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Below you will find my latest article for Conservative Home:

Rishi Sunak is a clever man with a good life story. I thought he was badly treated over his wife’s wealth and tax affairs. Jealousy is no part of Conservatism, where we welcome people of all backgrounds, rich and poor, achievers and inheritors, people who can make it  for themselves and people who need help. In office I always found him polite, willing to explain his position and interested in what colleagues had to say. I have never had any personal differences or problems with him.

I also found myself unwillingly drawing into more and more disagreement with the analysis he offered and with the actions he took as Chancellor. He started well amidst great popularity when he rightly backed and developed plans to offset the big economic damage of lockdown. I welcomed some money creation by the Bank in March 2020 and wanted a scheme to subsidise jobs whilst people were banned from working. Disappointment first set in when Rishi declined to treat self employed and small business people with the same generosity in all cases, leaving  some smaller businesses at risk and threatening us with reduced capacity when we reopened.

I took issue with the increasingly pessimistic forecasts coming from the OBR which he accepted and  from the Treasury which he signed off. In the budget debate of March 2021 I stressed that the forecasts were suggesting  too large a budget deficit and borrowing based on low field estimates of tax revenue. There was no need, I argued, for a £12bn tax hike through National Insurance.  A year later we see the central government deficit came down by a whopping  £131bn compared to forecast, and tax revenue surged bn £77bn over estimate despite or because of  no tax rate rises that year.  Rishi became a high tax Chancellor based on these views. Why did he do that?  He told us he believed in low taxes yet spent his time in office putting in new taxes and raising the rates of old ones. He could instead have put in a growth strategy, challenged unrealistically gloomy forecasts and showed the power of selective tax cuts.

I voted against the National Insurance rise. Why did he decide that the missing £12bn he thought he saw in the accounts should be provided in this way? It was a clear violation of a Manifesto pledge. It was a  tax on work and on business at a time when we needed to encourage both. He knew he needed to impose more discipline on the spending, particularly on the runaway budgets for test and trace and for covid loans, but found this difficult. He correctly agreed that the extra money going into the NHS needed to be tied down to specific spending needs that would boost the workforce and tackle the backlogs but did not deliver. It is surprising given this  that on his watch the taxpayer paid large sums to the private health sector in the UK to use their capacity for NHS work, yet failed to use that capacity fully to keep the waiting lists down.

Rishi started his campaign for leader defending the Treasury orthodoxy. No tax cuts could be afforded. The package he had announced to help offset energy bills was the answer. He would fight inflation as his single crucial priority. This was difficult to believe. He had, after all, signed off a further £150 billion of money creation and bond buying extending right through 2021, well into the period of rapid recovery. This was likely to prove inflationary. He pledged full taxpayer and Treasury backing for the Bank for any losses they might make on the large quantities of bonds they bought at deliberately elevated prices. These were  not the actions of a cautious man preoccupied by the threat of inflation.

Under the pressure of the campaign he then shifted position. Removing VAT on domestic fuel was a good idea after all. In office he had always resisted VAT cuts and seemed to take the view that we could not change VAT in Northern Ireland as we wished. He did  not favour resolving this through unilateral action.

He reasonably has also shifted to the  view that we could borrow a bit  more this year anyway as energy prices were looking worse. He now goes along with UK legislation to resolve the Northern Ireland protocol though still thinks the EU is about to do a decent deal with us, which several years of negotiations has shown to be unlikely.

Throughout the leadership campaign he has struggled to come over as Conservative.  Where we want a lower tax society he in office put in major tax rises on incomes, profits, employment, energy  and digital services. He has allowed or supported major expansions of state activity, adopted Labour’s windfall tax and looked happy with an ever widening range of controls, rules, taxes and subsidies. Conscious he was  not appearing to be Conservative enough he then adopted some punk Conservative proposals that he thought might please. There was the wish to charge people £10 if they did  not turn up for a GP appointment, which annoyed many Conservatives who think the problem is more the other way round, actually getting one without cancellation by the NHS. He said he will double the number of deportations of foreign criminals without explaining how this would work given the trouble the government he belonged to had in handling criminal activity allied to migration.

