Modern Central Banks ironically do not think money matters. Most of them no longer target money supply, and many provide little or no commentary on it. This is surprising given the fashion they entertain to create more and more money to tip into circulation. They should understand that if you create more money and all else stays the same prices will rise, as more money will chase the same volume of goods and services. That is why money matters.

I guess their response is that as  they create massive new amounts of money the velocity of circulation, the amount of use people make of that money, will fall. So it need not be inflationary. It is true that in the short term in the pandemic lockdowns more money was an offset to the collapse of demand, and use of the money tumbled as many people  and companies hoarded what new found cash came their way.

It did however have a first round inflationary effect, as it was planned to do. It inflated asset prices, pushing up the price of government bonds which the money was  used to buy. The people who sold the bonds to the Central Banks then often bought other assets like shares with that money, pushing their prices up even more than the  bonds. So far so good. The governments could borrow loads of money on the cheap, and the inflation cheered up anyone with assets and did  no harm to those without. I supported a vigorous Central Bank response to offset some of the worst economic consequences of the anti pandemic measures. I also thought governments would get away with a massive one off increase in borrowing, financing it at very low rates, all the time activity was so depressed.  There did need to be a  big offset and rescue packages given the economic severity of the policy.

If you carry on creating more and more Central Bank money to keep government borrowing rates low there becomes more danger that the money will start to find its way from asset markets into creating demand for goods and services. All those extra savings people made during lockdown as they saved their going to work costs whilst still banking their pay could be spent in a rush, driving up the velocity of money use.  If commercial banks use the extra cash they have to expand credit that too creates more demand for goods and services. By these means more created money can lead to goods and services inflation if the money starts to create more potential demand than there is supply.

Central Banks in the USA, UK and the EU should stop their money printing and bond buying now to reduce this risk. They and the other bank regulators should ensure total money growth is sufficient  to  allow decent growth without encouraging too much extra inflation. That can best be secured by setting appropriate levels of permitted lending / balance sheet strength for the commercial banks using their existing powers. States should continue to cut back their deficits and borrowing substantially by promoting growth policies which will swell revenues and cut crisis spending.

Since I and others raised this in the Commons last week during the passage of the Environment Bill the Minister has supplied additional information about how they are proposing to get rid of bad discharges to rivers as we all want:

• “Between 2020 and 2025, water companies will invest £7.1bn on environmental improvements in England.
• Of this, £3.1 billion will be invested in in storm overflow improvements specifically.
  • We have also made our expectations crystal clear in our draft Strategic Policy
  Statement to Ofwat where, for the first time, the Government will tell the industry’s
  economic regulator that we expect water companies to take steps to “significantly
  reduce… storm overflows”, and that we expect funding to be approved for them to
  do so.
  • In August 2020 we established the Storm Overflows Task Force to bring together
  key stakeholders from the water industry, environmental NGOs, regulators, and
  Government in order to drive progress in reducing sewage discharges.
• The Task force has agreed a long-term goal to eliminate harm from storm overflows.
  • We have committed to reviewing the case for implementing Schedule 3 to the Flood
  and Water Management Act 2010 in England, which would set mandatory build
  standards for sustainable drainage schemes on new developments, and which
  many have called for. This action has the potential to markedly reduce quantities of
  water unnecessarily entering the sewerage system.
  The significant action I have detailed will deliver real reductions in the harm caused.”

The Chancellor tells us he believes in low taxes. In that case he has work to do. Let him prove his point in this coming budget.

First, abolish the tax on jobs he proposes for April with his National Insurance surcharge. The advisers who told him he needed to raise an extra £12bn next year, have now told him he has already raised an extra £46bn in tax in the first half of this year thanks to tax cuts and recovery.  Their revenue forecast was that much out between March and September! Let’s stick with a winning formula of lower tax rates and more revenue.

Second, end the attack on the self employed by cancelling  the changes to IR 35. We need all the enterprising and self employed people we can get to power recovery and change the economy.

Third, remove VAT from green products. The government claims to be the greenest ever, so why charge VAT on boiler controls, on insulation, draught proofing and various other green energy products?

Fourth remove VAT from  domestic fuel to offset some of the large rises in price brought on by the gas shortage. The gas price rise will act as a tax on consumption, cutting growth.

Fifth end the threat of higher corporation tax rates

Sixth, consult on setting the new world Minimum Corporation Tax rate to offer some tax competition to Ireland.

If he did these things he would indeed be a lower tax Conservative., He would also collect more revenue and have a lower deficit because the economy would grow more.

The Budget this week will doubtless be damaged and misdirected by wrong official forecasts. The Office of Budget Responsibility is meant to be independent, yet Chancellors seem obliged to use these forecasts and defend them. Given how wrong they usually  are it places the government in a false position and misleads them over what is the proper policy response. Indeed, it leads officials to recommend advice which will slow the recovery and worsen the outturns.

The OBR and Treasury officials are wedded to Maastricht austerity economics. They slavishly publish the UK’s position against the Maastricht debt and deficit criteria as if we were still in the EU and had to comply with the Treaties. They will doubtless inveigle the old Maastricht debt and deficit requirements back into a so called new statement of economic policy aims and controls for this Budget  despite Ministers rightly wishing to review the framework.

