I am publishing this today as it contains unfinished business on  monetary and fiscal policy.  It appeared in the Telegraph before the Autumn Statement. My schedule got too crowded to fit it in ahead of the Autumn Statement, but the issues deserve a further airing, particularly on bond sales and public spending.

 

 

The official advice in the run up to the Autumn Statement has been well leaked. It all seems designed to stop as many tax cuts as possible, at a time when the public and the Conservative Party are desperate to turn the tide of rising taxes and unleash some growth.

There is the doctrine of headroom. We are told based on OBR forecasts of deficits that are likely to prove as overstated as the past that there is little or no headroom for tax cuts. They never comment that there is no headroom for spending increases, which continue week after week with inflation of costs, plunging productivity and Ministerial announcements.

There is the doctrine that tax cuts cause inflation. Apparently from media accounts of this thinking a cut in Inheritance Tax is not inflationary because the money goes to someone rich enough not to need it or spend it. Any tax cut that goes to someone who does need it and spends it is automatically assumed to be inflationary. Then the same must be true of increases in benefits. I think we can afford some better news for the many with tax cuts that help get inflation down

The official view  is all very bad economics. Money and credit play an important part in inflation. The Uk public sector refuses to apologise for an independent Bank creating huge quantities of money and the state borrowing large sums at near zero interest to spend. Surely these lie at the heart of the inflation we are living through. Japan and China facing the same price rises  of energy and food on the back of the Ukraine war did not have the same inflation we and the  EU had. Their Central banks did not step up the money printing and bond buying.

If the state borrows to spend more on services than it collects in taxes that is not necessarily inflationary. Borrowing the money to pay the bills takes that money away from the person or company that has the savings so they cannot spend it. It is if the banks are  awash with Bank of England created  money and then lend it out as they did for property and other asset purchases that you get inflation. They do not warn us that borrowing more money to spend on state services or benefits is inflationary yet that must be true if tax cuts are inflationary. The aim of state spending is to give employees and benefit recipients more money to spend.

What I want to see is the end to the aggressive selling of bonds by the Bank sending huge bills for the losses to the taxpayer. That drives rates including mortgage rates still higher and flattens the economy more.  I want the bank to be able to cut rates a bit to price mortgages back for people who want to buy a home and to lend to companies that want to expand.

To do so we need lower inflation. So Chancellor, suspend VAT on domestic fuel. Cut fuel duty of petrol and diesel. Suspend carbon  taxes on heavy  energy using industries. These will directly cut the inflation rate. These are tax cuts to bring inflation down sooner and more.

As this happens so the Bank will be able to ease the squeeze. The Chancellor will have some flexibility even on pessimistic OBR numbers. He can add to this by selling all the shares in Nat West. He can delay some spending on carbon capture or turn to the private sector to finance it. He can pursue a drive to get the lost  productivity back in the public services. A recent big fall has cost us around £30 bn extra for doing the same things.

He needs to boost output and capacity in the  economy. More services and goods on offer will help bring inflation down. The quickest and cheapest way to do this is to lift the VAT threshold for small business. Many of them want to do more and have the ability to do so. They do not because  they cannot face all the costs and compliance of registering for VAT.

He should reverse the changes to IR 35 . This measure blocks self employed people from getting contracts from businesses  nervous about being caught up in an argument with HMRC  about the tax Status of their sub contractor. He could lower their National insurance as well to provide more incentive. We have lost almost  800,000 self employed since February 2020. We need to help them back. They would give us more supply, more flexibility, more choice.

Halving inflation this year is welcome but it is not job done. Key to growth and future prosperity is getting it down faster. Then we can have a better money and credit policy to boost jobs and growth. Tax cuts are essential to competitiveness, to promoting self employment and helping small business. Cheaper energy helps everyone, giving hope of a better Christmas with more to spend on good food and presents thanks to lower heating and driving bills. Growth brings more capacity and choice, removing inflation creating shortages

If only the government would break free from the gloomy advice and models at OBR and Bank which have given such wrong forecasts. If we set the same business tax rate as Ireland we would see our business revenues shoot up. Ireland gets four times as much business tax per head as we do by setting a much lower rate of tax.

