Incisive and topical campaigns and commentary on today's issues and tomorrow's problems

     Whilst we await the public’s verdict at the ball0t box, it is fortunate that I have another leak from Dame Lucy about how the true government of the UK is going.

Letter to Dr. Roy Spendlove from Dame Lucy

Dear Roy,

             It is useful to take stock whilst our political masters are off campaigning for their elections. As I suggsted to you at the beginning of the Coalition government, I thought it right to play the austerity question long. Ministers saw the wisdom of signing up to two more years of real spending increases overall in 2010-11 and 2011-12. I think now we do have a duty to point out to them that the tighter spending settlements they signed up to for 2012-15 are going to cause some pain.

             In our cross cutting role we can point out that the troubles with border security partly stem from cuts. We need to highlight that if the government really wants us to exercise a level of control over our borders we have not exerted for more than 10 years, they will need to put a lot more resource into the system. We also need to remind them that  none of this can apply to our borders with the rest of the EU, where the previous government made changes to promote a common policy with our partners.

             We need also to warn them that their bold plans to computerise PAYE so real time information passes to  the Revenue and Customs, and then to add to that Treasury calculation of the tax of each individual weekly or monthly, is going to take a lot more effort and spending to get it right. As you will understand, Ministers have signed up to savings on welfare that depend on successful implementation of the new single purpose benefit, coming in around 2015. This of course, can only happen if the Treasury have successfully implemented their real time PAYE system, as the universal means tested  benefit is the back end of the income and tax calculations for all in work. I fear Ministers may have underestimated the complexity and potential cost of all this.

           I do detect that Ministers would like some way round the substantial capital spending cuts that the last government bequeathed to them. So far the Treasury has reinstated just a small proportion of the cuts.I know you were unhappy at the time that these were conceded, but it seemed to some of us more  important to protect the current spending base. I had hoped we would find an opportunity to reinstate many of these projects.  I would like you to look again at ways that could be used to redeploy deferred purchase, private capital and the like to bring forward some of this spending. Ministers will not wish it to look like the previous government’s PFI/PPP programmes, which they have in the past criticised. I would like you to find ways of presenting these new methods of financing that would be acceptable all round. Ministers seem especially keen on items that result in construction contracts soon.

             I am pleased to report that Ministers have been very understanding of the substantial limits on their freedom for independent action placed by the many Directives and Treaty commitments past governments have made in the EU. The EU position has led to a diminishing interest in deregulation, always something oppositions prefer to governments. Many Ministers have come to accept that the regulations they most would like to remove or amend are European in origin. I think some key Ministers have also been surprised by the frequency and intensiveness of much EU business,and are finding that it absorbs a lot of their energies that might otherwise lead them to ask more questions about domestic business.

            Given the current state of public opinion and the recent GDP figures, I think you will find Ministers are now more willing to look at your various ideas for more public sepnding. I would like to see a list of items in the “Spend to save category”, which is how we have programmed the computerisation schemes at Treasury and Welfare. I think we could also relaunch such schemes for revenue collection, benefit fraud reduction, and border enforcement. These schemes would, I think, rightly take priority over any crude idea of cutting the overall government overhead.

Yours

Lucy

                  It’s the voters turn to say what they think.

                   In France it looks as if an other incumbent who has presided over the Euro crisis, another supporter of Euro austerity, is about to lose office. Latest polls shows Mr Sarkozy trailing Mr Hollande by between 6% and 11%. If Mr Hollande wins, expect rapid moves to bring him on board for the austerity treaty of late last year, sweetened by some kind 0f Growth package to be agreed with Germany and the Commission. Do not expect a radical change in the EU’s approach to the Euro.

                   In Greece the two larger parties of past elections and the last Parliament saw much lower poll ratings in recent months.  Pasok, the current ruling party, saw its rating slump from 38% in January 2011, to around 14% in the last permitted polls.  New Democracy has had a smaller fall, from 30% to 23%. They do not allow polls close to the election. There is speculation that the two main parties, who both broadly support the loan and EU policy, will neither win a majority, and may not be able to form a coalition together to supervise the EU agreement.  Expect uncertainty if as expected there is a Parliament with a variety of parties represented, as they seek to establish a new government and maybe  form a new policy in relation to the EU loans and requirements.

