The webmaster is changing the technical arrangements for the website and has asked me to advise you all that there will have to be a temporary suspension of the comments service whilst he loads the site onto a new system.

I am sorry for any inconvenience, but am told we will have a better service thereafter. I will of course publish a daily blog tomorrow as soon as possible.

          When I went to Wellingborough and back to make my contribution to the Corby by election, I was told to catch the 3.30pm outbound, and get the late train back after canvassing and giving a speech to a dinner.

           I was impressed by the refurbished St Pancras. The shopping centre there is good, and the old building has been stylishly restored and extended. If you want to buy gifts or have a coffee I can recommend it. It was altogether more difficult if you wished to be a train passenger on “national” routes.

           I walked the full length of the station to find the ticket office, as the more accessible part of the station is taken up by Eurostar facilities. I asked for ticket options and prices.  As this was a political visit I was of course paying for my own ticket.  I bought a first class return to Wellingborough, as the price they quoted for that  sounded very reasonable. I bought my ticket just before 3pm.

            I had to wait by the ticket office as the only indicator board I could see with train departure times and platform indications was near the ticket office. There was no board near the steps up to the train gates.  At around 3.15 they placed a platform number up for Wellingborough. I had to walk back down the station to find the stairs up to the national platforms, and then walk back to the gates which were directly above the ticket office. As the ticket I had bought seemed good value and stated on it it was a restricted ticket without having on it how it was restricted, I checked with the man at the platform gates. The last thing I wanted was to end up in the wrong carriage with the wrong ticket.  He told me the ticket I had been sold was not valid for the 3.30. I asked if I could pay him a supplement to travel. He said No. I asked if I could use it to travel standard class instead. He said No. He told me I had to walk all the way back to the ticket office to change the ticket. I was naturally concerned, as owing to the late posting of the platform number  I was running out of time.

                 I did as instructed. I queued at the ticket office where I had bought the ticket. The employee told me when I got to the window  that I could not change that ticket in that ticket office. I had to go round the corner to another ticket office!  I did so. There was another queue. Someone kindly let me ahead of them given the time constraint. I  got to the window and had to pay a supplement to travel on the 3.30. They issued me with a third ticket. (The original ticket was two tickets, an outbound and an inbound).  By running fast I just managed to get on the 3.30, having been at the station more than 30 minutes before its departure!  What a great start to a journey.

                  I also took the train to Durham to do Any Questions. The programme supplied me with a standard class single, and said they would drive me home, as the return time was after the last train. I was travelling from Reading to Darlington on the cross country service. The door to door time of my journey was a massive six hours and ten minutes.  That included a couple of taxis to travel around fifteen miles that the train could not offer. The return journey door to door by car was four hours forty minutes. The car was also more comfortable.

                 I was fortunate to have a seat reservation on the train, as it was crowded for much of the journey, with people having to stand. Whilst very few people wanted to go a long distance as I was doing, the train regularly  filled up to go one or two stops. That meant people standing for half an hour or more.

                   I do think the railway could do more to improve the service it offers people who want to travel.

 

              The public seems to have a greater sense of public spending crisis than the government. Many voters are apprehensive about the rapid build up of debts, and understand that we  and our children will have to repay them in due course. This makes it more difficult to gain and hold support for expensive policies.

               The public would like the UK to do less by way of military intervention abroad for a bit, whilst we are sorting out our finances. It would be a popular move to accelerate our departure from Afghanistan. There is no great appetite to get dragged into another war , this time in Mali.  There is also a fear of more members of our armed services losing their lives in difficult places, where their own actions have to be curtailed or constrained to avoid harming the local civilian population.

                It is good news that the government has ruled out sending in troops to fight, but there are worries about mission creep and questions about how much spare money and military resource we have to commit to yet another difficult civil war so far away from home.

Jonathan Portes wrote a critique of my piece on fiscal stimulus on his blog. I felt his response showed we are making some progress in promoting a better understanding of current UK policy. Despite a personal attack that was uncalled for, he agrees with quite a lot of the analysis I have been offering.