If you are going to steer economic policy around debt and deficit figures you need to be able to forecast them accurately and understand what actions balloon deficits and which ones reduce them. Last year I drew attention to the wildly pessimistic budget deficit forecasts. The outturn was first published as an overstatement of a massive £90 bn in the deficit, even larger than I had dared to suggest.  It was subsequently adjusted down to £64 bn  by proposing that there will be  some hidden losses yet to be determined to add to  last year’s figures. I repeated the claim that this year’s budget deficit was also substantially overstated. At the half year stage it turns out the deficit was overstated by a whopping £43 bn  in just six months.

The main reason is the OBR and Treasury underestimate the buoyancy of revenue in an upswing, and have false models of tax revenues which depress revenues when you cut rates without allowing for behavioural effects which increase transactions and output  with lower rates. Thus we see that in the year to date Stamp Duty has risen by a massive 85% thanks to a mixture of unlocking and the lower tax rates the Chancellor wisely introduced. Corporation Tax is up 20% despite the Chancellor  offering a super deduction for investment which officials are nervous about reading their latest published report.

The Chancellor should announce a strong commitment to low inflation, underlining the 2% inflation target which we are currently breaking. He needs to target tax cuts, regulatory actions and government procurement on scarcity areas where prices are under upwards pressure and offer supply side reforms to boost capacity. Energy, transport, domestic food growing, domestic timber and others are obvious areas.

There should then be a growth target, to send a clear signal to all of government that there is work to be done to boost the growth rate and the productivity rate with great education, training, network investments, incentives for the self employed and small businesses and innovation.

The state debt is currently stated as £2.2tn or 95% of GDP. As the state will own £875bn  of the debt by year end the true figure is £1.325 or 57% of GDP. This is a manageable amount at current low interest rates. Because the OBR grossly overstate the deficit they will demand tax rises which will slow the economy , damage  confidence and impede  rectifying supply shortages.

( text amended to include all QE to date, not just more recent)

The 26th COP conference to save the planet takes place in early November. Like its forbears they tell us this is the last chance and that much is riding on the results. Clearly they are right that as the previous conferences have not agreed sufficient action to even begin reducing the total carbon dioxide produced in many places nor to start to cut the total amount of fossil fuel burned around the globe  this conference needs to be more successful than past ones to wean the world off fossil fuels as they wish.  World oil demand at 85 m barrels a day in 2006 is forecast to exceed 100m barrels a day again as world recovery from the pandemic continues, and to stay there for the next decade.  As the Conference approaches we are told that it will  be an extremely difficult task to get an Agreement. I would be surprised if it is allowed to break  up without one. I would also  be surprised if it is the last such conference, declaring job done. In practice the world is nowhere near getting to net zero any time soon all the time China, India, Brazil, Pakistan, Bangladesh and other heavily populated countries see the need to burn more coal, oil and gas to grow.

The UK as joint chair with Italy has set out four crucial areas to get agreement – coal, cars, cash and trees. They will  need to negotiate the question of grants and loans from the rich countries to the lower income countries, as they are making this an essential part of co-operating with the general green revolution. A recent meeting of the 20 country strong Like Minded Developing countries (includes China, Saudi, Pakistan, Malaysia, Bangladesh) issued a tough communique saying the advanced countries as a whole needed to cut their carbon output more quickly as they had put plenty of carbon dioxide into the atmosphere during their industrialisation. The rich countries needed to  be tolerant of the developing world’s need to grow using fossil fuels, and to offer far more financial support for green transition by them. They pointed out that many developed countries had failed to make their full contribution of cash under the Paris promises, and had not met their own carbon dioxide reduction promises either.

It seems likely the Conference will have to proceed without either President Xi, or President Putin being present. China is by far and away the largest producer of carbon dioxide, at 28% of the world total, and Russia is in fifth  place at 4.5%. It now seems likely Prime Minister Modi of India, in fourth  place with 7%, will attend but it is unlikely he will be able to pledge cuts in Indian use of fossil fuels and will understandably want more financial support. China and Russia will send delegations and will offer national plans of sorts, but they will fall far short of what green campaigners would expect. There is unlikely to be an early phase out of coal by emerging countries, with China aggressively adding coal mines and coal power stations to her energy mix.

It will  be easier to agree more trees, though difficult issues remain in parts of Latin America and Asia over cutting down forests to grow crops and graze cattle. Everyone will  be sympathetic about electric cars.

The central Agreement will therefore rest on further pledges of progress from the world’s second and third largest emitters, the USA and EU. The UK will assist as the one larger  advanced country that has already done the most to cut its own carbon dioxide output. Getting a better commitment from Germany to cut out coal would help them. There are rumours that a possible new coalition government there might want to bring forward the elimination of coal from 2038 to 2030. The EU will doubtless find it more difficult to get an improved commitment from Poland, another large coal user.

Without larger and faster contributions from the first, fourth and fifth largest producers of CO2 in the world it is going to take more such conferences to chart a reliable path to net zero for the world.

