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.

 

As we approach the publication of the Leveson enquiry findings, the spin doctors have already set up a partial debate. We are told that Statutory regulation would be good if we wish to stop malpractice and law breaking by journali

sts trying to get big stories. We are warned that it could get in the way of press freedom and allow some malefactors to get away with it without press disclosure of their ill deeds. I doubt if either part of this proposition about Statutory regulation is true.

I approach this problem as one who thinks press freedom is important to a democracy, but freedom is not the same as licence. There should be – and is – a law of libel to protect reputations from lies and malice. There should be a more limited right of the state to block publication of matters which could harm us collectively, by exposing the plans of our army in the field or revealing security secrets that put at risk our protectors for example. There is always a danger that this right is abused by those in office, hushing up matters which should be exposed. It needs limiting, with safeguards against abuse.

I also have experience of the press publishing lies about my private life, seeking to tackle and misrepresent me rather than reporting criticially the ideas and people I represent, and listening in to my private conversations. None of this has made me want to regulate them because of it, or seek to curb their freedom of enquiry into others who may have guilty secrets to reveal, hurtful though it has been at times.

We have good experience of what happens when a major activity shifts from self regulation to Statutory regulation. This has happened to the financial industry over the last twenty years. Over this period we have shifted from a world where no major bank went bust, to a world where several major banks have been driven into state hands and public subsidy. We have moved from a world of limited financial crime, to a world where many major institutions face enquiries into abuse of markets and queries over their corporate conduct. We have moved from a world of lower cost of doing business to higher cost of doing business. People have to pay more to cover the cost of regulation, or end up with no professional advice at all. In the City we have moved from a world where the mainstream decent companies applied moral and upright standards to their own conduct, to a world where the main players ask lawyers and compliance officers what they can get away with and are often tempted to push the many rules as far as they can. Rules compliance has all too often replaced a sense of decency in conduct.

Spin doctors and sloppy journalists have conspired together to characterise the noughties as the era of “light touch regulation” or even of “deregulation ” in financial markets. Anyone who weighs the Statute book, examines the volumes of rules, guidance and compliance materials will know that the noughties saw a large increase in the volume of regulation. The Financial Services and Markets Act 2000 put in place a comprehensive system of Statutory regulation for the first time in the UK. This was changed and reinforced by the Financial Services Act 2010. It was also complemented by the EU financial services plan, including wide ranging legislation like MIFID. Never had the UK been so regulated, and never before had things gone so badly.

Unfortunately the Statutory system saw major errors of judgement by the regulators over safe levels of cash and capital for credit creating institutions, which then threatened the whole system. The noughties were not an era of light regulation or self regulation. They were an era of bigger Statutory regulation both at home and in the EU. This new regulatory system defined by Mr Brown’s big changes to the architecture and by the comperehensive financial law introduced, failed both to keep our system safe, and failed to prevent crime. It has been a notable failure of the free press to expose the true nature of the last financial crisis, or even to report sensibly the current state of public finance. I can’t see how a Statutory regulator for the press would help tackle this problem. Ironically some in the press will now find it harder to make the case against Statutory regulation, because they have so failed to explain its manifest massive failures in the case of the City.

Why do people think Statutory regulation of the press would be any more successful or better judged than the financial regulation was? How would it actually stop journalists eaves dropping, twisting replies, failing to read the basic materials, making snide comments about people and causes or getting the wrong end of the stick? Wouldn’t it mean more managers , compliance officers and box ticking, which would slow down stories and draw out mistakes, rather than abolishing them?

Nor would it necessarily prevent newspapers exposing folly and mischief in high places. If a government tried to use its leverage over the Statutory regulator to close down a story or an outlet, that in itself would be a fine story which would probably get out and do more damage to the government than if they had not bothered.

I remain a sceptic about the powers and wisdom of Statutory regulation. There is a lot to be said for having a clear and well enforced criminal law to prevent extreme conduct, and leaving the rest to competition, choice, public opinion and the free play of ideas and views. Now we have such a lively and often unruly medium in the web, if you regulate mainstream media too much it simply will not be able to compete with the new ways of voicing criticism of the powerful.

 

   I have been asked to post the lecture I gave at Oxford. I spoke without a text, but will post bullet points on Monday.