Mr Portes agrees that overall public spending has not been cut. He states ” Individual spending cuts do not show that spending is falling overall, and on that Messrs Redwood and Nelson are correct and make an important point”. I am glad we all now agree with the Treasury figures, which are very clear. I have always accepted that capital spending has been cut, and some individual programmes. Total current public spending has been rising in cash and real terms 2010-12. Total cash public spending has also beeen rising overall.

He goes on to say “As yet, so far, there has been relatively little (overall) austerity in public services, with health and schools protected, though local services have suffered”. Education is of course the single largest local service, and has been protected from reductions.

He then points out that there has been austerity in the private sector thanks to tax rises – and I would add thanks to inflation and the price of public services and regulated utilities. I have never denied this and have stressed it in most of my pieces.

The nub of his remaining disagreement with me is over fiscal stimulus. I use the normal definition that a fiscal stimulus is state borrowing to spend beyond its means, adjusted for the cycle. He thinks it is only a stimulus if the state borrows more next year than this year, an unconventional analysis. Each year’s borrowing is new money seeking to create more activity than will be paid for by taxes.

Let us compare his treatment and mine. If the state borrows a cyclically adjusted 4% of GDP in Year 1, 5% of GDP in Year 2 and 9% of GDP in Year 3, then borrows 8% in Year 4, 7% in Year 5 and 6% in Year 6 Mr Portes says there is only a fiscal stimulus in Years 1-3. I say there is a fiscal stimulus in every year. The fiscal stimulus is rising in years 1-3, and falling in years 4-6. More importantly the fiscal stimulus is larger in every year of years 4 to 6 than it was in years 1 and 2. Mr Portes disagrees with this, as there is no stimulus in his world in the later years. His definition is unusual. Even on his definition, as borrowing so far in 2012-13 has been higher than in 2011-12, he should concede there is some stimulus. He does accept the economy has been flat rather than falling over 2012 as a whole so the cyclical affects should not stop this being true.

He agrees with me that if you take an extra pound in tax and spend it in the state sector that is not reflationary, as the private sector can no longer spend that same pound. It is of course possible to argue that in some circumstances there might be a favourable timing difference – the money might pass from someone in the private sector who would otherwise save it, to someone depending on benefits more likely to spend it. But equally the money might pass from someone spending all their income in the private sector who then has to spend less on other things to pay the extra tax, to someone on £150,000 a year in the public sector as a bonus or payrise, or as a contract payment to a well paid private sector consultant, which might be saved. You also need to look at the second round effects. Saved money is not destroyed. If the saver deposits it with a bank the bank might lend it on to someone who does spend it. If the individual invests in a company, the company is likely to spend the saved money.

I agree with his conclusion that “I do think it is important not to exaggerate either the magnitude or the impact of the austerity in the UK”, as long as he is talking about the public sector 2008-12.

Addition:

Following an exchange with Mr Portes he has apologised for some of the words he used:

“First, and most importantly, I wanted to apologise for what you regarded as a “personal attack”. I honestly didn’t intend it as such while writing it – Ido think the Tresasury view is a basic error – but re-reading it I agree it was uncalled for and unnecessary, so I’ve removed a couple of sentences. Apologies again”.

I accept his apology.

I listened carefully to the Today programme interview of the Shadow Foreign Secretary on Saturday morning. It was a typical Today interview with plenty of interruptions and assertions by the interviewer. As a result we got less out of it than we might had it been more forensic.

Labour made clear that they are against an In/Out referendum. They think the threat of one will lose us jobs and investment. They are now unable to rule out one for ever, but they offered no hope of one anytime soon. Their modification of their opposition to one amounted to no more than “You can never say never”, a stupid phrase in politics. I can always say “Never” to legalising murder, for example.

