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I have recently been sent a copy of this interesting private email  from Dr Spendlove of Special Projects  to his civil service boss  Dame Lucy Doolittle:

 

Dear Lucy,

             I think your memo asking us to find ways of co-operating with Labour in opposition to avoid the U turns and difficulties the Coalition government have experienced was a stroke of genius. I am so glad you persuaded me to stay on after the 2010 election when I was down in the dumps. 

          Your suggestion reminds people of all the mistakes of the Coalition politicians where they failed to listen to our good advice. Those failures did lead to a series of policy reversals, most notably with the latest budget, as with the sale of forests.  It also  implies that serious people in the civil service  do not think they can win again, without being in any way disloyal.  The civil service is at its best when it is loyal but prudent, working with our current masters but planning  an orderly transition should that be the people’s wish. We do need to begin a serious process of preparing them for power, as some in Labour will also wish to rewrite the rules of government which have been so carefully constructed here at home with the help of the EU. They need to know in advance there is little scope for manoeuvre in the circumstances.

          Meanwhile I am sure you are alert to outstanding business with the Coalition. Now we have succeeded in implementing our plan of public spending  rises in cash and real terms in the first two years of the Coalition, the difficult years, we need to ensure that Ministers do not now implement the damaging cuts we have dissuaded them from so far. We left some very tight numbers in the more distant years in 2010. We now need to explain the political wisdom of quietly moving away from those. There is renewed interest in growth, and we can suggest to Ministers cuts now would not help it. All Ministers, will I am  sure see the dangers of unpopular cuts ahead of an election. It was a nice touch to make sure official figures for the economy take full account of the likelihood that reduced levels of public spending  growth have already damaged output. We can adjust them upwards later should it clearly emerge we have been  a bit too cautious.

        We need to be aware of a new stridency in the Conservative party over European matters. We need to ensure they are not able to opt of all those excellent Criminal Justice measures in the EU that we have helped create. There should be a majority in the current Parliament to keep them, and Labour will I am sure be understanding. I would be happy to be a secondee to Labour, as working with them might improve our mutual understanding on these sensitive issues. We also have a duty to brief Ministers of the importance of not trying to disrupt this autumn’s complex negotiations on  keeping the Euro together with any demands for the UK to get powers back or have a looser relationship. This  would be seen as very unhelpful by our partners and lead to a further loss of UK influence, which is bad enough thanks to our position on the Euro and banking matters.

          I am pleased to report that several of our former colleagues have found good jobs in consultancies and other private sector areas where they can use their wisdom and skills well. They tell me it is not too bad out there, and they of course do have the nice advantage of the generous compensation Ministers so thoughtfully provided when we explained to them the complexities of their plans to slim down the civil service. I fear we will need to make more use of outside help again, now we have lost so much talent through the voluntary redundancy programmes.

 

Yours in hope of a new assignment

 

Roy

 

 

           Yesterday the Today programme ran an interview with an IMF spokeswoman who told us cutting a deficit at the wrong time could be self defeating. She  was asked by Mr Davis if we cut £1 of deficit how much economic output would fall. She said it could do 6-10 times as much damage. He pressed her to give actual percentage figures. She said if the deficit was cut by 1% output might fall by 0.5% in a good case, but could fall as much as 2% in a bad case if the economy was already weak.

           At this point the interview should have become interesting. Surely sharp Mr Davis would ask why she had scaled her 6-10 times back to four times  with just one additional  question? Would he ask what evidence she was using? Which deficit reduction programmes had they examined?  Had she examined the cuts in deficit and spending plans  in the early 1980s and early 1990s in the UK, both of which led to good recoveries? Could she explain why Sweden had grown so well since the 1990 cuts? Why did the new Scandinavian model where growth is faster  rely on much lower public deficits than the UK or Greece?  Why do all IMF programmes demand cuts in spending and tax rises, if they now think this cuts national income? Why did they impose such cuts on Greece at a time when its economy was clearly in free fall, if they now think this will make it worse?

          Instead he let her go on to assert that cutting people’s benefits and pensions would be much better than cutting other types of public spending. He might have asked her how cutting people’s spending and general demand would help, where cutting civil service salaries would not, but failed to do so.

          No-one was invited on to debate with her, no-one was interviewed to provide balance. Surely if the BBC regards such a person as an expert they should be asked tougher questions about their research, what numbers they have produced, and why they think it is right? The interview was remarkable for giving us no actual figures or any country experience.

