The Governor elect of the Bank of England has caused a stir through his latest speech as Governor of the Bank of Canada. Whilst the speech comes from the CFA Society of Toronto and is researched and put out by the Bank of Canada, inevitably British audiences are applying its message immediately to UK conditions.

         Mr Carney argues that when a Central Bank is running a very low interest rate policy to stimulate a weak economy, it may also need to manage expectations to encourage faster growth. He endorses Canadian and US past  actions where the Central Banks have announced the maintenance of low interest rates for a lengthy period, to reassure markets and foster an expansion of money and credit. In Canada the promise of low interest rates was conditional, with a statement that if inflation rose too much they would increase rates anyway. For more severe cases  of income and output loss Mr Carney favours an outright promise of low interest rates regardless of the inflation rate.

         He went further. He said that when an economy has lost a lot of output (like the UK, which he did not mention) the Central Bank and the government may need to shift from an inflation target to a  nominal GDP target. This would allow the Bank to run very low interest rates even after inflation had picked up, if output was still below where the authorities wished it to be.

          This is an interesting and challenging new path. As it does not seem to apply to current conditions in Canada, naturally people ask if that is what he is hinting the UK needs. Will he ask the Chancellor to change the target? Will he be willing to turn a blind eye to higher UK inflation in the hope that this could allow more output growth?

          The problem with this approach is obvious. Last year the Bank’s inability or unwillingness to control inflation led to a sharp spike in price rises. This meant a cut in people’s living standards, which further depressed real demand. The danger with Mr Carney’s suggestion, if  it is aimed at the UK,  is twofold. Would higher inflation do too much damage to demand again if  allowed? Would shifting targets as fundamentally as this help to undermine confidence in longer bonds, leading to higher longer term interest rates? It is easy to lose confidence, more difficult to restore it. There would be dangers in signalling that the Bank under  new management no longer wished to even  pretend to curb inflation, in an economy which can be inflation prone.

          Meanwhile, on cue, the Fed has stated it intends to create a lot more money, and does not intend to put interest rates up for a long time, until unemployment has fallen substantially, whatever happens to inflation.

        One figure stared out of Mr Davey’s Statement about the Doha Climate Change Conference. He reported that the “countries taking part in the second Kyoto period (2013 to 2020) account only for around 14% of world emissions (of CO2) – by 2020 this could be less than 10% of global emissions”.

          Mr Davey sagely concluded that “This underscores the need for the future climate regime from 2020 to involve action by all”. In effect just the EU and Australia agreed Kyoto II. China, India, the USA and even Japan are not in or no longer part of the Kyoto targets.

          The EU has signed up to cutting emissions by 20% compared to 1990 by 2020, with an option to make that a 30% cut. It has confirmed its promise of Euro 7.2bn of aid for climate change payments to developing countries  in the period 2010-12, followed by maintaining the average level of support from that period in future years.

            This will be a disappointing outcome for all who believe in Global Warming theory. Surely if the theory is right the emissions of the whole world have to be cut, not just 14% of the emissions coming from the EU? As the EU deindustrialises and Asia and other faster growing economies go through their own industrial revolutions, they will generate an ever higher proportion of the CO2. The EU needs to negotiate multilateral reductions, not just unliateral reductions in its own contribution to the world totals.

          Those who do not believe the theory will wonder why the EU is imposing this expensive burden on itself. They will also question the wisdom of accepting the moral obligation to compensate other countries for past CO2 emissions in the EU, and wonder how well spent is  the current fasttrack climate change aid.

             Mr Monti has decided he can no longer survive as unelected Prime Minister of Italy, without a working majority in the Parliament. It was always an odd idea that an unelected “expert” could parachute into the job of Prime Minister without having taken the precaution of building a majority party and winning a General  Election first. Now it appears that MPs in the Italian Parliament are no longer willing to go along with what he wants to do.