What we needed was an interview which probed the small window of opportunity for Labour to want an In/Out referendum. On what was said it is difficult to believe they would ever seriously consider one. If they fear that the offer of one now is damaging to jobs, why wouldn’t the offer of one in the future be similarly damaging in their view? If we do not need one now, after an intense period of movement to a common European governemnt in so many areas, when might we need one?

I can’t help thinking the Labour’s position on this is unsustainable. They are the party in office that forced through three major Treaties, Nice, Amsterdam and Lisbon, against the strong opposition of the Conservative party, and without any referendum to ask UK voters if they accepted such a huge transfer of power. Their decision to do this is very unpopular, and makes governing the UK now very difficult as Ministers so often find they do not have the power to do what is needed. The Single European Act and Maastricht were different, as Labour in opposition supported the general principles behind those changes, and the government opted us out of the single currency, and main point of Maastricht. Both main parties were persuaded to offer a referendum should they ever want the UK to take up the main point of Maastricht, joining the Euro. Nice, Amsterdam and Lisbon were unacceptable, because the Opposition and much of the nation fundamentally disagreed with the large changes they made to our ability to govern ourselves.

Maybe someone in the weeks ahead will succeed in questioning Labour more intelligently over their stance. How can they refuse the British people a say on this mighty matter? Have they seen the polls on how popular a referendum would be? In what circumstances would they rethink? Are they seriously planning to fight the 2015 election on the wrong side of this issue? Do they agree that the UK cannot join the fiscal, political and banking union the Euro area now needs? Do they not think these changes are large and will have some impact on the UK? How would they wish to guide the UK during an intense period of European centralisation?

On the Today programme the issue was muddled by discussion of referenda on any further transfer of powers. There Labour has accepted the new settlement, that a further transfer would need a vote to approve it before it could happen. That is now a relatively minor matter compared to the large issue of do we want to stay in what we have got? How does Labour plan to get the nation to love the huge changes to our constitution that Nice,Amsterdam and Lisbon inflicted? Why didn’t they bother to explain them and persuade us at the time they rammed them through the Commons?

I was interested that my brief blog on Mr Cameron’s Europe speech got the biggest ever response. Clearly you do not need my thoughts to get you going, when you are interested in the topic.

Now some of the dust has settled I thought I would put down some of my observations on the EU debate brought on by that speech.

The first thing to say is that all those who think the UK public are not interested in the issue of the EU or are turned off by parties banging on about Europe need to think again. The press and public interest has been big. The Conservatives have gone up in the polls whilst holding a very public conversation about how far and how fast we should go in a Eurosceptic direction. Just as Mr Cameron got a big improvement in ratings when he vetoed any UK membership of the Fiscal Treaty, so too his ratings have gone up during debates over that speech.

The second is to say to all those who want deeds not words, on this occasion the words matter and they were good. The EU world will not be the same again, now a UK Prime Minister has dared to explain that we do not wish to join their union. It is no longer a question of a slower pace of travel in the same direction, no longer a question of a few opt outs.

Many of you will agree with these words:

“We have the character of an island nation – independent, forthright, passionate in defence of our sovereignty. We can no more change this British sensibility than we can drain the English Channel.”

“First, the problems in the Eurozone are driving fundamental change in Europe. Second , there is a crisis of European competitiveness… And third there is a gap between the EU and its citizens which has grown dramatically in recent years. And which represents a lack of democratic accountability and consent that is – yes – felt particularly acutely in Britain.”

“The European Treaty commits the Member states to lay the foundations of an ever closer union among the peoples of Europe…. for Britain it is not the objective”

“power must be able to flow back to Member States, not just away from them.”

“democratic accountability – we need to have a bigger and more significant role for national Parliaments. There is not, in my view, a single European demos.”

