There are still commentators who find it difficult to distinguish debt from deficit. The UK government itself sometimes says it has “paid down a quarter of the deficit”. Whilst this phrase does not say they have paid off any debt, it can mislead the unwary into thinking maybe they have. Polling shows that many think there have been big spending cuts in the UK  and that the debt is now falling.

The truth as many readers here will know is all too different. The UK is still running a deficit of over £100 billion a year. Current public spending  has been increased by this government.  That means that the UK state is still adding to our debts by more than  £100 billion again this year, or by nearly  £1700 for every man, woman and child in the country. Meanwhile total state debt exceeds £1000 billion, excluding the state banks’ debts, PFI, PPP and various pension items.  That’s nearly £17000 per person of debt already racked up.

All these debts have to be repaid one day. This generation is building up debt to live beyond our means, in the hope that our children will come along and be able to pay it back, or be able to refinance it at sensible  interest rates.

So far the Coalition has cut the deficit, which means they have cut the rate at which the debts increase, by around one quarter. Recent figures imply some backsliding even on this modest improvement. If all goes according to plan  this Parliament they will add around £600 billion to our state debt, or almost £10,000 extra borrowing for every man woman and child in the UK. The increase in the debt this Parliament will be more than the total official state debt ten years ago.

In summary, the UK state has a large mortgage, its big inherited debts, and is still running up ever bigger bills. Living so much beyond its means  requires it to keep increasing the mortgage.  The only good news is the last two years have seen a bit less added to the total debt than in 2009-2010.

There are some who seem to think increasing the debt like this is essential to growth. They have to answer why there have been two recessions at periods of very high borrowing. They may well say the borrowing goes up owing to the recession, but that still does not explain why such huge rises in debt failed to get the economy going again. They also need to answer why past recoveries have begun with  reductions in planned or actual public sepnding to bring the deficit down as part of the recovery plan.

 

 

 

It looks as if the world’s authorities  are all determined to do what it takes,  to print as much money as they dare, keep interest rates low for a long time, in a desperate bid to move the world economy forward more quickly.

In 2013 the whole world will be reflating. China and the other emerging economies have served their penance for high inflation, and are now shifting back to a more accommodating policy stance. Meanwhile the Fed, the Bank of England the Bank of Japan are all planning to expand money and credit as much as possible. Inflation fighting takes  a back seat.

2013 may be another year when the Euro area muddles through its debt problems, at the expense of poor output figures and continuing unemployment. The US should continue to grow somewhat, whilst Chinese and emerging market growth may pick up a little from the lower rates hit in 2012. The UK too should start to edge forwards next year, as some of the easy money the Bank is creating and injecting will at last get into the real economy. Who knows how long or deep a recession the electors in the most damaged parts of the EU will put up with as a result of the Euro experiment. Falling output will prolong the period of time it takes to get on top of the debts and deficits.

I doubt the UK will accept it needs to cut tax rates to increase the revenue and to stimulate activity, though that would help. I expect the US to come up with a temporary fix for the so called fiscal cliff, but do not expect the fiscal tightening in the USA to remove the modest growth in the US economy. The new Chinese leadership seems to have made a solid start and will doubtless wish to implement the policy of expanding domestic incomes and demand more rapidly, in the face of more limited opportunity to expand exports.

In other words, 2013 will be more of the same. The emerging market countries will grow fastest. The US will be the best of the west. Europe will be a weak performer, held back by stressed banks and by poor state finances, as well as by the Euro scheme.  The UK will undertake more monetary experiments, and should meet commentator expectations for some  slow growth in 2013.

 

Mr Carney the proposed new Governor of the Bank  made clear in his recent lecture that a bit more inflation might be a price worth paying for more growth. I doubt that more inflation helps in that way. Past UK experience shows that when the authorities become cavalier about inflation it is possible to lose control of it, with bad consequences for output and jobs in due course.

However, Mr Carney has certainly got off to an inflationary start when it comes to his own salary and housing allowance. A total package of more than £870,000 is generous in a public sector and regulatory job.  The basic pay of  £480,000 is 57% higher than the present Governor’s basic. Then there are arguments over how the rest of the package compares to the present Governor’s generous pension arrangements.  Even allowing for this, the Bank seems to be exempted from the public sector pay feeze policy.

As a supporter  of free enterprise, I have no problems with people in the private sector earning large sums. All I ask is that their customers, shareholders and other providers of finance pay for it and accept it, and that none of it comes from tax revenues. There should be no recourse to state subsidy.  I do have issues with people charging the taxpayer for very large salaries.

