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My Intervention on the Charter for Budget Responsibility

February 7, 2023 14 Comments

Charter for Budget Responsibility – Volume 727: debated on Monday 6 February 2023

John Redwood
Will the right hon. Gentleman give way?

Mr McFadden
I am happy to—I thought mention of the IMF might bring the right hon. Gentleman to his feet.

John Redwood
I would like to know the Labour position. The European Central Bank is not selling debt at a loss into the market because it does not want the losses. The Americans are selling debt into the market at big losses, but they do not send the bill to the taxpayer. Only the Bank of England insists on both making huge losses and sending the bill to the taxpayer for immediate payment. Who is right?

Mr McFadden
I suspect that the Bank of England will not be the only institution attacked by the right hon. Gentleman tonight, but I remind him that part of the purpose of the charter is to restore our faith in the economic institutions, after what happened less than six months ago.

The IMF has forecast that the UK will have the lowest growth among developed countries for the next two years: bottom of the league on the record and bottom of the league on the forecast. And yet still the Government come along tonight and table a debate supposedly designed to enhance their economic credentials.

Well, what will the effect on those credentials be of the re-emergence of the former Prime Minister at the weekend? I have to give her 10 out of 10 for timing. What better time to write an article saying that her mini-Budget was right all along than the day before the Chief Secretary has to come here and stand up for the Government’s fiscal stability record? What better moment for her to say to members of pension schemes that had to be put on life support as a result of her mini-Budget that it was not her fault? No contrition for trying to borrow from my constituents in Wolverhampton South East in order to pay for a tax cut for people earning over £150,000 a year; not a word of apology to the millions of mortgage holders left paying a Tory mortgage penalty because of the reckless irresponsibility of the Conservative party. Just when the Government were trying to bury the memory of that mini-Budget under 10 feet of concrete, up she pops—like one of those hands coming out of the swamp at the end of the film—to tell us it was all someone else’s fault.

For me, the best bit in the article was when, in a long list of culprits, other than the Government that actually introduced the mini-Budget, the former Prime Minister blamed the Treasury civil servants for not warning her about the impact on pension schemes. I had to ask myself, were these the same Treasury civil servants that she had spent the whole summer scorning and disparaging? Were they the same Treasury civil servants whose boss was shown the door on the first day of her premiership? In what world are we expected to believe that the former Prime Minister, her Chancellor and the Government would have listened to a word those civil servants said, when all along she defined them as being part of the problem and not part of the solution?

The real problem for the Prime Minister, the Chancellor and the Treasury is that this is not going away. The last Prime Minister is not a lone voice, and the more that Conservative Members realise the Government have nothing left in their tank and are resigned to managing decline, the louder the drumbeat will become; and it will be cheered on by the same newspapers that gave such a warm welcome to that mini-Budget in the first place. The Prime Minister, demonstrating the sureness of touch with which we have come to associate him by now, has labelled those on the Government Benches calling for tax cuts “idiots”. That is his phrase, not mine—about those on his own side. And yet today, fearful of them, the Prime Minister now says he will listen. Which is it? Are they idiots or is he listening? This weekend’s intervention, and those who cheer its argument, will have the Prime Minister and the Chancellor looking over their right shoulders every day between now and the election, when they should be focused on the needs of the country.

This debate is supposed to be about all of us swearing fealty to fiscal rules, but there is another problem: since this Government came to office, they have broken their fiscal rules 11 times. They have had even more sets of fiscal rules than they have had Chancellors and Prime Ministers over the past year. If you don’t like one set, don’t worry—there will be another one along in a while! The Chief Secretary himself outlined how these rules were different from the ones we debated this time last year in the George Osborne tribute debate of 2022, and each time we are expected to treat the new rules as though they were the ten commandments.

The second part of this is about respecting the role of the Office for Budget Responsibility. The document before us is very clear about that. It talks in great detail about the importance of that role. Indeed, when it was first launched, the Economic Secretary to the Treasury of the time set out the benefits of the OBR, making clear the value of its

“strong, credible, independently conducted official forecasts”—[Official Report, 14 February 2011; Vol. 523, c. 747.]

She said that the establishment of the OBR and its independence from the Treasury meant that

“Governments will be reticent about introducing policies that seem to take them off course”—[Official Report, 14 February 2011; Vol. 523, c. 749.]