In the UK “People feel that the EU is heading in the wrong direction that they never signed up to. They resent the interference in our national life by what they see as unnecessary rules and regulation. ”

“It is time for the British people to have their say… I say to the British people: this will be your decision”

The third observation is this speech has made many on the continent think again. They were happy to ignore UKIP polling 3% in a General Election and 20% in a European election, with a Conservative Eurosceptic choir in Parliament demanding change. They first realised there was something more serious when 100 MPs voted for a referendum. It is altogether more serious to have the leader of the largest party and the Prime Minister saying that the EU is not working for the UK and offering a vote on whether to leave.

Heavyweight German opinion has let it be known that they agree with various criticisms Mr Cameron has made of the EU. They have also indicated that if the UK electorate did vote out, they would of course want a proper Free Trade Agreement with us to defend their most important export industries. Dutch opinion has included voices who like Mr Cameron’s idea of Member States having much more power and say over a wide range of policy. Some have spoken out about the tribulations the Euro is now causing its members.

It is early days. Much will happen before we get our promised and much needed referendum. However, the game has changed. It is difficult to believe that Mr Miliband can hold his position for long that Labour neither wants to negotiate a new relationship nor wants to give the UK electors their say. If electors respond positively to the pollsters saying they want this referendum and want a new and different relationship for the UK with the EU, we could see more progress.

Instead of constantly asking questions about the “cuts”, the question that needs to be asked about the UK economy is why hasn’t the huge public sector stimulus injected since 2008 succeeded in pushing the economy back into growth?

Since April 2008 there has been a surge in public spending and borrowing. In 2009-10 the state borrowed 11.1% of our National Income, in 2010-11 another 9.9% and in 2011-12 another 7.9%. Before my critics point out that borrowing was bound to be higher owing to the poor state of output, let me also give the cyclically adjusted figures which allow for this. On that basis the state borrowed 8.9%, 7.4% and 5.3% of National Income adjusted for the extra borrowing needed for the weak output levels.

This level of extra spending and borrowing is far higher than previous recessions. In the early 80s recession the cyclically adjusted borrowing was 4% of National Income. In the early 90s European Exchange Rate Mechanism induced recession it peaked at 5.5%.

Current public spending has been rising in cash and real terms. Public sector growth has added to the output of the total economy. So no-one can say that the public sector “cuts” account for the disappointing levels of output. The disappointing levels of output are despite the increased size of the state sector.

There are two main reasons why growth has been elusive.

The first is the private sector has been starved of new money to borrow. This has made it difficult to expand business activites and to invest. The broken or over regulated banks have been unable to finance a traditional private sector business recovery.

The second is the high tax rates and the big prices rises put through in the public sector have squeezed people’s incomes, cutting confidence and demand. High rail fares, high energy costs, higher VAT, National Insurance, and Income Tax for those pushed into the upper bands have all conspired to cut demand. Inflation has been a big problem, producing a large fall in real incomes for many.

Because the state needs so much tax revenue, other income and borrowings to feed it, it squeezes the rest of the economy. If the government decides on an extra pound of public spending paid for by a tax increase, that has no overall beneficial impact on the economy. The public sector grows by a pound, but the private sector shrinks by a pound. It is not a stimulus. If the state borrows an extra pound to spend, the private sector cannot spend the pound it lends to the government.

If the state spends another pound which it prints, that can increase total activity in the economy, as long as the extra money goes into more output and not into more inflation. So far the money printing has gone into both, with the price rises offsetting some of the public sector stimulus. The more prices rise, the bigger the cut in real incomes for the private sector, and the bigger the fall in output from the private sector.

The biggest ever fiscal stimulus, Keynsian stimulus, is being tried. It is not working. Instead of asking for a bigger one, more of the same, people should ask what can be done to promote a more buoyant and successful private sector. That, as readers will know, rests on mending the banks, setting competitive tax rates, reforming welfare and tackling costs like energy and transport.

2012 ended with another down quarter. For the year as a whole the public sector produced real growth of 1.9%, Business services grew 1.3% and utilities 1%. Mining and quarrying (especially oil and gas) fell 11%, Construction fell by 9.3% and manufacturing fell by 1.8%. This year oil and gas output should fare a bit better, but public sector growth should fall.