The Office of Budget Responsibility makes running a consistent economic policy extremely difficult. Their numbers  change from forecast to forecast with wild swings making it impossible  for the Chancellor to know how much future borrowing is likely to be, how much he needs to do stimulate growth and to curb inflation, and what is likely to be the outcome. I have long been a critic of the fiscal rules which seek to ensure debt is falling as a percentage of GDP by the end of a five year planning period. I argue for proper controls on inflation and borrowing for the immediate year of the  budget. Strengthen the inflation target, have a growth target, and have a statement about how much it is appropriate to borrow in the light of debt interest costs.  No-one can come up with a reliable forecast of what the borrowing will be  five years  out. The OBR can stop tax cuts by offering an unduly pessimistic forecast of revenues. The Treasury can try to create more scope for tax cuts or spending rises by putting forward an unduly low figure for spending for the fifth year. The Chancellor needs to make good judgements about how much he should borrow , tax and spend in the first year of the forecast when the forecasters have much more opportunity to get the numbers roughly right. Unfortunately the run of estimates this decade have been far from accurate for the immediate year in question, let alone year five.

The latest OBR forecast is a revision for forecasts made as recently as March 2023. The OBR tells us “The combined effects of the historical revisions and latest outturns leaves the level of real GDP at the start of this forecast almost 3% higher than we thought in March”  A fall of 1.1% has become a rise. The government had to live with all the bad press for the alleged bad performance, and the March  budget judgement was on the wrong basis. Their views of inflation have gone the other way. In March they said inflation would be well beaten next year  and into 2026. Now they tell us it will get down to the 2% target a year later and will  not go well  below as they said in March. That requires a very different policy response as well.  They expect the Bank of England’s base rate to be 100 basis points higher or a quarter  up on the rate in the March forecast, and expect longer dated gilt interest rates to be between 100 basis points  and 150 basis points higher. That has a direct impact on the debt interest charges which on the official method of calculation are large. The higher inflation rate also boosts those account items as they lump the indexation of debt costs which are not  items requiring cash payments year by year with normal payments of debt interest which are most certainly annual spending.

The government is rightly concerned to get borrowing under good control and  not to add to the real stock of debt going forwards relative to the country’s ability to pay. The OBR have announced that they overstated the deficit and borrowing for just the period from April to October this year by £20 billion, so why should we  believe their five year figure and agonise over it? The deficit mistake is based partly on an understatement of the amount of revenue that existing tax rates will yield.  They confess that they greatly understated migration numbers which they use to boost GDP as more people taking more jobs boost output. There are arguments over what the public spending impact of that is, and whether it helps GDP per head as well as GDP. Their report does include a summary of the overall errors in GDP forecasting and shows they have got larger in recent years.

It seems likely the tough monetary squeeze which the Bank is administering will help inflation down some more and will continue to slow activity. It is clearly hitting the housing for sale  market and will drag on some companies ability to expend where they have high borrowings. The Autumn Statement was right to look for ways to stimulate more investment, to help the self employed and small business, and to look for more ways to help people into work. There will only be a stronger recovery when inflation is down enough to persuade the Bank to relax its squeeze. The Bank  like the OBR have had major problems with forecasting. They ran far too loose a policy for too long  because their forecasts said inflation would stay around 2%. Now they run the risk of doing the opposite and running too tough with forecasts that do not properly reflect the slowdown. The Bank is selling far too many bonds at huge losses, unlike the European Central Bank who made a similar problem by creating too much money and buying too many  bonds to create inflation. At least the Bank is reviewing its models and forecasting. Maybe the OBR should do the same.