          Meanwhile the UK state debt goes on up and up. Are there no limits to taking on debt? Why is borrowing an extra £10 bn a month an insufficient deficit? Why does it lead to the economy declining? How would borrowing say £15 bn a month provide growth?

           Labour inherited a state debt of £290.3 billion (outstanding gilts) in 1997.  This rose to £355.5 bn by 2005, an increase of 22.5%.  By March  2008 it was up to £478.8 bn (before the Credit Crunch crisis hit fully), an increase of 65% from 1997. By March 2010, just before Labour left office, it was at £913.5bn. This took Labour’s increase in the state debt to £623bn over 13 years, or an increase of 214.7%. I am excluding all the PFI/PPP and bank debts also incurred.

           The Coalition debt reached £1163.8bn by March 2012, a further increase of £250.3 bn over 2 years, or 27.4% on their inherited base.  This means the debt to GDP ratio (just taking money borrowed via the gilt market) has reached around 77% of GDP.

            However, the Bank of England has bought in £375 bn of this debt, or almost one third of it. If the government simply cancelled this debt, and the Treasury loan to the Bank financing it, UK state debt on this number would fall to £788 bn or around 52% of GDP, a more modest proportion by modern government standards.

            The government  is not rushing to cancel this debt. No doubt it is worried how such a course of action would be perceived by the markets and media. It has four options for its quantitative easing programme:

1. Carry on with more of it. It keeps the rate of interest on government debt at very low levels, making the government’s excess spending seem affordable.  

2. Stop new quantitative easing, but leave the purchased bonds with the Bank of England. As individual bonds are paid back, the Bank would reinvest the money in other gilts from the market, keeping the QE amounts intact.

3. Allow the repayments of gilts that occur to reduce the amount of gilt edged stock owned by the Bank over time, gradually working it out of the system.

4. Sell the Bank’s gilts back to the market, to recoup the created money from the system.

Memo:   Between 1992-3 and 1999-2000 Cyclically adjusted UK net government borrowing was slashed from 5.5% of national output to -1.1%, a turnround of 6.6%, and the economy expanded by around 3% per annum

Between 1980-81 and 1982-3  Cyclically adjusted net borrowing was cut from 3.4% of GDP to -1.4%, a reversal of 4.5%. The economy started to grow As the programme was completed and grew continuously until the ERM disaster at the start of the next decade.

 

Conversely, large increases in the Cyclically adjusted net borrowing occurred piror to the mid 1970s slump and IMF visit, and prior to the Credit Crunch of 2008-9.

 

               That was quite a storm. After years of rising standards, with each year showing an improvement, we reach a year when fewer young people are awarded A* to C grades.

                Some  teachers complain that good pupils have been marked down. They say that if they had been told what the new higher standards were, they would have prepared their pupils to achieve them. They say the marking has been too tough. It was, of course, teachers undertaking the marking, with other teachers advising the Exam Boards on the papers and the marking system.

                Other teachers say it is important to arrest grade inflation. They think it had become too easy to get an A or A*. They hope this latest set of results marks a turning point in establishing and maintaining standards of achievement.

                There seems to be some uncertainty about whether the current system is trying to establish an absolute standard of achievement which stays the same year after year, or whether they wish to have a similar proportion getting higher grades each year by fixing the pass mark through keeping the proportions of the different grades the same.

                 It is unfair on those taking the exams if they do not know what is expected, or if the standards change between the time they start and the time they finish without them knowing it. It is particularly unfair if  someone needs a C or higher in a GCSE to go on to further study, and has just failed to get this through some unannounced change in the standard required.

                  A case can be made for a different approach to exams, and reconsideration of what is expected. Some older people who did O levels think a return to their virtues could help. I am not  sure. O levels required a lot of learning by rote, where the information is now easily available to anyone who wants to look it up. O levels did also require some different levels of thought and attainment from GCSE, which might be worth considering as part of a new GCSE syllabus. Some GSCE syllabuses include items which are good additions to the old O level.

                 I am myself now unsure of what is going on and what is needed for 16 year old qualifications. To do well in the 6th form students should need some basic knowledge, good skills in maths, English and foreign languages depending on their choice of 6th form course, and a capacity to study independently. How far does GCSE prepare young people for that? How could it be improved? I look forward to your views.

 

              I find it difficult to do interviews on the state of the economy. The BBC interviewers all think there have been large cuts in public spending. They want to debate the question should the state spend and borrow more to lift the economy out of recession. I always have to start with explanations of just how much extra the state is spending and borrowing. They cannot point to anyone recommending a  large figure for extra state spending and borrowing,  who thinks deficit reduction is not important. They cannot explain why so much state spending and borrowing so far has not produced the growth most of us want. Under the Coalition government  an expanding state sector has increased national output, but not by enough to offset declines in the private sector.

