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I spoke yesterday in a Westminster Hall debate about the UK’s energy security. The Minister Greg Hands confirmed that the UK is pressing ahead with new oil and gas investments as part of an effort to reduce European dependence on Russian hydrocarbons. He told us the UK is supplying gas to the continent this summer from its LNG import facilities, to help fill their storage facilities ahead of the winter. The UK of course has  very little storage of its own. It had low storage because it used to be able to produce 100% of the gas we needed so the storage was the original gas fields themselves.

The Opposition parties continued to live in a make believe world where a bit more investment in windfarms would solve the problems of our energy supply. They revealed two mistakes in their thinking. They firstly failed to realise that electricity supplies a minority of our total energy needs, as we depend substantially on gas delivered direct to homes and factories for heat and power, and on petrol and diesel for much of our transport. If you wish to depend on renewables you first have to convert all vehicles to electricity and take all homes and factories off gas. They secondly would not accept that our present solar and wind power is intermittent, meaning we need to have back up generation capacity for when the wind does  not blow and the sun does not shine. We are often generating a majority of our electricity from gas, wood pellets, and  coal.

I reminded them that to make more wind and solar work we will need ways of storing the electrical power generated when intermittent sources do work to use on days when they do not. That may be large batteries. It might be conversion of the renewable electricity to green hydrogen for use in our boilers and  vehicles. There might also be breakthroughs to allow gas or coal to be burned in power stations with carbon capture and storage systems to achieve CO2 goals.

You might have thought official forecasters would have given up trying to prove their wildly pessimistic forecasts about Brexit had a point. After all they said unemployment would rise and it fell, that interest rates would go up and they went down, that GDP would go down and it went up. It was curious that the Bank and Treasury “independent” forecasters , the officials, felt able to publish these pieces. We were told it was fine because it was government policy to stay in the EU so supportive forecasts reflected government wishes. We do not however have them publishing supportive forecasts during a General election, even though Ministers can say it is their government policy for them to get re elected. The officials rightly respect the need for electors to make their own minds up over who to have in government uninfluenced by special official forecasts serving the current government.

I had chosen to remind people of the very inaccurate recent official forecasts of our economy to query some of the policy advice currently being given  to Ministers based on strange views of how the economy has worked in the past. I then heard that the OBR has revived a claim that leaving the EU will cost us 4% of GDP. How do they know this? Over what time period? Why doesn’t the outcome depend on what policies are now being followed?

The OBR has drawn on other people’s work, and it all seems to be based on guesses about trade. They claim trade with the EU will fall and this will cause a fall in productivity which leads to their very precise 4% GDP shortfall.If we lose exports to the EU but at the same time make and grow more things at home to cut imports from the EU that may boost GDP, not reduce it. They do not have to be less productive as they will need modern capital investment and be geared to our shortage of labour.  If we bring down our trade deficit overall we could have a stronger economy. The import model within the single market entailed the loss of a lot of UK capacity and jobs.It meant borrowing more and more money to pay the import  bills or required us to sell our assets to foreigners.

Taxpayers pay good money to have an “independent” civil service body to evaluate U.K. economic policy and supply forecasts of what that policy will deliver.

In March 2021 they did their usual budget forecast out to 2025. They said inflation would be below 2% until 2025 when it would just reach 2%.  Inflation a year later hit 9%.

If you use the war in Ukraine as an excuse you still have to explain why inflation was at 5.5% in January pre war, 175% over target and more over forecast.

They forecast growth will never be lower than 1.6% a year out to 2025. March to June this year probably saw no growth and growth in Q3 will depend on the emergency cash injections recently announced as budget adjustments.

This shows the OBR/Treasury have models that do not work based on misunderstandings of the economy. This  matters. They give wrong policy advice to the Chancellor. He should challenge it more and act on it less.

 

In OBR world cutting tax rates leads to a loss of revenue, yet if you cut the  right taxes it stimulates more activity and brings rising receipts. In OBR world if you increase taxes the deficit falls. If you raise taxes too much in reality you slow the economy too  much and the deficit rises.In OBR world if you are running below capacity there will be little inflation. In the real world if you expand money and credit massively you get inflation four and half times target even when below capacity as they judge it.

OBR/Treasury advice is in danger of delivering unacceptably  high inflation and a recession to follow. They have a long record of boom/bust advice. Why do it again?

We could  get similar and some  better forecasts free from the private sector to help inform budget judgements.

We read the government is thinking of fifty year cross generational mortgages to help people buy a home. They also need to look at supply/demand balances.

Most of the debate centres around the need to build more. It is time the government looked at demand. All the time we invite in an additional 250,000 people a year we need to build a large number of homes for people who do not yet live here. We of course want people coming to our country to live and work to have decent housing. This then helps drive prices too high for young people growing up here.

We should be less generous with permits for more economic migrants. We should make more determined efforts to help people living here off benefits and into jobs. We should do more to encourage and support investment in machinery and AI to replace lower paid jobs. Many people want to buy their own home but there is a shortage of available affordable homes for sale. Time to reduce economic  migration  into the U.K..