Well, there was not much sign of that reticence last year as the Government crashed the economy, caused a run on the pound, caused mortgage rates to rise and put pensions on life support. Indeed, we had a real-time lesson in the cost of disparaging our institutions—institutions that the Conservative party used to care about. But tonight, even after that experience with chapter 4 of the charter, we are back to a hymn of praise for the OBR.

The real problem here is not just inconsistency, but credibility. I am afraid that the many-year record since the idea of this charter was first conceived a decade or more ago has meant that the Conservative party has now forfeited the right to call itself the party of sound management; it has forfeited the right to call itself the party of growth, because the record on growth has been abysmal; it has forfeited the right to call itself the party of low debt, because debt has rocketed; it has forfeited the claim to careful stewardship of the public finances, with billions lost in bounce back loan fraud, personal protective equipment waste and tawdry stories of one dodgy contract after another; and it has forfeited the right to call itself the party of low tax, because the tax burden is at its highest for decades.

What, after all that, has this been for? We have record waiting lists, trains that people cannot rely on, and delays and backlogs everywhere. In fact, there is not a single public service that runs better now than it did 13 years ago, when the Tories took office. Low growth and high tax for a worse outcome—that is the record. When people are faced with the question, “Are you and your family better off?”, the answer is no.

Two weeks ago, we had the Chancellor’s speech on the way forward. He had four Es, and more than one person said that the biggest E was for empty, because the real problem for the Conservatives is that, when it comes to growth, the only policy they reach for is unfunded and untargeted tax cuts, and when they tried that in September, it blew up in their faces. Growth is the right question for the country, but it does not come from the discredited idea of trickle-down economics. It comes from the efforts of all of us—from every businessperson with a new idea and the drive to make it happen, and from making sure we use the UK’s strengths to make the most of the green transition that is coming, rather than standing back and allowing those investments to go elsewhere. It comes from every teacher equipping a pupil with new skills and knowledge, and from not having 7 million people on NHS waiting lists, keeping many of them out of the labour market. Talking of former Prime Ministers, it does not come from saying “F*** business”, but from a modern partnership with business that brings in the long-term investment the country needs. Most of all, in a knowledge economy like today’s, growth has to come from everyone, not just from a tiny proportion of people at the top.

Fiscal stability is an essential foundation for what we have to do—I agree with the Chief Secretary on that—but it is not an end in itself. It has to be the foundation for meeting the challenges the country faces and for giving people a more prosperous future. After many years of this debate, we look less at the latest version of the rules and more at the gap between claim and reality, because after crashing the economy and leaving the British public to pay the bill, the Government have no credibility to come forward and claim to be the champions of fiscal stability.

The idea for this charter was born in another political time, as I said at the start, and if it did have a purpose, events since have rendered it an unconvincing exercise to say the least. It certainly has not kept the Government to their fiscal rules, which have been broken many times, and it is unlikely, particularly after recent months, to convince anyone outside this Chamber that the Government have got the economy back on track.

My Intervention on the Charter for Budget Responsibility – Inaccurate forecasts

February 7, 2023 11 Comments

John Redwood
(Wokingham) (Con)

Does the Minister not think there is some difficulty in trying to steer the economy on the basis of a five-year forward debt forecast when the official forecasters have been more than £100 billion out in two of the last three years, and £75 billion out this year with a one-year forecast?

 

John Glen

I will address the provisions of the charter and my right hon. Friend’s point directly in a few moments. As the Chancellor set out last week, we have a credible plan to generate economic growth by getting Toggle showing location of Column 723people back into employment, reinvigorating a culture of enterprise and continuing to drive up standards in education, and ensuring that that happens everywhere. The Chancellor’s plans to generate growth need to be underpinned by sustainable public finances, but the global economic shocks we have faced mean that borrowing remains high. We are expected to borrow £177 billion this year—double pre-pandemic levels. That is contributing to ever larger public debt.

