Inflation is at 1.3%. (CPI 12 months to Dec 2019) compared to the target of 2.0%. Thanks to the world slowdown and the Chinese epidemic oil prices have fallen by one fifth this year, with freight rates and other commodities also well down. The pound is rising against the Euro and yen. All this points to no inflationary surge ahead. Indeed if there is an inflation problem it is it will be too far below target, as the target is meant to be symmetrical.

The Bank of England should recognise that its tightening of credit conditions through two rate rises, FPC advice against car loans and consumer credit, and tough rules on mortgages has greatly reduced money growth. Tight credit has helped slow the UK economy down to almost a standstill. There is nothing wrong with some increase in credit to people in  jobs to buy homes and cars, or to businesses needing more stock and equipment  because their revenue is growing. The Bank has to work with the commercial banks to assist  low inflation growth.

I do not think a 0.25% cut in the low official rate will do much. I would prefer a new round of Funding for Lending, a scheme which makes cheaper money available to UK banks prepared to undertake sensible new lending to the UK economy. This worked well before and would ease pressures in various areas.

The second is to do what the Fed is doing and make clear to markets that the Bank will make cash available by buying Treasury Bills if needed to preserve liquidity and enforce the current low rate structure in money markets. Commercial banks need to know the Central Bank is not about to squeeze them or damage them as the Bank of England did in 2008-9 by leaving markets short of cash.

Prosperity, not austerity, was my slogan for both the 2017 and 2019 elections. When it became clear Mrs May was going to keep Mr Hammond as Chancellor and allowed such a  negative approach from the Treasury and her top officials, I joined with others to replace her so I could advance the cause of Prosperity.

The new Prime Minister made clear his economic policy is the promotion of Growth and Opportunity. He has from the start injected a welcome optimism into the country’s view of our future. When his chosen Chancellor fell for Treasury pessimism and tax rises, he asked him to work using shared advisers with No 10. I think the PM was right. The Chancellor was unwilling so  had to resign. I think we will be better off now we have a new Chancellor who should understand what the PM is trying achieve.

One of the Chancellor’s  jobs is to tell Treasury officials that we want realistic optimism about the UK’s economic prospects, with an expansion minded budget which will boost our growth and improve our outlook. It was not a case of the outgoing Chancellor valiantly defending a Treasury orthodoxy that is right against a PM who wants too much expansion. It was a  Chancellor giving in to the excessive pessimism of the Treasury/Bank/OPBR that has fuelled so many bad and wrong forecasts from them since 2015. The new Chancellor needs to say that we have growth in  our own hands, and that whatever the outcome of trade talks with the EU the UK can have a good economic future if we take the correct decisions now.

In future blogs I will  be looking at the range of measures the government now needs to take to shake off the slow EU style growth rate we have sunk to, and to liberate damaged sectors that have been hit by too many taxes and wrong policies like housing, cars, general manufacturing  and retail.

The Bank of England too needs to work with the government on promoting growth. Inflation is below target and looks set to remain  weak for the time being, so the Bank should assist the drive for growth.

I strongly support the aim of the First Homes proposal. More people want to own their own home than currently can afford to do so. We need more affordable homes for sale.

The essence of the proposal is twofold. The first is that some of the large gains that landowners and developers stand to make on the grant of planning permission should be shared with First Home buyers by giving them a discount on the normal market value of these new homes, paid for out of the money that is released by the development. The second is that a buyer of such a home accepts a restrictive covenant on the property that means when they come to sell they need to offer  a similar percentage discount to the buyer that they enjoyed on purchase.

I have no problem with the idea that some of the gains on development should be shared with buyers. Currently these gains are effectively taxed to allow the state to spend more money on supporting community infrastructure and on affordable homes to rent. It is no greater distortion of the market to allocate some of the winnings to subsidise affordable homes to buy instead. It has the advantage from the state’s point of view that the buyers take responsibility for repairs and maintenance, whereas with rented social housing the obligation remains with the state or Housing Association. Given the strong wish of many people to buy not rent, surely we should do more to help them.

The second proposition is a new intervention in the housing market. It means creating a parallel market to the primary market for buying second hand homes out of a group of people who qualify for the scheme. This will only work if the pool of such people is sufficiently large so a potential vendor of a First Home has enough potential  buyers to make a decent market. The Consultation wishes to limit the ability of First Home owners to rent out their property, as it has to be their home that they live in , and asks about reward for improvements. The danger in the scheme is the person will suffer a discount on the improved value of the home, not just on the underlying investment. So if someone bought a two  bedroom First Home but was able to add two more bedrooms and extra downstairs accommodation they might not get back all they had spent on such a substantial extension given the application of the discount. The more restrictions that are placed on the First Home buyer the less attractive it is as a proposition, and the less like normal home ownership it becomes.

My view is I would rather share some of the gains with a First Home buyer than with some  local Councils and their choice of projects to spend planning gain receipts on. We should not be afraid to help make people a  bit better off by allowing them to buy a home at a discount.It is difficult to stop them renting out their homes if they suddenly get a requirement to work abroad for their employer or if an elderly person has to go into a long  stay care home.

