The Fed, the ECB and the Bank of England all made the same mistake last year. They carried on printing more money and buying up bonds to keep interest rates around zero for too long. They were right to offer a big stimulus in 2020 to offset the covid inspired downturn, but misjudged the recovery and helped fuel the inflation.They ignored those of us who warned against excessive laxity. They stuck to silly unrealistic forecasts of inflation for this year of around 2% when it was obvious it would rise considerably higher, especially in the USA where the stimulus was largest.

The Bank of England saw sense soonest, stopped money printing at the end of last year and has started to raise rates. The Fed carried on printing until March this year and has only just started to hike and unbelievably the European central bank is planning to print Euro 90 billion more in the second quarter of this year and is putting off tightening to be reviewed again in the third quarter. Spanish inflation is already at an alarming 9.8% and Eurozone inflation generally is over 7%. How much higher do they want it to go?

The UK has to be careful, as it is not only tightening money policy but also increasing taxation at the same time. The danger is this double hit to an economy which has been recovering well from covid lockdowns will prove too severe, slowing the economy too much. The Bank’s tightening means dearer mortgages and credit, squeezing many consumers further as the high energy prices kick in like a big tax rise. That makes the NI rise and the tax increase on energy that comes with higher energy prices an inappropriate added threat to ,jobs and output.

The UK needed a bit of tightening to curb price rises. It does not need to lead world austerity just as the cost of living crisis hits. The government also needs to do more to assist and stimulate more domestic production of everything from fertilisers to gas and from food to microprocessors. To the extent  that the inflation stems from a series of supply side shocks, boosting supply can start to right the position.

The government needs a touch of the Oliver Twist in its approach to UK food production. Freed of the Common Agriculture policy which left us short of permits to produce milk, paid grants to rip out   our orchards and used rules to slim our beef herds we expected a policy that promoted more UK produced food. We need to recapture the lost market share of the CAP years.

Instead so far the government has used its freedoms to pay farmers to leave farming, paid farmers to wild their land and stop growing crops, and paid them money for a range of environmental goods that impede or prevent food growing. What we now need is recognition that imported food can be hard to come by when the world experiences shocks like the Ukraine invasion and the gas shortages. There is a good green argument to cut the food miles. It is easier to be assured of the safety of our food and of the humane treatment of animals and birds reared for the table if the work is done at home under UK regulations.

Agriculture in most parts of the world is heavily subsidised and regulated by governments. Most countries use their powers and money to promote more domestic production,  not to stop people farming. We need to catch up. The UK needs to restore full fertiliser production, hit by high gas prices. It  needs to work with supermarkets to ensure sensible prices are offered farmers to grow the grains, rear the animals  and produce the milk and eggs people will want, seeing that farmers costs for these items have risen rapidly in recent weeks.

Farmers need grants to help buy the more automated systems to plant and harvest a wide range of crops, and to assist in putting in the extra greenhouse and polytunnel capacity needed to extend our growing season. It is bizarre that we import so many flowers, salad stuffs and vegetables from countries like the Netherlands that have no better weather than us but have better systems of investment encouragement and support.

Some have queried why Ministers have not been sharing tips to keep the energy bills down. I think they are wise not to. Someone on a six figure salary who can afford the price rise is not well placed to lecture others on how they might use less energy. There are plenty of experts who can help people see if they can manage their bills down a bit without going cold.

These experts and the industry backing energy efficiency measures can help all of us see if we can insulate our homes and improve our use pattern of energy to save energy or to save money on the bills. Anyone thinking of a heat pump will be told they first need to insulate their homes to high standards to get any such installation to work. Such high standards will cut the bills for a traditional gas boiler quite a lot.

More insulation comes at a cost. There are government schemes to help those on lower incomes with the initial cost. The pay back from tank and loft insulation can be quite fast. Improving or changing windows and walls is much dearer and more intrusive though it may make sense in the context of wider home improvements someone with a bit to spend can afford to undertake.