I have no reason to doubt the poll findings and Conservative Home’s surveys which suggest Liz will win with around twice as many votes as Rishi. If that proves to be roughly right it will confirm that the Conservative party is in a mood for positive and radical action to bring inflation down and try to see off a long and deep recession to follow. Rishi’s strong suit was said by his followers to be his economic and business understanding and experience. It is I fear members appraisal of his time in office that has proved his encumbrance. He did put up those taxes. He did back the Bank, triggering an inflation almost three times target before Russia invaded Ukraine. He has changed his stance a bit during the campaign about whether we need to fight recession as well as inflation.

I think the senior people in our party who pushed Rishi forward and tried to make him the shoe in establishment candidate did his cause harm. Their enthusiasm for an economic  policy which had given us 10% inflation and may give us a recession was tone deaf to the mood of members and the country. Claiming it was what Margaret Thatcher would have done was so silly and wrong. By digging Rishi in behind  a system and policy that had misfired  they did not allow room to offer something better, let alone allow any reflection on what has gone awry economically in recent months. When we need change and improvement an attempted establishment stitch up is a bad look.

Conservatives want a better deal for all those who work hard, who set up small businesses, who battle on in self employment, who want to grow the economy and create more and better paid jobs. Raising productivity and helping more places to catch up with London’s dominant economic performance requires more freedoms, more private enterprise, and lower taxes as well as more transport,water and energy capacity. Socialism penalises such people and makes the outlook worse. You cannot tax us out of recession though you can tax us into one. You cannot regulate prices down, you need to encourage more output and supply. Rishi flew too close to Treasury orthodoxy and got too keen on Labour ideas to win more member votes. Liz will speed more people on their personal journeys as training, education, self employment, opportunity come to touch many more.

One of the features of the OBR/Treasury model that works badly is the ability to forecast the all important public sector deficit or amount that the state needs to borrow each year. This is all important as the forecast drives tax policy. Whenever the  model forecasts a high or rising deficit the cry goes up to increase taxes.

The last two years saw massive over forecasts of the likely deficit. It seems the model underestimates the impact of recovery or growth in output and incomes on the deficit. Faster growth spurs considerably more revenue, as each marginal pound of extra personal and company income is taxed more highly than average income. It is also more likely to spent more on discretionary items that attract more VAT and transaction taxes than purchases of the basics.

There is also an inbuilt hostility to any laffer effect. Cutting Stamp duty to stimulate transactions recovering from covid for example was scored as cutting revenue but the overall boost to taxable activity was positive and Stamp duty itself overall rose.

This financial year we may discover the model makes these errors in reverse when there is little or no growth. I expect the deficit to exceed the OBR forecast of £99 bn given the big hit to real incomes and the marked slowdown in activity. The bizarre way of counting so called debt interest at a time of high and rising inflation will also push up the stated deficit. So far this year the government has paid bond holders  just £11.6bn of debt interest in cash payments. It is scored as £39.8bn of spending given inflation effects on indexed debt with no accounting offsets for gains on erosion of real value of the bulk of the debt from inflation.

 

There is renewed interest in productivity. The way to higher pay and better services is to work smarter. Applying new technology and more machine and digital power can help employees achieve more. Improving ways of working to make them easier with more right first time can save money and improve service. As improvements are made so it is possible to share the financial benefits between the service users and the providers.

UK productivity has been disappointing this century. The ONS figures for public service productivity shows that our large public service sector has been particularly poor. Between 1997 and 2019 pre pandemic total public sector productivity rose just 3.7% over the whole period. In the first decade under Labour, 1998-2008, it did not grow at all. In the following period it grew at 0.4% a year.  Public service productivity fell over lockdowns and has still not got back to 2019 levels.It was 6.8% below average 2019 levels in the first quarter of 2022,  more than wiping out all the gains of the previous two decades.

This should be a matter of grave concern. Productivity of making welfare payments, for example is well down despite the arrival of much smarter computer programmes and automated payment systems. In the case of education some argue there can be a need to lower labour productivity by allowing fewer pupils per teacher or more teaching assistants per class. There are also ways of raising productivity when it comes to support services and use of on line materials.