                     In London it looks as if Boris will win the Mayoralty. It will be a triumph for him personally, running on his lower tax ticket with strong messages on law and order, and the EU.  It will be  consolation for the Conservatives on a night when they themselves have forecast losses of Councillors elsewhere.  Labour is expected to pick up a good number of seats around the country. In 2008 when these Councils were last contested, the Conservatives polled 44%, the Lib Dems 25% and Labour 24%. Current pollls show Labour doing much better, at the expense of both Coalition parties.

                  However, Labour’s night could be spoiled if they lose London again, and if they also lose Glasgow to the SNP, where pundits say opinion is shifting against Labour, the incumbents. In 2008 nationwide  the three main parties shared 93% of the vote.

                 Some think Greens, UKIP, English Democrats, Independents and others may poll better this time. At the moment they only have a handful of Councillors. The English Democrats are defending the position of one elected Mayor, in Doncaster. They achieved that breakthrough following  conduct of a Labour Council which was criticised by Labour itself  in a traditional Labour area.  I do not expect the  English Democrats and/or UKIP to win control of any Councils.

         Some of you have commented that London has grown faster because it has taken a disproprtionate share of the infrastructure investment. It is difficult to square this with the reality.

           The truth is that much of the UK is short of transport capacity. The country is gradually benefitting from a big expansion of digital broadband capacity, with major investment in all regions. London, the south-east and the east are  suffering more than the rest of the country from a failure to invest in enough reservoir capacity for water demands. Electricity is delivered by national grid, and gas and oil are shared around the whole country.  There is, it is true, only one high speed train line from London to the Channel tunnel. The rest of the railway  network was shared around by Victorian entrepreneurs who put substantial capacity into the then prosperous industrial regions.  Modern subsidy perpetuates the broad shape of the Victorian railway, as adjusted by Beeching. 

          If you look at road investment the south of the country has received less motorway investment than the Midlands, Lancashire and Yorkshire. East Anglia, Devon and Cornwall, Lincolnshire and Northumberland have all been left out of the motorway age.

          All four major urban complexes, London, Birmingham.,Manchester and the Yorkshire urban area have their motorway boxes. The M 25, the M42, and the M60 are ringways for London, Birmingham and Manchester. The  Yorkshire motorway box links Leeds, Sheffield, Doncaster and the other main cities.

           The London ringway is fed by the M1, M11, M2,M20, M23, M3, M4 and M 40.  Despite the varied links, there is no motorway link from London to  anywhere on the south coast between Folkestone and Portsmouth, no motorway to the crucial ports of Harwich and Felixstowe, no motorway or continuous dual carriageway link along the route of the A303 to the west country. The south has no motorway or continuous dual carriageway along the south coast. The capacity on the main routes west is poor for the heavy  traffic volumes, especially in the M4 corridor. 

           The Birmingham ringway  is fed by the M6, the M40, the M5, the M 54, the M45 and the M 69. There are good Birmingham motorway links to London ( 2 options), the west country, Lancashire and the north west, and to the M1 north. The A14 haul road to Felixstowe is of reasonable standard.

              The Manchester ringway is fed by the M62, M56, M61 and M 66. There are motorway links to all the main towns and cities in Lancashire, across the Pennines to Yorkshire and north to the Lakes and Scotland, as well as south to London.

              The Yorkshire broader ring  has links to the A(1) M, the M62, the M18, the M 180 and the M1. This links the cities to each other, to the East Midlands and London  to the south, Lancashire across the Pennines, to Kingston upon Hull and Scunthorpe.

               The government has stated its wish to expand transport, broadband, water, electricity and other energy capacity. Much of the investment can be made by the private sector. Electricity capacity is urgently required, and will be available nationally. Water capacity is needed in the south and east, where water companies have failed to keep pace with growing demand. I would be interested to hear from contributors about what expansion of road and rail capacity they would like to see, and how much of any additional capacity  could be privately financed.  Getting more out of  our existing railway is a story for another day, but an important one. Having enough airport and seaport capacity is also a crucial issue, as economic development normally flows from proximity to a good port.

