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.

 

       In November 2012 current public spending excluding debt interest rose  by a lively 7.6% (compared to November 2011). Income tax receipts plunged by 12.3% or by £1.3 billion.  For the year to date overall taxes on wealth and income are down by 3.6% on the same period the previous year and current spending continues upwards. Between April and November spending is up by £4.35 billion, whilst total revenue is down by £3.3 billion.

       As a result November state borrowing increased  by £17.5 billion, a £1.2 billion increase on last year for the same month. It still looks as if high  tax rates are helping push revenues down, as output was the same as a year earlier.  There is still no evidence of the overall  cuts in spending many talk about.

 

  The UK establishment is engaged in one of those bizarre arguments over how to escalate regulations, long after a crash where the regulators failed to use the powers they had to stop trouble.

      No UK bank went down in 2007-8 because a risky “casino” bank undermined a good retail bank. Northern Rock, Alliance and Leicester, Bradford and Bignley and HBOS all got into difficulties in  traditional mortgage lending and High Street banking. The regulators did not try to make them keep more capital or to  take a more prudent approach to bad loans, though they had the powers to do so.

RBS  took over too many bad businesses with too little capital. The FSA, the Bank of England and the Competition Authorities could all have intervened in various ways to stop the damaging acquisitions or to make RBS hold more cash and capital against them. They failed to do so.

The UK economy needs better banking, not banking regulated to death. That requires more banks  behaving more competitively. The governemnt should get on and split up RBS instead of arguing over how to stop a future crisis after 2015 or 2019. The problems are now.

Electrified fences will not solve the future problems either. Who turns on the current and when? Why will it be better than last time when the regulators all failed to see the crisis coming?

 

           As Parliament broke up for Christmas many Conservatives stayed behind to discuss the nation’s  big issue – what would a new relationship with the EU look like? How can it be brought about? How can we make a start in this Parliament, when no party has a majority?

            President Obama and the UK establishment’s recent intervention to tell us the US does not want the UK to leave the EU was a foolish piece of spin. Try to bully Eurosceptic Brits, and we become more determined, not less. It was a crushing irony that the President of the land of the free and the Leader of the Free World should be telling its former colonial  power to stay in a dependent relationship with the EU. Mr Obama is understandably proud of those English gentlemen living in the USA in the eighteenth century  who threw off government from London, so why does he expect us to accept so much government from Brussels?

           Similarly, various continental threats that the UK would no longer be able to trade with the EU part of the continent serve to unite British people in wanting a looser relationship, or wanting out altogether. No-one sensible believes the threats. The UK would want to allow French and German goods to still have access to our market. Arrangements would be made. They could be made by a new agreement, or under world trade arrangements.  Germany would not wish to lose sales of her popular cars in Britain.

           Many Conservative MPs now agree that the matter of UK membership will not wait until the 2015 election to be resolved. Nor do we think that there will come a time when the continentals need a new Treaty, maybe in 2014, which offers a better  chance for a UK renegotiation. After all, there is a new fiscal Treaty going through for the rest of the EU right now, because the UK rightly refused to sign it, and witheld consent for it to be a proper EU Treaty.  The UK has to accept that the EU is in a state of constant and agitated renegotiation of many of its terms and functions, with a view to hastening full economic, political, fiscal and banking union. That is why the UK has to make a start on establishing this new relationship now.

           The balance of forces in this Parliament  provides a big majority against immediate withdrawal from the EU. Lib Dems are federalists. The overwhelming majority of Labour MPs wish to stay in. There is a group of Conservatives prepared to vote to come out immediately, but most Conservatives wish to negotiate with the EU before letting the nation decide whether to stay in on new terms or to leave.   That also seems to be the majority view of the British people. A handful of Conservatives, like many in the other parties, wish to remain in come what may.  Tomorrow I will look at Mr Cameron’s options for the speech

 

 

 

 

             The government has recently published an update on its One in One out policy for regulation.  On arrival in office the Coalition agreed that there is too much regulation. Some imposes disproportionate cost for the benefit, some is out of date or no longer needed, some can be counter productive.