The private sector has managed a bit better record on productivity, though here too there are service areas where a build up of more regulatory requirements and greater administration has offset gains from more digital processing and record keeping. Factory productivity has continued to advance rapidly in the best cases with the application of more computer control and robotic handling.

It is time the Cinderella of productivity came to the economic ball. There are ways to raise quality and reduce costs at the same time which are much needed in some public service areas.

The strikes that swirl around the railways are damaging a business in trouble. The railway main  problem is it lacks fare paying passengers. The mainstay of the passenger railway prior to 2020 was the five day a week commuter into  city centres. They were made to pay  large sums for season tickets as they had no real choice over how and when to get to work. Covid lockdowns and the move to hybrid working has demolished the railways main pool of passengers. People now may only go  in twice a week to the office . They may go in at other times of day that qualify as off peak.

The passenger market railway managers  say they  wish to expand is the leisure market. This has often been a discount market where people choose to visit places when they are offered cheap tickets. The railway often declines to run special trains to serve popular events which might  offer some better fare opportunities.

Going on strike puts more people off relying on trains as well as losing most revenue on strike days. It gets occasional commuters doing more from home or finding road based alternatives.

The employees say they want a pay rise close to inflation along with job guarantees. All the time the railways are so short of business they cannot afford large pay rises. The pay increases the industry would be willing to pay depend on reaching agreement on working smarter. All employees need to buy into boosting fares and curbing costs to give them the best chance of keeping their jobs.

The government needs to stress that paying more and more subsidy to run more and more near empty trains is not a good use of taxpayers money. It also needs to allow more competition over using the tracks to run services and over putting in  new links to get the railway to where the potential customers are. The Hull train services are a good example of how competitive challennge can create better service and new demand.

Ever since the Maastricht Treaty the Treasury official advice has been a version of the Treaty controls on EU economies. These were designed for countries in or planning to join the Euro, so they were answering the question  how do we get these economies to converge. They were not designed to optimise the growth/inflation outcomes, and usually entailed the target economies running with considerably higher unemployment than countries on different systems. It was only when covid and lockdown allowed the Euro controllers to undertake large QE schemes creating huge liquidity did the EU abandon the Maastricht criteria, and go for a mixture of much faster inflation and a temporary fall in unemployment from stimulus.

The two controls were to limit the budget deficit to a maximum of 3% with a lower average deficit across the cycle, and to try to get state debt down to 60% of GDP. This became more fanciful as the years rolled on, so the new aim is to get highly indebted states to start reducing debt as a percentage of GDP. The UK followed this with fervour, with an annual debate on progress and full reports to the EU, even though it had no intention of joining the Euro and did not face the same penalties for Treaty breaking on deficits as Euro members did.

Out of the EU the Treasury has reformulated these two controls, but they remain similar. It is now clear that in recent years they have not led to a combination of low inflation with good growth. The official forecasts have tended to be too pessimistic about debt and deficit levels leading to a bias in policy to higher tax rates than needed. There is also the issue of whether some higher tax rates are in themselves self defeating, leading to less activity and lower revenues than a growth based model would produce.

So Treasury orthodoxy at its worst conjured up a National Insurance Tax rise to come in in April 2022, a tax on jobs and a hit to real incomes at exactly the point where high inflation was undermining real incomes anyway. The official view was we needed to raise an extra £12bn and this was a good way to do it. Then they discovered an extra £77bn last year in tax revenues over forecast.

Any sensible economic policy aims to control public spending by concentrating on priorities and seeking good value for money. Excessive borrowing is not a good idea, and a control over how much tax revenue goes on servicing debt is a wise precaution. Good budgets and a strong Treasury value for money based Spending Control department is important. If the aim is to see off a possible recession higher taxes are a very bad idea. If you wish to have a lower deficit then more growth is a good way to achieve that.

At last there is widespread interest in Treasury (and Bank) orthodoxy. I have been critical for sometime of the models and forecasts the Treasury and Bank provide, which do not help policy makers make good decisions. I have also been critical of the fiscal rules, which are the repackaged Maastricht rules. Under these controls and with these forecasts we have ended up with inflation five times target, and with the threat of a five quarter long recession according to the Bank. We can do better.

