1990 s. The government collected £5.1 bn from sales receipts for the businesses and from taxes. 
 
Given the initial monopoly elements retained in regional distribution companies the government imposed a Regulator, Offer. The early price controls were thought to be lax so they were toughened in 1994 and helped bring prices down. 
 
When I had discussed electricity privatisation in advance of the event with the industry I told them I would guesstimate a 20% Labour productivity improvement after privatisation. They  assured me they were perfectly productive and could achieve no such gain. I pointed out that was a typical saving from contracting out public sector services. The 2000 study revealed that in practice Labour productivity doubled between 1990 and 1997. When I talked to the industry after the event they teased me for underestimating the improvements they had denied could happen.  
 
When in the early days I queried the industry’s heavy reliance on inefficient large coal power stations they told me the laws of thermodynamics meant  they could not progress beyond 32% thermal efficiency. I responded that having read a bit of economics and business history I thought they would find more thermally efficient ways of generating that did not  lose two thirds of  the energy inputs. As it happened the industry had started experimenting with small gas turbines. The privatised industry went on the dash for gas, capturing more than half the energy burned in a greatly expanded gas fleet. 
 

 

Rail  was complex. I sat on the Ministerial  Committee to work up proposals, I favoured the minority proposal to keep track and trains together, to privatise regional companies and licence competition over regional tracks.The proposal adopted created a monopoly track,stations and signals company which did not perform that well. It was renationalised with its successor under government control also performing badly and causing many delays for train operating companies. In the first few years of privatisation the railways went through a renaissance thanks to new ideas and investment by the new train operating companies. . They reversed the decline of passenger  numbers and introduced  new trains.  More recently the Regulators have stifled innovation and taken over control of many fares and of timetables blunting most possible gains from private sector better management.

 

 

The continuing collapse of the UK car industry

The car industry has worried about Brexit then got its continued  tariff free access to the EU. It has worried about US tariffs though never faced high ones until now. The industry’s output has more than halved. This has nothing to do with either of these two much discussed developments. It has everything to do with government policy forcing the industry to shut down all  its petrol and diesel capacity and build new plant to make battery vehicles.

As some of us have been pointing out most car buyers do not want battery cars and many buyers cannot afford them. No sensible green campaigner would want one. Take it home and plug it in and your vehicle will be charged with electricity burning more  gas as there is not normally any spare renewable power waiting.

Honda has  left the UK and the EU to consolidate car making in Japan. Ford doesn’t make any cars here anymore. BMW are going to make either most or all their electric Minis abroad with Cowley’s future bleak. The UK has watched as China has built a dominant position in making batteries and affordable battery cars. The UK has insufficient battery capacity.

It is sad to see the fast collapse of car making in the UK. It is disastrous that government and industry are locked together with a policy that is doing so much damage.

2017 UK car production. 1.7 million

2024 UK car production  0.78 million

Coalition of the unwilling

I am glad the PM and President Macron have been forced to agree with my view. There is no peace agreement  to keep in Ukraine. If Russia does agree a general ceasefire or peace they will not  agree to UK and French troops stationed along the Russian border  to enforce it. The idea of some NATO countries without US backing doing  this was always a non starter.

I am now alarmed that  the PM and the President of France now think they can form a coalition of forces to offer a security guarantee to Ukraine. As members of NATO with full US backing under Biden both countries rightly declined to offer a NATO guarantee to war torn Ukraine. So how come they now think the UK and France could do this without access to US back up , weaponry and intelligence?

Russia has maybe 1 million troops in or near Ukraine. Ukraine has 800,000 defending their land. How could  say  20,000 Anglo French troops be a credible force to deter further Russian aggression ? Why run the risk of Russia testing out the inadequate  force?  If the UK and France are serious about fighting a war against Russia if Russia invades more of Ukraine then when will they mobilise and supply significant armies that could defeat the Russian hordes? Both countries would need to be put on a major war footing and  would need to recruit large armies to drive Russia out of Ukraine.

Privatisation – taken up by the Thatcher government

 

The new Conservative  government began slowly, still heavily influenced by civil service thinking. They sold some more BP shares in 1979  as Labour had done in response to the IMF crisis. They went on to sell smaller concerns including Amersham, British Aerospace, Cable and Wireless and Britoil. There was still resistance to undertaking a major privatisation of a big utility.

After the election victory in 1983  I was invited to Downing street to hear the Prime Minister say she was now ready to undertake a larger programme of disposals and wanted me to join her to assist. She approved a Cabinet paper setting out a larger programme, appointed John Moore as the first privatisation Minister in the Treasury and agreed British  Telecom should be the first large sale. The aim was to take privatisation from under £1bn of sales a year to several multiples of that. Sales hit £4.3bn in 1984 and £9 bn in 1987. More important than the proceeds was always the possible transformation of these crucial industries, and lifting their growth and investment rates with access to private capital.

 

The work we did on BT shaped the rest of the programme. Each major industry had its own Bill setting out what was being sold and how, putting in place regulation and  sometimes promoting competition. Some were sold whole, some were split up to create more competition. The Treasury was keen to sell BT as a monopoly. From the US experience of breaking their monopoly provider I was sure competition was needed. A compromise was struck with one  competitor, Cable and Wireless, allowed for the business market. Competition for the domestic market was only allowed some years later.