              Instead of adopting the idea of regulatory budgets with requried reductions in the cost of regulation every year as recommended in the Conservative Policy review, they decided on a One in, One out policy.  Any new regulation had to be matched by the removal of one at least as burdensome. Overall they wanted to get the costs of regulation down.

            They have so far reported on four six month periods. In three of the four periods they have removed substantially more regulations than they have introduced. Only in the first period did they fall short by two measures. Overall they have removed 69 and introduced 38.

             More important than the numbers of regulaitons is the cost imposed.  In the first six month period they reduced regulatory cost by £3.3 bn, in the second by £221 million, whilst in the third costs rose by £9m and in the fourth by £2.66bn. Their forecast for the whole One in One out period is for a net reduction in cost of £919m.

           The government now wishes to accelerate the progress. They are changing policy to One in, Two out. That is good news. They still need to ensure that this results in a significant downward movement in total regulatory cost, preferably with an improvement in the beneficial impact of what regulation remains. It should be psosible to improve the efficacy and reduce the cost of regulation substantially, after years of fast and badly planned growth. It is a good area to achieve more with less.

            None of these numbers, of course, include EU regulation. A full survey should do so. The UK government should be able to strip away loads of domestic regulations, as the EU progressively takes over many areas of law making from the domestic lawmakers. Looking at the figures, only the DWP has cut out  more than £200m of cost, with a total saved of £681m. DEFRA and Business have both managed more than £100m each, but the rest have  got nowhere.  The Treasury, the lead economic department, has special scope to do so much, but for the time being seems to be making the overall tax system more complex, with ever longer legislation.

 

Once again the UK has shown herself to be a good European. By asking to stay out of the banking union, the UK has spared the rest of the EU the complication and the danger of having to regulate and stand behind the very large and sometimes wayward UK  banks.

The UK stayed out of the Euro. This saved the Euro from catastrophe during the Credit Crunch. Then as now the UK saved the EU by its decision to be offshore from the full EU arrangements. The Euro may well have been lost had the currency scheme had  the excessive UK state debts and the overmighty UK banks to contend with as markets tested the structure. The rest of the EU would not want to have to stand behind RBS and the other state financed UK banks.

Just look at the stresses the banks of Ireland, the property crash of Spain and the state finances of Greece have imposed on the Euro. The numbers for UK banks, UK property losses and state debts are so much larger than any of these. Our property and banking boom and bust would have been worse if it had been supercharged by membership of the Euro.

So far so good. The banking union is designed for the 17 members of the Euro. The UK government claims to have negotiated so that the UK will opt out of the new system. The UK will not have to accept all the rules and regulations the ECB decides to impose on Euro area banks. To prevent the European Banking Authority repeating all the ECB rules and imposing them on the rest of the EU members, there will be a double lock. The Banking Authority will need to win a vote not just of the banking union members, but also of the non banking union members before it can place new requirements on the banks of the 27 member states including Britain.

This system only works if there are other countries remaining out of the banking union. So far the Czech Republic and Sweden have said they will be outside for the time being. Bulgaria, not a Euro member, has volunteered to join the banking system. Denmark, the only country with the UK to enjoy a legal opt out of the Euro, has not decided yet about the banking union. As eight of the ten countries outside the banking union are meant to be preparing to join the Euro, and as most of them want to join it, we cannot rely on this group remaining outside the banking union. Nor should we assume that their interests will usually align with the UK and the City of London, rather than with the other banking union members of the EU. Whilst the double lock is a neat idea and offers some reassurance, I doubt it will work well from the UK’s point of view. It is not nearly as effective as a UK veto.