             It will be interesting to see if the Italian General Election will bring to the fore important debates about the future of the Euro scheme and its impact on  the Italian economy. Will Italy vote for more of the same? Will they vote for remaining in the Euro and applying more of the austerity medicine that goes with the current version of the currency?  Will anyone campaign for withdrawal from the Euro? Will anyone say that the current budget and banking policies being followed within the Euro scheme are combining to throttle the Italian economy?

              The issue before the Italian electors is in essence a simple one. Will they continue to do whatever the EU demands, as the price of Euro membership? Are they happy with the current results of these policies, measured in many lost jobs and falling output?  Or do they think the current Euro sceheme is not working? Do they want Germany to contribute more by way of transfer payments? Do they want the ECB to print more money? Do they want cross guarantees to support all Italian banks? Should Germany inflate more to help correct the lack of competitiveness in the south?

              I suspect they will choose another government which signs up to the full Euro scheme for fear of worse. Now is their opportunity to have the debate they need to have over why the current Euro scheme is not working economically for them or the other southern states. Their current levels of youth unemployment are worryingly high. Many forecasters now expect another two years of Italian recession.

I attended a very interesting private meeting  recently on the Scottish Question. A couple of  learned Scots told us that Scottish nationalism was  defined by dislike of the English in general, and the dislike of English Tories in particular. Scottish nationalists do not like London making decisions for them. They like it even less if it is English Tories calling the shots there, instead of Scottish Labour MPs.

None of this is suprising. The success of the Scottish Nationalist party has been brought on by Labour’s anti Tory  campaigns for devolution. Their failure to secure enough votes for devolution in the 1970s, when Scotland was still reluctant to tread this path, led to a long sulk and a revitalised and successful attempt to put it through on return to office in 1997.  Labour consistently claimed that a Conservative “English” government of the UK should not govern Scotland. They saw nothing wrong with a Labour UK governing Northern Ireland with no Labour MPs, or governing England with a majority of Conservative MPs, but they did think a Conservative majority government at Westminster lacked authority to govern Scotland if the Conservatives had few seats for Scottish constituencies.

Labour’s dislike of the Tories, their insistence on using the legitimacy argument against the Conservatives, and their determination to polarise opinion on devolution, helped the SNP establish its position as a credible force in Scottish politics. The SNP had lively internal debates about whether it was a true independence movement, as the purists wanted, or a party of Scottish government seeking more devolved powers within the UK. Mr Salmond has often come across as  a devo max man rather than a true independence fighter. He after all wanted devo max on the ballot paper for the referendum.

The stated position of the current SNP is not to seek Scottish independence, but to seek a new kind of dependence, with some more things being settled by a devolved Scottish government. It is difficult to argue that a country is independent if it does not have its own currency and central Bank, yet Mr Salmond wants to stay with the pound and a monetary policy and interest rates fixed by the Bank of England. Mr Salmon also wants Scotland to be a member of the EU, with all that that implies for loss of sovereignty. The SNP wishes to share a Queen with England, rather than have a new Republic with a Scottish President.  The SNP are just better at devolved politics than Labour, and have used Labour’s anti Tory and anti Union rhetoric of past years to gain themselves devolved office. Now they wish to press for devo max, calling it Independence. In practice what they seek woukld  leave their new  Scotland  controlled financially by a monetary union where they  no longer have a seat at the Cabinet table or in the Central Bank, and leave Scotland under an avalanche of new EU controls without the current UK opt outs.

English nationalism is not defined by attitudes towards other parts of the United Kingdom. Indeed most English nationalists are relaxed about belonging to the union of the UK. Most accept that it is Scotland’s call whether to stay or go from the union. The defining characteristic of English nationalism is dislike of EU power, a sense of shame or anger that a once great free country is now bossed around by the institutions of Brussels. English nationalists are not allergic to the Scottish saltire, but to the twelve stars.

It is true that English nationalists now think the deal within the UK union is unfair on England. They want as much self government for England as Scotland enjoys for Scotland within the union of the UK. They want a fair financial settlement between the differing parts of the UK union. They either want English votes for English issues, or a new English Parliament.