There are some good developments as the government seeks to change energy policy. There is rightly much more attention to security of supply, and to the need to develop our own energy sources to eliminate reliance on imports. There is an understanding that for the next few years most UK people will have petrol or diesel cars and vans, and will heat their homes with gas or oil or solid fuel boilers. For the period of transition prior to many more people heating and travelling with electricity there needs to be a reliable supply of oil and gas at affordable prices. The strategy accepts that we need to use more of our own oil and gas from the North Sea. There is a review of onshore gas. The best answer to the issues that poses is to adopt a model which allows any community or landowner to say No to drilling, but to allow communities willing to see such developments a share of the turnover or profits or offer them free or discounted energy.

For the longer term the government favours a major commitment to nuclear. There has been a long history this century of PMs wanting more nuclear only to find it is watered down and delayed by a range of forces against. The best hope the government has of changing this is probably to back the development here of a suitable small modular reactor that can be produced at scale mainly in  factories and assembled  on site with suitable substantial concrete workings for containment. The UK could become an exporter of such technology to extend the production runs and lower average unit costs. There are sites around the country where larger nuclear stations are closing who might welcome a new replacement and would have some of the skilled people necessary to run it.

The government still favours more wind farms. It does now accept that these will not satisfy our demands for power on calm days or on days when the wind blows too strongly. It is therefore investigating ways of storing the power on windy days and nights to use on days of high demand and little wind. This is going to be necessary to keep the lights on. It also needs to account properly for the cost of the windfarms themselves and for any backup or storage needed to make them reliable for consumers.

Meanwhile the next few years whilst people still need plenty of fossil fuels for home heating and transport and industry remains fuelled by gas we are going to need more gas as a  stop gap. The government needs to work closely with industry and grant the necessary permits in good time to help this endeavour.

As a teenager I was shocked to read of the horrors of the Great War of 1914-18, and to hear a little of the reality from my two grandfathers who both fought in the trenches and survived. My study of what was called English history which was really UK history made me think the UK had fought too many wars, being dragged into many continental conflicts for  no good reason.

I am  no pacifist. I understand there are violent and dangerous countries that may wish us harm. Indeed having stronger defence forces than we currently enjoy seems like a good insurance policy and a necessary statement to put a hostile power off challenging us. We needed force to liberate the Falklands from the senseless and violent Argentinian invasion, and to help the USA liberate Kuwait from an unwanted occupation. There may be other such needs in the years ahead.

Throughout the last 500 years of our history we have sought to prevent a single dominant power taking over much of Europe by force. In the sixteenth century we with the Dutch resisted Spanish attempts to add the low countries and England to their continental empire. In the seventeenth and eighteenth centuries we worked with a coalition of other states to prevent French military domination of the continent, culminating at the turn of the nineteenth century in the great victories of Trafalgar and Waterloo to end  Napoleon’s empire building based on his large and threatening armies. In the twentieth century we twice fought against German domination of the continent. Today we have  no issues with the EU emerging as a single force on the continent. We made the sensible decision not to join them, as our interests are global and based on trade, investment and contacts with the wider world. We should leave most continental political issues to our neighbours to resolve through their elected member states governments and through their strong centralised law making at EU level.

Foreign policy obviously looks very different from Warsaw which is closer to Moscow than to London, or in Berlin so much closer to the eastern borders of the EU than the UK is. Countries with continental land borders may choose closer agreements and arrangements with their neighbours to regulate their affairs. The UK is right to condemn Russian aggression and spiteful violence towards Ukraine and to help as a non combatant with other allies. The big issues about Ukraine’s European status, possible membership of the EU and development of the Association  Agreement are not matters we can or should wish to get involved with. We wish to see the end of the war and the dreadful violence and damage being done but we should not wish to influence the political settlement which has to follow. The main protagonists are Ukraine who need to resolve their own future, and Russia. Ukraine may want more help from the EU which they wish to join given its role in the conflict and its interest in future governing arrangements for Ukraine.