Along with high debt in a time of rising inflation and interest rates comes the £120.4 billion we are projected to spend this year on debt interest alone. Let me remind the House why that is. For almost two years, in the face of a historic pandemic, we took unprecedented, bold, decisive action to support people, jobs and the economy. We rolled out vaccines at a world-leading pace, we paid 80% of people’s wages, and we gave grants to businesses to help cover their bills. The costs of inaction in the face of covid-19 do not bear thinking about. I am proud to represent a Government who took the big decisions to keep the public and the economy healthy.

As inflation rose to figures we have not seen in more than 40 years, led primarily by increasing energy prices, we again took action to safeguard the nation by contributing to people’s bills. Nobody in this Government would argue that that is not money well spent, but we are also cognisant of the facts. At nearly 100% of GDP, public debt is at its highest level since the early 1960s. It would not be sustainable to continue to borrow at current levels indefinitely. If debt interest spending were a Department, its departmental budget would be second only to the Department of Health and Social Care. Not only does that direct our resources away from vital public services, but for those of us who have paid attention to the economy, it is clearly unsustainable in the long run. It is unsustainable because increasing debt leaves us more vulnerable to changing interest rates and inflation. For every percentage point increase in interest rates, the annual spending on debt will increase by £18.2 billion. That is money we could be using to invest in schools or hospitals and in the transition to net zero.

Aside from investing in the services that we need and that so many rely upon, there is another important moral point to debt. Letting our debt increase is simply racking up debt on the nation’s credit card and handing the bill to our children and grandchildren. We are not alone in our ambition to reduce debt as a share of GDP over the medium term—Germany, Canada and Australia have made similar commitments. It is not just numbers on a spreadsheet; it will have a material impact on the lives and living standards of those who have not yet been born.

Instead, we choose a responsible, fair approach. We are demonstrating fiscal discipline, which will support the Bank of England in bringing inflation down. That is carefully balanced against the need to support the most vulnerable and to protect vital public services. At the autumn statement we announced a series of difficult decisions worth around £55 billion to get debt down, while ensuring that the greatest burden falls on those with the broadest shoulders.

All Members will hope that, having faced the pandemic, war in Europe and a bout of rising prices, we will have seen the worst of this economic storm. The truth, however, is that we do not know exactly what lies ahead, and we need to create the room to respond comprehensively in the future, should another shock occur. Last year my right hon. Friend the Member for Middlesbrough South and East Cleveland (Mr Clarke) came to this place to approve rules to guide us on a path to strengthen the public finances after the worst of the pandemic had passed. By the third year of the forecast, in 2025-26, those rules require underlying debt—that is, public sector net debt excluding the impact of the Bank of England—as a percentage of GDP to be falling and everyday spending to be paid for through taxation by the same year.

Since then the context has changed yet again. To continue protecting the most vulnerable and investing in public services, the Chancellor updated the fiscal rules at the autumn statement, and we are updating the charter for budget responsibility. It will give everyone the confidence and certainty that we are going to repair our public finances. It will provide the foundation for long-term growth. In following them, we will be able to get debt down while protecting the public services upon which we all rely. The rules require that we reduce the deficit so that debt falls as a share of the economy in five years’ time. Expenditure on welfare will continue to be contained within a predetermined cap and margin set by the Treasury unchanged from the level set in 2021. I am pleased to say that the Office for Budget Responsibility confirmed in November that we are on track to meet all our rules, with debt falling and the deficit below 3% GDP in the target year of 2027-28.

Aside from the fiscal rules, the charter remains unchanged. We continue to be at the forefront of financial management through our monitoring and management of the broader public sector balance sheet. The independent Office for Budget Responsibility provides transparency and credibility via its economic and fiscal forecasts. Many colleagues have remarked on the important principle that our fiscal plans are transparent, fully costed and accompanied by an independent assessment of the economic and fiscal implications. The Government agree with this principle. There may of course be extraordinary circumstances where that cannot be the case, as we saw during the pandemic, and it was right not to delay announcing critical help for households and businesses, but in normal times major fiscal announcements should be made with one of the OBR’s two forecasts. As is usual, the spring Budget on 15 March will be accompanied by a full OBR forecast.