All of this argument is second order compared to their overriding wish to be rid of EU interference in our law making, budgets and general government. A true Scottish nationalist wants for Christmas to be free of London control. A  true English nationalist wants to be free of Brussels. Eng,lish nationalists also want their country to be allowed to exist, instead of continually wiped from the Brussels version of the map. The aim of balkanising England into unloved regions has been defeated. Now we need to rebuild England.

          Coming to this blog for the festive season:

A modern fairy story,   “Dave, George and the magic lamp”

and the latest leaks from the heart of government, as we discover what Dame Lucy and Dr Roy are up to.

What else do readers want to hear about?

             We saw yesterday that the OBR forecasts a gently rising recovery from here. People’s real incomes will go up modestly, share and property prices will rise  a little, more people will get jobs.  The trouble is the OBR have been too optimstic before about this economy.  It would be wise for the government to take more action to try and ensure a faster recovery, and head off more bad news and downgrades like the ones we have experienced for the last two years.

              I want people to be better off. I extend that wish to people at all income levels.  Lower tax rates could help. So too could a faster rate of economic gr0wth, generating better returns for savers and higher incomes for those in work. Breaking up the state banks, writing off bad debts to speed the day when the banks have good enough balance sheets to lend more against decent projects, is central to making progress. A new generation of would be home buyers and entrepreneurs are being denied access to proper credit facilities thanks to past errors, weak bank balance sheets and now super prudent regulators who cannot resist getting the cycle wrong both ways.

             I do not wish to hit people on low incomes by being mean on benefits for those who need them. The government is right not to hit the pensioners and the disabled with increases in pensions and benefits below the level of price rises. I have no wish to cut important public services. I do, however, think the government is correct in saying it must get the deficit down, and make progress in limiting the build up of debt. The Opposition too agrees with this, though there are still rows over timing and extent.

            So how can you square the circle? The answer surely is to be generous to those in need, but to be firmer over eligibility for state help. Many of us wish to be generous to pensioners, so maybe as longevity rises so we have to make further increases in the age of retirement to help balance the books. A 60 or 65 year old today is on average fitter and likely to live considerably longer than the equivalent twenty years ago.

             We should speed the moves to control our borders better. We should not extend out of work benefits to people who recently arrived in the UK and are not UK citizens. If they come here under the free movement of workers they should not be entitled to out of work benefits for doing so. The availability  to  work test should be applied to ensure that those who can work do work when work is available.

               The introduction of a high cap for housing benefit in understandable, as the government does not wish to destabilise families living in dear to rent homes . There could be a much tighter cap for new claimants.

                The UK could have a couple of years off from meeting the 0.7% target for Overseas Aid whilst we are sorting out our large budget imbalance. There are still items in the Overseas Aid budget that do not represent value for money, or further the noble aims of relieving poverty and disease in the poorest countries. Mr Cameron could dig deeper over the excessive contributions  we currently make to the EU budgets. Why not tell them we do not wish to contribute to the EU regional aid and agricultural programmes? it would be cheaper to do our own.

              There is universal acclaim for more public capital spending. We need to remember that these are often growth projects, which then need revenue finance to keep them running once built. When trying to reduce public spending, you do need to limit new capital works. If we gain better control over our borders then we will cut the need for extra schools, hospitals and social housing, which will represent a substantial saving to the taxpayer.

              Let’s have lower more competitive tax rates, better working banks, and more realistic public spending. Then we could match or probably exceed the OBR’s forecasts for rising incomes and a more successful economy.  Some seasonal cheer is better than more gloom about austerity.

          The briefing that we are in for several more years of Austerity Britain was curious.  How does this square with the more optimistic forecasts from the Office of Budget Responsiblity, the official forecaster?

          The official forecasts do not think we are in for more years of austerity. “Whole economy earnings” grow at 2.6%, 2.2% and 3% in the three years up to the election.  Wages and  salaries rise by more than inflation this year and in 2014-15,  and go up by 2.5% in the middle year when prices are forecast to rise 2.6%.  In their graph the OBR shows real wages increasing   just above zero next year, rising to a 2% annual  gain by 2015. The OBR forecasts rising share prices throughout the period and small rises in property prices. There are too many people in the UK on low incomes, and have been for many years. At least the forecasts say more will have jobs and wages will start going up.

