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.

 

The best boost the Chancellor could give to the UK economy would be cheaper energy.

Uk energy is too dear for much of industry. As a result more goods are made abroad where it is cheaper, rather than here. More energy intensive industry is contemplating closing plants, or putting its new investment elsewhere. The government says it wants more manufacturing in the UK. It needs cheaper energy to encourage it.

UK energy is also too dear for consumers. As we experience a succession of cold winters, people need some relief from dear energy so they can keep warm at home and still have some money left over for discretionary spending. Cheaper energy would provide a boost to spending and therefore to jobs. It would come as welcome relief especially to people on lower incomes who see too much of their money gobbled up by energy bills.

The Chancellor needs to persuade the Energy secretary, Mr Davey. We want more exploitation of the UK’s gas and oil reserves. It will take more gas fired power stations. It means allowing shale gas recovery. it means a tax regime for our energy reserves that promotes more production.

Maybe Mr Osborne is now able and willing to do this. He should say “Drill Davey, drill”.

 

As politicians and some in the media work the country into a frenzy against tax dodgers, please spare a thought for all those politicians and commentators arguing for more tax breaks to promote good works, more gr0wth and healthy lifestyles. One man’s tax dodger is another man’s prudent individual taking advantage of strongly recommended tax breaks which have been carefully honed by government.

Some people pay less tax because they give generously to charity, some because they are making accelerated savings for retirement so they will not depend on benefits and taxpayers in their old age, some because they are investing in places and causes approved by politicians, some because they are lending their money to the government to spend on public services. Most people take action to avoid tax. If you have to drive into central London, if you do so before 7 am you avoid the Congestion Charge. I do not have a tv in my London flat in order to avoid having to pay a second BBC licence fee. If you do not smoke or drink spirits you avoid large amounts of tax on alcohol and tobacco. If you do not move home in recent years, you avoided the large Stamp duties now imposed. Tax is taxing. Tax has a direct and visible impact on what you can and cannot do. Tax is often designed to stop you doing things. In other words many taxes are designed to encourage you to avoid them.

The UK’s problem is not that we pay too little tax. It is that the country produces too little for its ambitious plans for public spending. We need to produce more to make our current level of spending affordable. The problem is our current level of tax gets in the way of growing the economy faster. As a country moves to taxing too much, as the UK is doing, so governments have to find more and more ways of getting more and more money out of the same people and companies . There is always the danger that more tax will put people off earning so much, or drive them to live or work in another country.

In the UK the motorist is one of the favoured groups to pillory. Many politicians make motorists out to be some kind of special group of planet wreckers and anti social people to start with. Out of taxed income a motorist now has to pay tax to buy a car, tax to keep the car on the road, special taxes to drive in London or over certain bridges in the national network, tax on the fuel in the vehicle, and car park charges in state owned car parks and to park on the state provided highway which he or she has already paid for.

If the government wants to stop people avoiding tax there is an easy answer. They should legislate for simple flat taxes, and abolish all allowances and tax breaks. Out should go the exemptions for charity, for pensions saving, for prime residences, for certain kinds of investment, for National Savings and all the rest. In should come lower tax rates that apply to us all however we choose to spend our money.

I doubt the government would want to do this, as each tax break is defended by armies of supporters and media commentators. In which case, isn’t there a danger in all these witch hunts against people who are just good at using the large number of legal loopholes and taxbreaks to pay less tax?

 

In recent years a depressing cry has gone up for more regulation of anything that goes wrong. Often the things that have most let us down are already heavily regulated. Then the cry goes up for more regulation, and different regulation.

Too many people seem to believe in the perfectibiltiy of man and woman, as long as they are strictly controlled by tough regulators. If we have more regulators banks will no longer lend too much and go bust, financial service businesses will no longer offer products which lose people money, journalists will no longer get stories wrong, employers will no longer be unfair to employees, trains and cars will not crash, people will not slip up on icy pavements. The list of wrongs that can be righted and accidents that can be avoided gets longer by the day.

Every disaster understandably brings forth a “Something must be done” crusade. Ministers of all parties solemnly tell the Commons that action will be taken to make sure it will never happen again. That tendency of human nature to make mistakes, to do things too casually and come unstuck, the criminal tendency to be greedy at others expense, will be miracled away by a new and enlarged generation of regulators.