 The Coalition came together to eliminate the structural deficit over the lifetime of this Parliament. The government tells us they have cut the deficit by one quarter so far, and intend to go further.

Mr Clegg now says he does not think it was right to cut capital spending so much at the beginning. This is a criticism of Labour as much as of the Coalition, as all the Coalition did was inherit Labour’s plans for large cuts in capital spending, reducing the cuts just a little. They reduced them further in subsequent budgets. I think Labour were right about this. In a previous blog I have described how cutting out “growth” spending on new capital facilities is one of the best and easiest ways of stopping public spending growth overall, as new capital items often lead to continued extra current spending in future years.

There is no particular magic about capital spending as opposed to current spending. It is all spending, and needs borrowing to pay for it. Capital spending does not have unique properties which bring the deficit down or create more economic growth whilst current spending increases the deficit and cuts growth. The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service.

A few billion more capital spending in 2010-11 or 2011-12 would not have transformed the growth rate of the Uk economy. The Coalition did raise current public spending by 5.3% in its first year in cash terms, and overall spending by 3.7%. The Coalition has increased public spending in real terms since coming to office. The poor performance on growth compared to forecasts comes from declines in private sector output, especially in financial services, construction and banking , and in oil and gas. It does not come from reductions in the public sector.

This week’s figures do not make good reading. Between April and December 2012 the state borrowed an extra £106.5 billion, £7.2 billion more than the same period in 2011. There were two main reasons for the high borrowings. The first is a shortfall in tax receipts from Income and wealth taxes and company tax. The second is the large increase in public spending.

Taxes on income and wealth were £194 billion for the whole of 2012 compared to  £199.7 billion for 2011. As I have reported before, income tax on high earners has fallen sharply this decade with the higher 50% tax rate in place. Corporation Tax has also been weak.

Spending in December 2012 was 5.4% higher than spending in December 2011. According to CEBR, the economics consultancy, real public spending rose by 2.8% in 2012 compared to 2011.

I have long argued that the government’s strategy for cutting the deficit relied entirely on higher tax revenues, with real increases in public spending in the first three years. The latest figures reinforces this view of the government’s strategy. Their  problem is the high rates of tax allied to the poor rate of private sector growth are not delivering the extra tax revenues they forecast, so the borrowing is continuing at higher levels than planned. They need to get a stronger grip on the increases in spending, especially at a time of good progress in the private sector generating many more jobs.

I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit, and does know the debt is still rising.

         Proponents of more EU integration always concentrate on a small part of the UK’s balance of payments, our goods exports to the continent, which in turn is a small part of our total economy.

          Whilst the goods balance is well in deficit anyway, with the EU selling us much more than we sell them, the position on the transfer accounts is far worse.

          The UK earns a healthy surplus of dividend and interest income from the rest of the world, amounting to a net £25.3 billion in 2011. The balance with the rest of the EU was a negative £8.5bn, meaning they earn more from us than we earn from them.

          Worse still we send the rest of the EU a net £11.4billion, much of it our contribution to the EU club paid by UK taxpayers.

          Our total surplus with the rest of the world was a positive £17.6 bn in 2011, whilst the total deficit with the rest of the EU was a depressing £46.6 billion.

          It would be good if the UK could reduce its deficit on foreign account. We are as a country exporting more cars and still doing well with exports of services. Meanwhile, the government’s large transfers to the EU institutions drag us the other way. The EU is also a weak area for us making investment abroad. Most UK companies expanding overseas prefer to go the Americas or Asia than to the continent. As a result the UK ends up having to pay more out in profits and dividends to the rest of the EU than we earn from them.

           At a time of need to bring our costs more in line with our income, the government should turn its attention to the big deficits we are running with the EU. Business says it likes the single market, but the figures show us that UK businesses do not by and large invest on the continent and create jobs and dividends out of doing so.