Worldwide advanced country governments are committed to the road to net zero  by 2050. Their plan at Glasgow COP 26 was to speed progress. The sudden invasion of Ukraine disrupted the supply of oil and gas, drove up prices and made them more apprehensive about their duty to keep the lights on and  homes warm. The EU announced that it would henceforth regard gas as a green transition fuel and accept more of it. President Biden turned from wanting the rapid run down of oil and gas production in the USA to boasting that more oil and gas is now being produced on his watch than happened in early  Trump. The President is urging oil and gas companies to drill and produce more, and urging refineries to convert more to products. In the UK the government has moved policy on to favour North Sea oil and gas production instead of imports, and is examining the case for allowing onshore gas drilling again.

I would be interested in your thoughts on how far this rethink should go? How much more do governments need to do for the current decade to offer enough affordable energy?  It is clear India and China as large users of energy and producers of CO2 now plan to mine and burn yet more coal, delaying the world’s wish to move on from coal as soon as possible. Germany too is being forced short term into more reliance on coal as Russia cuts the supply of gas via pipeline.

Decarbonisation plans hinge on wholesale electrification of heating, industrial processes, transport and much else. In turn this will need a massive expansion of electrical power generation which must come from renewables or nuclear. It looks as if this will need methods of storing surplus wind and solar power when it is available to deliver enough power when the sun does not shine and the wind does  not blow or blows too much.  What do we think a realistic timetable is for installing the extra capacity and confirming the technologies for storage and smoothing?

It will also need a consumer revolution. People will need to accept the free smart meters which half the public refuses. Consumers will need to be tempted in large numbers to buy heat pumps and electric cars. How far off a popular revolution are we? Without it decarbonisation will make slow progress, and the huge increases in CO2 from the emerging world led by China will overwhelm  the global figures.

This week at the G7 Germany as host nation invited Senegal, South Africa, Argentina, Indonesia and India to join the members. India as one of the largest economies and the most populated democracy has been several times before. The presence of two African nations shortly after Chancellor Scholz’s three nation African trip is more interesting. 

    The EU has  been stung by the exit of France from Mali and the growing influence of Russia in the Safel, the long belt of land to the south of the Sahara from coast to coast. The EU wishes to buttress its influence in this region, offer military training and assistance against Islamic terrorism and help stabilise countries to cut the flows of migrants northwards. Spain is particularly keen to extend an African policy to NATO as well as the EU. Recent dangerous eruptions of groups of  migrants through the high and tough fencing that separates Meililla from Morocco has worried them. More than 23 people died in one of the attempts to break into the Spanish enclave on the north coast of Africa. 

    The EU is keen to establish military trainers and advisers in these states to help them with establishing and maintaining order. Chancellor Scholz was offering EU food as trade for Senegal at a time of disruption to |Ukraine grain supplies to the region. He went on to South Africa to develop the long standing relationship with Sasol to create low or no  carbon fuel substitutes for petrol and diesel. 

History shows us that Treasury and Bank advice for the last fifty years has been poor, or in some cases Treasury advisers failed to prevent Chancellors making bad mistakes. 

 

1970-73   The Bank allowed a massive explosion of credit, creating a secondary banking and property crisis. Inflation took off, and the Bank posted  higher rates to contain it. A collapse was inevitable

1973-4   An oil crisis brought on by OPEC hike oil prices and cutting supply added to the inflation. Higher interest rates and the net income hit from higher prices took the economy into recession and brought the property and banking system into trouble. 

The Conservative government followed pay and price policies which did not work and failed to control the boom/bust policy of the Bank of England over credit and property valuations.

JR view – too  inexperienced to have a  view of the policy errors. 

1974-6  A Labour government came in thanks to economic failure by outgoing Conservatives. It decided to spend and borrow too much. Inflation continued and the government was forced into a visit to the IMF to borrow money to shore up the falling pound.

1976-9 Inflation and low growth stalked the UK economy , allied to a winter of strikes. 

JR view I disagreed with  the big uplifts in public spending and borrowing , especially through nationalised industries and saw them as inflationary and negative for growth

The Labour government followed a disastrous economic policy unconstrained by Bank or Treasury advice or maybe with their agreement. 

1990-92  The UK joins the European Exchange Rate Mechanism. Economy enters a period of too much money and credit expansion,  bringing on inflation, to be followed by a weak pound, excessive monetary tightening and a big recession. 

JR view I wrote a pamphlet explaining how the ERM would be destabilising and argued the case against joining and against  staying in. 

The Conservative government was to blame for accepting strongly held Bank and Treasury advice to join and sticking with it after it was clear it was a disaster. Conservatives were evicted from government for 13 years for economic incompetence. 

2004-7  Treasury, Bank and Gordon Brown allowed a big increase in credit and expansion of commercial  bank balance sheets, claiming this would not be inflationary. Balance sheets of banks and borrowers become very overextended and inflation rose. Bank, Treasury and government then reined in credit too abruptly, raised rates and forced write offs of debt leading to the great financial crash and recession of 2008-9

 

JR view I opposed with my party the big build up in debt, and I also opposed correcting the imbalances so abruptly in a way  designed to bring on bank collapses. 

The Labour government lost office, so far for 12 years, based on its economic incompetence. 

During all this time of boom/bust and defeats of governments I do not recall much comment on  senior Bank of England or Treasury officials offering bad advice. Some of these events were  brought on by following official advice. There has been no proper enquiry into bad advice and wrong forecasts.