All of us have long agreed and accepted that there are some types of conduct which are unacceptable. We make these offences under the Statutory criminal law. Businesses must not kill their customers. Commerce has to use fair contracts to supply goods and services. Theft is a crime. Most of the things that go wrong and most bug us are already crimes. They are therefore already under Statutory regulation. We more often have an enforcement problem than a shortage of rules and laws. We all want to know that if a major food company supplied food that poisoned us, or if a public transport company drove us recklessly on train or bus making an accident very likely, there would b e criminal sanctions against the management and perpetrators.

The Regulators come in both to buttress the police in enforcing the criminal law, and to impose a whole series of rules or mini laws on practitioners governing matters that fall short of being crimes. Before allowing such regulators access to our wallets and free rein over competitive busiensses, we need to ask what value do they add?

It is possible that allowing regulators to ask many questions of businesses, and to demand certain practices of businesses, they might cut the incidence of crime, or turn evidence of crime over to the authorities more quickly. It is more often the caee, however, that potential crime is unearthed by customers who report it. They could equally well report it to the police as to the Regulators. Regulators in general can be an expensive and cumbersome way of strengthening the police force and the capacity of the police to tackle business crime.

The main preoccupation of Regulators becomes the encouragement or imposition of best practice on their captive industry or regulated groups. This may ensure some of the poorer performers in the profession or industry do a better job. It also may limit innovation, prevent some from experimenting with better answers. It can ensure the errors of the majority are enforced on the majority. In Statutory financial regulation we saw this in the period 2000-2007 after its introduciton in the UK. The Regulators bought the common thesis of the day that new ways of spreading risk made massive gearing safe. They not merely allowed it, but helped spread the damaging doctrine.

We do need to ask who regulates the regulators. Parliament should do this. In its current mood Parliament is not that willing to question the need for so much regulation, its wisdom, or its consequences. Not all regulaiton is good. Much of it is wasteful. Some of it is positively harmful.

 

The EU is changing its attitude to regional and provincial government. It used to see it as an ally in attacking the powers of the member states. The EU offered more powers to the regions as it took more powers to itself, acting as a pincer movement on the authority of national g0vernment. They sought a Europe of the regions.

Now the EU is becoming concerned that fostering regional power centres is getting out of control. They do not welcome the independence movements in Catalonia, Scotland or Lombardia. They are happy for regions to have some devolved powers, but they do not wish them to press their claims to the point where they rupture the constitution of a member state. The EU would not wish to renegotiate membership with a smaller Spain and an independent Catalonia. It does not want to see the richer parts of Spain spin off from the Spanish state at a time of heavy indebtedness and substantial cross border liabilities extended through the Spanish state and Spanish banking system.

Scottish nationalists assume that Scotland could automatically become a member of the EU on the same terms as the UK currently enjoys. Even if the rest of the EU agreed, there would have to be Treaty amendments, as the MEP seats, the voting weights and other constitutional matters would need sorting out between Scotland and the rest of the EU. There would have to be a deal on both the rest of the UK and Scotland’s financial contribution. Would Scotland still enjoy the exemption from joining the Euro? Would it negotiate any part of the UK rebate? The rest of the EU might see Scottish secession as an opportunity to make Scotland join on more conventional terms.

What sort of a deal could either Catalonia or Lombardia do, should they fulfill their wish to gain independence following a referendum? How could the EU be sure residual Spain and Italy could honour their debts and liabilities?

It is facsinating to see the EU now becoming an advocate of the status quo on exisiting member states configurations. The early enthusiasm for stronger regional government, which may have stoked some of the mood for independence, is now coming back to worry them.

Meanwhile the EU’s refusal to recognise England along with its continuing wish to splinter England into unwanted regions, fuels anti EU sentiment in England.

It is not easy running a successful coalition, particularly when the two parties in it disagree fundamentally about big issues like the role of the state, the EU, and the constitution.

Success comes from concentrating on a few crucial things that need doing where there is agreement. Strains occur when the Coalition government tries to stretch the agreement, to institutue radical reforms that do not have the whole hearted support of both parties or do not resonate with a large majority of the public. This Coalition has been very ambitious in what it wishes to change, with a result that there are strains in the alliance.

The Lib Dems got a great deal in the original negotiation. They decided to press on with large scale constitutional change. Their passion for a different voting system led to the voters rejecting the plan, when Conservative MPs allowed them to test opinion in a referendum. Very few Conservatives ever wanted a change to the voting system.