               I am a strong supporter of the government’s Plan A. That Plan was stated in words. It was to remove the structural deficit by 2015. 80% of the work would be  done through spending cuts, and just 20% through increased tax revenue. It would actively promote a private sector led recovery by supply side measures. That was a good plan, and would probably have worked fine. The trouble is they never implemented that one.

               The embarked on Plan B in their first budget. This kept the sensible idea of eliminating the structural deficit by 2015, but decided to do it by a huge forecast increase in tax revenues, whilst allowing public spending to rise. At the time I suggested the tax forecasts were too optimistic, as the higher rates were always likely to lead to revenue shortfalls.  I also suggested that if they simply froze public spending  for the first year, they would borrow £160 billion less over the 5 year period of this Parliament. That would have given them more leeway and help secure success. They opted for a plan which proposed borrowing an extra £451 bn over five years instead, to allow a substantial spending  rise in the first year.

               Now we are on Plan C. Plan C delays eliminating the structural deficit until 2017 or later. It is seeking to reinstate some of the cuts in public capital spending made by Labour and included  in Plan B. It recognises that revenue will be lower than forecast in Plan B. It is, if you like, a massive fiscal stimulus plan, based on borrowing  £556 billion  extra between 2010 and 2015. Latest figures imply they may well add additional fiscal stimulus to this package, as so far this year they have borrowed £9 billion more than budget. How much more borrowing do the additional  fiscal stimulus enthusiasts think it takes? Why hasn’t the huge fiscal stimulus administered by the current large structural deficit done the job?

           State borrowing is simply deferred taxation. It all has to be paid back, with interest, by taxpayers. Too much deferred taxation is as damaging to enterprise, incomes and prosperity as taxation itself. The government has increased planned borrowing by £105 bn for the period of this Parliament when shifting from Plan B (Budget 2010) to Plan C (budget 2012).  How much more deferred tax do people want?  This autumn will probably see a further rise in the official forecasts for the borrowing total.

 

              People on this site love to knock the Coalition. As host I don’t censor  your criticisms  or even censure you  for doing so.

              In the interests of democratic debate and fair presentation, I thought today I would ask if any of you did like some of the things the Coalition has done. Someone the other day said they did like the ending of the M4 Bus lane, and the abolition of Home Information packs, though they would have liked the Energy reports to have gone as well. I agree that I thought those two items were good.

              I might add that I have  liked the ending of long detention without trial or charge, the increase in Income Tax personal allowances (any income tax cut is a good thing), the cap on Housing benefit claims, the stated intention to get the deficit down, the one million new jobs which the private sector has generated so far and the veto on the new financial Treaty to stop the UK being dragged into it.  Abolishing the South East England Development Agency was also a good moment. Some of you are doubtless benefitting from the more generous state pension payments.

                  On Monday the Times published a list of 50 areas where they expected disagreement between Lib Dems and Conservatives in the Coalition. They asserted that many Conservative Ministers have come to the conclusion I advanced at the outset, that a minority Conservative government would be easier. Then  people could see which things the Lib Dems blocked in Parliamentary votes.

             However, the Times  list did not always reflect the feelings of the respective parties and made more of the disagreements in some cases  than is warranted. They argued, for example that Conservatives were against sorting out the lop sided extradition arrangements with the USA, when many of us have pressed Mrs May to do just that. They say Conservatives want to hold internet service information for police use, when many of us are worried about the impact of that on freedom. They suggest Conservatives are keen to push up rail fares – not the ones I know. They argue the Lib Dems want income tax cuts. I can assure you so do Conservatives.  They see Conservatives as resisting bank reform. Many of us have been going hoarse demanding it. The picture is more complex than the Times suggests. Their list also repeated items to make it look longer. 

           The one major area where the difference is large and important is over the EU. Several of the items related to EU powers and policies, where there is one Eurosceptic party and one pro EU party in the coalition.

 

                  The July  figures for public borrowing were disappointing.  The government borrowed an additional £600m in a month when revenues are traditionally strong. The deficit in July 2012 was  £3.4 billion higher than in 2011.

                    There are two very simple reasons why borrowing was up. The first is  a fall in tax revenues.  They collected £0.4 billion or 0.8% less than in July 2011 in cash terms. Allowing for the current inflation rate of 3.2% (RPI) this is a considerable real fall.