 

The Treasury wanted to maximise valuations in the short term. Those of us who favoured competition expected faster growth and a larger tax base from early introduction of competition. Given the need for large capital spending programmes for the extra capacity and wider range of  telephony services  competition looked the better path. The UK monopoly kept people waiting to put in a new phone line, only allowed you to rent from a very limited range of phones and struggled with other uses of phone lines. Without major changes nationalised telecoms  were going to impede the data revolution hitting business which needed more line capacity for transmission.

 

Stephen Littlechild  had produced a paper on the need for regulation. I agreed with his view that the regulation should be time limited, to be replaced by competition. He proposed a simple monopoly price control for the early years using a price cap of RPI – x. This was adopted for several privatisations. In each case a simple but effective formula was gradually complicated, supplemented or replaced  by complex rate of return formulae and detailed Regulator  analysis  of budgets and capital programmes.These did not improve matters.

 

The City when I took the early plans for BT to them were disappointing. Many of them harked  back  to the idea of Busby bonds. Some wanted BT and other large nationalised corporations to raise their own debt capital in markets. This was a bad idea  as they would have been made to pay more for it than simply being given cash from cheaper government borrowing, yet there would have been relentless  pressure for the state to always bail them out to avoid a nationalised bankruptcy. The Treasury may have accounted for it as non state borrowing, but outsiders were more likely to see it as a liability of the state.

 

Some in the City claimed the BT issue would be too big for markets, as it was many times the biggest share sale to that date. I initiated work to cut the volume of  shares City institutions had to buy, We decided on a three part sale. There would be a sale of some shares to foreign buyers. There would be a popular issue to the public through the post and the conventional offer for sale to City institutions. I knew that would mean City investors could not collectively buy the average weighting of the  new share in the index. To make it easier we decided to only sell a bit over half in the first offer for sale. It meant the institutions  were short of shares in the biggest ever offer for sale, and helped ensure the shares went to a premium in early dealings. The sale raised a new record £3.9bn with the issue heavily oversubscribed. The City had just become a larger and more successful share market and found new liquidity from the retail share buyers who bought direct.

 

British Gas followed in a similar way in 1986, followed by British Airways and others in 1987.

The water privatisation in 1989 was disappointing, as the government accepted the argument that water was a natural monopoly. In practice it is a monopoly created by Statute, confirmed by the privatisation legislation. It is quite possible to have competing water suppliers using common carrier pipes as with gas. It is possible to allow challenger suppliers to take on new developments with new pipes or put in new pipes in existing areas. Water competition was introduced  for business in Scotland. The privatisation of the water monopolies left a very regulated industry with continuing arguments over the pace of modernising and enlarging  pipe networks and the prices to be charged to cover those costs. 

 

 

What do boys want?

Today my new short book What do boys want? is available on Amazon.

This is based on my recollections of childhood. The book explores how adults often fail to see or understand what the child sees or thinks, explaining  how  a small boy has a very different perspective to his mother. It also captures social history, contrasting adult views of boys when I was young to changed views today.

It charts some of the more crucial moments when I learned  an important truth about the human condition. It reveals the problems learning to walk, the need to go mountaineering  on furniture made for giants, the frustrations of not being able to do things, and the problems of responding to grown ups who whilst trying to be nice were patronising or asking impossible to answer questions. I saw my bedroom as an action set for my cars, toy soldiers and model aeroplanes, whilst  my mother saw it as a challenge to try to make it a tidy bedroom.

I never wanted to play with dolls, choosing boys toys out of preference. From an early age I was drawing what my car  might look like when I was grown up.

The Spring Statement

Please can we spared the misleading presentation of the  government’s budget difficulties today. Their problem is not a shortage of money to spend, but an inability to spend the money wisely. Their numbers are damaged by no growth brought on by a confidence shattering tax raising budget.

The last budget boosted spending substantially, then put up taxes and borrowings to pay for it all. The higher taxes undermined business and led to a reduced demand for new employees.

The waste of public money is distressing. Net zero subsidies and  excessive  capital for carbon capture and storage are a bad idea. Allowing a million young people to avoid work, training and education is not good.High Speed Rail has become High Cost rail with plenty of delays on the line.

The Chancellor needs to revolutionise the government’s management of the public sector, and rein in its poorly performing offshoots.

 

Questions to the Chancellor before the spring statement

Growth

Will you remove the deeply damaging Jobs tax which has hit  confidence and undermined investment?

Will you remove the tax attack on family farms and small businesses, as you need them to expand to get growth?

Why do you think the US has been growing twice as fast as the UK? Will you copy their success, based on cheap energy and lower taxes?

Public spending

Have you calculated how much it costs to provide  subsidised housing, NHS service, school places and other public sector capital and services for each no income and low income migrant? How many can we afford?

Why is public sector productivity down 8.5% since  2019? When will it return to 2019 levels?

What action are you taking to boost public sector productivity? Why is there no recruitment freeze in place apart from medics, teachers and uniformed personnel?

Spending cuts

Why do you accept the need to reimburse the Bank of England for tens of billions of losses each year?

Why do you not take action to stem the losses and cost overruns at HS2, Network Rail and the Post Office?

Why do you want to cut disability payments and pensioner fuel allowance when there are so many easier and larger targets for savings?