The Lib Dems tried to reform the House of Lords, against considerable opposition in the Lords and in the Conservative Parliamentary party. They abandoned it when they finally realised that it was not going to get through both Houses.

The Lib Dems decided perversely to impose high tuition fees on students, a reversal of their stance in the General Election. It turned out to be very unpopular policy, and does not even help the public accounts in the short term, given the state finance behind the loan scheme. Conservatives went along with Dr Cable’s scheme.

The Lib Dems succeeded in imposing a Mansion Tax Stamp Duty of 7% on dear properties, which has damaged the property market in central London and led to a halving of activity levels. They talked the Chancellor into a rise in Capital Gains Tax, which is now depressing CGT receipts.

The Conservatives insisted on seeking to control immigration, but are finding they can do nothing about EU immigration, where the Lib Dems do not wish to see a renegotiation or fundamental change in our relationship owing to Lib Dem views.

The Conservatives did veto the Fiscal treaty for the UK, and have demanded a better budget deal from the EU, but are not able to pursue the instincts of the party for a major change in our relationship as the Euro superstate emerges as quickly and as fully as Conservatives want.

The Conservatives did not succeed in curbing welfare spending as they wished thanks to differences with the Lib Dems.

The two parties did agree on an Income Tax cut through raising thresholds, which was popular. They did agreee to seek to cut the budget deficit, with majority support from the country. They did agreee the end of ID cards and a few other civil liberty measures at the beginning, but are becoming more authoritarian in office.

The disagreement over the response to Leveson shows how difficult it now is to do things together. As the leaders plan more than two more years of this, it would be a good idea to sit down and think about how they could use the time usefully. There are areas where they should agree. Why not more civil lilberty measures? Why not less nanny state? Why not more genuine devolution of power to Councils, companies, families and individuals? Why not do the job of cutting spending plans and deficit as originally stated but not yet fully executed?

Yesterday the long Leveson report produced different statements from the Prime Minister and from his Deputy. The Liberal Democrats opted for the less liberal option, leaving opinion very divided in the Commons and potential voting tight.

Amidst all the pages filled and ink spilled there was little debate over why people think Statutory regulation would work better. Where is the evidence that it does? The main faults in the press in recent years were crimes – they probably broke the law over eavesdropping and bribery in the worst cases. The answer is to enforce the law properly, and to bring cases to court where there is evidence. How does introducing a heavy handed Statutory Regulator help?

The Statutory Regulators in financial services, introduced in 2000, have not stopped financial crime or deterred it judging by the number of scandals and pending cases that have come out. They also presided over the collapse of large parts of the banking system they were meant to protect.

The irony of this debate on Leveson, ignoring the key question about effectiveness of regulation, is that it comes about at a time when the traditional papers are having the fight of their lives to survive. There is a danger that any Statutory Regulator would add to the cost burdens and the inflexibilities of these organisations just when they need to be cheaper and more flexible to combat the huge competitive challenge of the new media. Regulators tend to regulate the old or the decaying more than the new and the emerging, because they can measure it, talk to it and pin it down.

They just cannot leave it alone. Yesterday morning on Radio 4 the early religious slot was taken by Alison Twaddle. She did an uncritical advert for global warming theory, with of course no balance or questions allowed. She told us that the

latest US great storm was the kind of event you could expect to be more frequent in an age of high CO2 output, and asked us to thank God for the climate change scientists who have revealed this truth. The link to religion was tenuous and attenuated.

This was followed by a patsy interview on Farming Today with a representative of the famous East Anglia University climate change department. There was no mention of errant emails or past controversies. The lady was able to tell us that periods of high rainfall as we have just experienced would become much more common in the years ahead, as would dry hot summers. She stressed she had no idea what the weather might be like for the next few years, but was categoric that the average experience would be both wetter in winter and hotter and drier in summer if you took the long term perspective, looking ahead 30-50 years. She was not asked to produce any evidence, not asked how she could predict the average but not the individual years that make it up, not asked why they have not forecast recent year’s weather with any success and not asked to explain why CO2 rather than water vapour, sun variation, wind and cloud patterns is seen as the crucial sole variable.

Then the Today programme sought to push the EU agenda. All this week they have promised to investigate Germany more. They started with a very unrepresentative German who likes “England” which he muddles up with the UK. His job was to reassure us all that Germany agrees with us over the EU budget and wants the UK (or England) to stay in the EU to make it all lovely. He was not asked why, for example, the UK should want to help pay the bills for Euro failure, why we should wish to continue with the CAP which is bad for taxpayers and food buyers, or why some think Germany would stop selling us her cars if we were no longer in the EU.