This updated charter puts stability first. It sets a credible plan to deliver on the Prime Minister’s key promises to get debt falling and to halve inflation, and it fosters the conditions for growth. It continues our historic support for households, as it allows us to increase the national living and minimum wage and pensions. It maintains gross investment at record levels in innovation, infrastructure and education. We have protected the most vulnerable and vital public services, and we are protecting the economy. After making the difficult decisions at the autumn statement, today we have a choice: we can sit idly by and let our economy slip into disrepair, or we can secure the foundations of our future by protecting the foundations of our economy. For those reasons, I commend this motion to the House.

 

 

My intervention on the NHS Strikes Debate

February 7, 2023 11 Comments

NHS Strikes – Volume 727: debated on Monday 6 February 2023

 

Will Quince

I remember another Scottish National party Member making a similar comment in a previous urgent question, crowing about how Nicola Sturgeon, the First Minister of Scotland, was directly negotiating with the unions and that they had paused their industrial action, but only a handful of weeks later that industrial action was renewed. Pay is of course a devolved matter for Scotland and for Wales.

I will not make unfunded promises or pledges from this Dispatch Box. I want to have an honest and open dialogue with the unions about what is affordable for the NHS, where we recognise and reward NHS staff—who do the most incredible job day in, day out—with one eye to recruitment and retention, but it also has to be fair to taxpayers; and that is the spirit in which I approach this matter.

 

 

John Redwood (Wokingham) (Con) Can senior managers of NHS England and its various trusts make more use of pay gradings, job evaluations, promotions and increments, using pay flexibilities so that staff who are doing a good job feel valued and can be paid more?

 

 

Will Quince:

That certainly is an option. My right hon. Friend talks about NHS managers. Understandably, the Opposition focus on nurses and paramedics, but let us not forget exactly who we are talking about: the entire Agenda for Change workforce, which is 1.245 million people. That is exactly why every 1% equates to £700 million. My right hon. Friend is right that pay is a factor, but it is not the only factor, which is why we also focus on working conditions and environment.

Comparing the digital and green revolutions

February 7, 2023 104 Comments

 

The digital and green revolutions compared

 

         In recent years the world has been swept by a massive wave of digital investment. Most people have come to own a smartphone, pad, desktop or laptop computer. Many have switched their entertainment from standard national tv channels to downloaded films from subscription services. Many now get what news they want from websites and social media in place of newspapers and tv news. More education and training is now done remotely on computer. Families keep in touch with on line meetings instead of a phone call. Many people communicate with friends and family on social media instead of letters and face to face to face meetings. Businesses are automating more and more processes, taking advantage of the enormous processing and storage power of electronic systems. Much shopping has gone on line. Phone apps can be used for getting a cab, following a map, booking a meal, ordering a service.  All this happened with no special taxes, no bans and  legal requirements, no public subsidy. Businesses innovated, showing how they could offer a much wider range of service over the web and people piled in to get more of it. The high price of some mobile phones and the subscription sums for broadband, software and download services was no barrier to many taking advantage. Covid lockdowns accelerated the movement. Those people who were not sure how to use the technology, or thought they did not like it, or who thought it a bit dear were tempted into adopting it as it offered the obvious way of staying in touch and placing orders for goods and services. Young people who adopted it more readily as a whole helped teach Granny who made the effort to stay in touch with her grandchildren.

 

        Meanwhile the green revolution is a top down revolution. Its main proponents are governments, large companies, universities and experts. They want people to swap the petrol car for an electric vehicle. They want families to rip out the gas boiler and put in a heat pump. They want people to give up most of their meat eating and go vegetarian. They want to discourage car and airline travel, promoting walking and cycling. So far the response has been on a modest scale. Many people think electric cars are too dear, worry about their range and about how easy it will be to recharge them. They stick with their diesel and petrol models for the time  being. Very few people put in a heat pump, finding them dear and the work involved very disruptive about the house. We have still to find the Mini or Beetle car of the electric car revolution that sells in millions at an affordable price to delighted buyers. We have not yet seen the electric heating package that people want enough to make the commitment  of time and money to the work. Some are now trying more vegetarian food, but meat and dairy eating habits are well inbred in national traditions and mothers’ menus.