I have drawn attention to the Bank’s confident forecasts last year that inflation this would be 2%. I queried if it was wise to continue creating so much money and keeping longer term rates so low last year when recovery was well set.  I have also pointed out in answer to a Bank which says they only got it wrong because of the war in Ukraine, that inflation had already hit 5.5% in January 2022 before the war. That was  some 275% of target. I disagreed with the Treasury at Budget 2021 when they forecast a huge budget deficit for 2021-2 and when Treasury advice  told the Chancellor he needed to put in tax rises to plug the gap. Come the end of the forecast year they reported £131 bn less central government borrowing than estimated! I said revenue would grow faster with faster growth which we achieved. This was before any of the tax rises came in to damage it. As a result last year revenue beat forecast and model prediction by £77bn. The OBR said they did not understand why company tax had been so good, the very company tax they wanted to increase in later years by putting the rate up. It is likely the Treasury/OBR forecasts of increased revenue from higher rates next year will prove optimistic against the background of recession.

It is important to get a common understanding of OBR and Bank independence. I am not recommending less discipline or less independence. Indeed we clearly need more discipline on inflation as the current rates are unacceptable and wide of the plan and targets.  Let me have another go at explaining the facts about the current control system. The Bank’s MPC is independent when it comes to setting the official short term interest rate, and no-one is suggesting taking that power away. It is not independent when it comes to influencing the other key interest rates. These have been manipulated on the market by the Bank creating money and buying up large quantities of bonds to keep longer term rates down. These programmes have always required the written consent of the Chancellor, and a full Treasury guarantee against losses on the bonds. No-one can seriously claim the Bank is independent when it came to printing £895bn of new money and buying such a large portfolio of bonds. These decisions dominated money policy and interest rates for most of the last decade.

The OBR is free to publish what forecasts it wishes based on the OBR economic models at Budget time. However, the model they use is the old Treasury model they inherited. Any amendments to the model are decided jointly by the Treasury and OBR. The assumptions used to produce an official forecast run are often decided by or influenced by Treasury officials. There is much close and iterative working between Treasury and OBR officials throughout. Any government should in a free society be open to challenge over the conduct and outcomes of economic policy. It is open to any expert forecasting House to be very critical of policy or to take on official forecasts. Sensible Ministers look at outside forecasts as well as the official ones and take interest in relative success rates of forecasters.

In a later piece I will go into what may be producing poor outcomes in these official models.

Yesterday U.K. wholesale electricity prices were at 414 euros a MW hour . In Germany, France and Italy they hit Euros 465 a ME hour. This  is a tenfold rise on a year ago.

The U.K. has been linked into the European market by interconnectors and is often a net importer thanks to the policy of keeping us short of capacity. This summer we have a small surplus to export but the winter may well prove more difficult.

The  continent is facing a damaging storm of problems. The wind often does not blow much, hobbling  the windfarms when we have high pressure and no westerly winds. The low level of water in reservoirs and rivers has hit renewable  power from hydro in Norway, Italy, Spain and elsewhere . The French nuclear fleet has maintenance issues at several plants and is short of cooling water to enable them to run at others. Germany has closed three of her remaining six nuclear stations and is still planning the closure of the rest by end year. The continent is racing to get Russian gas out of its system before Russia throttles the supply taps further.

Too little attention has been paid to security of supply and too much trust has been placed in renewables which do not always deliver. The U.K. has just shut one of its nuclear stations and plans to close all but one of the rest this decade. Even allowing for Hinckley C coming on stream we will end the decade with less nuclear than we began. That is why we need to keep all our gas plants and get more domestic gas out of the ground. On a bad day for wind the U.K. gets under 2% of its electricity and well under 1% of its energy from wind turbines.

Coming out of covid lockdowns we have been short of all kinds of capacity to supply goods and services. Some shortages of capacity had been building for a long time thanks to public policy and public services. Some have developed more recently. All were badly exacerbated by pent  up demand during lockdown and by the impact of lockdown on the labour market.