For this to work the rules need to be flexible. The issue is who should qualify? There does need to be some means test to stop people with substantial capital or high earnings from cashing in . The aim is to help local people, veterans and key workers like teachers and nurses.  There does also need to be a cap on the price of property involved. I suggest this should be done by principal Council area from average prices in that area, where the cap is not above the average price.  There will only be a satisfactory secondary market in First Homes if this is done at scale.

www.government.uk/government/Consultation/First-homes

Congratulations to Rishi Sunak. He is  able and hard working, with a knowledge of the expenditure side of the Treasury from his role as Chief Secretary.  

The immediate task is to challenge Treasury officials into completing the change from the Maastricht economics of austerity to a pro growth optimistic economics that chimes with the Prime Minister’s vision. Boris has been clear we want growth, opportunity and levelling up. The aim  is prosperity, not austerity. The purpose is more people in better paid work, more owners, a better spread of wealth and income around the whole UK.

You do not achieve that by writing the Maastricht rules back into the fiscal framework, nor by hiking taxes or trying to tax the rich out of the country. I think The PM was right to want common working between the Chancellor’s team and his own. The leaks, briefings and rows about the forthcoming budget were not helpful. I expect Rishi to spend more time on persuading Treasury officials to complete their journey. They need to move on  from  pessimistic Hammond style economics which said the UK cannot be a success on  her own and needs to beg to stay close to the EU, to an optimistic global UK approach. We need to grasp the future by investing in it. We need a bigger and  more prosperous private sector, which requires lower tax rates and a holiday from  yet more prescriptive regulation.

It is not surprising the cost of homes is so high, given the large increases in demand from new household formation, and the attempts to ration or limit supply by the planning system and the actions of the main housebuilders. It is also the case that pumping money into the system at low interest rates makes higher mortgages affordable for more people, so home prices like  bonds and shares have risen thanks to QE and low official interest rates.

To contain prices we need to cut demand and raise supply to better balance. Markets would do this for us but we have instead migration policies, housebuilding standards and planning policies that give government crucial roles.  The government via Councils and Housing Associations is also a major developer itself.All the time interest rates remain low we should expect mortgages at higher multiples of earnings to  be affordable.

In a managed system the government could reduce migration numbers as it has promised to do. It can continue with efforts to increase the number of homes built. It can also ask whether its standards and specifications are the right ones to encourage more building. A combination of UK government standards and wish to produce traditional looking buildings by the industry means a lot of work takes place on site. The UK has not taken up factory made sections and components on the same scale as in some other countries. It means the task of building is prone to delays for  bad weather. It requires a lot of on site supervision  to ensure decent quality, matters which would be partly taken care of by precision machinery in a factory prefabricating more of the home. The structure of the house building industry with its heavy regulation and high financing demands mean that most of the housing is supplied by a few large companies. They say they are constrained by a lack of skilled people and the need to maintain and supervise high standards from building more homes more quickly against all the planning permissions already granted.

Tomorrow I will look at the latest proposed government intervention into this government steered sector with their plan to use planning gains to offer discounts to some people on buying a new first home.

Many of us want a green policy, but definitions of what constitutes a good green policy vary. To me a good green policy protects the beauty of the English landscape. It encourages fresh air and clean water, prevents litter and facilitates good recycling or disposal of waste. We should not prevent all new development, but should seek to preserve much of the natural environment and the farms we see around us. The single most important green policy we can follow is to limit migration, as a rising population of course requires us to build on more green fields.

Since 1945 government and Council led planning has become more and more intrusive, trying to limit the volume of development, and having a heavy influence over where it should go and what it should look like. Substituting the judgement of civil servants for that of private landowners, homeowners and investors has not produced a notable improvement in the beauty and utility of development over say the Georgian terraces of Bath or the Victorian villas of London, nor has it arrested the steady erosion of the countryside around every main town and city. It leaves the market short of homes, helping prices of them upwards to choke off some people’s reasonable ambition to own a home of their own.

It has managed both to create artificial scarcity of development land, and to encourage concentration of development. In my own county of Berkshire large acres of West Berkshire are protected from most development by being registered as an Area of Outstanding Natural Beauty, whilst much of Maidenhead and Windsor constituencies are protected by Green belt designations. This leaves my own central Berkshire area prone to high levels of development as it does not benefit from any green space special protection.

We need to ask ourselves some basic questions about our current system of planning. How does it manage to let homebuyers and conservationists down at the same time? Why does it require high density of development and such large mortgages to buy? Why does so much development end up in London and the South East? I will explore further in future blogs.

The recent resignation of the Leader of the CDU in Germany, AKK, received little attention in the UK media compared say to the daily stories about the Democrat opposition in the USA.  We should consider why the lead party in the German governing coalition has just lost its new Leader, who was meant to be taking over from Mrs Merkel as Chancellor candidate or as Chancellor before the next election. Germany is an important country and economy, and her current troubles will have an impact on our economy  just as US politics has an impact on it.