There is a fundamental flaw in the thinking about all this.The City can be damaged or changed by the large amounts of EU law and regulation that already apply to it, and by the future decisions of the European Banking Authority and the equivalent bodies involved with insurance and financial services. The Coalition government inherited a position where most financial regulation comes from Brussels already, and has gone along with further Directives which confirm that progress. They have gone along with it because the UK government and Bank of England have wanted more regulation themselves, so it has not seemed to matter much to them if it mainly comes from the EU. They also thought they had little option, as so much of it now is enacted by qualified majority vote.

There is a fundamental weakness in this approach. Some of the current regulation is probably damaging, and unlikely to prevent some of the absues it is ostensibly designed to stop. When government wakes up to this, there is a world of differnece between changing UK based laws and rules, where Parliament can do it relatively easily, and changing EU laws and rules. This may prove just about impossible, given the large number of governments, the European Parliament and the Commission involved in the task. The UK needs a new relationship with the EU, which will include having much more power and sway over our own businesses.

So far the climate of antagonism to banking and finance, the rash of new laws, the higher taxes and the demands for much larger amounts of cash and capital have led to a sharp decline in City employment. It has led to a big fall in tax receipts from highly paid people, and to various activities moving to new locations where the tax and regulatory system is more benign. The EU is often hostile towards what it calls “Anglo Saxon capitalism” and is busy inventing new laws to control what they see as the excesses of the banking and financial sectors. The EU authorities are also keen to transfer business from London to the Euro zone, though their policies are better at transferring it out of the EU altogether. The UK is currenly having to fight a court case to try to preserve its legal right in the EU to carry out various transactions in Euros!

The government was right to stay out of banking union, and right to seek some protection for the UK. The truth remains that thanks to past Treaties and decisions one of the UK’s great commercial success stories, the City of London, is vulnerable to hostile legislation from the EU. The German motor industry is looked after by the EU. The City cannot expect the same treatment. It is one reason among many why the UK needs a new relationship with the EU that leaves us free to trade with them but not governed by them.

     The English cricket  win in India was great. The Captain batted brilliantly and gave good leadership to his team. Alastair Cook now has a Test batting record that puts him amongst the all time greats at such an early age, with many more years to add to his runs tally. In this four match series he made 562 runs himself at an average of 80.

     Pietersen, Bell and Trott all proved their worth as world class batsmen again, with good averages and some great innings. Prior also batted with distinction and did his job behind the stumps. Swann, Panesar and Anderson bowled so well, taking 49 wickets between them. In this series Stuart Broad did not have such  a good time, but his past performances tell us he does have what it takes to perform well at Test level. Time will tell if England now have found  the second opening batsman and the Number 6 they need to once again be the top team in the world.

    This was another sporting triumph for our country under a new Captain who proved his worth and led from the front.

 

          In 2012 the Post Office decided on a massive price rise in postage. The second class stamp for letters and cards in the UK soared from 36p to 50p, an increase of 39%. Many people bought stamps in advance of the price rise which will cushion the blow, but you would expect volume to decline on the back of such a large price rise.

          In the UK people have traditionally sent many more Christas cards than other types of cards and letters during the year. It will be interesting to see what impact the new high rates of postage have on card volumes. Some may still be working their way through the stamps they bought at the old prices this year, but by next year that effect will have disappeared.

         At exactly the same time that the Post Office embarked on its high price strategy the principal rival, the electronic card, was making inroads into the market anyway. I am finding this year that many institutions and companies that used to send a card now send out an e card instead. It can represent a substantial saving if you have a large mailing list.

          I like sending and receiving Christmas cards. MPs will  doubtless be amongst the last groups of people to carry on sending out cards, honouring the tradition.

           There are two types of card which I have not be so pleased to accept in the past. The one is the cards from organisations that use the Christmas  card to lobby and make political points. This seems to me to be a distortion of the true purpose of the card, to wish people well and to keep in touch in a friendly way. A lobby mail out discussing the issues when needed  would seem to me to be a better and more honest use of the lobby group’s money, than a hard hitting or phoney card.