The latest UN report on CO2 reveals what some of us have been saying for several years. CO2 output continues to rise year by year. The large emitters led by China and India are producing a lot more, and the USA remains at a high level. Total world CO2 output is now 54% higher than in the base year of 1990, when it is meant to be falling from that level. It demonstrates that many countries have  not offered a realistic target to reduce their emissions to assist the world plan, and demonstrates that some countries do not even deliver what they have promised. Meanwhile the UK producing under 1% of the world total is one of the few that has made major reductions. In 2020 CO2 output was just half the 1990 level though it presumably went up a bit in 2021 as we came out of lockdown. It was down 38% on 1990 levels in 2019. As the press releases based on the Report state, on this basis the world will not come anywhere near hitting the targets they say we need to hit to avoid a temperature rise of more than 2 degrees.

The net zero movement is only going to succeed if all major countries participate fully and take actions that do actually reduce their CO2 output. Some of the UK’s tough actions to cut its CO2 have probably served to raise total world CO2, as we have closed down industry at home only to import from places like China where they may produce more CO2 per unit of manufactured output. As I have often pointed out, keeping our own gas unused and importing LNG is a sure way to more than double the amount of CO2 generated in the overall process of extracting, transporting and using gas as a fuel.

In a world of energy shortages and high prices and food shortages the UK needs to take self sufficiency and security of supply more seriously. Making and growing more at home can also cut world CO2 at the same time, though UK CO2 will rise on the way of accounting adopted for this. Today the world economy is running on a model which maximises exports from high emitting economies and industrial processes, with imports into countries that could make and grow with less CO2 if the net zero rules were properly enforced in the exporting countries. It looks as if COP 27 needs to have more realistic tougher talks with the big emitters if it is serious about cutting overall world CO2 anytime soon.

 

This is my latest Conservative Home article.

 

Since  March 2021  I have been telling the Treasury that their forecasts were far too gloomy. They underestimated growth, understated tax revenues and wrongly ballooned the likely level of borrowing. I was not surprised when the Chancellor had to report much better news and confess how wrong the budget forecasts had been , though even I was surprised that the latest figures just before the 2021-2 year end show that they borrowed  an almost unbelievable £105,000 million less than planned! Keeping tax rates down, cutting Stamp duty and going for growth produced a much stronger economy than they expected. The extra tax revenues poured in thanks to more spending and more housing transactions.

 

So why change a winning formula? Why did the Chancellor fail to stress the successes and turn instead to more gloomy forecasts? Why did he think these mean  he had to put National Insurance up, freeze Income tax thresholds and get ready for a huge increase in company tax rates next year? Once again we were treated to some bizarre figurework from the OBR and Treasury. Clearly upset by how much better the revenues were than expected they  presented the costs of servicing the state debt in a  new way designed to sensationalise it . It looked as if they  hope that the government would be panicked into tax rises in the name of debt control. They decided to add to the legitimate and affordable cash costs of paying interest on the outstanding debts to savers and other investors the  non  cash costs of the indexation of the index linked debt. This only becomes a liability on maturity of any  given bond and will simply be refinanced by rolling over the real  value of the debt when it comes due. They did not put any offsetting figures into the account to show how much the state will benefit from the high inflation the Bank has now created or allowed, as it  will reduce the real costs of refinancing or paying back the majority of  the debt that is not index linked.

 

The government needs to understand that the cost of living crisis is going to be difficult for many people. It needs to do more to offset the effects of runaway energy price inflation, rising food costs and price hikes in a wide range of other goods and services. This is not the time to be taking more money off people through a National Insurance hike. It is not the time to insist on VAT on domestic fuel. It is the time to be more generous in offering a cut in petrol and diesel taxation which otherwise will rake in far more revenue than the original plans. Given the magnitude of the official forecasts for the hit to real incomes  now coming the Treasury should at least have given back more than 1% of GDP. This was eminently affordable given the great performance of the public finances over the most recent year. Instead the Chancellor spent less than 0.5% of GDP in tax remission, leaving most of his revenue windfall untouched.

 

The danger now is of the opposite effects. The hit to real incomes will slow growth. Many people will be unable to afford discretionary goods and services after they have met the food and energy bills. The fast recovery of health output credited to the state last year on the back of free test programmes and massive roll out of vaccines will slow dramatically. Higher taxes will knock confidence and higher inflation will worry consumers. The economy is going to slow sharply. Instead then of a revenue bonanza from better than expected growth we will experience a slowdown in extra tax receipts. More people will qualify for top up benefits and income support. The Treasury will learn the hard way that higher taxes can lead to bigger deficits and fewer good options for economic policy.

