Damage to the car market

The latest industrial output figures for the UK are disappointing but not surprising. In part they reflect a general decline in industrial activity, which was more pronounced in France and Germany last month than here.

They also reflect local matters that are longer term and more worrying. A strong domestic car market up to March 2017 has been transformed into a weak one in the four months since by a combination of higher taxes and tougher regulations. The new levels of Vehicle Excise duties for dearer cars has hit that part of the market badly. The new messages against diesels with the longer term threat to both diesels and petrol vehicles has also had an impact. More people are waiting for further clarification, and to see if electric cars are going to become cheaper and easier to use. Meanwhile the Bank of England is tightening the availability of credit to buy or lease a new vehicle. One of the recent successes of the UK economy in increasing car sales and output has just been damaged by a combination of an attack on the idea of the purchase, and tougher controls over innovative ways of financing it.

Those who dislike cars, wrongly seeing them as the source of all the pollution that matters, may be pleased. They usually ignore the pollution coming out of the bus, train and household boiler. Those who fear any kind of borrowing by anyone to do anything may also rejoice. I think it does matter. I see no special dangers in more people leasing a vehicle. All the time they have the income they will make the lease payments and all will be well. If someone loses their job or struggles to meet the payments then the lending institution will take the car back and sell it on to someone else second hand. They will get something for it, and if they have run a sensible business may even get all their money back on that customer. None of this need be bank threatening!

The UK now has a strong car industry with some excellent factories, products and employees. The fact that these are in foreign ownership does not affect the important underlying reality that the factories, jobs, ideas and energy for these businesses are here in the UK. They export a lot to non EU destinations as well despite the absence of EU trade deals with the main markets. Public policy should look after the industry in a sensible way. Working with them to produce greener and better products is fine. Taxing too much and stifling credit is not such a good approach.

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The UK negotiating strategy

The UK government is about to publish a series of position papers on the EU negotiations. It is doing so in part in response to the EU’s tactic of publishing lots of papers about principles and problems, whilst refusing to tackle the issues that matter or to set out the EU wishes.

It is most important as the UK does this that it avoids three mistakes. The first mistake is to give any hint of us negotiating with ourselves. We don’t want options or details over how the UK position may evolve. We certainly don’t want a public exploration of what we might surrender or shift under pressure,as that invites the EU to hang tough and to pocket any offer we make.

The second mistake would be to claim it is all complex or difficult in a way which gives succour to those in the EU who think if they delay and obfuscate enough the UK might weaken or change its mind.

The third mistake would be to ask for too much expecting things that are not obtainable. It is not, for example, in the UK’s power to decide what rights going forward will apply to UK citizens living in the EU after we have left. That will be a matter for them to decide, under international law.

The negotiation can be very straightforward. The UK takes back control of its money, laws and borders,as it is entitled to do. The EU decides whether it wants the comprehensive free trade arrangement we offer, or whether they want to face WTO tariffs.

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How much have we learned 10 years on from the banking crash?

Most commentators and bankers now accept that big mistakes were made in the middle of the last decade allowing commercial banks and investment banks to borrow too much money, to lend too much money out to people and companies, and to develop too many clever financial products that recycled the debts around the market. The favourite excuse at the time was the globalisation of markets and the creation of mega banks allowed them to run more overall risk, because it was spread over so many different instruments, currencies, jurisdictions and borrowers. Those of us who worried about these things were told we did not understand how good financial markets and banks had become at spreading and managing risk.

As it turned out, the older idea that a bank should keep a decent amount of cash and reserve capital against future losses was a better one. That has now become fashionable again, with banks typically required to keep more than twice as much cash and capital as they did at the peak of the boom relative to their risk assets or loans, with many of them choosing to have rather more than the minimum.

Fewer commentators accept that a second important mistake was made in 2007-9 by the Central banks and government authorities. They decided to raise rates and reduce liquidity in the markets too much, bringing down the over exposed balance sheets by deflating them too quickly. If Central banks withdraw cash from the market, it lowers the value of assets like property and shares. These are the backing for loans banks have advanced. As they fall in value so the solvency of the borrower is put at risk. As interest rates rise, so more people and companies struggle to pay their debt interest. Banks end up with a pile of bad loans and insufficient collateral or backing to meet the losses on the loans.

For a period of unreality in 2007 many were talking about a necessary correction for the masters of the universe in finance who they thought deserved to lose, in the belief that this could occur without harming the “real economy”. As a few of us warned at the time, bringing the excesses of the financial sector down would also bring down the real economy, closing factories, collapsing businesses, costing people their non financial sector jobs. So it proved. The corrections, administered by the authorities in the first instance, soon became self fuelling. The advanced countries affected entered a severe depression.