                    The second is the continuing growth in spending.  Current spending was £2.4 billion or 5.1% higher than in July 2011. It confirms the pattern of considerable real increases in current public spending, even after allowing for 3.2% inflation. Given the  fact that a public sector pay squeeze is in place, the real increase should be more than this implies. Government investment spending also rose by £0.6bn or 33% on the low July 2011 base.

                     If  the government keeps increasing spending at this rate, there will be too much borrowing. Tax revenues from  self assessment income tax  and capital gains tax are falling because the government has set uncompetitive rates. The Chancellor wisely changed his tax regime for oil and gas in the latest budget, following the fall off in activity  last year from higher taxes. He needs to review all taxes with a view of maximising revenues by setting competitive rates.

 

          The Housing Minister has said he thinks it is sensible to sell social homes when they become empty in expensive areas, and use the money to build more social homes in less expensive streets not too far away. His critics say this amounts to “social cleansing”, driving social housing tenants out of fashionable areas.

          If the state does  do this, it will be behaving like the rest of society. The high priced parts of central London have already been awarded to the rich  by the market. Most people paying UK taxes  even on well paid jobs are priced out of the central districts. If they want anything other than a very small flat they need to buy elsewhere, so high are house prices.

             You could argue this either way. Does that it mean it makes sense to sell social homes when they become available, in an effort to try to get the prices down a bit in these very dear areas? Wouldn’t it free much needed state money to do more good at a more sensible price nearby?  Or does it mean you just add state “social cleansing “to market “social cleansing”?

                Maybe the idea of social cleansing is a silly one. All my life Mayfair has been very expensive, banned to most of us as a possible place to live. Just as you have to be very good at football to play for Manchester United, or have to pass elite exams to be an NHS doctor, so you have to be very rich to live in a house or large flat in central London. It was ever thus. One way or another you have to ration access to Mayfair housing, as there is not enough for all who would like it to have it. I cannot see that state allocation would be better than market forces. What are your thoughts?

            The idea that social housing landlords can sell high priced property when empty to pay for more replacements in cheaper locations is not a new one. It also rests on the assumption that sufficient high value property becomes available, as the scheme rightly assumes the social landlord can only sell once the property has been willingly vacated by the former tenant.

 

          In the Economic Policy Review  presented to Mr Cameron and Mr Osborne in opposition, we  recommended 33 specific items of deregulation. We also recommended that a Minister be responsible for constructing regulatory budgets, with a view  to cutting the total cost of regulations for business by £14 billion a year by the fifth year of a new government. To do so meant tackling some large areas of regulation like data protection and working time, and accepting that some of the dearest regulations were EU in origin which needed amendment or repeal.  So how has the Coalition government got on?

           They have appointed a Minister, and they do now keep and publish  a score of the costs to business. Each new domestic regulation has to be costed, and the sponsor department has to explain how it will offset this cost. According to the Minister, the government has so far saved business £850 m a year on domestic rules. However, without knowing the costs of EU rules this is only part of the story. They require every department to remove at least one regulation for every new one introduced, which they have been doing. Quite a lot of those removed are on examination  no longer effective or have been replaced by some other measure.

          This £850 m saving rests heavily on one measure, the changes to indexing pensions rules which companies are using to cut pension cost. This large saving of around £3.5 bn has been substantially offset by a more recent requirement to automatically enrol employees in the new pension scheme, which is estimated to cost £2.8 bn extra each year. As Mr Prisk, the Minister, says “Excluding private pension reform, regulatory savings to business since 2011 are expected to be at least £160 m” (He actually  writes -£16om but think he means positive savings of £160 m).

          The government has ended the bulk of the Home Information packs which we proposed for abolition, but had to keep the energy part of it to comply with the EU. They have announced some changes to employment law. They are still consulting on how to make money laundering enforcement proportionate and sensible, where we recommended removing the need to make checks where the money was coming from an account in a UK, EU or US regulated bank. They have scrapped the Comprehensive Performance regime for local government and made changes to the Best Value regime as recommended.

             As a result from January 2011 to the end of December 2012 the government has or will repeal 77 measures whilst introducing 40 new ones. The Business department and Defra (after DWP’s pension changes)  have made the largest reductions in regulatory cost.  The Climate Change Department, Transport, Health and Home Office have all increased the costs on business from their activities.

 

          In the post Olympic euphoria about team games and individual sporting achievements we have become fixated by school playing fields.