 

The official figures tell us that tax as a percentage of national income was at 33% in 2019 and will be at 36.2% by the end of this Parliament. That is a substantial rise in the tax proportion. It comes from the upwards movement of rates for companies, the freezing of personal allowances and the introduction of the National Insurance/social  care tax proposals. It will cut the growth rate and lower average take home pay. It will damage private sector investment, which is already disappointing despite the offer of a temporary super allowance. Businesses look at the coming hike in company tax rates and are put off.

 

I am glad the Chancellor wants to be a tax cutting Chancellor and admires Nigel Lawson who definitely was a tax cutting Chancellor. He slashed the rates of Income Tax and company tax and the extra money rolled in as a result. It would be a great policy to follow now. People want to know the government is on their side at a time of income squeeze. They will see that external events have  created strong upward pressures on oil and gas prices and may understand government cannot protect us from all such pressures. They will be less understanding of why at the same time the government shifted from a successful relatively low rate of tax policy to higher tax rates. They will blame the government for taking money away that they need to pay the higher bills.

 

As the Treasury needs more revenue they need to help the private sector grow the economy to deliver the extra cash. They already get a windfall tax on home produced oil and gas in the form of a doubled corporation tax rate on such activities. They should make extracting more oil and gas at home a high priority with every government assistance to get it done. That will bring in a lot of extra revenue as well more well paid jobs. Then the Treasury needs to be more positive in support of domestic process industry which is struggling to stay alive against the background of such elevated energy costs. That too could be a net win on revenues.  I will urge the government again to dump the gloomy Treasury fiscal rules and substitute just two key aims and controls. One should be to take the 2% inflation target seriously. That means the Treasury helping government do more to eliminate supply bottlenecks at home. The other should be a  growth target to galvanise public policy to support expansion of jobs and investment.

 

We need an update on the Spring Statement urgently. It would be better to head off the worst of the income squeeze before it sets in and people have to pay the high bills.

Like most westerners I blame Russia for the murderous assault on Ukraine and for the violent siege tactics now being deployed to try to wrestle territory away from those who live there who wish to remain self governing. Russia’s troops have been killing civilians in frustration at not being able to occupy and overwhelm as easily as they expected. Proof of this will be used as evidence of war crimes.We are all appalled at some of the scenes we are now being shown.

Like most westerners I would like to see an early truce and a negotiated settlement. I understand how difficult this will prove as the two sides have such a different view of the rights and wrongs of the situation, and neither side has yet been able to achieve enough by force of arms to enforce their settlement on the other. Ukraine has fought bravely but cannot rid themselves of Russian troops and artillery on their land. Russia has failed to capture any of the major cities on its list and has shown it lacks the ability and force to maintain control over areas it has thought it had conquered.

As peace talks continue the aims of the two sides remain incompatible with each other. Ukraine wishes all Russian troops to withdraw, to be followed by discussion of the government of those parts of Ukraine which Russia has occupied and a referendum on a possible new constitutional settlement. Russia is holding out for Crimea to become part of Russia, and for new governing arrangements for a swathe of territory from the Russian border to Crimea that would give it control or substantial influence. That is why the fighting is likely to continue.

There seems to be a bit more flexibility over the ability of Ukraine to choose its own allies and international policy. It seems unlikely NATO will offer membership to Ukraine any time soon, having notably refused to come to Ukraine’s assistance with any NATO forces. Russia’s aim of excluding Ukraine from NATO might in practice occur. The issue of EU membership also hangs over the conflict. The EU intervened in Ukraine to help topple the elected Ukrainian President in 2014 when he wished to walk away from the draft EU/Ukraine Association Agreement and be closer to Russia. This was the background to Russia’s annexation of Crimea and civil war in Donbas. Today Ukraine has applied for formal membership and the EU needs to respond. The EU says it sees Ukraine as part of Europe and talks of Ukraine’s European destiny in terms that implies in due course it does want Ukraine as a member state. This is a complication for a Russia which dislikes the expansion of the EU as well as of NATO close to its borders.