The idea of the OBR was to have an independent referee or forecaster who could keep the Treasury honest. It can only work if the referee has sensible  rules and gets its forecasts right. If it persists in getting growth, inflation and deficits very wrong it can generate wrong policy responses and can certainly distort the debate about how the economy is doing.  There are always dangers that an independent body formed largely from Treasury officials talking to Treasury officials a lot may not consider other views and other ways of running models that are more accurate. Maybe a truly independent OBR would be bought out by its managers and experts and would be available to offer tailored forecasts for others. I  am all in favour of independent forecasts as a means of exploring public policy and as a check on what governments do and say. I  worry about  an independent body owned and paid for by the Treasury that offers  fluctuating forecasts that are given so much significance when on some of the key variables they are wrong.

John Redwood (Wokingham) (Con):

 

I welcome the measures to promote more investment and more growth, which is vital. We have lost about 800,000 self-employed people since February 2020. The national insurance measure will help a bit, but will my right hon. Friend look again at the way in which IR35 prevents them from expanding their businesses and getting contracts? The measures to promote the growth of small businesses are also welcome, but the VAT threshold acts as a strong disincentive to expand a business when it reaches a certain point.

Jeremy Hunt, Chancellor the Exchequer:

I thank my right hon. Friend. I had extensive discussions with him in the run-up to the statement, including many discussions about the self-employed. Indeed, it was partly his advocacy of the role of the self-employed that made me so enthusiastic about making the national insurance changes that I was able to make.

I hear what my right hon. Friend says about IR35. We took our decision partly because of concerns about avoidance, but I am happy to look at that again. As for the VAT threshold, many other colleagues have made the same point. We do have the highest threshold in any major European country, and, indeed, any G7 country, but there is always this issue of the cliff edge, and my right hon. Friend is right to draw my attention to it.

I am not posting contributions on this topic as the Irish police are not telling us who carried out the knifing though they do tell us in general terms who they think were rioting.

I condemn all the violence and law breaking.

Ireland needs to manage its own migration and law and order issues and will want to deal with criminal activity in ways their local laws and Irish public opinion require.

The latest immigration figures show the government should have listened to those of us who said they needed to tighten the rules over inviting in economic migrants and students. Last year to June 2023 1.2 million came to stay in the UK, with 508,000 leaving. All the people coming need housing, health care, schools for the children. The 508,000 leaving free some housing, but not necessarily the right type in the right places for those arriving.

The costs of all this are very large for taxpayers. There is a growing danger we cannot offer enough decent housing and public services for our new arrivals. The government needs urgently to raise the income level for a job that qualifies for a work permit, and to enforce  new rules over students’ dependants whose numbers have shot up.

In 2016 Commissioner Timmermans, today in the news contesting the Netherlands election for the left/Greens alliance, made proposals about burden sharing for EU migrants. He told the EU that member states should make a payment of 250,000 Euro for every migrant a country did not want to take under its quota for sharing the influx of migrants around the Union. That was probably a fair assessment then of the capital costs of providing new homes and  public service provision, along with the early running costs borne by the state.

I think the UK should produce an updated figure for us today. It may well be that around £250,000 is a fair guess. A new social home costs around £300,000 to provide, but much of that is family not single person housing. A new school place costs say £20,000 to provide the building,  averaging primaries and secondaries. The annual cost of a secondary school place is above £6000 and of a primary place above £4600.  Adding an additional 600,00-700,000 people a year probably needs a couple of new District General hospitals at say £500m each as well as new surgeries. The annual cost per person of NHS provision is now more than £4000.

This shows that the so called cheap labour we invite in may help employers but creates  a headache for public spending. The bogus figures that say a low paid incoming worker profits the state leave out all the extra capital provision to provide the services and homes, and leaves out the running costs of the public services they need. If one extra person comes in we can find an empty home and a spare school place. If a million come in we need to build two or three new cities to provide for them.

So government, change policy. The Treasury says adding more people adds to economic growth and adds to total tax revenue. They do not tell us how much it adds to public spending or what it does to GDP per head. The Health department says it means we can staff our care homes and social work settings with new people. We also though need to recruit a lot more of them to provide all the extra healthcare for all the new arrivals. There is a lot to be said for fewer invitations and better pay for people already here to fill the posts.