           Many of you have pointed out in your responses to yesterday’s blog that London has always been richer than the rest of the country. There have always been rich people who want to congregate near to the royal court or to the seat of government, rich people who want to enjoy the culture and society of a large city, people who come to London as it is by far the best known city in the country. There used to be many Englishmen who did well out of royal favour by being at court.

          London has always been more than the capital, drawing benefit from that. After all, Washington and Brazilia are governing centres, but they play poor second fiddles to New York and Rio. London has managed to be a large commercial and business centre, as well as a capital city. It used to have a great deal of industry. As a contributor has reminded us, 1930s London saw flourishing light industry in iconic buildings along the great arterial roads into the centre.  It was the UK’s number one port, with plenty of wharves and port related industry and distribution. It lost its lead to better located places with deeper water  like Felixstowe and Dover. Industry declined or migrated.

                More recently it has transformed itself into primarily a business services and financial service centre. Indeed, so successful has this development been, that on most measures it is the best of all such centres in the world, or runs as joint top with New York. It also sports an important media, fashion and cultural hub, and offers great facilities for leisure and tourism. In other words, London the port and London the industrial centre have passed over to London the world business centre. London has reinvented itself, has moved with the times, has allowed thousands of entrepreneurial changes to completely transform the landscape and the nature of the jobs on offer.  

             Instead of much of the UK being proud of London, and enjoying her success, it all too often produces jealousy or demands that London be taxed  into changing her ways. Jealousy is a powerful political emotion at the best of times. It can become an all crushing political emotion at times of stress or recession. The current jealousy of financial services, banking and the leading centre of them in the UK is driven by the fact that rewards now are so much higher relative to the rest of the country, than were the rewards of the light industry and port activities, as well as of the smaller business services of previous eras. I of course agree that the banks should not have been bailed out, and that bankers in bail out should not be paid large salaries. Most of the financial services industries and other business services sought and received no bail out, and paid good incomes out of their own revenues and profits.

              Today the same money will buy someone a bedsit flat in the centre of London as buys a five bedroom detached house in my constituency just 40 miles out of London.This is a bigger gap than there used to be in property values.  The latest Sunday Times Rich list shows that a person now needs to be worth more than £72 million to qualify  in the top 1000, whereas the top 100 in Scotland goes down to £50 m and the top 250 in Ireland to £33 million. All these figures are considerably higher than a decade ago, whereas UK GDP is still 4% below the 2007 peak. The level of income of the top 50 has risen from a minimum of £600 million ten years ago, to £1400 million today.

                  726 of the top 1000 made their own wealth. The rest inherited. There are computer entrepreneurs, fashion success stories, popular artists and musicians, hedge fund founders, and industrialists.  London and the south east accounts for 529 of them , including all but one of the top ten. The only one not in London in the top ten, the Duke of Westminster, owes much of his fortune to the 300 acre family Mayfair and Belgravia estate.

                  The picture we see of London through this snapshot is of a world city attracting some of the richest and most entrepreneurial people there are. Because there are now world brands and world markets for successful artists, footballers and the like, they make so much more money. London acts as a magnet for talent and cash. It then becomes very dear for anyone on a  normal UK salary. Does the UK wish to carry on hosting the world’s rich and successful, or do we wish to turn our back on London’s success as a world city? Is dislike of riches a necessary driver of policy in a democracy? Should it be directed against pop stars and footballers as well as against hedge fund managers and top lawyers?

         When I wrote the Economic Policy Review with colleagues before the last election, one of the most striking findings we highlighted was the persistent outperformance of the London economy compared to the rest of the UK. 

          Indeed, we discovered that the further from London you went the slower the growth. We also reported that the regional economies in the UK that received the largest subsidies and the most government  assistance and intervention performed the worst.