The main points I made were:

 

1. There is no positive correlation  between fast growth and large amounts of state debt. China has fast growth and low debt. Japan has high debt and low growth. Greece has high debt and recession, the US and UK have quite high debts and slowish growth.

2. In past UK crises – 1974-5, 1981-2, 1992-4 the formula of cutting the deficit and easing money policy  produced growth and recovery. Indeed, as the cuts came into effect, so the economy grew faster, reinforcing the drop in the deficit through the cyclical effect.

3. After the 2007-8 crisis, the Coalition government proposed the same forumula as in the previous three crises. However, they did not succeed in cutting the deficit as quickly or as far as  in the three previous crises, because they decided to keep on increasing current public spending. They did raise taxes.

4. Whilst they tried to expand money, and printed far more than in responsse to previous crises, the broken state of parts of the banking system and the tough regulatory framework introduced at the wrong stage of the cycle prevented credit growth in the private sector to fuel the recovery

5. So the main difference between previous recoveries and this is the government has neither delivered as low a deficit as before, nor as  much money and credit expansion as before. As  a result growth has been very disappointing.

6. Overseas evidence reinforces the message that tighter fiscal policy and easier money policy produces expansions This has been shown in countries like Canada and Sweden which went through substantial programmes of spending reduciton and deficit cutting which  produced growth from the better balance of the public finances.

It has been a traditional feature of IMF recovery plans that the deficit has to be cut as part of the package to generate private sector led growth and further cyclical falls in the deficit.

 

           Lord Hall has received a wide welcome as the new Director General. I wish him well. I trust he remedies poor journalism and the institutional bias which can disfigure the BBC’s news and current affairs output.

            It was a little worrying to hear so many enthusiasts for more EU government and  for global warming theory extolling his virtues. The rest of us who are sceptical of more EU government or who do not like the EU government we already have, will reserve judgement. The test for many at  the BBC is to understand that there is now a large chasm between their metropolitan views on the EU, carbon dioxide, immigration and the rest and where much of their audience is on these issues.

            I have a plea to Lord Hall. Could he first concentrate on the quality of journalism? Before we get into an argument about whether all sides in the main controversies are fairly represented, can we at least agree that journalists on quality programmes should read some  original sources rather than just relying on spin doctors? They should, if presenting economic arguments about debt, deficit and spending, know the main numbers and present them fairly. They should, when investigating an EU matter, read the underlying budget or document to understand its significance. When wishing to relaunch a very old story like the Welsh child abuse story, they should at least read the full public enquiry which has already reported on it, to understand it better and to see if they have anything new? When wishing to talk about climate change, they should seek independent scientific and economic advice from both sides of the argument, and not decide with forces on one side that it is all settled.

    There is clearly a political controversy about whetehr an economy recovers by borrowing and spending more or by borrowing and spending less in the public sector. It is not, however, possible to have an intelligent debate about this if the participants and the BBC expert do not know the figures or understand how much government spending there is and by how much it is increasing anyway.

             If Lord Hall recognises the need for change over these crucial issues, then I will join his fan club.

 

           I will today be talking to the Thames Valley Chambers of Commerce at lunchtime on growth and the UK economy. This afternoon, at 5pm, I am giving a public lecture on Growth and the UK economy in the Old Library, All Souls College, Oxford.  I will have limited time to moderate.

 

              There are now so many sources of authority and law affecting our country that this fundamental question does need to be asked.  Much of our law is now defined or influenced by EU law. There are laws Parliament cannot pass and stay within the EU legal framework. Our justice system is limited or controlled by membership of the European Convention on Human Rights. The judges of the ECHR, like the judges of the ECJ, can now dictate some of the answers to Parliament. The EU runs our agriculture and fishing policies, has a major say in our environmental policies, runs our trade and competition policies, and how has some influence over almost every  policy area.

                 Nearer to home the “independent” Bank of England decides interest rates, settles the regulatory framework of the commercial banks, and is often the decisive influence on how much money and credit circulate. A host of other quangos from culture to the environment operate with some independence of government in their chosen areas of activity.