The tribulations of AKK got worse late last October  with the Thuringia State election. We are told far more about the Democrat caucus in Iowa than such Lander elections in Germany. In that election Mrs Merkel’s CDU party fell to third place with just 21.7% of the vote, losing 13  of its 34 seats in the Parliament. The AFD came second with 23.4% of the vote, adding 11 seats to its existing 11. Its leader is a very contentious figure with views about Germany’s past  that all mainstream parties find unacceptable.   Mrs Merkel’s main coalition partner, the SPD (Social Democrats) sank to just 8.2% of the vote, losing 4 of their 12 seats. Die Linke, the left wing challenger party stayed top with 31% and 29 seats.

In this state election the combined forces of CDU and SPD (Traditional centre right and centre left dominant parties, Conservative and Labour in UK terms) polled just 29.9% of the vote. Two radical parties of left and right polled 54.4% between them. In the hung Parliament created in a recent vote CDU members helped the AFD throw out the Die Linke left radical  Minister President  and replace him with the Leader of the  Free Democrats who got just 5% of the vote. This broke the Merkel rule that CDU members should not support the AFD, and led AKK to take the hit and resign, for the bad result and above all for the voting decision taken in the new Thuringia Parliament. Public protest soon led to the resignation of the new Minister President. The Parliament is currently unwilling to hold new elections which Mrs Merkel and some others want and has yet to appoint a new Minister President.

This tells us there is great unhappiness in Germany about current policy and the stance of the present government. It means there is a lack of leadership in the CDU who have been leading government for much of the time in recent years. Mrs Merkel clings to her pro EU green strategy, offering no support to her struggling car industry. The economy has plunged from good performance to little or no growth interspersed with the odd negative quarter.  There is a big argument going on about how to spend the surplus on the budget within the coalition, with some CDU hawks still unhappy about the whole idea of fiscal reflation.

It is still not clear what will happen about who should govern Thuringia. Many Germans are alarmed at what has happened there.

As expected the twin squeezes on the UK from monetary and fiscal policy along with a weak world background produced no growth in the fourth quarter of 2019.

For the year as a whole the UK managed a creditable 1.4% growth, a bit higher than I expected given the policy background and a testimony to the underlying strength of the economy. This means the UK outgrew the Eurozone again last year. This happened despite the world car manufacturing recession and the impact of higher taxes on UK homes and cars.

Given the weakening world background the UK needs positive action from the authorities to support the uplift in confidence generated by the result of the election.

After years of being wrongly told UK supply chains will be disrupted when we leave the EU, today there is surprisingly little discussion of the impact of the corona virus on world output.

  The Chinese  had to extend their New Year holiday production shut downs this year. Yesterday there was some return to work, but there must still be many closed factories, and  factories with reduced workforces. Some cities  continue with restrictions on travel and activity, and some people in China are isolating themselves at home for 14 days after contact with someone who had the virus.

The South Korean car companies have announced periods of closure as they are short of Chinese components. It is highly likely other companies and countries face shortages which may entail closing their plants for a period.

Meanwhile the worries about the virus have led to a big decline in international travel, the loss of tourism business in China and other parts of Asia, some loss of luxury goods sales which accompany travel by the rich and other knock on effects from the epidemic.

The Chinese economy is the second largest in the world and was meant to grow at 6% this year, meaning it was forecast to provide the single largest boost to world growth of any economy. In the first quarter of 2020 it is very unlikely the Chinese economy will be able to achieve anything like this growth rate. The oil price is down 20% from its January peak as markets worry about lost Chinese consumption and orders.

All this implies the western economies need a bigger monetary and fiscal boost to offset these negative trends from China. It also acts as a reminder that dependence on components from far away can be an additional worry or weakness in manufacturing.

The UK has many campaigners against carbon dioxide who worry about levels of man made gas being put into the atmosphere. I suggest today to them that the UK has been one of the most successful countries at getting its CO2 emissions down. They should now divert their energies to cutting CO 2 in places putting out much more and not cutting in the way the UK has.

They should start with China. China adds around  around 30 times more CO2 to the atmosphere each year  than the UK. It also puts out considerably more CO2  per head. At around 30% of world new CO2 output it is surely the place to start, as its output is still increasing.

If that is too difficult then surely they could turn their talents to changing the EU. After our departure they account for around 8 times our output with a higher CO2  output per head. They still mine and burn a lot of coal, which we have stopped doing,

Germany in particular needs attention. At more than double our CO2 output there could be quick wins. They might also like to campaign about the German motor industry which is still based around fossil fuels for most of its output.

Clearly it is much easier and cheaper to cut CO2 output in a country like China where there are quick wins and easy changes the UK has already made. It should also be welcome to the EU if we offer them advice on how we got to much lower levels per head than them, as their whole new economic and regulatory policy is based around CO2 reduction.