The NHS lacked bed capacity before covid. Large extra  sums were put in prior to the virus but the managers rarely  managed to increase beds and provide the medical staff to deliver the extra treatments and operations needed. During covid Ministers made them  put in a lot of extra Nightingale capacity. There was a reluctance to use it and then early closure of it, writing off the investment. Taxpayers also paid to take over most of the capacity of the private sector hospitals for the severe covid period. The Ministerial idea was to get much of the routine work on cataracts, hips, knees and the rest in covid free wards in private hospitals. There were reports of insufficient use being made of this capacity, so waiting lists soared. Somehow Ministers now need to direct more of the extra  committed cash into providing more capacity to tackle the enlarged backlog.

Many highways authorities around the country have been busy reducing road capacity by traffic management measures and closures of lanes and through roads in the name of being green.The result is more congestion, more exhaust pollution in traffic jams, an increase in business costs, delays with deliveries and general  inconvenience.

I have written recently about the water regulator, doubtless in part responding to EU directives, trying to cut individual use of water and leaving us short of reservoir and borehole capacity. The ultimate renewable resource is now scarce. No proper additional water provision has been made for the millions of migrants who have come to our country this century.

We are in the midst of a shortage of gas and electricity. Some days wind turbines only manage 2% of our electricity, well under 1% of our total energy yet the Regulators seem to think more windfarms are the answer.Ministers have now altered their line and accepted that at least for this decade we need more gas.Until there are good commercial ways of storing wind power on windy nights to use on calm days we need more reliable power. We now need to promote more U.K. gas, oil, biomass and hydro power as quickly as possible. Ministers were right to keep what little coal generating plant we have left on stand by in case the renewables produce too little.

Amidst all the talk of excessive  bills there  needs to be focus on solving the underlying problem of power shortage. We cannot rely  on imports from a Europe even shorter of energy than us.Even  friendly Norway may not  have electricity to spare as low water levels mean less hydro.France is struggling to keep her big but ageing nuclear fleet going. we need more of our own power. Of course government needs to help those in need pay their bills, but we have to solve the underlying scarcity rather than press on with ever more subsidies and regulatory complexities.

 

 

If you want to end up with many  in poverty and many fleeing your country to escape economic disaster you should follow Venezuelan  policies.

They sought  to control a wide range of prices below the level business needs to charge. This slashed supply and drove  more businesses into bankruptcy, or stopped people trading there. Then they  nationalised key industries. This drove out what remained of overseas capital and technical skill. Venezuela converted herself from being one of the  most important oil producers into a country struggling to produce a small fraction of potential. The country lost big revenues.

The Starmer plan to stop energy prices going up will require taxpayers to subsidise energy companies otherwise trading at a loss, or require large sums to bail out energy companies that have gone bust. How does it help a customer to save money on the energy bill, only to have to pay more tax to deal with the corporate damage?  The current price controls failed to stop prices going up and  bankrupted a lot of companies. Bulb is proving a dear pensioner of the state as a result.

There is competition in water provision for businesses in our system. The householder cannot switch suppliers so most of us have to get our water from a regulated monopoly. These companies are now under the spotlight as there is an overall shortage of stored water for a dry spell so far this year. There are also too many sewage discharges into our rivers.

The nation should also be alarmed that we are constrained from doing things that need access to more water. Farmers are discouraged from irrigating more food crops, and are prevented from extracting sufficient water from rivers when flows are low for obvious reasons. The water companies have not done enough to help them find access to safe water in dry periods. Some industrial activities also need plenty of water, and the generation of power from water needs ample supply.

 

The competition allowed in business water provision allows choice of retailer who provides the customer interface, sends the bill and deals with issues. The retailer ,however usually has to buy the water and the waste water services from the local monopolist, so the impact of choice is limited.

The simplest model to bring more effective  water competition to the many is to allow any water company to supply to any consumer using the existing pipe network as a common carrier. This will reduce the amount of regulated monopoly considerably and will allow new entrants to invest in new storage or borehole water they can provide in addition to current amounts. The pipe network will need rules on quality of water put in and on access rights to pipes given their capacities. The existing rules on water quality should suffice and are already being enforced.  Where a monopoly pipe is already being used by the monopolist at full capacity then there will need to be a new pipe anyway and that might then be put in by a competitor if the monopolist refuses to make more pipe capacity available. Over time we might see new capacity to the pipe system added by new owners, or arranged by the current pipe monopolists accepting a regulated return on its use.