          I am all in favour of schools having good playing fields. They need space to allow team games like football, cricket, netball and hockey. They need space to permit summer track and field events. A school set in fields offers a more pleasing environment in many ways, though this may not be possible in city schools where land is at a premium.

           Nor do I favour selling off good playing fields to make money from housing development where the school is then left with inadequate facilities or a cramped environment. I went to a state primary which had a modest field behind the school which permitted some team games and a green lung at play time. I appreciated that at the time.  My secondary school did have playing fields, though I remember the school often preferred to make us run a cross country for exercise which took us way beyond the grounds of the school. Local lanes became improvised playing fields. Not all sporting facilities have to be on school land.

             What is curious about the latest debate is the assumption that only the Secretary of State can be trusted to make the decision to prevent the sale of playing fields, and the implication that when he allows local people to sell a playing field this is always a wrong decision.

              I think Secretaries of State should be careful before using powers to block local people, Governors of schools, Headteachers and Council Committees, from doing what they think is in the best interest of their schools. The Secretary of State is a busy individual, and may not be able to go and visit and see for himself the circumstances on the ground. He rarely gets to talk the various interested parties.

               There may be good reasons why a playing field should be sold. If a school is closing, and future local students are going to other local  schools, there should be no objection to the sale of the playing fields if those other schools already have good provision. There should be no objection if a playing field is being sold because it has high development value, and the school concerned is picking up another local field to replace it. There should be less objection if the school selling still retains substantial land holdinsg to provide the space needed for all reasonable games use. There might be no need to object if a school is selling fields because the local authority is providing better sports facilities nearby which the school can use. Joint use facilities have a lot to recommend them, as school facilities often get closed throughout the school holidays, limiting their utility. More use of the available facilities throughout the year would be welcome.

   If we get ourselves into a world where no playing field can ever be sold we run the risk of setting educational  property in aspic and make improvement and development more difficult. If sports facilities are ony for the use of one particular school in term time we do not get full value out of them.  I have no idea of the wisdom of the various cases where Mr Gove has allowed a playing field to be sold. I assume in each case the leaders of the school and local community thought it a good idea, which is a good start. There may well have been sensible reasons in each  case. Maybe Mr Gove’s critics should wait and see more of the detail of the decisions. Or maybe they should set out some live examples, if they think they have a case where they think  he has got it wrong.

 

           I was an early moderniser. In the  mid 1990s I felt the Conservative party needed to change.  The old fashioned approach based on supporting the pro European UK establishment in conjunction  with Labour and the Lib Dems  had led to national economic crisis  with the Exchange Rate Mechanism. The Tory brand was damaged by association with the high interest rates, decline in output and the boom and bust which our membership of the ERM caused. Far from being too detached from the EU by the Eurosceptic wing of the then Tories, the party had come too close to the EU sun and its economic wings had melted. The Conservative party allowed its opponents to tell a story as if Conservatives revelled in making economic life tough, instead of the truth that the whole UK establishment  including the leaderships of all three main  parties had just made one of their worst collective mistakes which had cost us dear. It was the ERM, Euro ideology, which caused the high interest rates and the damage of the early 1990s recession. Once we cut free we ushered in a long period of expansion.

            With some others I began to seek change and modernisation. We fought and won the battle to keep the UK out of the Euro. Maastricht was the first EU Treaty the UK signed where we managed to keep out of the main point of it. I felt we needed to go further, and show that if we kept or restored more of our economic independence from the EU we could use the powers wisely, in the wider interests of the people.

            Of course I agree that Conservatives should be proud of the UK as it has become, and keen to unite the people who now share the fun of the Olympics and wish this country well. I do not think the Conservatives ever had the problem which Labour tried to pin on them. Conservatives do not wish people ill or seek to make life less pleasant. There is a long tradition of Conservative welfare policy to help those in need.   Many Conservative members have long had a proud tradition of being volunteers in other causes and charities. Mr Cameron’s Big Society is just recognising an old truth about Conservative concepts of public service and volunteering. Conservatives are often the ones who will roll up their sleeves and get on with whatever needs doing, instead of demanding a grant from the government.

           To me modernising is spreading the word that greater freedom can bring greater happiness and prosperity. The message should be that we want more self employed owning their own businesses, more successful small businesses, more people owning their own homes and other assets. We want a country of owners, a country where most people have a stake in our society, a country where hard work and enterprise are rewarded and risk taking admired, not condemned. Modern Conservatives need to be freedom loving, and to encourage individual and family enterprise and responsibility.