We were also treated to a sudden flurry of “news” on efforts by the EU to promote trade agreements around the world, after years of failing to do so. Clearly the message was the EU is heeding the UK at last. The BBC did seek to inject a little criticism into this piece, by exposing the ICT visa issue, but the main thrust was clearly to buttress the EU and show it is “going the UK’s way”, as we are so often told.

It was another very bad morning for the BBC, with sloppy journalism riding favourite hobby horses in a very uncritical way. I am writing to Lord Patten about it.

 

We are all fans of Canada now. The outbreak of cross party support for the appointment of Dr Carney to the Bank of England was based on enthusiasm for the way Canada got through the last boom and bust crisis in much better shape than the UK. There were no failures of major banks, a smaller drop in output and a much quicker recovery. So we need to ask what were the magic ingredients behind this success?

It was not just better Central banking, though that did help. The Central Bank of Canada did make enough liquidity available to banks at a time when the Bank of England was preaching moral hazard and watching banks go bust as a result. Today Canada has an official interest rate of 1%, and an inflation rate below the 2% target. It was also the state of the Canadian public accounts. that helped Canada through the Credit Crunch.

Canada had followed a path of spending and borrowing too much, leading to an earlier crisis. A fundamental review of public spending was undertaken and substantial cuts pushed through. Following this adjustment, the economy started to perform better. The UK Conservatives studied this in oppposition, but have not been able to do something similar in a Coalition government.

In 2011 the figures show that Canada’s public spending as a percentage of GDP was 39.7%, compared to the UK’s 47.3%. Keeping public spending under better control before and during the crisis clearly limited the damage from international events and allowed a swifter recovery.

In 2011 tax revenues amounted to 32.2% of GDP, compared to 38.9% in the UK. Canada’s economy benefitted from lower rates of tax and less tax being raised by fewer taxes. The UK’s level of taxation was 6.7% of GDP higher. Canada’s top rate of federal income tas was just 29%, compared to the UK’s 50%. It comes in when incomes rise above $132,000. Even adding in state income taxes, Canada’s income tax levels provide a top rate of around 40%, not 50%.

Canada has been running a smaller deficit and building up debt less quickly.

The Canadian economy was assisted by sensible Central banking across the crisis,, but performed better for a range of reasons. Lower tax rates, better value for money public spending, and better control of state debt levels were important factors in the success. Can Dr Carney help persuade more UK politicians of the wisdom of such a policy package?

Canada is now generating 7% more output than before the crisis, whilst the UK, Japan and the Euro area are still below 2007 levels. The Canadian economy has grown in every quarter save one since 2010.

 

The Chancellor reported a surprise to Parliament yesterday. He announced that after all, and after the denials, the Head of the Canadian Central Bank, Dr Carney, will be the next Governor. Labour agreed with the appointment

, and the Chairman of the Treasury Select Committee who gets to interview him as well more or less accepted that he will be the next Governnor. I send him my congratulations.

I am pleased the Chancellor did not appoint one of the figures who has been responsible for the Bank and the FSA’s conduct in recent years, as it is difficult to make the case that they have done a good job. Let us hope that Dr Carney will bring new thinking and greater purpose with him from the new world. He is Central Bank Governor to a smaller country that has its own currency whilst trading substantially with a much larger neighbour. He has never, along with the Canadian establishment. suggested Canada should join the US dollar, nor proposed a pooling of sovereignty as part of their single market arrangements with the USA.

More importantly, Canada got through the last few years without major banking disasters. Canada lost less output and recovered more quickly. We have things to learn from Canada’s relative success.

My only worry at the moment about this appointment is the timing. Dr Carney remains Canada’s Bank Governor until May 2013. He takes up post here in July 2013, and may not start taking decisions or making major contributions until the autumn of next year. I think we need new thoughts and new policy now from our central bank.

On his agenda should be the following questions:

1. How do we restore the commercial banks to health more quickly, so they play a role in economic recovery?

2. How much more, if any QE is advisable?

3. How long should interest rates penalise savers, and damage pension fund liability calculations?

4. How does the Uk get a grip on inflation?

5. How does the Bank work to promote low inflationary growth?

Readers will know my answers to these questions. I look forward to hearing Dr Carney’s answers when he appears before Parliament, when I will give you an update.