The Finance Ministers and Central banks awoke to the full dangers early in 2009 and started to make large amounts of cash available to the markets to prevent more banks and other businesses failing. They went on to pioneer programmes of state money creation and government bond buying, as their way of replacing the money destroyed in the commercial banking crunch with public money issued via the Central banks. It was better than nothing. It lifted asset prices, which prevented more bad loans and failed banks.

The Central banks are now discovering that it is easy to distort economies by providing cash to boost asset values, but more difficult to wean an economy off such medicine. The USA is furthest advanced in this cause. It stopped money printing the earliest, and is now planning a gradual reduction in this stimulus as commercial banks take up the slack and as more real activity takes place. The UK has also now stopped QE, though it had an additional programme which was started last summer. The European Central Bank and the Japanese Central Bank still carry on with their Central Bank money creation.

One of the crucial lessons of 2007-9 must be that acting too stridently can cause grave damage. If you have high levels of debt, you need to tread carefully to get them down, in ways which most borrowers and lenders can handle. Any other course causes major dislocation for people who had nothing to do with the excess credit in the first place.

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The UK Supreme Court after Brexit

I hear that the UK Supreme Court wants more clarification from Parliament over how to judge matters after we have left the EU.

The proposed guidance set out in the European Union Withdrawal Bill seems very clear to me. It says that after we have left UK judges no longer have to follow new judgements by the European Court of Justice, but may do so if they think they are sensible from the UK point of view.

This applies when a case comes before the UK Supreme Court that relates to a UK law which was until we left an EU law which we have now adopted as a national one. The Supreme Court can decide as it sees fit. If there has been a new case before the ECJ that changes the EU’s law the UK Supreme Court can if it wishes make the same change to UK law, or can decline to do so. These are experienced and senior judges who often like to change UK made law. It is a Court which is certainly not cowed by Parliament, as we saw when it told us how to go about leaving the EU and how to approve the sending of the Article 50 letter. It will be able to exercise similar independent judgement about what were EU laws once we have left.

Given the pro EU attitudes of many of our judges this means they would be free if they wish to follow ECJ judgements all the time we keep the unamended EU law as part of our UK law code. If they do so in ways which no longer suit the UK people then of course the UK Parliament will intervene and amend the law to override the Supreme Court judgement, as we can do today on UK made laws.

What is unclear about this? We will expect our Supreme court to be supreme when it comes to interpreting laws, which will mean former EU laws as well as nationally conceived laws. We will also expect Parliament to be sovereign. If the judges make a judgement that does not please Parliament can always change the law and issue new instructions.

At the moment both Parliament and our judges are impotent to change , amend or improve an EU law if the European Court of Justice has decided.
We do not at the moment expect our Supreme court to follow decisions of the US Supreme Court where they amend US laws where we may have a similar law.We trade a lot with the USA but keep our independent legal system. So why would the ECJ be any different when we are out of the EU?

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What does the EU want from the Brexit discussions?

You would have thought the rest of the EU would be delighted to learn that the UK, the most reluctant EU member of them all, was leaving. It means they are free to pursue economic, monetary and political union without the UK constantly trying to slow it down, impede or stop it, or demanding special treatment. Better still, that same UK is happy to make her market available tariff free to the rest of the EU who have been so successful at exploiting it.

Instead it appears that the EU is once again misjudging the mood of UK voters. The EU seems to think if it delays and creates difficulties the UK may think again or come creeping back for some version of its membership. The EU has invented the idea that the UK owes the EU a lot of money after we have left when there is no Treaty basis for this. They have proposed that the UK has to continue to accept rulings of the European Court of Justice in the way no other independent country that is an EU trading partner has to accept. They have suggested that EU citizens currently legally settled in the UK would continue to have EU rights policed by the EU instead of enjoying UK rights policed by the UK after exit. These are presumably provocative proposals designed to foment argument within the UK with a view to delaying Brexit.

The EU needs to learn from its recent experiences. It was this mentality which led the EU to turn down Mr Cameron’s modest requests for improvements in the UK/EU relationship and which led directly to the Leave vote. They underestimated the resolve of UK voters then, and are in danger of doing so again. Indeed, their current attitude reinforces the view of many UK voters that they made exactly the right choice. The process of exit is also serving to underline just how far our subservience to EU lawmaking and courts has gone, something hard line pro EU campaigners always denied prior to the decision.

As someone who has undertaken all too many debates on this topic, I was regularly accused of exaggerating the influence and power of Brussels, which was just a kind of large free trade arrangement according to many of its protagonists. Now they tell us it is all so complex and comprehensive it makes getting out all but impossible.