 

         Governments understand enough of market principles to try to use market mechanisms to promote their revolution. They offer subsidies to cut the price of electric vehicles. They are still offering a tax free period on the power to fuel them, unlike the high taxes on motor fuels for internal combustion engined vehicles. They are imposing higher taxes on older fossil fuel vehicles using certain routes or banning them altogether from some urban settings. They are imposing carbon taxes to switch business away from fossil fuels through an adapted price mechanism. The main problem with all of this is that because it is not done worldwide by all countries the market can shift activity around to places where there is less restriction and less tax on fossil fuel technologies. Individuals can stick with old boilers and cars if they do like the performance and price of the new alternative. 

 

         To get success in the market the new idea has to be one or more of better, faster, cheaper.  On line shopping was often cheaper and certainly faster than in store.  Web calls gave you pictures the phone did not offer whilst sparing you the journey needed to meet in person. Downloaded entertainment allowed you to choose what you wanted to watch rather than relying on pre planned schedules on tv. Getting news off the web allowed you to be your own editor, free from the political distortions of conventional news channels. People were prepared to pay for these improvements or got some of them free thanks to adverts. So far most people do not see the heat pump as better than the gas boiler, and know it is a lot dearer. They do not want to trade in a  car with 500 miles of range based on a five minute filling stop for a car that may have less than half the range and uncertainties over how to find a charger when out, and requiring substantial time for a full recharge. They certainly do not pay a premium for that. 

 

 

The dangers of more state intervention

February 6, 2023 125 Comments

Governments of the centre right as of the left have come to accept and recommend a whole range of interventions in the marketplace which do harm for the best of reasons. Wanting to keep rents down at a time of rising housing costs,  rent controls have been introduced and tax and regulatory attacks on landlords in several jurisdictions. These changes become a conspiracy against those needing a rented home. Stopping landlords getting a market rent, and placing too tough a regulatory burden on them, induces many landlords to withdraw their homes from the rental market. They may sell them to owner occupiers, or keep them empty awaiting better times, or use them themselves. Supply of property for rent contracts, the very opposite of what is needed to bring rents down. If governments respond by even tougher policies, the supply will fall further. Governments who try this end up with higher rents and less choice for tenants.

 

        Wanting to keep energy prices down many countries introduced price controls. These prevent the companies from charging the market price, and in some  cases as in the UK electricity industry drive them straight into bankruptcy. They had to pay market prices to buy in the power, but could not charge market prices to re sell it. Those in the industry that produced their own power without a commensurate rise in their energy costs were charged a windfall tax. This puts companies off adding to capacity by making additional investment. The governments created a money go round charging higher taxes on a part of the industry to send subsidies to another part of the industry with a view to extending the period of lower prices for consumers before having to allow them up again. It is quite obvious looking at the energy crisis that the main cause of it is lack of supply. This was primarily brought on by the West’s need to take Russian oil and gas out of its supply for political reasons. It was also exacerbated by the wish to transition from fossil fuel based electricity to renewables, and to greatly increase demand for electricity by switching many more people to electric cars and heating systems.  The last thing you want to do in  such a circumstance is to tax energy producers more deterring new investment, or show them that if they are successful their prices will be curbed. Short term popularity with electors angry about high prices and profits leads to worse shortages. 

 

       Governments in the West also wish to accelerate the reduction in carbon dioxide output. This has led them to impose carbon taxes on energy production and industrial energy usage, as a deterrent to more use of fossil fuels. This has turned out to be a good way to show how markets work. Faced with higher costs in the EU, UK and other places with high carbon taxes, energy using industries are transferring their activities to lower cost countries with no  carbon taxes or low ones. The UK in its haste to close coal and gas power stations has got itself into a position where it needs to import electricity to keep the lights on at times of high demand and low renewable output. Cold days when the wind does not blow become problems to manage. These policies do not succeed in cutting total world output of Carbon dioxide. Instead of burning fuel at home with CO 2 produced there, the exporting country burns the fuel. In many cases switching from home production to imports increases the amount of CO 2 produced as the diesel driven ships needed to bring the product to the user adds to CO 2. The processes in the exporting countries may also be more fuel intensive. 

 

 

The battle of free enterprise and state control

February 5, 2023 102 Comments

 

 

        Capitalism has a bad name with the left who wish to make out it is characterised by exploitation of labour, overcharging and sole preoccupation with profit. Most businesses know that offering keen prices and good service are fundamental to success. They recognise that employees are one of their main resources, so treating employees well is crucial to delivering for customers and shareholders. Capitalism works best when ownership is widely spread. Many people in prosperous free enterprise societies own a home of their own. They own shares through their pension funds and their insurance policies, or they own shares direct. Many have stakes in the businesses they work for through employee share schemes. In the self employed and small business sector individuals and families own businesses and keep the profits of their labours directly. 