I read that the government is debating amongst itself how much additional commitment to make to new nuclear and new wind energy as it responds to the current energy crisis. As one of the few that has been advising successive governments over the last ten years of the pending energy shortage and the need for more national self sufficiency I am glad they are now actively discussing these matters. It is quite clear today we import too much and have too little spare margin to keep the lights on and the wheels of industry turning.

I have no objections to government making a substantial commitment to new nuclear . It could well make a good contribution to our needs in fifteen years time.  It needs to do so understanding three crucial matters.

1. Whatever it now does nuclear will represent a considerably smaller part of our electricity output in 2030 than today because all but one of the existing stations  are scheduled to close, with only one new plant coming on stream. Nuclear agreed in principle today will not be producing any power this decade.
2. To bring off this nuclear growth the UK will need to rebuild our nuclear industry and secure good intellectual property under out control. We should not want to have the Chinese or others controlling the IP and capable of using it as leverage over us.
3. The state will need to be involved in financing. A way would need to be found  to ensure some competitive discipline and genuine risk for the private sector partners to avoid the taxpayer ending up with plants that are much delayed and massively over budget bankrolled by the taxpayer.

I have no objections to the government encouraging more offshore wind farms. I would accept more onshore windfarms as long as landowners and Planning authorities had a veto over locations, and  could share in the revenues as compensation.  The government needs to understand that whilst windfarms could be put in much more quickly than nuclear, they too will not solve our current energy shortage without tackling three problems they pose.

1. On Monday wind energy supplied just 1% of our electricity. On Saturday writing this wind was only supplying 5% of our electricity. If you are going to rely on more wind there has to be breakthroughs in storage technology to allow you to harvest the wind power when it is not needed and supply it when the wind is not blowing.
2. If you press ahead with more wind energy you need to understand that will still leave us short of total energy, as renewable electricity only accounts for around 5% of our total energy. Most energy is still needed as gas to heat our homes and fuel industry,  and as petrol and diesel to fuel our trucks and cars. We cannot rely on more renewable electricity all the time most of our transport, heating and industrial energy is not electrified. It will take time for the electrical revolution to convert every home, factory and  vehicle to allow electricity to take more of the strain away from directly used fossil fuels.
3. If you encourage more renewable power you need to allow more back up power generation for the times when the wind does not blow. All of this entails more cost.

The governments energy policy needs to back more domestic oil and gas for the current decade, all the time people have gas boilers and petrol cars.

The January trade figures were disappointing, showing a marked fall in exports to the EU which has caused some concerns by those who did not study the figures. The ONS has decided to change the basis for compiling the import and export figures, and by its own admission there was a one off hit to reported exports to the EU by delaying the dates of record.

During the first year after leaving the EU customs union both exports and imports were higher for non EU than EU. In the first half of 2021 we had a welcome balance in total trade, with a strong services surplus offsetting the usual large goods and food deficit. EU trade continued to be in deficit and the rest of the world in surplus. In the second half the trade deficit we were used to in the EU returned, with a total deficit of £24 bn for the six months. The top five imports are vehicles, medicines, gas, non ferrous metals and oil.

The strains on the balance of payments will increase this year given the high oil and gas prices. It  underwrites the need to extract more of our own oil  and gas. The government has said it has now shifted policy on this and I  look forward to the executive decisions being taken to make this a reality. The UK offsets a substantial part of the vehicles deficit by strong exports of UK made vehicles mainly to non EU markets. It will be important to invest in and retain a strong car industry as EVs become more common. It should be a welcome challenge to the UK motor  sector to seek to make and sell attractive products to home consumers  that can substitute for the high volumes of EU  vehicles still coming in.

The balance of payments was still sandbagged in the last quarter of 2021 by a large £5.8bn payment to the EU. One of the big balance of payments wins from Brexit will be the ending of these payments. It is a pity the UK offered such an attractive deal to the EU on payments after exit, as this has slowed down getting the benefits.