           Some of you are ready to leap to your keyboards to say that you should not claim cause and effect when of course government spends more and intervenes more in parts of the country with poor prospects. Let me spare you the anger. Part of the reason the poorer parts of the country receive more government help is that they are poor to start with. That’s why governments of all persuasions send them more money. They are locked into a single currency with London, so they need transfer payments to survive.

            The poorer places receive tax revenues from the succesful parts to pay the extra benefit bills for the higher levels of unemployment and disability. They receive larger grants per person for their local authorities, schools and health services, as the payments nationally are weighted to give more to disadvantaged areas per head. They are the main beneficiaries of regional policy, with a wide range of grants and public capital spending. Conservative governments treated them more favourably than richer areas. Labour then did it on an even grander scale, with large increases in public funding.

              So one of the questions I wish to ask today, is why didn’t it work? Why didn’t thirteen years of large increases in public spending, with the poor areas the main beneficiaries, lift them into success? Why didn’t the preceeding twenty years of favoured treatment establish the ground work for the success of the last Labour government’s big bazooka approach to spending?

              The left wing myth makers think Margaret Thatcher had a downer on Northern industry, deliberately closing heavy industry in the 1980s and leaving the communities without jobs and hope. As so often , this good story is ruined by a few facts. Much of the  industry – steel, shipbuilding, aerospace engineering, car manufacture, railways  and energy – was nationalised. In the 1960s and 1970s under Labour all these industries sacked a large number of people, confirming a trend which continued under both the last Conservative and the  more recent Labour governments. Neither party intended to do that.  It just happened. The industries were not competitive, and foreign competition stole the jobs. Monopoly or oligopoly nationalised businesses regarded politicians as their main customers, seeking subsidies, instead of concentrating on selling good quality affordable product at a profit making price.

          As examples, the National Coal Board had over 700,000 employees in the early 1950s. This had fallen to 400,000 in1967 and to 235,000 by 1979, on the eve of Margaret Thatcher in Downing Street. British Rail shed more than 300,000 jobs between 1950 and1967 . The Electricity industry fell from 220,000 employees to 160,000 employees between 1968 and 1979.

        The collapse of steel making and shipbuilding was pronounced in the 1960s and 1970s as well as in the 1980s. It was a progressive collapse, despite or because these industries were heavily subsidised and centrally directed for much of the time. Labour like to forget that much of the decline occurred on their watch between 1964 and 1970 and again between 1974 and 1979. Industry continued to fall as a proportion of the total  between 1997 and 2010.

          Labour and Conservative governments have tried a variety of responses to this de-industrialisation. Neither so far have succeeded in arresting the downwards movement. There have been Enterprise Zones, various tax incentive schemes for investment, inward investment promotions and subsidies, regional aid, EU programmes for the worst hit regions, and the large injections of public money for a wide range of programmes. They have tried education and training, apprenticeships, the construction of infrastructure, environmental improvements, direct subsidies and offers of public sector land.

          Some companies have proved that you can make things in the UK to the highest world standards at a competitive price. Several leading motor manufacturers have come to the UK and set up world class factories. Aerospace engineering, pharmaceuticals , food manufacturing and a number of other areas show that the UK can combine excellence with innovation. Despite this, unemployment and lower incomes have remained obstinately persistent in some parts of the country where industry used to be central to employment.

           London has pulled away from the rest, especially by concentrating on fianncial and business services, media and lesiure and other newer areas of activity. London’s industry has declined with the rest of the country’s. London’s  landscape includes the husks of old power stations, the remains of old docks and wharves, and the reshaped profiles of old factories and warehouses. In London now they usually house people in new flats or smart offices, carved out of the remains of a former industrial heritage. London does  not regret the passing of these old lifestyles. It moves rapidly on to a better tomorrow. One of my grandfathers made his living shoeing horses for the brewery trade. It was not a skill which could even see him out, and not something I ever wanted to do or thought I had a right to inherit as a way of life.

 Yesterday I argued that the US was not growing faster than the UK because it was enjoying a larger fiscal stimulus. Most of you agreed, but some were extremely sceptical of the quality and sustainability of US growth. Today I wish to look at the factors that are assisting the US growth rate. I understand that there is still too much unemployment in the USA, and that some people’s living standards have been badly squeezed. However, the official figures drawn up under  international public sector accounting conventions do show faster growth in the USA last year and this, than in troubled Europe.