 

       Nationalisation and state control have a bad name with advocates of free enterprise democracy. In the Uk nationalised industries in the last century sacked much of their labour. They put up  prices, using their monopoly powers. They often delivered bad service and failed to innovate. They were kept short of investment capital in many cases because their investment competed with spending on public services and was a charge on taxpayers. British Rail was famed for cancelled and delayed trains, poor  catering and high ticket prices. The Post Office telephone service fell way behind US technology and capacity prior to privatisation owing to a lack of modern investment. There were long waits to get a phone, the need to accept a line shared with the neighbour  and little choice over equipment to use on the network.  The Steel industry got big investment in five major new plants, only to be unable to sell nearly enough of the steel and to embark on a series of closures. The electricity industry concentrated on large coal burning stations. Once privatised it was transformed by a dash for gas, cleaning it up and greatly raising its energy efficiency. Socialist supporters of nationalisation look back to that era with nostalgia, wishing to see there keener prices, better service and better employment than ever existed.

 

       It is true that there is no single country that has adopted a purely democratic and free enterprise system of government. Nor are there many examples of complete government control, though North Korea gets close. Countries are somewhere on the spectrum with the USA and small countries like Norway, Switzerland, Singapore and San Marino clustered towards the free enterprise end with high incomes per head, and Venezuela, Cuba and North Korea at the other extreme with low incomes. Most advanced countries accept a substantial role for government. They want government to tax successful people and companies more to redistribute money to people on low and no incomes to help them have a better lifestyle. They use government interventions to keep markets more competitive and to secure other social ends. The danger all face is if they interfere too widely for however good a reason, they may end up damaging markets, restricting supply and undermining prosperity.

 

 

Democracy and free enterprise reinforce each other

February 4, 2023 116 Comments

Markets are economic democracy in action. Free  enterprise Is essential to democracy, the other side of the same coin. Free enterprise and democracy are the strawberries and cream of the styles of government. In a democracy people have a say in who governs them. Because they can vote an elected official  out of office, they can individually and with others influence the debate or persuade the representative  to take their views seriously and to help them with their problems. Living in a free market, the same individuals can choose to spend their money as they see fit, helping summons more supply from the market as they with others concert their buying. They are free to offer their labour where they wish and to take a job that suits them best from those on offer.  They can set up in business for themselves, providing new products and services to the market. The more democratic and economic freedom people enjoy, the more overall freedom they experience. Freedom allows choices, brings opportunities and helps find solutions. 

 

          Autocracy, Communism and fascism  cannot  allow democracy and have to control, direct and own enterprise. Communism in the USSR  killed the independent farmers of Russia, nationalised industries and stole private property. Communism in China  controls prices, takes over businesses, scythes the tall  poppies of the residual private sector. Autocrats do not like successful entrepreneurs. They  want to be seen to be the source of all people need in life, so they can demand loyalty and obedience. Citizens in communist systems may be told where they have to work. They may need travel permits to move from their home city or town. They may find goods and services are rationed or limited in supply. They have no say over who governs them and little say over how they are governed. They need to mind their words as well as their deeds. They are required to conform to state standards and mouth state views.

 

        Free enterprise means anyone  can join the market to buy a good or service they want, or to sell one to others. In a free market all have equal access subject to price. If something is wanted and scarce the price will rise and more supply will then become available. If something is in glut its price will fall and supply will contract. Price changes will also affect demand, increasing it at lower prices and rationing it at higher. For individuals the market is the way they can have access to many of the things that make life pleasant without having to produce them themselves. Individuals and society are much the richer for exchange of services and goods, allowing specialisation, the transfer of skills and innovations, the accumulation of capital to reap the economies of scale, and to focus the best answers.

The danger is that political parties in democracies can demand too many controls and rules, limiting the choices of others and reducing the very freedoms essential to successful democracy.