Glad to see the government  now start to cut taxes and set out their intent to bring them down more. I am also pleased that they wish to assist the self employed, the small businesses and the larger companies that can make major investments. As I have long argued you need tax cuts for growth and you need more capacity to make things and provide services at home. The balance of trade deficit remains too large and supply shortages help fuel the inflation Bank policy  unleashed.

I raised the questions again with the Chancellor about the need to change IR 35 and raise the VAT threshold for small business. He responded more favourably to a question about reinstating VAT free shopping for foreign visitors now we are losing business to Milan and Paris from our imposition of it.

I am writing today in the Telegraph about the wildly swinging forecasts of the OBR. They have changed the forecast for GDP by 3% between March and October portraying now an economy that had grown and was above pre pandemic levels instead of an economy that was performing badly and had fallen in output. The OBR had to make major revisions to its March forecasts of migration numbers, interest rates, inflation and the deficit.It had been too pessimistic about the deficit by £20bn so far this year. It had expected lower interest rates and lower inflation than we experienced.

These wrong and fluctuating forecasts make economic policy making difficult.The idea of headroom for tax cuts is based on wrong numbers. They never discuss headroom for spending rises where there have been many.

Leading specialist in European laws, Martin Howe KC, has published the case for leaving the European Convention on human rights.

I have not myself argued this case, and have sought to get the government to overcome the potential difficulties of the way the Court interprets and widens the original convention in the vexed case of illegal migration. There I and other MPs have proposed amendments to legislation where Parliament needs to  assert itself against possible ECHR overturns of policy.  The wish to end the small boats trade and to send the illegals somewhere else safe for consideration of their cases is one such area.   There is an argument going on in government about using such a domestic legal override given the importance of the issue, with the former Home Secretary and the current Migration Minister thinking there does need to  be a Notwithstanding clause to ensure the will of Parliament is upheld in the event of someone trying to appeal to a foreign court or under an international convention.

 

Those of us who favour a limited exemption for a clearly required policy like stopping the small boats can point to Parliament’s success in resisting votes for prisoners. The ECHR told us to grant them and the UK parliament voted not to. We stayed in the Convention. Other countries with democracies and decent human rights have disagreed and not accepted verdicts as well and stayed in the overall scheme

The UK was one of the original drafters and instigators of the Convention on human rights. It was aimed at general state policy, to foster more democracies and  countries with a rule of law after the horror of Nazi and communist tyrannies in war torn Europe. It was only later the ECHR started to widen the remit to give individuals rights against governments justiciable in that court, instead of it staying at a high level assessment of a country’s democracy and civil rights achieved through national democratic process.

 

Martin Howe argues that a true Parliamentary democracy needs a sovereign people who delegate power between elections to a sovereign Parliament. What the people and Parliament want should be good law and upheld as such. This cannot be true if there is an international external body that can effectively strike down domestic law. He is happy to rely on the UK Parliament and elections to determine our civil liberties and rights, and thinks there can be no guarantee that we can stop the small boats or carry through other desirable policies all the time we stay in the Convention which has changed and grown in power a lot since we first helped invent it.

I would b e interested to hear your thoughts on these two different approaches.

 

The Chief Secretary needs to come forward urgently with a good plan to raise productivity in the public services, at least back up to 2019 levels. Setting this an immediate task should not be threatening or should it require large amounts of new capital investment to bring it about, as four years ago we are at the levels we should wish to regain.

Central to this task must be reviews with the 4000 senior managers at Director level and above and their equivalents in the quangos. This is a good job for junior Ministers to lead or review. What has changed for the worse? What immediate steps can be taken to boost output. There should be a comprehensive freeze on new staff from outside, and a review process to amalgamate or remove jobs as people leave by natural wastage. External recruitment should only be allowed where there is a clear need approved by a Minister.

The reviews should encompass use of external consultants. Staff should be encouraged to replace some of the consultancy contracts that come up for renewal by offering cheaper in house routes of doing the work using present staff.