My advice to the EU is simple. The UK has voted decisively to leave, with a massive Parliamentary majority to carry out the wishes of the voters. The UK wishes to be friendly and generous in departure. Indeed, many of us think we will be a better partner and neighbour when we can make our own decisions, than when we were constantly having to fight against imposed collective decisions we did not like. The EU can do a good deal for itself if it wishes. It can secure free trade, defence collaboration, protected rights for EU citizens settled in the UK and much more. If it doesn’t want to do that we will be leaving anyway.

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Was 1st Quarter growth in the UK understated? Bank of England predicts steady growth in business investment

Some have made much of the slowing in UK growth to 0.2% in the first quarter of 2017. It picked up a bit thereafter.

In the Bank of England’s Inflation Report for August we find the following interesting quote:
Quarter 1 growth “slowed sharply to 0.2%. The GDP backcast, which takes into account the revision properties of the official data and information surveys, suggests that growth in Quarter 1 was higher, at 0.4%”.

The Inflation Report also reveals a worse balance of payments position in the first quarter than the Bank expected, with more imports than in their forecast. This meant international trade subtracted 0.4% from our GDP, given the continued high level of imports. This puts a different slant on the picture from the loss of confidence myths.

Contrary to some comments on the current position, the Bank was relatively positive on business investment, though would like it to rise faster. They said ” Business investment is estimated to have risen by 0.6% in Quarter One…. Investment is projected to continue to grow at a steady pace in the near term”.

The UK economy could clearly benefit from more investment in capacity, both to replace imports and to meet export demand. The rising profitability of business in general and the availability of low cost credit should encourage more such investment.

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Transition and implementation in our new relationship with the EU

The Prime Minister has wisely avoided the word Transition in her statements on Brexit. If you envisage a Transition Agreement and a period of Transition, you need first to have an overall Future Relationship Agreement so you know what you are in transition to. It is not inherently easier to negotiate a Transition Agreement than a full Agreement. The sooner you get to an Agreement on our Future Relationship the sooner you start implementation. There might need to be interim arrangements if parts of the Agreement we make on departure require a bit more time to bring in. We can judge that when we have an Agreement.

The technical matters that some worry about concerning customs systems, rules of origin, lorry inspection and the rest can all be solved by a UK/EU customs Agreement, which could be sorted out in the next 19 months before we leave if the EU wanted to. The EU has customs agreements with many non EU countries. Alternatively we will leave with no agreement, operate under World Trade rules, and both sides will presumably do what they need to do to make sure their respective borders work, as it is in their interests to do so. German car exporters, French farmers and winemakers, Dutch market gardeners and the rest would not take kindly to the EU deliberately messing up the borders to impede trade. The EU would find itself on the wrong end of political pressures and legal claims if it tried that. The UK obviously will wish to run her borders efficiently and effectively, allowing easy despatch of goods and free access for imports subject to the normal checks to limit smuggling, illicit goods and fraudulent or faked products. We already run efficient borders for tariff based trade with non EU countries so we know how to do it, and could add EU countries to that group if we have to.

Negotiators should concentrate on the simple basic question. Does the EU want to accept the UK’s generous offer of a free trade agreement based on our current tariff free trade with relatively few barriers, or not? If it does it should say Yes and get on with creating the registerable Free Trade Agreement with the WTO in time for our exit. If the answer is a perverse No, then we can get on with planning for the WTO option.

I am constantly told by EU lovers that the UK has to be punished to show it is not a good idea to leave the EU. I find this a bizarre attitude. If the EU is as good as they usually claim, leaving is not going to be popular with other countries. The EU has a Treaty requirement to get on well with neighbouring states and promote good trade and other relations. I have a higher opinion of the other countries than some for Remain, and think as intelligent people they will want to obey their Treaty and keep free trade. If my optimism is misplaced, trading with them under WTO rules will be fine. The EU does not have the power or the legal right to stop people on the continent buying and selling goods and services across the Channel. The EU does in my view have too much power over us, but it does not have the means to impose a stop on trade.

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How the Bank of England and the government can cut UK debt

I agree with the government that UK gross state debt is on the high side. It makes a significant contribution to total UK debt.

There is a simple way to bring it down. The Bank of England should announce that from next month it is going to reduce the stock of government debt it owns by £7bn a month. Over a five year period this would eliminate the £435 bn of government debt the Bank of England owns on our behalf. It would reduce state debt by around one quarter and would reduce our total indebtedness as a nation by a little over one fifth of National Income.

There is a precedent for this. The USA has announced its plan to start to cut the US state debt the Fed owns.

How can this be done? At the moment every time a government bond owned by the Bank is repaid they go out and buy another bond to replace it. Basically they can stop doing this and accept the repayment, which cancels the debt. They would need to switch bonds of varying maturities from time to time to ensure a smooth pattern of debt reduction.