The worry about Mr Carney is already that he will not be hawk enough on inflation. He will need to send clear anti inflaiton signlas when he arrives, to avoid losing confidence in the authorities’ resolve on these matters. He also needs to woo, not undermine savers.

I wish him well when he arrives in this country. I hope when here he listens carefully to those of  who want him to succeed. There is much he can do, but being careless about inflation or public sector value for money would not be a good idea. Savers have had a poor deal in recent years, yet we are trying to recover from a borrowing crisis, where people did not save enough.

He also needs to examine what he can do as Governor to create stronger banks sooner, in a position to finance a decent recovery from here. The exisiting Bank’s policy towards commercial banks has left some of them pensioners of the state, and unwilling or unable to finance a normal recovery.

 

            In 2010 at the start of the Coalition Nick Boles published an interesting book on how to remodel government. Entitled “Which way’s up?” it brought together a lot of exciting ideas for changing government for the better.

             I agreed with many of them. I have always wanted wider ownership and more participation in the wealth of the country for all. I like devolving power from government to individuals, families, charities and private institutions. I am up for a major improvement in productivity and quality throughout the public sector. This is all common ground. Some of the ideas drew on things Conservatives  were doing in 1980s, some on the radical maifesto of Hannan and Carlswell, the “Plan”.

             At the core of much of it was a plea for a radical transformation of government, devolving power from central government and Whitehall to Town Hall. Mr Boles recommended the abolition of all District Councils, the introduction of elected Mayors, and the transfer of many powers to  County and Borough government. He recommended Councils having more powers to tax, so that half their revenues come from local taxes, to enable central taxes to be cut further as services are transferred. He wanted Councils to have more power to make more government decisions that affect everyone’s lives.

               I mention this today because Mr Boles is now in a position to do something about all this. He has settled in as  Planning Minister in the Department for local government. He is working with and for a radical Secretary of State, Eric Pickles. Mr Pickles has already swept aside much of our unloved English regional government structure. The question is, what will this pair now do to reduce the amount of government we have in total, and to transfer functions to local control where governemnt is needed?

                In Mr Boles own area of planning we were promised a system where once a local Council has an approved plan national Inspectors and Ministers will not second guess it on appeal. So far this has not been delivered. Appeal decisions still go against Councils with plans, undermining their ability to negotiate strong Section 106 agreements.  Time will tell whether Mr Boles can and will do it. I wish him well.

                 It will be interesting to see what if any monument for less central government he chooses, and how easy he finds it to push through what remains overall a very bureacratic and centralised structure. There are more gold stars  for finding things government no longer needs to do at all, but there are good marks to be won  for stronger and more accountable local government as well.

 

               The public sector is not very good at controlling public assets. One of the ways the government could make the money it spends go further in the new year would be to get a better grip on all the assets it buys and uses. This applies to all departments and quangos. It applies to assets used  by staff, and by the general public.

                The NHS, for example, sends many people out of hospital each year with walking sticks, crutches, wheelchairs and other aids to mobility. Many get better. Some of the NHS assets get put in the garage, discarded as no longer needed. There is no universal system for the NHS to get its items back for another patient to use.

                  Many departments allow their staff  laptops and mobile phones for use at home or away from the office. Has there been a recent audit of them?  Are they returned when a staff member leaves or moves job?

                   Does the department or quango have an effective way of preventing theft by staff or public?  I was reminded of the dangers talking to a hotelier recently of how they have to find ways to ensure a minority of paying guests do not take bath robes, bed linen, or even lamps and tvs out with them at the end of their stay. The NHS sometimes has patients who think items from the hospital would be a suitable compensation for being ill.

                    I would be interested in your experiences of how well the public sector controls the issue of assets in the first place, and their recovery when no longer needed for the intended purpose. If the government started 2013 with an amnesty to get property back, it might amount to a lot of money.

                     There is also the issue of oversupply. Many people receive medicines, medical supplies, special diet food and the like, in quantities well beyond their needs or willingness to consume. Once issued to a patient, the NHS will not take back unused items, even though they have survived with the packaging intact. Could there be better systems for controlling the issue, and doing more of the storage through the suppliers and just in time systems?  In public sector offices and schools, what are the rules on private use and access to office consumables?   When did the public sector last enjoy a proper de stocking exercise, to use up the large stock positions before they are damaged or out of date? What is the wastage rate?