Some have rightly observed that the USA now has very cheap energy in the form of low priced gas, thanks to its enthusiastic embrace of shale gas. Mr Obama was dismissive of Sarah Palin’s “Drill baby, drill” remark when asked about energy policy, yet his administration seems to be adopting it as a practical means of cutting energy bills and providing a big stimulus to industry. The Uk needs to pursue cheaper energy policies, as I have often argued here.

The USA is riding the digital revolution well. The US still has that energy and dtermination which produces huge corporations from new technology and new market opportunities. The USA has moved on from the Microsoft generation to the Facebook and Google generations. Large US corporates lead the field. There is in the USA a zest for enterprise and success which is often lacking in Europe.

Government helps reinforce this with lower income and capital gains tax rates than in much of the EU. The top rate of income tax is 35%. The top 1% in the USA pay an even bigger proportion of total income tax  than in the UK.  The US has a no nonsense regime over out of work benefits and availability to work, which makes the US labour market more dynamic and successful.

The USA fixed their banks more quickly than the Europeans after the Credit Crunch. Businesses and consumers can now get access to credit more readily than in Europe. They allowed house prices to fall further and faster,and wrote off the losses more rapidly.

          All the so called neo-Kenysians are out and about telling us that the US is recovering well owing to further fiscal stimulus, whilst the UK is said to be faltering thanks to a government “cutting too far and too fast”. It is time to debunk this nonsense.

           Let me start by saying I think Keynes was a great economist. His insights into the creation of money, inflation, and growth are important. All mainstream political parties are heir to his traditions in several respects. All agree that the state should borrow to offset a fall in demand in a recession. All agree that there needs to be controls over money and credit creation with a monopoly money system organised by the state. The Central Bank has to decide on overall levels of money and credit. They do not, however, tend to follow his precepts in a boom, when they ought to be asking the state to control spending and repay debt.

             The figures for the deficits in the USA and the UK show that the US has a smaller fiscal deficit, and it is falling more quickly. The US public sector  borrowed 8.7% of GDP in 2011, and plans to borrow 8.3% in 2012 and 5.5% in 2013. In contrast the UK public sector borrowed 9.5% of GDP   in 2012-11, 8.5% in 2011-12  and plans to borrow 7.7% in 2012-13. The UK deficit is larger each year, and falling less.

             Whilst the Federal government has not been keen to cut spending in an election year, states’ spending has been cut in many locations to bring the overall deficit down.  Total US public spending  rose by 2.2% in 2011,  is forecast to rise by 3.8% in 2012 and by 2% in 2013. UK current public spending  rose by 4.8% in 2010-11, by 2.9% in 2011-12 and is forecast to rise by 2.6% in 2012-13.UK  capital spending is falling slightly over the same time period. The main cuts in capital spending occurred in the revised Labour plans before the General Election. The UK public sector accounts for 45% of GDP. The US public sector accounts for 40% of GDP.

             Of course it is true that UK inflation has been higher. However, in the public sector with a wage freeze it should be considerably lower, given the high proportion of wage expenditure in the total. It is also true that as an economy grows the deficit should come down as revenues pick up. If the contrasting performances of the two economies proves anything, it appears to prove that an economy with a higher proportion of public spending in total GDP with  a higher level of public borrowing performs worse than an economy with lower figures.

                Yesterday in Parlliament the Leader of the Opposition could hardly wait to get through a couple of questions on the economy, to get on to the issue that fascinates the political and media classes – themselves. The latest revelations about the relationships between the Murdoch media and the present government caused the downfall of a Special Adviser. They leave the Culture Secretary making the rogue adviser defence, saying that his Adviser said and did things he should not have done, but they were unauthorised by his  boss. The Leveson Enquiry is likely to find that the relationships between politicians of both main parties and the Murdoch press have been close, with both parties  competing for favourable coverage and backing. As far as the public is concerned, they want an economic recovery and want more attention on jobs, savings, and prices.