What is the downside? The danger is such action tightens money too much. As an offset the Bank should relax its some of its strictures against new mortgage and car loan borrowing, whilst still policing proper evaluation of individual credit worthiness. It should keep interest rates low whilst reducing the stock of debt in this way. It should be ready to abort the programme of debt reduction if money tightens too much.

If instead money grows too quickly for other reasons then of course it can take other action to avoid any inflationary threat.

What’s stopping them getting on with this? We should be taking strides towards a more normal monetary policy now.

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Why does the Bank of England have it in for young people?

Debt is a young person’s game. In most free enterprise societies older people own most of the wealth. Young people borrow to get started as homeowners and business people. This happens naturally, as it takes time to save, to accumulate assets, to buy a home and to benefit from it going up in value. Most of us start out with no assets, receive no inheritance, and have to save for our old age as we work and earn. Even those who can draw on the bank of Mum and Dad usually need to borrow commercially as well to fulfil their ambitions.

It is the job of the banking system to lend the money older people save and deposit to their collective children and grandchildren who need it to buy homes, cars and other expensive assets, and to businesses who need it to increase capacity and to supply new goods and services.

Today the Bank of England is arguing that there is too much mortgage and car loan debt in our country, and this needs to be controlled. They are instructing the commercial banks to lend less. It is difficult to understand why.

The commercial banks now have much more cash and capital by way of reserves than they had during the banking crisis of the last decade. They are also more profitable again. These buffers can take care of any bad debts they do incur. Employment is expanding. As people get jobs so they can afford to borrow to buy a car or a home. The banks should be allowed to meet their aspirations. The invention of the 3 year car loan/lease allowed many more people to have a new car. The banks would be able to foreclose on the vehicle if someone fails to make the payments, so there is reasonable security.

Of course banks need to examine each loan application. The individual has to demonstrate they have the income claimed and show they are likely to keep a job. The bank lending money does need to make a judgement that the person concerned will not behave irresponsibly. Most people do take their debt obligations seriously.

Current levels of mortgage and car loans would only be unsustainable if the Bank decided once again as it has in the past to withdraw liquidity from the markets too quickly and push up interest rates too far too fast. It assures us this time it does not wish to do that. There is already considerable protection against rate rises, as many have chosen to take out fixed rate loans. In that case it should allow more young people to borrow to buy a home or a car. More mortgage and car loan debt when the economy is growing and more people have jobs is not something to worry about. Tomorrow I will describe how the Bank and government could do something that would make a real difference to reduce total UK debt that does not require squeezing the young.

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The importance of property to a democracy

Free societies allow individuals to buy and own property. Communist and authoritarian societies claim all property for the state.

Making everyone a tenant of the state gives a state much more control over its citizens. It also usually leads to a crony system, where those who toe the line and are in with those in power, get favourable access to property. Corruption normally follows the concentration of power in the hands of the state, and often is practised surrounding state property or trading assets. The privileged regard state property and nationalised industries as personal fiefdoms, earning rent from them at the expense of everyone else.

Largely free societies do need to impose some restrictions on the freedom to own and use property as individuals and families wish. It is common to discourage anyone seeking on death seek to freeze a property which the dying person liked, to prevent a mausoleum community developing full of empty properties. It is usual to require permits to change the use or develop a site which someone owns, in the interests of protecting the neighbours and creating some order over infrastructure and service provision. It is very common to impose taxes on property ownership. Whilst this is mainly for the state to have more revenue, the taxes may be designed to influence use of the property.

The drift in free societies is to more and more state intervention in the buying, selling, use and enjoyment of property. Taxing property related activities can be easier than taxing income or spending, as the property has a fixed address and a registered owner. What begins as a legitimate interest in orderly development of a neighbourhood can become a large experiment in social engineering, with the state granting huge windfall gains to some who are allowed to build on their land, and denying others any scope for modest self improvement of their property.

In the UK today the argument about rich people owning homes they do not live in for much of the time has become an issue. It is difficult solving the problem without very intrusive regulation and policing. How many nights should a person stay in a given home to qualify as reasonable? What do you do about someone starting up a relationship with a new partner and then spending the nights with them rather than in their own home? How do you capture the complexity of family life with grown up children spending more time in their parents’ homes? You could have a law which discriminated against foreign owners, with suitable definitions of who is foreign. This would not be a very welcoming approach, and could have side effects like putting rich individuals off investing in the UK or considering moving more permanently here. It might cut total tax revenue considerably.

I am suspicious of the idea that the state should tell people how much property they need or are allowed. The state can and does affect the pricing of property which will of course influence the decisions of property buyers and users.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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