There can also be plans to get above older levels. After all, the private sector has exceeded pre covid levels of productivity, in services as well as in manufactures. One thing to do is to eliminate some of the duplication and overlap between central government departments and quangos. More work should be taken into the department under proper Ministerial supervision. Ministers in many cases will be blamed when the quango makes a mistake or gets it wrong, so better to have more control where there is accountability. Employees in the civil service should be allowed or encouraged to bid to take over areas of work to run as contracted out activities where they turn themselves into contractors and can use their skills to win work form others. This would not apply to matters relating to national security, policy and other sensitive matters. I led such changes to the old Property Services Agency, the direct labour organisation within the civil service that maintained public sector properties.

The application of more computing power through AI and related technologies can also produce plenty of productivity gains. Much of government is processing data, awarding grants and benefits, answering similar queries from the public, handling applications and ensuring access to public services. This is eminently suitable for more automation.

In the three years to March 2023 there was an increase of 63,000 civil servants, or 64,000 full time equivalents. Over the 3 years 2020 to 2023 there was a substantial fall in public sector productivity. There are now more than 4000 senior civil servants in Director level and above jobs.

Whilst it is understandable that the NHS and the civil service needed extra temporary help to deal with the special needs and extra government direction which covid controls and lockdowns brought, it is surprising that extra recruitment has continued well after lockdown was lifted.

At the same time there has been expansion in numbers at various quangos and so called independent bodies. Far from slimming the centre as more is done outside core government, the advent of more and more powerful independent government bodies seems to have increased the need for staff. Maybe the need or wish for cooperation, coordination and communications between the external body and the government department has required more people to talk to each other.

It is time for Ministers to set out their plans to get productivity back up to 2019 levels. It is time for them to ask civil service senior managers and quango chiefs how come productivity has slumped? What action is being taken to put it right?

Poor productivity can come with bad service. Get things right first time and productivity and quality rise.Do things  promptly and spare yourself the need to respond to enquiries and complaints about delays. Have easy and friendly systems and requirements and have fewer complaints or need to help people access your services.

The Times runs detailed stories on what will be in the so called Autumn Statement. Time  was when the Autumn Statement was an annual review and future budget for spending, provoking proper debate about priorities, costs, public sector productivity and the rest. This was followed by a Spring budget which set out how the spending would be paid for. Tax changes were proposed and revenue voted by Parliament.

This Autumn Statement appears also to be a budget. There is active discussion of tax changes. The story has changed several times recently. I have no idea what the PM and Chancellor will decide. I do not think the Times makes it all up, so their stories presumably  come from people who do know something. This implies that the ideas for the budget have been fluid. Today’s stories say the decisions are still not made. This is running it late as the government will need to print all the documents with their confidential press in time to release them the moment the Chancellor completes his presentation to Parliament.

 

After someone briefed widely a cut in Inheritance tax I now read that this will not happen next week. A tax cut for a  small group of well off families to receive more  on death does  seem an odd priority for now. I am sticking with my advice to prioritise getting inflation  down with energy tax cuts for the next year, and to boost growth and output with cuts to tax on small business and self employment. There is a suggestion in the press that the latest figures give the Chancellor more scope to cut taxes as the outlook is better again than OBR forecasts.

My package was modest, and included asset sales and spending changes to give more leeway. I read they are considering a possible 5% cut in the standard rate of income tax from 20% to 19 % or a lifting of the 40% threshold or a cut in National Insurance. Of those as an extra to my proposals I favour threshold changes to take more out of 40% tax and to correct the anomaly of withdrawing tax free allowances from £100,000 rather than a higher figure. A cut in standard rate would also be OK. The National Insurance proposal is the least attractive.

I stress again the main objectives must be to  give inflation another push down and get growth going. This argues for a more generous package for the self employed, small business and on energy costs than I set out rather than tackling Income tax next week. Sort growth and inflation now and start a stated planned reduction of Income Tax next spring as growth returns and yields more revenue. Getting  inflation down faster would mean earlier interest rate cuts to boost the economy .