          The second are cards from public sector bodies where no-one sending them out troubles to sign them or personalise them in any way. I wonder why they do that, and why someone authorises spending public money on them  if they cannot be bothered to say who they are from, and or why someone has sent them. 

         I would be interested in your experiences of  sending and receiving cards. I expect the volumes to be down this year. I am hand delivering more cards where I can, as I do think the current price of postage is too high for all the cards people  would like to send.

          Do you like ecards? Will they take over? Is the high cost of postage killing the festive spirit and damaging the card business? Should public bodies spend taxpayer money on sending out cards? If so, who should receive them?

I have come across this letter from Dr Roy Spendlove to his opposite number in the Foreign Office, Marc Notte

Dear Marc,

              In my capacity as Head of Special Projects I find developing and preserving good relations with our partners in the EU is fundamental to the work we do. As you will appreciate, we so often need EU permission to go ahead with projects. We may need consent to suspend state aid rules, we may need a waiver on EU competition rules, we may need understanding over changes to specially designated EU planning zones, we may need access to EU money and we may need to co-operate with other countries and EU companies to bring our task to fruition. The EU does now lay down  much of our environmental, industrial , trade and energy policies, as well as of course maintaining its lead role in fishing and farming. We should keep stressing how crucial EU trade is to our wellbeing.

               I am finding in recent months that it is more difficult now to gain consent and to preserve the necessary friendly relations with continental colleagues, owing to the new aggressive Eurosceptic tone coming from some parts of the government. We look to the Foriegn Office to do more to stress to Ministers the need to preserve and foster good relations. We do not wish to lose our reputation as a better European, which was much cultivated by the previous government. Their approach of going along with most of the EU plans for new laws and further integration helped a great deal. Their realism over open borders, over the Treaties of Nice, Amsterdam and Lisbon, and their welcome for EU  legislation in areas a diverse as the environment and the finance sector got over some of the damage done to our relationships by the rows over the Euro after Maastricht.

                Today my opposite numbers in France and Germany express concern that the UK has for the first time refused to join in a new Treaty at all,  preventing the rest of the EU from using the EU framework for the Fiscal Treaty they are planning. Whilst they can get round this problem, it is a legal nuisance for them that they have not faced before. They are unhappy about the way the UK government places the concerns of the City of London above the need for better centralised banking controls through the ECB and the European Banking Agency. They are particularly unhappy about the UK’s refusal to assist with the new bail out funds needed by the  poorer EU countries. The Germans have some more sympathy with the UK’s refusal to counteance any increase in the EU budget, but this is causing considerable antagonism amongst the majority of member states. There are worries now that the UK is moving away from proper observance of the EU climate and energy policies with its new emphasis on carbon based gas. There is relief that the UK is still accepting the common borders, a crucial part of the whole move towards greater union.

             I am writing to make sure you are aware of this rising tide of discontent with the UK in the EU. We look to the FCO to steady the position. Could you perhaps get Foreign Office Ministers to make speeches reaffirming the importance of our EU membership, and mitigating the attacks upon the EU position that some see in recent decisions and positions adopted by the Coalition government? I appreciate that the Foreign Secretary always used to confirm that membership of the EU is in the UK’s national interest. Today the Prime Minister has changed this position to the much more alarming statement that the UK needs a new relationship with the EU. It is most important to make sure the FCO does not seek a major renegotiation before the next General Election. This would be especially destabilising, threatening to destroy the good work we have all put in over the last decade to build new bridges to Europe and to become good Europeans. Whilst we of course remain strictly neutral on political matters, we do need to plan for the possible return of a Labour government as UKIP claims to  be able to stop the Conservatives getting a majority. It is important that such a  replacement government reverses the policy of seeking a new relationship and abandons ideas of   opting  out and loosening ties. Current Labour policy is more committed to our European membership.

 

Yours ever

 

Roy