                 The age of spin has encouraged the strange idea that a party or an individual can maintain a good press whatever the reality of their actions and their consequences. To hear that politicians rang up leading journalists to ask how obviously bad events might be covered shows a curious naivety about the way the world works. It does not matter how many spin doctors a government employs, how much it has courted leading commentators: if it does not deliver a reasonable outcome for the public  it will be the object of criticism or abuse. It makes more sense to me to spend more time trying to get the policy right, and less time worrying about the headlines. If a party holds public support because it is delivering a good result, it will  find that the press is less hostile. Newspapers have to sell daily to the electorate. If the electorate think from their own experience that the government is doing a good job that will tone down the daily abuse Ministers can expect from a sceptical public and a free media.

                The Coalition government will find its press improves as and when recovery picks up, as people find there are more jobs, as real incomes start to rise. Low poll ratings and a poor press are the result of a continuing squeeze on living standards brought on by the tax rises needed to pay for all the extra public spending of the last few years. The government needs to show the value of that spending if it is to justify the tax rises, or get better value from spending so it can get the tax rises down a bit.

                     There needs to be a credible message of hope – we want to know the sacrifice of the tax rises is worthwhile and will deliver higher standards of living and quality of public service. I was pleased to see a few articles picked up the obvious but neglected point that current public spending continues to rise in real terms. My main contribution to the public debate seems to be to read the government’s numbers, which so many commentators decline to do  so they can make up stories not based on the reality of the public spending patterns. Many of them continue to talk about austerity as if it was a phenomenon confined to public spending, when it is primarily a reduction in living standards for the many, a reduction which started under the past government thanks to a big recession and has continued under the Coalition thanks to tax rises and inflation.

The headline figure of minus 0.2% for economic growth in the first quarter of 2012 may be revised at a later date. It confirms that the economy is becalmed at best. It will doubtless lead to more demands from some to raise public spending and borrowing, to provide an additional fiscal stimulus. Readers should look more carefully at the underlying figures before rushing to such a false conclusion.

In the first quarter of 2012 government spending once again made a positive contribution to total output, contributing 0.2% real growth to the economy. Meanwhile construction, minining and quarrying fell sharply. It is interesting  to look at the last five years of numbers, to see that over this period the government sector has been used to provide a large boost, but this has not  offset the  whole decline in total production industries output.

These figures are all in real terms, adjusted for inflation.

So over the last five years government has provided a large stimulus to total output, but the manuafacturing and mining sectors fell dramatically in the Credit Crunch of 2008-9 and have recovered very little since. The issue we need to address is how to create a faster private sector led recovery. The government has spent massively to offset the impact of the economic decline, which has entailed very large borrowings. Borrowing even more would be counter productive, as the private sector woudl have to pay the interest on the debt and ultimately repay the loans. The issue is how to get faster growth in the private sector, which is about all the issues on banking, taxation, regulation, transport and enegry that we often discuss here.

Yesterday I asked in Treasury Questions what the extra £64.6 billion current spending this year is being spent on, compared to 2009-10. The Chancellor did not have time to itemise the main increases, so I thought it would be of interest to set out what they are spending the extra on. I appreciate these are all cash sums, so where pay and prices have risen some of the money is needed to pay for such increases.

The biggest increases are on benefits. This year benefits are scheduled to cost £7.1 billion more than last year, and £19 billion more than 2009-10. Gross Interest charges are forecast to fall by £2.6 billion this year compared to last, but are up by £13.9 billion compared to 2009-10. Tax credits rise by £500 million next year, and are up by £3.1 billion since 2009-10. Net Public service pension payments will cost an extra £3.2 billion this year compared with last, and are up by £6.9 billion compared to 2009-10. Local Council current spending will rise by £600 million this year against last, and by £1.7 billion compared to 2009-10. Overseas Aid, Health and educational spending also rises, within the Departmental spending totals. Payments to the EU are said to fall by £400 million this year, but are up by £900 million compared to 2009-10.

2011-12 total borrowing came in on the target £126 billion extra in the figures announced yesterday. There were some signs of year end additional spending, as is the usual public sector pattern.