                       I will take these matters up with the Cabinet Office for central government. Councillors could do the same for their local authorities.

 

Today I am interested in  how far you think the  EU will go in creating the United States of Europe?

How much power will it have?

How long will it last?

How much unemployment,recession, lack of democracy will people put up with in the various countries?

When will they start to blame their EU government rather than their national governments for their plight?

 

I wrote this when I was last in the Scillies, a beautiful part of the country I love.  

Scilly empires

 

Waves heave and scour in fury at Hell Bay
Calm will bring peace on the beach next day.
The great dashing ocean has time on its side
To flatten us all on some future spring tide.

 

Waves, wind ,sea can all bide their time
These lovely islands are well past their prime.
Each wave which hurls, each wave that smashes
Leaves less shore, or a cliff that crashes.

 

Each wind which blows, each hail which breaks,
Loosens stones, shatters rocks: every plant shakes.
Granite turns to sand, shorelines slip away,
Samson’s hills are parted, the sand bar can’t stay.

 

One island once, twenty long since
Now fifty or more, with many just hints.
They give rocks tough names – like men-a-vaur-
But they know one day they’ll be no more.

 

Empires are like these islands, now humbled
Europe seeks union, but past efforts crumbled.
They tell us that Europe can soon be as one
That conflicts, battles, wars are all done

 

They say one currency will make it alright
That one army will unite us to fight
They urge us together, to build one nation.
We may not want it: they seek an ovation.

 

To all who want Europe to be one
Tell them the people will not let that run.
For people are like the waves of the sea
They break empires – like islands: they won’t let them be.

 

Some Scilly rocks became sand grains
Once lovely hills became a beach
If islands can be levelled
How far can unwanted empires reach?

 

           I will not be posting today, nor moderating.  All are still welcome to contribute as you wish.

           I wish you and your friends and families a very happy Christmas. 

          I would like to thank you all for contributing to this lively and wide ranging blog. I learn from it. Together we can influence the mainstream media and the debate. It is always worthwhile in a democracy offering new analysis and a different point of view.

 

Today we have a fairy story.

 

Once upon a time David and George worked hard so David could become King. After five years toiling, one day the people acclaimed David as their new King. He put on the crown,  and invited his old friend George round for a drink. He wanted to look after his old friend, but he also needed his help.

“I will make you the second most important man in the kingdom, George” he said. “I would like you to be my Treasurer. I need someone I can trust to collect in the taxes and look after all the money we now have.”

“Thank you, Dave” said George. ” I am grateful , but I am also very worried. You see, I have  found a note from the outgoing Deputy Treasurer, telling us there is no money left. I am afraid that if I am Treasurer I will become very unpopular. The people will expect me to pay the bills, but I will have to tell them I cannot, as there is no money. ”

David was concerned for his friend, but he needed him to do the job. “Well”, he said ” we always told people we would spend the proceeds of growth. What we have to do is to get plenty of growth and then we will have money again. I will help you”.

George was still worried. Some of the soothsayers, always a pessimnistic bunch, were saying there wasn’t going to be much growth either. “I am not sure they are going to buy that idea” said George hesitantly. “It will also make you less popular as well” he said, more defiantly.

That got David’s attention. “I want you still to be my best friend. I will help you. When I became King they showed me a magic lamp. They told me when I was in trouble I could rub the lamp and a genie will appear. The genie will put in any policy I want quickly, so I can get out of whatever fix I am in. I can use the genie on five occasions in my reign.  As we are both going to be in this together, and you are my main adviser, I will let you tell me what to ask the genie for”.

George was much relieved at that thought, and willingly said yes to his friend.

Early on George and David decided things they had inherited  were so bad they needed to use the genie to get off to a good start. After discussion David liked George’s idea that they should ask for a low carbon policy to be put in. George knew David liked that sort of thing, and George dreamed of lots of low carbon jobs.

Together they had read the small print on the magic lamp. There were fading printed instructions, well thumbed from past use.  It told them they could ask for policies, but could not ask for the wider solutions they wanted. They could not ask the genie to make all the voters happy or rich. They had to ask for things that might bring that about. As the small print said, they could ask for the very difficult but  not for the impossible.

They thought this was all very reasonable. Then they saw scribbled at the end a modern  addition to the rules. It said  they also had to take into account the fact that the genie was just a UK genie. His powers  were now subject to limits from more powerful European genies who were no friends of our dynamic duo. They decided not to worry too much about that. They thought the Eurosceptics went on  about that type of thing far too much.