To the BBC and Remain critics a free trade deal with the EU was essential to our economy, whilst a free trade deal with anyone else is a big threat to  our own farms and industries, allowing foreign competitors more of a chance to lift orders  from us.

They never see the contradictory nature of their twin positions. Apparently New Zealand lamb could drive our sheep farmers out of business. No such damage they say is being done by the EU.  They ignore the way German cars, French dairy, Italian textiles, continental steel and others drove many of our companies out of business  when we went to zero tariffs with the ECEC on  joining , let alone the damage the CAP did to farming and the Common Fishing policy did our fishing grounds and industry.

The truth is we rely for our substantial foreign trade on WTO membership which secures most of it with or without top up trade deals. A top up trade deal can be helpful overall, but of course it only helps our business where we are competitive and harms it where we are not. We have a massive deficit with the EU thanks to the asymmetric  way tariffs and barriers were taken off industry where they had an advantage, but kept barriers on service  where we had an advantage.

The other criticism they advance of a deal like the New Zealand one is our trade is relatively small.  This of course contradicts the other criticism that it is seriously harmful. The NZ deal cements  a friendly alliance that matters, but it is also progress to joining the TPP which is large Asian trading area of faster growing economies which we can do more with.

The absurd argument that we have swapped a great deal with the EU for one with smaller counties is silly. We have a tariff free deal and WTO access to all EU markets, no we are adding a bit better deal with places like NZ and Australia, preparatory to joining TPP which the USA may well also join.

Brexit supporters always had a sense of perspective over trade deals, knowing the key was WTO membership for trade access. We left to run our own affairs generally. Membership of the EU single market did considerable damage to industry, agriculture and fishing owing to the asymmetry in its rules. They could fish our waters, for example, but we didn’t get rights to Mediterranean fish.

Over the next few years we will face a reduction in nuclear power as older stations are closed, well before a new large nuclear power station comes on line. We will experience growing demands for electrical power as more people switch to electric cars and electric heating, and as the economy and the population continues to grow creating more need. There will be a further major increase in wind power, which will cover the days when there is the right level of wind to maximise turbine output without needing to shut them down through too high a wind speed. The question remains, what is the back up plan for days of high demand when the wind does not blow and when solar output is also low?

In the short term the government has brought three coal power plants back on stream to deal with shortages. These have to be kept, and perhaps could be converted to biomass to make them more reliable and popular contributors to our power output. The country relies heavily on its remaining combined cycle gas stations which produce less carbon dioxide than the coal stations per unit of output. It would be a good idea to bring several old retired gas stations back into a state of readiness to be available to produce power when the wind drops. These are matters which our managed system of generation can commission by offering capacity payments to the owners to make the facilities available.

The government should also look at how it can increase domestic gas output. Currently half the gas we use is imported. Some of this is dependent on paying high and wildly fluctuating spot market prices. Some of it is shipped long distance on tankers. If we produced more domestic gas this could pass to users via pipeline and could be purchased under contract at more stable and lower average prices. Immediately the government could allow Shell to progress the Jackdaw field, which can use the existing Shearwater platform and the existing gas and liquids pipes into St Fergus/Cruden Bay for onward distribution by the existing pipe network. This would be a greener method of supplying gas than the imports and provide us with more national resilience in energy provision. The government should review its other options for producing more UK gas as a transition fuel whilst it puts in place much more reliable renewable electricity and better storage for variable wind power.

Yesterday the government launched its strategy for cutting the carbon dioxide output caused by heating buildings. They wish to promote heat pumps, and will offer grants of £5000 to people willing to install these devices who meet their criteria. The details of the scheme will be announced prior to a launch in the spring of next year.
They also reiterated their strategy of banning all new petrol and diesel cars from sale in the UK after 2030, preferring universal adoption of new electric vehicles where people are buying new.

I pointed out that for this strategy to work the UK would need to generate all its electricity by approved green means, as otherwise we would simply burn the fossil fuel in the power stations prior to running homes and cars on electricity. As we are often still relying for 60% of our electricity on fossil fuels when the wind does not blow and there is not much sun that is going to take a major investment in new green capacity that will work when the weather is not helpful to certain renewables.

The Minister in reply did not promise a major expansion of green generation from reliable power sources. He did not comment on the possible shortfall in electrical power if the government is successful in getting widespread adoption of fuel pumps and electric cars. He did say the government sees gas as a transition fuel which clearly will do a lot of the work in generating power and heating buildings for at least this decade. Nor did the Minister answer those who asked when it was going to commission more nuclear power. This is reliable carbon free power, but we face the reduction in the amount of nuclear produced over the rest of this decade as old nuclear power stations are closed. down. This will add to the difficulties of supplying enough green power this decade.

Tomorrow I will set out again more of the ways the government can act now to ensure we have sufficient generating capacity and sufficient access to gas as transition fuel for this decade, whilst they put in place the major investments in reliable green electricity they will need for the next decade and beyond. They need to announce new nuclear, new small nuclear, more biomass more hydro and pump storage and more battery storage and hydrogen conversion for wind energy when the wind does blow well.