                 These large transfer of power away from a sovereign Parliament has led some to welcome a new era of diffused or spread power, whilst for many others it has led to frustration that elected MPs and Ministers can no longer do as they think the electorate wish. A government can look impotent if it cannot extradite who it likes, control its own borders, decide what interest rates should be or how banks should be controlled, or settle the price of energy and how it is to be produced.

                   The fact that quangos, the EU and the ECHR have these powers does not necessarily  mean that Parliament has lost its sovereignty. We will only be able to answer that when we know what happens next. If the British people get fed up with the results of so much power given away, Parliament could still take it back on their behalf. Parliament is still technically sovereign, because it can repeal or amend the 1972 European Communities Act, the fount of the EU’s power in the UK. It could by agreement or unilaterally renounce the EU Treaties. It could withdraw us from the European Convention on human rights, or negotiate a new approach to the Convention’s powers.

                           If many more years pass when people and Parliament do not do these things, we will reach a point where in practice Parliament has lost its sovereignty. Meanwhile, it would be foolish of Ministers and commentators to underestimate the latent power of Parliament. Ministers can take our armed services into battle, but need Parliament’s support to do so. They can propose a wide range of new laws, but need Parliament’s votes to agree them. Parliament and Ministers can make or break Governors of the Bank of England, Directors General of the BBC, Field Marshalls and Admirals. Parliament can create quangos, change them and abolish them. If the so called independent Bank of England ceases to please Ministers with the backing of Parliament  will instruct it or Parliament will reform it. Parliament still makes and can break governments.

                          We had thirteen years of a poodle Parliament. There were far too few votes against the patronage and spin of the established governemnt to make much impact. Today we have a Parliament with no party in the majority, where every voice and vote can count. Whilst many of us want more MPs to be strong on remodelling our relationship with the EU, this Parliament is prepared to say “No” to the executive, and to probe the overmighty in the world of quangos and the established official government.

                            Parliamentary  sovereignty is not yet dead. It has been asleep. The issues for all of us, is do you wish to stir it to a much more energetic purpose?

This will be the title of tomorrow’s blog. If anyone has received a short and badly typed piece on this topic today, that is because the computer apparently sent out a half finished first draft with poor  typing at high speed. Please ignore. As soon as I saw what it was doing I sought to retrieve.

 

 Seeing the reporting of yesterday’s figures, I am amazed. They know a few of the figures, and give a most misleading view of what happened. They all claim the problem was the 9% fall in Corporation Tax revenues.

The actual figures are  that spending in October was up by £3.6 billion compared to October 2011 (including interest payments – which reduced the increase. Spending excluding interest was up by £4bn).  Corporation Tax fell by £0.8 billion to £8.1billion.

Borrowing rose by £2.7 bn more than in October 2011. That means the rise in spending more than accounts for the rise in borrowing, with tax revenues making some positive contribution. Corporation Tax is relatively small and had a bad month. VAT and NI did better.

 

The latest figures for spending and borrowing reveal more of the same. Current public spending excluding debt interest was up by 9%, this October on a year ago. Including debt interest it was up 7.4%, as debt interest fell by 7.4% thanks to quantitative easing. Spending  was up generally. Benefit spending rose, thanks to the increases in rates last autumn. General expenditure was also up. Over the six months spending was up in cash and real terms,but by a lesser amount.

Meanwhile taxes on income and wealth fell by 0.7% on the month and by 2.5% this year compared to last. VAT receipts were up by a useful 3.6% and National Insurance by 5.1%. Within taxes on income and wealth revenue from Income Tax and Capital Gains was unchanged April to October compared to the same period last year, showing the continuing impact of the higher rates.

Borrowing as a result rose from  £5.9 billion in October 2011 to an extra £8.6bn this October.  It would be good if the media reported that the main reason for the bad October figures  was the sharp increase in current spending, but don’t hold your breath. I expect they will continue to ignore this inconvenient fact. They are buying the spin line that a fall in corporation tax receipts is the culprit. The problem with that explanation is the fall in CT is less than the increased deficit, whereas the rise in spending is more than the increased deficit. Clearly these media commentators don’t do numbers or even read the official figures.

As there have been some cuts in some programmes, and some redundancies, the issue is where is all the extra money going? It would be good to hear a programme exploring how the government can spend so much whilst many think it is all being cut.