A low carbon economy was just the ticket, they thought. It was modern and trendy. The European genies liked it. They summonsed their magic genie. He was charming. Soon the UK was sprouting windmills everywhere. Energy prices went up to put people off creating so  much carbon. People had to drive less as petrol was so dear. Carbon dioxide output fell.  Far from making George popular, the people did not seem to like their low carbon economy very much. Whilst the green jobs they wanted did come, they found they lost lots of other jobs that needed cheap energy.

George said to Dave that they needed to do something more to make them popular. He said what we need to is promise people that the government  will keep their interest rates low. That way people with mortgages will be better off. Companies that need to borrow money will find it’s cheap.

The genie frowned when he heard. “Don’t you know the Bank of England fixes interest rates, and they are said to be independent. I should not be able to do this for you. But it may surprise you to learn that when my last master fixed the Bank he allowed the genie to interfere, so you are lucky. Once again, master, your word is my command.”

And so it proved. For month after month the Bank kept interest rates on the floor. Lucky people with some mortgages paid very little interest. But still the economy did not grow, and still many people were not happy. All the savers – and there are many more of them than mortage holders- were up in arms because they got so little for their savings, and had less money to spend.

So George said to David, “We need to ask the genie to do more. I think we need to ask him to print us some money, so we can spend more on all the things people say they want”. King David was worried about this. “Doesn’t that upset the Bank of England” he asked. “Why haven’t people just printed it before, if is so easy?” George reminded his friend that the last King had printed lots, and nothing bad seemed to have happened- or at least nothing bad because of that. All the bad things that happened happened before he ordered the printing.  Reassured, they summonsed the genie.

“Your word is my command, master. Your predecessor made sure he and I had power to instruct for more money printing. Consider it done”

And so it was. The genie had printed £200 billion for the old King. This time he printed £207 billion for the new King.  It made it easier to pay all the king’s bills, but still the economy did not grow.

Despairing, our heroes decided they had to summon the genie one more time. It would still leave them the fifth wish for later, if things got worse. This time they said to the genie “We know bankers, journalists and rich people are very unpopular. Do things that show we don’t  like them, so we are on the side of everyone else, the decent people”

The genie looked concerned and said ” Once again master, your word is my command. I will do as you say, and can do as you say. I look apprehensive, because wishes are usually best when they are positive and happy. Your wish is negative. Consider it done”

Before they pair could reflect they found themseleves with the Leveson report into the press, with rich companies threatening to move abroad, and rich people hiring better accountants and lawyers to avoid their taxes. or simply working less. None of it seemed to make them more popular.

They had managed to find things for the genie to do that did not clash with the powerful European genies, hoping that they would stay quiet. Unfortunately, the European genies kept appearing, demanding that they did more and more. What could be done about that? Couldn’t they just put all that off for a few more years?

This fairy story is not yet over. I leave it to you, dear readers, to suggest your own finale. Will our duo use their last wish to get it right? What should they ask the genie to do for them now? Will patience bring its reward? Are things better than they look? Will it come right? Or do you want a miserable ending to our magic tale?

 

(The Bow Group recorded a version when I read the story for them. It will appear soon on You tube.) ( www.youtube.com/watch?v=liQtluB877l)

 

 

It is fashionable amongst the more cynical forecasters to say that of course the US, the UK and even Euroland will turn to inflation. When heavily in debt, they argue, governments love a bit of inflation. It erodes the value of their debt.

It is certainly true that the main Central Banks of the US, UK, Euroland and Japan are much more concerned today about the poor rate of gr0wth than about inflation. Japan has so little inflation that they want to get the rate up. The UK still has too much inflation, but the Bank has long been ignoring that. I do not doubt that the authorities now are much more tolerant  of inflation. None think it is about to become a major problem.

The issue though, is does inflation help an over indebted state? Is it the easy way of getting out of debt? I do not think so.

A relatively high rate of inflation in a given country is likely to cause devaluation of the currency. Where a state has borrowed from abroad in foreign currencies, the debts can get bigger as the domestic currency falls. The UK state has borrowed some money abroad – as with the borrowings of Network Rail – so would be vulnerable to lower sterling on these.

The UK state has also borrowed substantial sums in the form of Index linked gilts and National Savings. Here the state expressly cannot inflate away from the debt, as the debt goes up in line  with the rise in prices.