 

 

The Bank of England offers no compelling understanding of inflation

February 3, 2023 91 Comments

The Bank of England did not apologise for the massive overshoot in inflation. Hiking interest rates to 4% for no particularly good reason and dodging the big issue of selling bonds at a loss, the Bank did say “Our job is to make sure that inflation returns to our 2% target”. So they accept inflation is their responsibility and they have the tools to do the job, but offer no explanation that makes sense for why they did not keep it to 2% inflation in the last two years.

They blame the higher energy prices and higher import prices the UK has faced. They do not ask themselves why China, Japan and Switzerland facing those same rising world prices kept their inflation down to 2% for China and to under 4% for the other two. They do not explain why they kept rates so low and why they kept creating money and buying bonds as they watched energy prices soar. They do not explain why UK inflation hit 5.5% before Putin invaded Ukraine.  They do confess they let demand outrun supply. They do not comment on the £150bn of Quantitative easing bond buying at crazy high prices they did in 2021 when some of us were urging them to stop.

On their central forecast they have  now slowed the economy so much this year that inflation will fall well short of the 2% target by 2025. Why? Why do the extra damage to demand and ,jobs so you generate lower inflation than  needed and worse jobs and output? We need always to bear in mind that a year before inflation took off they were confidently forecasting it would stay around 2%.

They think the longer term growth capacity of the economy has slowed again to just 1% a year. The government needs to adopt policies that prove them wrong. The Bank itself needs to revise its forecasting models and give a more prominent role to money and credit. The Monetary Policy committee fails to report to us on how much money and credit creation there has been and has  no targets for anything to to do with money. No wonder they find it difficult to get it right.

 

How do you best get growth?

February 2, 2023 142 Comments

 

How do you best get growth?

 

         Capitalism has delivered fantastic growth in choice, incomes, goods and services. People on low incomes today in rich societies enjoy the luxuries of the few of past generations. In my lifetime I have seen cars, tvs, fridges and washing machines become the everyday experience of the many when many families had none of those just sixty years ago. A lot of hard manual labour to do the weekly wash, to keep the coal fire stoked, to put cables into streets, to dig and weed fields has been replaced by domestic machines, better boilers, and diggers. Working hours have been slashed, working at home established on a large scale , paid holidays have become the  norm, cheaper clothing made in heavily mechanised factories and  great value food from an agrarian revolution have all raised living standards and quality of life. Most of this has been the result of inventors, entrepreneurs, savers investing in companies and people going to work for them. Our ability to produce everything from roofing tiles to drainage pipes, from cheese to sausages, from machine knitted socks to waterproof coats in industrial quantities with machines doing most of the hard work has transformed our lives. Seasons have been abolished by glass houses and imports of food. Distances between peoples have been narrowed by jet travel and on line communication. It took the mythical magic Puck in Shakespeare’s time forty minutes to encompass the earth. 40 seconds would now be a long wait on a digital link. 

 

           Some say we should no longer want growth as it is uses too much of the earth’s resources and places too great a strain on our planet. Whilst I have no wish to impose controls on how many babies people have or to lecture on family size, it  may be that the lower income countries that are still growing their populations will come to want fewer children in the way the richer countries have decided by individual choices. Most advanced countries now have falling populations with a fertility rate well  below the 2 children per woman needed just to maintain numbers. The advanced countries with rising populations still are only gaining people through migration, not live births.  This would be the most obvious way of reducing claims on resources. It is also true that many of the resources we need are renewable or are in abundant supply. There is plenty of water, but there is a  need for more investment to have enough clean water for everyone’s requirements. There can be plenty of wind, solar and hydro energy, though there needs to be cost effective solutions over how to store it and share it between places and times with plenty and places and times with none. There can be enough  food adopting latest agricultural techniques, but there needs to be investment and income boosts in lower income countries to tackle under nourishment and their capacity to buy it. 

 

         Growth is the way to get people and countries out of poverty. Capitalism is the best way yet developed to move countries from low income to higher income. Overseas aid can alleviate the worst poverty, tackle hunger and sickness but it takes market transformation to make a Taiwan or Singapore out of a low income emerging market economy. People need to move from  low productivity jobs on the land into cities, factories and service sector facilities. It requires leaps forward in education, in training, in company formation, in innovation, in savings and banking.