            Current public spending rises every year in cash terms, and public sector investment spending also rises next year and the year after. The OBR confirms that in the period Quarter 4 2011 to Quarter 3 2012 the public sector has grown overall in real terms, contributing 0.4% to total economy  growth, which came in at just 0.3%.  They forecast small real declines in public spending hereafter, but that of course depends on how inflation turns out.  With a pay freeze in place, if it were effective, the cash rises in spending should allow some growth in service provided.

           The OBR forecasts 1.2% growth next year, 2% in 2014, 2.3% in 2015, and higher rates in the following two years. All this could better be described as “gently recovering Britain” rather than “Austerity Britain”. The number of jobs has outperformed their past forecasts by a wide margin, which is the one bit of good news.

           The issue, however, is will these latest OBR forecasts be any more accurate than the ones they issued two years ago?  Now they have slashed the 5 year growth figure from 13.2% for 2010-15, to under 6%, maybe they have cut it by enough. They do, however, still offer us the same profile of growth as before, with the fastest growth forecast for the latest years of the forecast. As the OBR say in their document  “A key risk is that potential output turns out to be lower at the end of the forecast period than we currently assume”.

            Indeed. The OBR’s gently recovering Britain could become  Austerity Britain again, if inflation is not controlled, and or if output does not expand as planned. We need more growth and faster growth. The aim should be to help many more people enjoy rising and higher living standards.

           I will look tomorrow at options to accelerate growth more, to make it less likely we have another disappointment.

The politics of the Autumn Statement once again are about fairness. The Coalition points out that under their plans the top 1% of earners will pay a quarter of all the income tax, and the top 5% of earners will pay 45%, more than twice their share of the income earned. The Coalition has raised taxes on the rich by more than taxes on other income groups. Labour says this is not enough, the richer people should pay more.

The Coalition counters by pointing out that the higher rate of Income Tax aimed at the top earners has so far caused (or coincided for those of you who still deny Laffer) with them paying much less total tax, a blow to a Treasury in need of more income to pay all its bills.

The Autumn Statement also reveals that since 2007 average earnings for those in work has risen by 20% (in cash terms – not real) whilst benefits for those out of work has risen by 24%. The Coalition as a result wishes to limit future rises in out of work benefits to 1%, likely to be below inflation. Labour is not sure it will support this, and asks to see the small print as to how many benefits are affected and if some of them are paid to people in work.

The best way to get the benefits bill down is to get many more people back into work. The UK state is still spending too much. Economic success will produce a more affordable state, and a more affordable state is necessary for economic success.

The latest forecast for the UK economy thinks there will be growth of around 6% for this Parliament, compared to the 13.2% the OBR forecast in June 2010. They attribute the worse performance largely to the weakness of the European economies, and slower growth world wide.

As a result of the slow down, they now forecast tax revenues some £50bn a year lower in 2014-15 than their June 2010 forecast. I have long argued that the forecast big surge in revenues looked problematic, especially given the higher rates. The Chancellor confirmed with some arresting figures in his Statement that the 50p tax band has cost the Revenue £7bn of tax income, as rich people have gone elsewhere to earn.

Total additional borrowing for the five years now comes out at £565 bn, not such a bad figure as feared. It is lower thanks to the large savings on interest payments, now amounting to savings of over £30 billion over the planned period. This compares with original forecasts of £451 billion extra borrowing this Parliament in the June 2010 figures. The extra borrowing has been brought on by loss of revenue. The higher spending forecast in 2010 is staying close to the original budgets.

Future growth rates depends crucially on changes in credit and money in the private sector over the next year or so, and over demand levels which will be affected by inflation. The future growth rate will be strongly influenced by progress in mending or bypassing the commercial banks. I will keep you posted of progress.