It is true that the bulk of the UK state debt is in sterling and borrowed at a fixed rate of interest. It is therefore true that this debt should get easier to repay as the state inflates. This debt does reduce in real terms. It only gets easier, however, if the state revenues rise in line with inflation or better, outpacing spending.

As the state is still spending well in excess of its income, we have to think about the impact of inflation on both its spending and its income. The danger for the state is that the gap between income and spending could get bigger, enlarging the deficit, if inflation gets too high.

The state guarantees real gains for many recipients of state pensions, and nominal gains for other benefit recipients. Inflation may make getting the deficit down according to plan more difficult. The government  has traditionally offered real rises to state employees each year. Expenditure in expensive areas like health tend to have higher rates of inflation than the average rate, and have budgets guaranteed to rise in real terms. Much  spending is likely to remain more buoyant than price rises, or to keep up with price rises.

Meanwhile, incomes are likely to be damaged by more inflation. Price rises can damage business profits and reduce the number of high incomes earned here in the UK available to tax.  We have seen how Income Tax and wealth tax receipts have fallen in cash terms in the last couple of years, at a time of considerable inflation.  The danger is that higher inflation could accelerate the gap between spending and revenue.

It is not guaranteed that a state can inflate its way out of debt. The danger is all too real that more inflation hits the costs and the revenues of the state in a way which widens the gap or deficit. The only ways out of excessive debt are to remove the deficit and grow the economy.

 

            There are various options open to Mr Cameron, given his stated aim of negotiating a new relationship with the EU.

1. Say he will campaign on a platform of seeking a new and looser relationship in the 2015 General Election, to get a mandate to do so. This could be followed by a referendum on the results of the negotiation.

2. Wait until 2013-14 in case a new Treaty is proposed, and then use the new Treaty demands to insist on very different treatment for the UK, seeking powers back in return for allowing the others to go further in the direction of full union.

3. Hold a mandate referendum soon, asking the British people the question “Would you like the UK government to negotiate a new relationship with the EU based on trade and political co-operation?”. Assuming a strong Yes vote he could then start negotiations with the clear support of the British people. The voters would then  be given  their chance to judge the results of the renegotiation.

There are also two popular proposals for readers of this site which I will consider:

4. Table a motion for an In/Out referendum immediately

5. Repeal or amend the 1972 European Communities Act

          Mr Cameron will not regard either of these as sensible options. There would be no majority for either of these measures in the current Parliament. Labour and the Lib Dems have made clear their opposition to an early In/Out referendum. A large majority of the current Parliament does not wish to pull out of the EU at all, or wishes to negotiate and then decide on membership, so there would be large vote against repeal of the 1972 Act. If there were a different Conservative Leader as some of you suggest  he or she would not be able to win either of these proposed votes, even if they wished to.

         The idea that we should defer everything until the 2015 election may fit the UK Parliamentary circumstances, but leaves it too late. The EU is changing rapidly now, and in the wrong direction from the UK’s point of view. Mr Cameron is being urged to recognise that Option 1 is too little too late. Although Mr Cameron did not offer a referendum on Lisbon in the his last manifesto, many have spread the lie that he did. The  Lib Dems have switched their position on referndums, resulting in the Lib Dems no longer wanting an In/Out referendum now they are in government.  Labour did not vote for the backbench proposal last year for an early referendum. All this adds to  the distrust of promises for a future Parliament.

            Waiting to see if another Treaty comes along before popping the question of the UK’s relationship will also fail to satisfy the public mood and the urgency of the issues. It invites the question why the Fiscal treaty was not used as this opportunity. Making it the policy is also likely to persuade the continnetals to get by for longer without a new major Treaty.

           Which leaves us with the Mandate referendum as the best option given the political realities of the current Parliament. Two issues have been raised to question its wisdom. The first is, why bother when it is obvious the British people would say “Yes”. You should never take people’s votes for granted, and some will oppose. The main reason for doing it, however, is to show the rest of the EU that they are not just dealing with a government which should  be out of office in two and a half years time (each political party wants the end of the Caolaition) but they are dealing with the British people.

           Some also ask if it could pass in the current Commons and Lords. I cannot believe all the non Conservative parties in the Commons would want to vote down this measure, given its likely popularity. Nor would the Lords, so soon after their victory over Lords reform in part through using an appeal to the need for a referendum, seek to thwart the popular will on this.

            In a difficult position for Mr Cameron, boxed in by the current disposition of the current Parliament, I see the Mandate referendum and the opening  of negotiations with the EU as the least risky and most sensible course.